Geoff Fischer writes: >In New Zealand we have the world's highest real interest rates and >some of the highest rates of profit on equity investments, including >forestry. But one cannot draw moral conclusions from that fact >alone. Rates of profit are high because there is no effective >labour union movement in New Zealand ( high productivity, high accidental >death rates and low wages compared with US forestry workers). >So is the New Zealand forestry industry "getting what it deserves"? I suspect that New Zealand also has the advantage of higher forest productivity (i.e., growth rates) and perhaps a favourable tax regime. Returns on forestry projects in the U.S. are low because land prices are often close to alternate use prices *1*, and the tax system is not favourable. Costs incurred in establishing and maintaining a forest largely have to be capitalised and cannot be expensed for tax purposes until the associated wood is harvested. When this happens, one is recovering these capital costs at historic cost, NOT inflated value. This system severely reduces the rate of return and is not a very good incentive for reforestation. There is (was) a concession for small woodlot owners, and even a tax credit, but the $10,000 limit isn't significant. Many pulp and paper companies are divesting their timberlands as the yield (often 8%) holds down overall return on investment/market capitalization. The U.K. allowed expensing against income in the '80s which resulted in many reforestation/afforestation projects then. Perhaps New Zealand also has favorable tax treatment. *1* - I mention this point because if the owner, especially a loosely-held publicly-traded company, does not consider the currrent value of land and the opportunity cost of holding it, it is vulnerable to takeover and liquidation, or at least more aggressive use of capital by a more financially-aggressive (or owner. Not considering timberland values (poor usage of capital) were major factors in the takeovers of Crown Zellerbach by James Goldsmith and Pacific Lumber by Maxxam Corp. The former invested in new mill capacity and started a very aggressive cutting cycle. The latter did the same and we're hearing the latest dispute as it plans to harvest (and rightfully so - property wise) supposedly the last large holding of primary redwood forest in the U.S. Terence Liow BSF MBA Sustainable Forest Systems L.P.
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