Why carbon farming is pushing hill country values through the roof

Carbon farming has well and truly taken off in New Zealand over the last few years.

According to a recent report commissioned by Beef + Lamb New Zealand, more than 50,000 hectares of traditional farmland were purchased last year for conversion to forestry and carbon farming, compared to less than 4,000 hectares in 2017.

Hill country farms, in particular, have significantly increased in value as a result.

Rural valuer Rod Baxendine explains why carbon farming is affecting hill country values and what farm owners should consider when weighing up their options.

Why has carbon farming taken off?

Under the Emissions Trading Scheme (ETS), New Zealand has committed to reducing emissions. One element of this plan involves increasing carbon sequestration (i.e. capturing and storing carbon dioxide).

Carbon is absorbed by timber, so many businesses are now growing trees (usually exotic species, like pine) and selling the carbon credits they receive (often to farmers, who need to offset their emissions).

This type of farming – known as carbon farming – has become very profitable.

Why is carbon farming affecting hill country farms?

Historically, hill country has been used for fattening and grazing sheep and beef.

However, the hilly parts of farms are less productive and more difficult to access than flatter farming areas.

Because carbon farming has become so lucrative, it now makes more economic sense to use hill country land for carbon farming than for traditional farming.

As a result, an increasing number of traditional hill country farms are being sold and planted in trees.

Buyers are now willing to pay much more for hill country land in comparison to its economic worth for grazing (i.e. its traditional grazing value).

In fact, the ETS has had quite a staggering effect on the value of some pieces of land.

How does carbon pricing play into this?

When carbon credits were sitting at $20-30 per tonne, we didn’t see much movement in values – everything was somewhat balanced.

But carbon credits have now risen to $80 per tonne and there are suggestions the price could go up as high as $110 per tonne by 2026. When these sorts of statements come out, investors are much more willing to pay premium prices for land that’s suitable for carbon farming.

Carbon credit prices never used to have much of an influence on property values when carbon was $10-20 per tonne. There was virtually no premium on buying it for forestry, as the earning potential was limited to growing trees and selling the timber for framing.

But now, there’s a significant difference in value between land that’s suitable for carbon farming (post-1989 land) and land that isn’t (pre-1990 land) – buyers are very willing to pay a premium for the former.

The market difference between these two types of land can often be as much as $8,000 to $10,000 per hectare.

What are the flow-on effects of this?

In some areas of New Zealand (Southland, for example, which has historically been a strong pastoral market), we’ve seen huge areas of pines planted on easy, rolling farmland – and it’s unlikely this land will ever be converted back to traditional farming.

The process of getting rid of all the forest, taking out the stumps, mounding and getting it back to pasture would be very costly.

And the more land we convert from pasture to carbon farms, the less land there is to produce red meat, which is going to have an impact on both our export market and on the price of meat here in New Zealand.

We simply won’t be able to produce the same volume of meat anymore, so it’ll become much more expensive on the domestic market.

Where does this leave hill country farm owners?

If you’re considering your options, it’s important to understand which category your land falls into:

• Post-1989 land – if the land has never been planted before, you can plant it and apply for it to be registered under the ETS
• Pre-1990 land – if the land has previously been planted and the planting took place before 1990, there's no opportunity for carbon farming, as you can’t register the land under the ETS

If you have post-1989 land, you’ll typically have three options:

1. Sell the land to a carbon farming business
2. Plant the land and undertake carbon farming yourself
3. Arrange a long-term lease (for example, you could lease it to a carbon farming business for 30 years or 60 years, allowing your family to get the land back in the long-term)

How we can help

If you’re looking at buying, selling, leasing or converting farmland for carbon farming, our rural valuers are here to help.

We can provide specialised advice and valuations, including:

• Pre-purchase or pre-sale
• Estate planning
• Rental assessments
• Asset valuation
• Mortgage assessments

Get in touch with a rural valuer today