Sunday, 15 February 2015

Has FT found the way?

Forestry Tasmania’s (FT) controversial small native forest coupe in the Flowerdale river catchment area at Lapoinya in NW Tasmania is one of its better coupes. FT is adamant clearfelling will be a profitable exercise.

After a relentless pattern over the years of failing to cover even $1 in staff wages from its operations this looks like a real live test case to establish which exactly of FT’s operations are profitable, if any.

From a strict financial accounting viewpoint, each year FT adjusts the value of its forest estate so that as at 30th June FT’s balance sheet contains the current value of its forest estate.

Hence clearfelling a coupe merely realises its current value. It is simply swapping trees for cash.

The accounting profits from the Lapoinya coupe should have already been recorded in FT’s books over the years if the current value of the trees as recorded is correct. The small profits over time scarcely dented losses from other sources.

Chopping down a coupe is a realisation exercise not a profit making one.

Forest companies make accounting profits by ensuring their estate grows faster than the losses from harvesting and natural disasters and is enough to cover other expenses (depreciation and overheads).

Because a forest company is profitable doesn’t necessarily make it cash flow positive.

FT has been a conspicuous failure in both regards.

But FT indicates this coupe will generate a cash profit. Not just taking into account opex such as harvesting and carting but capex such as the road, bridges and infrastructure costs and the regeneration expenses.

The initial unknowns are the harvest area and timber yields.

The wood production plan on FT’s website didn’t give coupe boundaries, just a shaded bit comprising a harvest area of 35.7 hectares.

It was noted the coupe size was subject to change pending preparation of a Forest Practices Plan (FPP).

When the first draft plan appeared it showed a coupe area of 89.7 hectares with a harvest area of 68.7 hectares.

FT however indicated only about 38 hectares would be harvested and revealed expected yields of 7,600 tonnes.

It didn’t look particularly profitable based on average costs from FT data and other best estimates.

Not enough to cover any overheads.

The harvest area shrank when endangered Brooker’s Gums which FT apparently hoped no-one else would notice, needed to be excluded.

FT prepared a revised plan expanding the coupe area slightly but reverting back to the harvest area on the original plan less the Brooker’s Gums. The revised harvest area is now 51 hectares and the yield is 12,500 tonnnes. And what’s more there’s 1,250 tonnes of Cat 1 sawlogs.

The significantly revised plan prepared on the 24th December was withheld from adjoining landowners and community members until last Friday. Roading is tentatively due to commence in a fortnight but FT will try to give at least one days notice if it decides to proceed.

It was a chutzpah moment.

...”I think our staff at a regional level have been doing a very good job in engaging with this group and hearing their concerns”, FT’’s Chairman Bob Annells assured a parliamentary inquiry in December.

This coupe will make a profit, without doubt, Friday’s meeting was told.

The tabled attached at the end of the blog is the revised best estimate of the coupe. It still doesn’t look profitable if an estimate of FT’s other direct costs and wages are included.

FT doesn’t allocate overheads on a coupe by coupe basis. That’s perfectly understandable. But coupes collectively must generate enough cash to cover overheads, with profitable coupes contributing more than others. The amount of $212,500 represents 50% of FT’s 2014 wages and overheads calculated on a per tonne basis. As a cross check FT says its target wood production per employee is 6,645 tonnes this year and last year average staff costs were $94,000.Not all FT employees are directly involved in wood production but add in a few more overheads and the $212,500 may not be too wide of the figure that needs to be recovered from the coupe to assist FT make a profit.

It’s a guess. Just because it may require a subjective judgement isn’t a reason for ignoring other direct costs before asserting a coupe’s profitability.

FT won’t release coupe by coupe information.

OK but why not release aggregate figures for each district, income and direct coupe costs, maybe on a quintile basis. Clearly FT does budgets for each coupe as part of the FPP process. Press the button on the computer, aggregate the figures across districts and break them into quintiles and show FT’s ultimate owners what a profitable coupe like Lapoinya looks like. No commercial in confidences breaches involved. It may help sooth community angst about the continued propping up from government coffers and detail FT’s contribution to rebuilding the forest industry and may even assist the government as part of the review into FT reportedly due by June this year.

Although there’s more sawlogs in the revised calculation the biggest change to the calculation is to include the full proceeds from export woodchips, not merely the delivery of logs to the chip mill door

Woodchipping is the key to FT short term future.

The calculation is quite sensitive to increase in chip prices. A rise of $10 will improve the bottom line by $33,000. The woodchip price of $140 per tonne may be too low. FT won’t disclose it.

Tas Ports acquired the Burnie export woodchipping plant from Gunns’ Receiver Korda Mentha in 2014 and signed a new Facility Management Agreement with FT. (One of Tas Ports’ directors incidentally is Evan Rolley.)

Woodchipping is the only way FT can make profits given the quantities of the other native timber types are reasonably small and subject to long term contracts and price resistance. FT has gradually moved into the space previously occupied by Gunns and Artec. Gunns complained towards the end that FT was stealing its customers. In hindsight that’s probably true.

One wonders whether FT is competing with Artec? If it is, it’s in clear breach of National Competition policy which is supposed to prevent such behaviour? How FSC auditors assess a heavily subsidised government business in breach of National Competition guidelines against its economic sustainability criteria is not known at this stage.

FT becoming a new Gunns would appear to present PR difficulties for the Government especially if sacking nurses and teachers and instead using $30 million from Tas Networks to fund the adventure.

FT claims the contracted sawlog and peeler billet quantities will generate 870,000 tonnes of pulpwood this year.

The raison d’être for FT’s contract with Ta Ann was that it would use wood otherwise destined for the chipper. Ta Ann billets were originally spun to the public as a use for pulp logs, but are now another product line which creates even further pulpwood.

It’s been a disingenuous exercise.

FT’s 2014 Annual Report flagged recommencement of woodchip exports from Burnie in 2014/15 which given the falling AUD$ and falling oil prices making shipping cheaper has given FT a brief stay of execution.

FT must have been close to falling off the edge before the Burnie facility deal was finalised.

Naturally FT claim the sawlog requirements and Ta Ann contracts are driving the need to harvest Lapoinya, not the lure of lucre from chipping.

The increased sawlog haul doesn’t appear to be an urgent concern as there are piles of undelivered sawlogs in already harvested coupes and more in timber yards awaiting processing.

Even if delivered will FT get paid on time?Or will FT, as has been its bent lately, act as a working capital source for a capital deprived industry by providing inventory it doesn’t need, using the $40 million line of credit provided by Tascorp before the government plunders TasNetworks to help FT out of the red by the end of June?

Last year FT was owed $19 million in forest sales at 30th June with 40% owing for longer than 90 days. Not many businesses are able to offer such generous terms. But not many businesses have a Letter of Comfort from the Treasurer.

Perhaps there’s a woodchip boat on the horizon which FT needs to fill?

Ta Ann, initially lauded as a saviour to the industry by adding value to pulp logs is starting to emit a malodorous whiff familiar to follows of Tasmania’s brand of corporate cronyism.

FT’s 2006 Wood Supply Agreement with Ta Ann was signed by FT when Evan Rolley was boss. He is now an executive director of Ta Ann Tasmania P/L (TAT).

The IGA in 2011 saw TAT receive $26 million for surrendering 108,000 tonnes of its 265,000 tonne annual contract with FT for the supply of peeler billets, a contract that was granted gratis in 2006.

The contract always created losses.

Just as Gunns were compensated for surrendering loss making wood supply agreements, so too was TAT.

How can something that creates losses have a value?

Imagine the costs to taxpayers if they were making money.

TAT received another $7.5 million towards the construction of a $15.8 million ply mill in Smithton which will further process veneer produced from peeler billets.

In the past TAT only had one customer for its veneer products and that was the Malaysian plywood manufacturer in the Ta Ann group. TAT always ran at a loss. The Directors categorically acknowledged this state of affairs and didn’t usually bother to record the effects of losses on future tax payable on future profits because such an eventuality was considered unlikely.

The year 2013 was headed for an even larger loss until Mr Rolley negotiated a $26 million payout to TAT pursuant to the IGA.

The tax losses previously assigned to the bin were quickly derecognised to use the accounting jargon. Most of the tax losses were needed to soak up the effects of the government handout.

In order to create more losses TAT adjusted the sales figure between itself and its parent. Amounts included in the cash flow statement as revenue were reassigned as loans from the parent. The sales price for the veneer product was reduced to an estimated $203 per m3 when the cost is roughly double. Sawn pallet timber is worth more. The lower cost of sales figure in turn caused closing inventory to fall creating more losses.

There may be other reasons for the adjusting accounting entries, but none are obvious.

The effect was to create enough losses to avoid income tax of $7.8 million of the government handout. Combined with the sawmill grant of $7.5 million gave $15.3 million towards the sawmill costs of $15.8 million.

The Wood Supply Agreement forces FT to chop down immature sawlogs and sell them to TAT for little return. TAT may provide employment. But it comes at a cost, in the form of government subsidies provided and FT’s balance sheet losses. Any profits are shifted offshore.

According to FT’s latest Annual Return the mill door delivered price to TAT is $62 per tonne. At this price, after harvest and cartage costs there’s not much in it for FT (possibly $20). After only 60 years of growing (FT’s target average age for native forest rotation is 90 years) it’s a pretty dismal return.

Native forests grow pretty slowly, the Lapoinya coupe has a MAI of about 4 (MAI=mean annual increment in tonnes per hectare). The calculation above gives average yield at 245 tonnes per hectare.

Profits can’t be made when forests grow at that rate. Plantation growers don’t make much unless the MAI is above 20.

The absence of future profits means roads and regen expenses need to be written off immediately. That’s accounting convention.

A few years ago the Auditor General reminded FT that if capex expenditure is unlikely to generate future profits then it should be written off immediately. If a capital asset is impaired, in other words, it should be written off.

Hence each time a native forest coupe is flattened, FT’s balance sheet shrinks even further.  Converting an asset to cash where the accounting profits have already been realised incrementally over the years won’t increase the balance sheet. If roads and replanting are written off and the cash doesn’t cover wages and overheads the balance sheet shrinks. The replanted coupe will have a zero value The growth of its remaining forest estate isn’t enough to offset yearly losses. Arguably an unsustainable path, even from a narrow financial accounting perspective.

A lot of work was done during the forest negotiation about sustainable yields. Any analysis on sustainable balance sheets has been missed by the writer.

FT always dwell on the fact that land lock ups have reduced its balance sheet. True. But it also shouldn’t be forgotten that it’s not a lack of scale that has contributed to FT’s balance sheet problem. It’s been a lack of profitability, selling products below cost.

That’s the issue that FT needs to address and the issue that Messrs Harriss and Hodgman have scrupulously avoided to date.

FT should account differently. FT’s financials aren’t known for being widely understood. An understanding of the difference between cash profits and accounting profits and the consequent effects on the balance sheet is not evident when FT managers talk about profits. If the balance sheet keeps shrinking it’s Goodnight Irene. Chopping down a few more coupes on the way to the exit will only enrage affected community members.

In 2010 FT adopted a new way of valuing its forest estate which is comprised of land, roads and trees. Future expected return are discounted back to derive a present value which is then split between the 3 components. Land is allocated a zero value (it doesn’t own it anyway, the Crown does). Roads are allocated their written down value and trees end up with the balance. The total estate at last count was worth about $170 million roughly 50:50 between roads and trees. It’s quite bizarre, roads are valued at $85 million yet the land upon which they’re situated is valueless.

I’m not sure what approach FSC takes to valuation which surely must be crucial in determining question of economic sustainability.

Land valuers, as I understand, value land on the best possible use basis.

FT valuers give land a zero value. It may cater for FT’s needs but from a wider social viewpoint it’s conceivable there may be wider uses for that land with additional eco system services value for instance?

Assigning incorrect values will lead to perverse resource allocation decisions.

The proposed Lapoinya coupe provides an opportunity to drill down to discover the elusive factors that may make FT profitable in the future.

At a time when the government is contemplating FT’s future and the FSC auditors are taking a close look at FT’s practices it seems a perfect time to parade a profitable coupe that FT is seemingly determined to clearfell as a beacon for the new forest industry.


(including capex for roads and reestablishment and direct overheads)
Cat 1&3
Cat 2
Harvest (tonnes)
Mill door/FOB value
Harvest costs
Cartage costs
Chipping and port costs
Net harvest proceeds
Roads & structures (incl 3 bridges)
Reestablishment  costs
Net cash surplus/(deficit) before wages etc
FT wages and other direct costs
Net cash loss
Cash profit per tonne before FT wages etc
Cash profit per tonne after FT wages etc
Total yield (tonnes)
Timber  per hectare ( tonnes)
Harvest %s
Cat 1 & 3
Cat 2
Coupe area (hectares)
Streamside/retention reserves etc (hectares)
Mill door prices ($ per tonne)
Cat 1 & 3
Cat 2
FOB export price woodchips ($ per BMDT)
Harvest costs ($per tonne)
Cartage costs ($per tonne) <100kms
Chipping and port costs ($ per tonne)
Roads & structures $
Post harvest
Reestablishment ($ per hectare)
FT wages and other direct costs(per tonne)
1. As advised by FT
2. As advised by FT
3.From Data Tables FT Annual Report 2014
4.Estimate. 2 tonnes green logs= 1 BDMT (bone dry metric tonne) chips
5. Contract rates based on market info.
6. Estimate
7. FT estimate
8. 2014 FT overheads (excl depreciation) plus employee costs totalled $47 m
      Tonnes harvested were 1.386 m tonnes.
       Allocating 50% costs as direct = $17 per tonne




  1. Small clarification re a widely misreported aspect of this debate - Brooker's Gums are not endangered in and of themselves. A certain forest community dominated by them ("Eucalyptus brookeriana wet forest" - code WBR) is however listed as a threatened forest community. The presence of specimens of E. brookeriana does not in and of itself create an obstacle to logging; the presence of it in sufficient numbers and size to dominate a substantial area of forest can.

  2. "FT doesn’t allocate overheads on a coupe by coupe basis. That’s perfectly understandable. But coupes collectively must generate enough cash to cover overheads, with profitable coupes contributing more than others."
    Given that this is "high value native forest" why can't the community demand that every single coupe logged be profitable?? I can't see any logical reason for cross subsidising to occur between coupes. A business model has to have some basis in reality, and coupe-by-coupe profitability would seem to be a good place to begin.
    Another great withering analysis John. Thanks!

  3. Incisive as ever John. Every government member should be reading this.

    1. Unfortunately half of them wouldn't understand what John was talking about.