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Spitting chips: forestry MIS-management
MARIUS CUMING
4/02/2009 6:19:00 PM

Firestry managed investment schemes under a financial cloud and questions remain about the future of the 500,000 hectares planted to blue gums across Australia.
The Port of Portland in Victoria has announced over $16 million worth of woodchip orders have been cancelled by Japanese interests since November and this week timber giant Gunns also confirmed a reduction in woodchip demand from Japan.

Tax effective investment in some of the debt laden companies involved has all but stopped, with some share prices dropping over 95 per cent in the last 18 months.

A long term follower of the MIS sector, Austock analyst Craig Stranger said a number of the leading companies were financially stretched having established sizeable land, forestry and orchard holdings and had associated debt levels that were clearly too high at a difficult time to sell assets. Mr Stranger said overseas investment funds may well be looking to buy established plantations, as timber is an established asset class in countries such as the United States.

In a bid to stay afloat, some timber companies now have numerous properties on the market, with Timbercorp in the process of selling half of its 100,000 hectare estate under blue gums.

Author of "The Forest Wars", economist at Australian National University, Judith Ajani is not surprised by the big questions now facing forestry MIS and says history will show Australia has wasted the last decade in developing a viable plantation resource.

"It's not looking good for these prospectus companies as they are constrained by a stagnant global market and fierce competition from state government subsidised native forest woodchips. Plantation prospectus investment returns look OK on paper but many foresters have doubted seriously the wood yield assumptions and, for many years now, I have argued the wood price assumptions are too optimistic. The forestry MIS sector is yet another example of government interference upsetting markets, in this case the price of land. This industry should have been driven by the market prospects for real products manufactured and value-added locally, not driven by tax minimisation. We wouldn't have the mess that we are about to see."

But Agribusiness analyst with Lonsec, Jim Blackburn said he did not see the sector crashing.

"The share prices for some of these companies have dropped dramatically because of many issues; debt level, company re-structuring, heavily discounted assets placed under long leases and obviously the current economic environment. It is not fair to blame the reduced share prices on being an MIS as some Forestry MIS schemes are doing very well," he said.

With big woodchip volumes expected from 2010 onwards, Dr Ajani said selling woodchip as a bulk commodity was always going to be difficult but has now been heightened by a world gripped by an economic crisis.

"It might delay the harvest a couple of years, but there will still be a dramatic over-supply because these schemes were allowed to run out of kilter with the worldwide demand for hardwood chips and no south eastern state government seems the slightest bit interested in stopping the deluge of cheap native forest chips," she added.

Timbercorp spokesman Matthew Trewin said his company was in sound shape as while the share price had fallen dramatically, annual management fees for plantations were still being paid, a feature not shared by all MIS.

Timbercorp is not offering a forestry MIS in 2009.

Mr Trewin added the company had supply agreements with Japanese interests out to 2012, with negotiations on price to get underway in coming weeks.

"We are set to start harvesting in western Victoria later this year but there is no problem with our exports from Albany (W.A) as far as I am aware."

Dr Ajani said the problem with forestry MIS has its roots in the former federal government.

"The problem began back in the mid 1990�s with the former coalition government's 'Plantation 2020' strategy to triple the plantation forest resource, a policy that always had the carbon market in mind rather than wood market realities."

Late last year the Nationals and Greens combined forces in the Senate over new tax breaks for carbon sink forests. With Senator Milne's tax barrister advice, they argued that the legislation opened the door to land purchase costs and other associated capital costs being fully deductible upfront.

Dr Ajani believes these next few years are critical for the future of tree planting and agriculture, but the whole concept of planting trees in a cropping regime as long term carbon sinks is flawed anyway given they die and release the carbon."

Mr Trewin said there needed to be a change in the guidelines for current forestry MIS to be included given plantations had to demonstrate permanency, with crucial negotiations in Copenhagen to discuss the topic later this year.