Edward Miller is Strategic Advisor for FIRST Union.

On the face of it 2013 was a disaster year for NZ’s forestry industry. The death of 11 forestry workers on the job squarely focussed media attention on the sector. Forest owners, managers, contractors and Government agencies blamed alcohol and drug abuse, swearing it was smaller forests that were the problem. Workers, unions and forestry communities sought accountability, raising issues like fatigue, long work hours and unacceptable pay. Their campaign regularly received newspaper columns as worker after worker fell victim to the job. Yet at the same time, things had scarcely been better for investors in NZ forestry. Log prices rallied significantly over 2013 and in early 2014 (1) on the strength of strong demand from China, which accounted for 72.5% of 2013’s raw log exports. (2)  Total roundwood removals are now a hair’s breadth from reaching 30 million cubic metres, almost 50% higher than just five years ago. (3)

This did not happen overnight. The connected processes of corporatisation, privatisation and financial deregulation cleared the way for an increasingly financialised ownership of New Zealand forestry, and a shift in the values and purposes of forestry towards those valued by financial markets and actors. The corporatisation of the New Zealand Forest Service meant a transition from a well unionised regular workforce into a competitive contracting model that has meant a race to the bottom in wages and conditions. Privatisation of cutting rights and the relaxation of foreign investment restrictions has shifted the stream of income generated from forestry into private (and increasingly foreign) hands, and integrated New Zealand forests into global circuits of capital accumulation. The old adage remains true: money doesn’t grow on trees. It flows through them, extracting wealth while subjecting the productive output of one of our most valuable assets to the vicissitudes of global financial movements. This article will look at the financial relations that underpin some of the largest forest owners and managers in New Zealand and some of the ways in which that has affected the industry.

Neo-Liberal Restructuring

The New Zealand forestry and wood processing industries were developed as a distinctly social project. They absorbed surplus labour through the 1930s’ Depression period for afforestation and harvesting, developed rural communities around wood processing industries and supplied materials for New Zealand’s significant State housing projects. The sector was dominated by State intervention, large vertically integrated oligopolistic firms and a fully unionised workforce that had garnered a reputation for wage militancy. International investment in wood industries had been premised on NZ maintaining a protectionist economic policy providing a shelter from global wage competition, in line with the Keynesian welfare state model. The New Zealand Forest Service was a significant employer and trainer of forestry workers and New Zealand Forest Products was the largest owner of forests. Alongside this large vertically integrated timber firms Fletchers and Carter Holt both owned forest and milled timber for sale on both national and international markets.

These relations were forcibly unravelled through the sweeping neo-liberal reform agenda of the 1984 Lange Labour government. The Forest Service was corporatised into Forestcorp and all assets (which included 53% of NZ’s plantation forests) were prepared for liquidation. Large swathes of forest were sold well under price – by 1992 the sale of 550,000 hectares of cutting rights had netted the Government only $1.4 billion. (4)  As log prices spiked in the mid-90s, the share of forests owned by Fletchers and Carter Holt (major benefactors of the privatisation) was valued at around $7 billion. (5)  The project was deeply ideological, rendering the wood supply chain more cost-efficient to attract more foreign capital to New Zealand.

The implications on labour were similarly stark. Mass redundancies from the corporatisation of the Forest Service forced workers into small private sector contracting crews that were cheaper, more pliant and much harder to unionise. Wages fell dramatically as NZ workers soon found themselves competing with workers from developing country competitors (like Pinochet’s Chile, where NZ forest owners were also investing) with relatively low wage demands. Between 1972 and 1986 the share of income passing to workers from forestry hovered between 50-70%, however after the privatisation process began this fell dramatically (to only 10% during the height of the 1990s’ log price spike) and not rising over 30% thereafter. (6)  Today there are around 4,000 workers in the forestry sector, and wages have scarcely moved since privatisation. Employment Websites suggest that forestry workers can expect to earn between $28-60,000 a year. Charles Finlay, who was struck dead by a log in July 2013, was on only $16 an hour after over 20 years experience as a forestry worker.

The increases in production have come from both mechanisation and an increasing intensity of work, brought about by stagnating wages and the demise in union representation. By 1994 the Labour Department noted that the fatality rate in the forestry industry had doubled in just a decade. (7)  Increasing work intensity had made fatigue a widespread phenomenon – a 2002 study reported that 78% of forestry workers surveyed experienced fatigue “sometimes/often/always”. (8)  Commercial pressure through the contracting model is driving much of that fatigue. In an online video released by the NZ Council of Trade Unions (NZCTU) Caroline Callow describes how her son Ken, a forestry worker who was crushed to death by a falling log in 2011, used to lie on the floor after work while his children would walk over his back to relieve the pain. On other occasions Ken physically couldn’t carry his chainsaw past the gate. (9)  Like the 3,000 workers in the wood processing sector who lost jobs since 2008, (10)  Ken had become a casualty of globalisation.

The Financialisation Of Forestry

Dismantling State support for the forest products industries opened the door for integrating NZ forests into global circuits of accumulation. The ownership of New Zealand’s plantation forest stock is now dominated by a handful of companies and, as around the globe, these are becoming increasingly dominated by institutional investors: the financialisation of forestry. Financial investment in the forestry industry first arose prominently in the US in the 1970s. At the same time as large forest companies began selling their timberlands, legislation encouraged pension funds to invest in more diverse assets than the previous focus on share markets alone. (11)  By the 1990s the market had begun expanding quickly. By 2013 the global “timberland asset class” believed suitable for institutional investment was conservatively estimated by one research unit to be in the order of $NZ180-240 billion, expanding at a rate of $NZ7-8 billion per annum. (12)

Epstein defines financialisation as the “increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.” (13) Financial actors include institutional investors like pension funds, hedge funds, investment advisors, mutual funds and banks. The movements of financial markets are relevant to determining how a fund manager might arrange the investments in their portfolio, as are decisions made by regulatory agencies, such as central banks such as setting interest rates, printing money, constricting credit or fixing exchange rates.

A number of factors make forestry attractive to institutional investors. Firstly, since wood is “stored on the stump” forests are both a factory and a warehouse. This allows investors to harvest their forests when log prices are high, or hold on to the asset when log prices are low. Secondly, commodities are thought to have roughly equivalent but negative returns to equity investments, and therefore can serve as an ideal hedge to offset the risk of other investments. For financial investors playing with pooled capital, price risk – the possibility that an asset’s value could change – is a key consideration. These qualities provide investors with avenues to hedge potential losses elsewhere in their portfolio. Global log markets are now increasingly connected to other financial markets, and the ability of investors to shift capital between different markets is unparalleled. Delineating between supply and demand “fundamentals” and speculative forces in light of these enormous markets is next to impossible (and scarcely matters for the investor), and the former often provides a convenient political cover for the latter.

Under financialisation that distance is getting greater. In geographical terms, overseas ownership and developing structural connection to faraway financial markets demonstrates growing distance. The culture of financialised forest ownership could scarcely be further from that of NZ forest workers, who are commonly Maori. Their bargaining power has been minimised since the defeat of forest unions, and only now after a concerted media campaign are workers actively organising around conditions of work and pay. Yet their agency is severely affected by other stakeholders along the chain, and pales in comparison to that exercised by the directors of this capital. We will now look at those directors.

The Biggest Owners

It is estimated that approximately half of NZ’s forests are held in institutional ownership, and NZ currently represents 4.18% of institutionally-owned mature plantations globally. (15)  The three largest owners – Hancock Timber Resource Group, Kaingaroa Timberlands and Rayonier Matariki – own approximately one third of NZ’s plantation forest area. The largest eight – the above three plus Ernslaw One, Global Forest Partners, PF Olsen, Crown Forestry and Pan Pac Forest Products – together own half of New Zealand’s plantation forest area. The following paragraphs will look at the three largest forest owners and the institutional ownership of these corporate entities.

Hancock Timber Resource Group owns 235,000 hectares of NZ forest, the largest owner in the country. These forests were purchased from Carter Holt Harvey (owned by New Zealand’s richest man, Graeme Hart) in 2006 for a suppressed price believed to be somewhere between $1.5 and $2 billion. (16) All shares are owned through a Melbourne-based parent company which is part of Hancock Timber Resources Group, a timberlands asset manager that manages over $NZ13 billion of forests in the US, Canada, NZ, Australia and Brazil. Hancock is the world’s largest Timberland Investment Management Organisation (TIMO), which is, in turn, owned by institutional investors, such as pension fund, endowments, foundations and universities. Hancock is part of the Manulife Asset Management Group, a Canadian-based insurance and financial services firm that manages around $NZ300 billion worth of assets globally. Hancock’s own investment promotional material establishes the return on capital in NZ forestry above 8%, higher but more volatile than the average across its global portfolio.

Kaingaroa Timberlands owns 174,000 hectares of NZ forest, which was purchased from the Central North Island Forestry Initiative by the Harvard Endowment Fund in 2003 after the Initiative went into receivership. At the time forestry investment in NZ faced the head wind of a high dollar and increased competition to the Chinese market from Russia. (17)  The Harvard Endowment Fund is made up of 11,000 funds and currently manages assets worth around $NZ36 billion. It has previously been criticised (alongside other similar institutional investors) for its role in agricultural land-grabbing in Africa. (18) In 2008 as New Zealand signed a free trade agreement with China, Harvard sold a 40% share to the NZ Superfund for $300 million, reflecting the financial mantra of “buy low, sell high”. Harvard sold down part of its’ remaining 60% stake in late 2012, first with a sale of 30% to the Canadian pension fund the Public Sector Investment Board (which manages $NZ68 billion of investments on behalf of Canada’s public service) and a further 1.25% to the New Zealand Superfund. The deal, reputed to be worth over $NZ1 billion, was managed by Goldman Sachs, helping to triple Goldman’s NZ profits that year. (19) In 2014 six central North Island iwi jointly purchased a 2.5% stake of the forest from the NZ Superfund (reducing their share from 41.25% to 38.75%), one of the largest ever iwi forestry purchases. (20)

Rayonier-Matariki owns 130,000 hectares of forest and is a subsidy of a Florida-based Real Estate Investment Trust (REIT) called Rayonier. REITs are corporations with special tax designations that allow them to invest in timberland real estate while vastly reducing their corporate income tax (90% of their income is required to be return to their investors). (21)  This may give some background to the Sunday Star-Times article in January 2014 stating that since 2000 Rayonier has had an effective tax rate of only 7.6%. (22) The Rayonier trust currently owns, leases or manages 2.7 million acres of timber and land worldwide, including 200,000 acres of high value real estate. Forest assets may provide a hedge to the speculative earnings gained from these real estate holdings.

These are only the largest of owners, but they indicate the direction in which forestry is headed. Ernslaw Oneis the only NZ forest owner with more than 100,000 hectares that is not held in institutional ownership. It was formed in 1990 to purchase NZ State forests (it owns 109,000 hectares) and is a fully owned subsidy of Malaysian transnational logging corporation Rimbunan Hijau, owned by the wealthy Tiong Hiew King (who has major holdings in forestry, property and media). It expanded into a vertically integrated softwood product company by purchasing the processing entity Winstone Pulp International Ltd. The next largest owner is Global Forest Partners LP, whichcontrols 91,000 hectares of NZ forest. GFPLP was owned by Swiss financial services firm UBS until a 2003 management buyout; it currently manages around over 750,000 hectares of timberland globally (valued at around $NZ4 billion) on behalf of around 100 individuals and 11 closed-end funds. Financialisation is pushing right through the forestry industry.

Addressing Financialisation

The increasingly embedded nature of financialisation in forestry became clear in mid-2014. After a long boom in log exports to China, log prices began to fall quickly in May 2014 as a result of a slowdown in the Chinese credit market. China’s rapidly overheating speculative boom in the construction and real estate sectors has prompted fears of a sudden collapse in asset values, triggering Government intervention to constrict credit. This has led to a drop in demand and, as a result, log prices have fallen quite dramatically. Given New Zealand forestry’s structural reliance on increasing Chinese demand (as the origin of 72.5% of our log exports) apprehension is growing in the industry. John Stulen, spokesperson of the contractors’ association FICA, suggested that 10-15% of the 6,000 people working in forestry could lose their jobs. (23)

There is no simple and easy solution to rolling back the financialisation project, however there are steps that can be taken to ameliorate some of its most egregious impacts. Falling global log prices would serve as an ideal backdrop to begin a process of Government-led procurement to facilitate building projects such as the Canterbury rebuild and meet housing demand in Auckland. An interventionist State could begin stockpiling logs now during this period of low demand and provide them to the domestic market at an affordable price. In doing so, this would provide a boost to the domestic log processing industry. Union organising is extremely difficult in light of the competitive contracting model (since a collective agreement with a single contractor may affect their ability to win contracts), and changes in the employment relations framework toward industry-standard agreements would be helpful. In the meantime the discussion about the structural role played by institutional investors in our forestry industry needs to take place. The current media focus on forestry, including the industry-funded Independent Forestry Safety Review, provides an ideal platform for organising workers to undermine the share of capital going to institutional investors in the forestry investment process. The industry’s profitability must be challenged directly, to force Government’s hand and make the case for greater intervention.