It was the disappearance of almost the entire farming community of Preolenna, just a few kms away from home as the crow flies that first sounded the alarm.
In just a few short years at the turn of the century all the working dairy and potato farms were replaced with a carpet of hardwood plantations.
In earlier times planting the odd block to trees by landowners simply as another crop. was accepted as part of the fabric of farming in North West Tasmania.
Suddenly the landscape changed. Who were the invaders? Where did they get their money? Pools of investors’ funds known as managed investment schemes (MIS) attracted by tax deductibility and pie in the sky returns were given a boost in 1997 by the Federal Government’s plantation 2020 vision statement.
The vision aimed to treble Australia’s plantation timber estate by 2020, increase opportunities in regional communities, protect the environment and improve our balance of trade. As with most motherhood statements opposing views were muted. From a public policy viewpoint it was an arbitrary goal with poorly substantiated net benefits.
By 2005 opposition to MIS forced the Australian Government to commence a series of public consultations into the taxation of plantation forestry in particular the bias of the existing arrangements towards short rotation crops over longer rotation timber trees.
Nothing eventuated. The market was left to its own devices. With hindsight we now know that short rotations were crucial to MIS companies.
The new breed of forest growers didn’t acquire land. The MIS companies did. Growers paid upfront fees as high as $10,000 per hectare for crop establishment, land lease and a promise to manage the crops for 10 years until harvest. Actual establishment costs were only $2,000.
At 2 billion hectares, the current estate has nearly doubled since 1997. The last 4 years has seen few new plantings due to the collapse of MIS companies most which had even shorter lives than the trees they’d planted.
Gunns was the last to fall.
Roughly half the plantation estate or 1 billion hectares comprises hardwood and 60% of these are MIS. Remaining trees are softwoods.
Gunns’ 235,000 hectares of MIS are spread across all States, 18 different Projects with 49,000 growers, each with a lease from one of over 200 lessors.
Upfront fees led to excessive commissions to spruikers. Great Southern during its brief 10 year life spent more on promotion and sales commissions than it did on establishing plantations. We may be a Lucky Country but not that lucky.
A period of grace allowed to MIS companies to plant trees for which the investor had already obtained a tax deduction and this led to a tendency to rely on this year’s fees to pay last year’s tree establishment.
During the good times, the rush by investors seeking tax deductions for their upfront fees, often wholly borrowed from the MIS company, resembled a Myer Boxing Day sale. As a consequence more land needed to be found quickly, often in less than suitable locations and increasingly leased from third parties.
The ongoing annual costs which needed to be paid by MIS companies skyrocketed.
Falling yields due to misplaced optimism, mismanagement and poor site selection and falling prices for plantation wood, a not unexpected occurrence with a global commodity were lowering future harvest commissions which had been expected to help offset the annual costs.
Having spent the original fees, new MIS growers providing fresh cash were needed to pay annual costs.
Alas this didn’t occur and the companies fell over.
Almost all current MIS growers will take their meagre proceeds and exit the industry. Losses average 80% of the original stake.
Australia wide grower losses for hardwood plantations will exceed $3 billion.
In Tasmania, of the $1 billion paid to establish 145,000 hectares of MIS hardwood plantations, $800 million will be lost, quite apart from the losses of our forest companies, Gunns, Forest Enterprises and Forestry Tasmania (FT).
MIS succeeded on one count only, it provided cash for MIS companies. But in doing so it distorted the industry helping it postpone its much needed reconstruction.
On every other score it failed. Everyone has lost money and wasted opportunities. Land and trees acquired with tax subsidies may end up with foreign investors.
Gunns going into administration means half the State’s plantations needs new owners. The Government seems unable to tackle more than one problem at once. The IGA roadblock, FT’s dysfunctionality and now the MIS mess is too much. It’s as if the Government can’t walk and chew gum simultaneously.
The Government has had ample warning of impending problems with Gunns. Bob Gordon from FT, not usually known as a canary in a coal mine advised the Government in July 2011 that Gunns’ financial problems were overwhelming and would probably soon lead to the appointment of a receiver.
It is likely that Gunns’ MIS will be wound up. All trees will find a new owner as will Gunns’ land. The legal complexities will make transfer to new owners an arduous task.
The Global Financial Crisis may not have helped but MIS were destined to fail. The inherent structural flaws led to their demise.
Preolenna may get a second chance.
(Published in the Mercury 10th November 2012)