Area of forest ‘at risk’ from deforestation
Analysis Using Anecdotal Information on Costs and Returns
A number of companies have made public statements regarding expected costs and returns from forest conversions to agriculture. This section looks at those statements and analyses the expected levels of profitability they imply.
Landcorp has claimed an expected three-fold increase in earnings from land north of Taupo (Tauhara and Tahorakuri forests) currently being converted from forestry to dairying/pastoral uses. The area in question totals 25,700 hectares and the reported cost to the conversion is $250 million – or $9,700/ha.
If land value is simply based on the discounted present value of the stream of income generated from the land, then a three-fold increase in income as a result of conversion would imply a three-fold increase in land values. Thus assuming an average or ‘typical’ value of forested land in the area to be $5,000/ha the figures Landcorp have released to the media would imply the average value of converted land might well be in the order of $15,000/ha. Given the suggested cost of conversion of $9,700/ha this type of analysis would imply a net increase in average land value arising from converting of $5,300/ha.
The accuracy of some of the underlying figures of the above analysis can be debated and changing them does impact on the results. A recent paper by Stillman (2005) would suggest a four-fold rather than three-fold increase in value might better approximate the expected return from conversion. Applying that figure to the land north of Taupo would suggest that after conversion the average land value – assuming forest land is initially worth $5,000/ha – would be nearer $20,000/ha. With conversion costs fixed at $9,700/ha that in turn would result in a net gain from conversion nearer $10,000/ha rather than the $5,300/ha given in paragraph 9.
Studies such as that of McCarthy (2003) would suggest that a basic CNI conversion cost of less than $6,000 per hectare might be reasonable – particularly if one was simply considering a conversion that is an extension of an existing farm (a marginal change). That in turn would indicate a higher benefit from conversion (perhaps as much as $14,000/ha) for the marginal case. McCarthy’s paper (as well as land sales data from the last three years) also indicates that assuming a basic land value of $5,000/ha for ‘conversion-suitable pumice plateau forest land’ is reasonable. One can find other figures, for example the valuation of Evergreen Forest’s land in mid-2005 just prior to that company selling its assets gave an average value of $2,267/ha for its 19,184 ha of forest. However, much of the land involved in this sale would not be considered to be ‘conversion-suitable.’
Contact for Enquiries
Sustainable Land Management and Climate Change
MAF
Pastoral House
25 The Terrace
PO Box 2526, Wellington
Tel: 0800 CLIMATE (254 628)
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