The forest industry must confront Dutch disease to reach $12 billion export target

The Government has set an ambitious goal to lift New Zealand’s export earnings from the current 30 per cent to 40 per cent of Gross Domestic Product (GDP) by 2025.  For primary sector industries this means at least doubling export earnings to more than $60 billion.

The forest industry has a plan to do its part - grow exports from the 2011 baseline of $4.7 billion to $12 billion by 2022.  The essential ingredients to achieve this are at hand – an increasing log harvest and much of the required processing and transport infrastructure, and innovation capacity. However, the industry also needs help particularly to improve the profitability and scale of the wood processing sector, since reaching the $12 billion goal is heavily centred on raising the proportion of logs processed onshore from the current 45 per cent to at least 70 per cent.

This is a particular challenge because other countries, notably China, want our logs and other natural resources, either un- or minimally processed. When such demand is strong, as at present, this contributes to a phenomenon The Economist, in 1977, coined ‘Dutch disease’ or, as abstracted from Wikipedia, “..where an increased exploitation of natural resources is associated with a decline in the manufacturing sector because increased revenues from natural resources [logs] contributes to a strengthening of the nation's currency and reduces the export competitiveness of domestic [wood] manufacturing.”

The Dutch experienced this with the discovery of a large gas field in the late 1950s; Australia experienced it through the recent mining boom; New Zealand is seeing this with an apparent insatiable global demand for our milk and logs. Given the increasing world population, mostly in developing countries, and associated growing shortages of land and water (and thus food, fibre and energy) this seems highly likely to continue.

Economies are not this simple, and the present effects of large scale and sustained quantitative easing in the US and Japan on the New Zealand currency illustrates this. But it does highlight the need for New Zealand to be proactive and deliberate if Dutch disease is not to be repeated here for our wood manufacturing sector. 

The forest industry recognises it has to do its part by improving process efficiency, such as by applying lean thinking; increasing product innovation, such as by increasing returns from sawmill residues; and, collectively, branding and marketing better.  However these steps are not sufficient in themselves; help is needed to quickly update building standards, for example, for engineered wood products; increase confidence to invest in new plant and equipment, such as through accelerated depreciation on these items across the manufacturing sector; ensure a level playing field in free trade agreements; and, encourage the use of wood in construction (as in Japan and British Columbia with their Woodfirst procurement policies).

Domestic development of the forest industry is vital too, because export growth must occur through increases in value as well as volume. Simply increasing the volume of commodities is unlikely to enable sustainable land management or improved water quality.  The Parliamentary Commissioner for the Environment’s (PCE) latest report, Water quality in New Zealand: Land use and nutrient pollution, highlights this reality.

Farmers face two primary constraints: reduced availability of land that is suitable for conversion to more intensive production such as milk and crops; and a limit to the capacity of these ecosystems to absorb associated higher fertiliser inputs. The PCE has highlighted Canterbury and Southland as regions facing an increased future water quality challenge – the Commissioner could also have added the central North Island.

You do not have to think too deeply about the Commissioner’s report to conclude that forests have a complementary role with lowland intensification to help mitigate nutrient run-off and leakage.  In these situations we need to be thinking not only of traditional forests but also of special purpose, high biomass growth - three to four times that of pasture - forests harvested at 10-15 years of age.  “Industrial forests” with these characteristics are common in South America and, as best I can judge, there is no biophysical reason why we cannot do likewise.

The achievement of the 40 per cent GDP target requires a more encompassing and diverse view of the economy than that presently offered by many commentators.  As some crudely put it – a future prosperous and resilient New Zealand is going to need to be much more than a big dairy farm and a large conservation estate!  Our challenge in the forest industry is to tell our story better about our scale; environment friendly growth; low carbon technology; and hazard and fire resilient construction materials.  The articles in this newsletter illustrate these qualities, as does our new ‘Prosperity from trees’ vision video (see the last page for access details).

As always I welcome any comments and feedback you might have.

Warren ParkerWarren Parker

Dr Warren Parker
Chief Executive