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The Forum > Article Comments > Growers dealt the poor hand in MIS house of cards > Comments

Growers dealt the poor hand in MIS house of cards : Comments

By Kane Loxley, published 16/6/2009

Timbercorp and Great Southern: industries that relied upon referrals and investor appeal are now like financial swine flu.

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I too have read the Environinvest case but disagree totally with your central contention that scheme assets can be used to satisfy secured creditors. This is just wrong. What was found was that the schemes were non viable , due to very poor growth, and should be wound up with the proceeds from the windup distributed to the growers. Given the poor growth rates this wont be very much. As for the secured creditors the advantage they get through wind-up is the ability to access the underlying land security and sell it on the open market which they could not have done if the schemes were viable. I have spoken to CBA which is involved in all of these schemes and they agree that the process is to sell the land and the trees together and then apportion value between the trees and the land. The problem for a grower with a 1-5 year old tree is that it is not worth much but a tree closer to maturity will get closer to fair value in which case the grower wont lose much.

But your central contention of the finding in the case is just wrong! If you dont agree show me the section in the judgement where it says that the secured creditors have rights over scheme assets. I just dont believe it to be the case...

This is not to say that I disagree with your view that the growers will lose a lot, they will. But the legal conclusion you draw is wrong.
Posted by lordolean, Tuesday, 16 June 2009 10:47:05 AM
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While I don't disagree with the central thrust of the article that MIS is now probably 'poison' to many investors simply because perception is everything, there are other facets to this issue that have largely gone unreported.

Most investors signed up to MIS because they could get an upfront 100% tax deduction, which they duly got. Many were reportedly philosophical or uncaring about whether or not they subsequently got a later return - although presumably some were counting on it.

Few have acknowledged that MIS has dramatically increased rural tree cover to an extent far beyond anything that could otherwise have been achieved. Prior to MIS, most plantation development was by direct government expenditure on public land from which native forest was cleared for pine planting.

When governments ceased this practice, plantation development became restricted to private lands and private funds which were not forthcoming due to the high cost of aquiring and planting land whilst then waiting decades for a return. For all its flaws, MIS spectacularly overcame this impasse.

There should also be a distinction made between MIS forestry and horticultural projects. Unlike the horticultural projects, the vast majority of the plantations have no ongoing management requirements. Apart from some that are growing on inappropriate sites, most will grow into a usable resource that will eventually provide socio-economic benefits in rural areas.

Not enough credence is given to the comment attributed to the ITC spokesman. TC and GS were fund managers to whom woodlot sales comprised virtually their whole income stream. Most of the remaining MIS forestry players are wood products companies who were using MIS to expand their resource base. There is a big difference.
Posted by MWPOYNTER, Tuesday, 16 June 2009 1:37:44 PM
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“MIS is a dirty word.”

Surprise surprise eh?. This is a classic example of the planned chaos that results when governments try to direct productive activities.

The difference between an MIS “industry” and an ordinary industry is that MIS’s are entirely an artefact of the tax system. Without the tax benefits, they would not make sense.

So how does the government decide in what areas of production scarce capital funds should be invested? Why pine plantations? Why not web-sites, or widget factories?

The whole purpose of political decision-making on resources is to use some basis other than profit or loss, ie whether the mass of consumers are actually willing to pay for the product. In the absence of economic calculation based on profit and loss, governments have no way of knowing what use of scarce resources should be going to what priority. They are flying blind and the only possible outcome is the planned chaos that is in fact the outcome.

In my district, there are hundreds of miles of these fake crappy pine forests, full of feral pigs and foxes. They drivie up both the price and costs of agricultural land trying to produce things that people actually want enough to pay for voluntarily; thus destroying businesses at the margin. So people become unemployed, and people in the world whom we might otherwise feed are going hungry, because the government is overriding the signals of profit and loss to divert scarce funds into these schemes ‘for the environment’ based on totally unaccountable political fads, and rules and regulations.

MWPoynter
It is not a valid function of government to ensure “rural tree cover” as a value presumed to be over and above other values of human need. In the absence of government intervention, if people want rural tree cover, they can simply buy the land to grow trees on. The very fact that, in the absence of government intervention, there may be less than more tree cover, simply means that people place a higher value on food or fibre. There is no reason why government should change that.
Posted by Wing Ah Ling, Tuesday, 16 June 2009 4:10:00 PM
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I was wondering which way they forestry spin was going to go this time. MWPoynter has answered this both in this piece and his age piece. Forest cover! Is that the best you can come up with this time? I think even the government might wake up to the forest lobbyist this time round. Lets put a few facts on the table. Analysis I carried out in 2006 when I submitted to the then MIS inquiry showed firstly that MIS promoters receive Government assistance equivalent to 34% of their gross Income.

Further the economic cost of your blanket of mono-culture blue gums has been great. The cost/benefit analysis of the MIS timber we carried out, that on average, substitution of broadacre farming or dairy farming country for blue gum plantation production destined for the woodchip significantly reduces the level of economic activities at a local level. For every 10,000 hectares of broadacre farming converted to blue gum plantation, local economic activity is estimated to reduce by $27.6m over an eleven year period and for Dairying farming the loss is $361m for the same period. That was based on the assumptions of 25 MAI. Based on the current debacle I have greatly underestimate the devastation Timber MIS has caused to small country towns.

If getting more tree cover was the only thing that the government was wanting to do then the $4.9bn of tax payer money that has been poured into these schemes could have been much more efficiently spent through direct support. Instead the MIS debacle will mean the only people who will win are a few ex-CEOs of the very mis companies that hundreds of investor entrusted their life saving with and lawyers.

But what I found out in 2006, other than these guys play rough, was this is not about getting the best for the Australian community it is simple about politics of the forest industry. And as Professor Judith Ajani pointed out in her book – forest wars ,self interest of the forest industry will always over ride common good.
Posted by horse, Tuesday, 16 June 2009 7:19:45 PM
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A number of enquiries have now found that there is little if any tax benefit received by MIS investors that is not available to farmers. Additionally farming is subsidised on so many other levels it is perhaps the most subsidised industry on the planet. Farmers always cry poor and usually get help due to political reasons. This is pretty much an established fact. So to continue with the argument that these schemes are unfairly benefitted just doesnt sit with the governments own facts. The recent non forestry MIS enquiry is an example where treasury struggled to conclude there was a tax advantage despite coming from a biased position of trying to get rid of these schemes by having the ATO crack down on them.

Second I think supporting tree cover is important. If we continue with land clearing and factory farming practices which produce highly noxious methane and degrade the soil we will continue toward destroying the earth. Its pretty clear given the UN FAO report that agriculture is the largest producer of greenhouse gases (not that the politicians will address this dirty secret) and if we dont do something to stop meat and grain production the world will not have enough food to feed itself and the environment will collapse. So yes I think tree cover is important as an offset to this. Additionally the amount of land we are talking about even with the MIS schemes is a small part of the national landscape. Lastly we have a trade deficit in timber products of about $2bn. If we dont plant any trees this will get worse. The public sector is stopping the business so who will take up the slack?
Posted by lordolean, Tuesday, 16 June 2009 9:43:10 PM
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Lets put this one to bed regarding MIS not getting a tax benifit - with some facts rather than spin hope you can follow.

Value of tax subsidy - MIS scheme:

Assumption 1: apply average costs as per BRS survey, quoted by Minister McGauran
Assumption 2: use of Great Southern scheme - cost of $9000 per hectare to investor.
Assumption 3: investor paying top marginal tax rate - 48.5%

INVESTOR
Cost to investor: $9,000 (GST inclusive)

Income Tax revenue foregone @ 48.5% $4,365

M.I.S. PROMOTER

Scheme sale (GST exclusive) $8182 (GST = $818)

Cost of offering scheme:
Site preparation $1,910
Product Development $1,490
Corp overheads $ 650
Land lease $ 270

Total operating cost $4,320

Profit (pre-tax) = $8,180 - $4,320 = $3,860

Tax @ 30% company tax rate = $1,158

After tax profit = $2,702 or 30% of the cost paid by investor.

TAX OFFICE LOSS

ATO loss = investor tax foregone - promoter tax paid
= $4365 - $1158

= $3207

Therefore, the direct tax subsidy/loss of the MIS scheme is $3,207 per hectare (35.6% of the scheme cost).

It would be cheaper for the Government to pay farmers a grant to plant the trees ($1910) than forego the tax

I think the facts speak for themselves.
Posted by horse, Wednesday, 17 June 2009 8:28:11 AM
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To Mr. horse
You are being a little disingenuous in accusing me of 'forestry spin'. Re, my recent The Age article, I submitted a 1300-word article which without my knowledge or input was trimmed to 800 words. Much of what was omitted was important.

However, even what was published acknowledged the problems of integrating conservative technical forestry into an aggressive business model, that the expected benefits often haven't been optimised, and that there have been both winners and losers from MIS forestry. Far from 'spin', I think this was quite fair and objective.

I am simply making the point that however we may have arrived at this point, when considered in perspective, is it such a bad thing to have rapidly established a large area of plantation? There are clearly many environmental and socio-economic arguements that support the 'no' case.

It would be interesting to compare your own analysis of the effects of MIS on country towns against the formal academic analyses by Jacquie Schirmer which reportedly doesn't paint such a dire picture.

Most foresters would prefer it if tree cover could be expanded through farm forestry plantings integrated with existing agricultural use. However, after years involved in farm forestry it is clear that it would take more than a century to establish what MIS achieved in 10 - 15 years.

Unfortunately, direct government funding of tree planting could never happen to any great extent given the far more immediate social priorities to which government budgets must respond.

You have referred to foregone tax revenue, but isn't it really delayed tax revenue given that tax will eventually be paid on the income generated from the plantation harvest?

History is instructive, I have no doubt that Judith Ajani would have been violently opposed to the expansion of pine plantations in the past. She has a very different view now. I suspect the legacy of MIS forestry may be also be viewed more favourably in the future.
Posted by MWPOYNTER, Wednesday, 17 June 2009 5:25:09 PM
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Mr MWPOYNTER

A couple of things. As we currently stand name me one clear winner from this disaster accept for the likes of John Young. How much has he ripped out from the investors? stunning.

With regards to Jacquie Schimer, as a trained economist who majored in econometrics, I would love the opportunity to compare assessments. I think the use of ABS stats as they did at such a Marco level it is very difficult to assess the localised effects on small country towns. I would also suggest you take a tour of the Casterton area to see reduction in economic activity. Futher who funded that study I wonder?

With regards to the tax revenue paid you have missed the point and it is THE critical point. Any tax paid at the end, and again this is questionable given the poor performance of the schemes so far, the tax cost is born by the investor. What the table tries to show is that the benefit of the tax deduction is past by the investor to the promoter. So you are right the investor will pay for the promoter to get a tax subsidy as shown. I can also show that if you add the time cost of money and based on a 15 MAI, even if you take everything into account, it is anything but tax natural.

Mr Poynter you seem to suggest the end justifies the means. Morally I cannot agree. We could have incorpoated forestry into agriculture and hopefully out of this mess we will develop Government polices that deliver this. The UK dealt with this issue very well by removing the upfront tax deduction on cost and making income generated on forestry tax free if held for a certain time. This way anyone can be involved and you don’t need to feed this huge inefficient MIS industry. In this way you encourage a forestry industry based on maximising value rather than minimising tax.
Posted by horse, Wednesday, 17 June 2009 8:11:34 PM
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To 'horse'
I'm not sure that I believe the end justifies the means as much as I just accept what has happened. I've never been a great MIS fan, but I don't see much point in being morally outraged that some businessmen may have made a packet out of it. That's how business works doesn't it - but on the upside there is now a resource in the ground which will employ people and produce essential materials, particularly once the cycle of harvest and replant gets into full swing.

Not all of this resource will endure due to unsuitable sites and a shakeout of these with perhaps some replanting of other marginal sites to hardier species that can generate solid wood products, will be a good thing.

Much as it would be better for trees to be integrated into the agricultural landscape rather than be a replacement land use - there are difficulties with such an approach.

In Victoria, it is well documented that government farm forestry subsidies became a form of middle - upper class welfare mostly taken up by wealthy hobby farmers often with little intention to grow a timber resource as distinct from revegetating their land. Even where there is an original intention to grow timber, something like 50% of rural properties change hands every 10 years and in most cases the new owners are attracted by the aesthetic quality of the trees rather than their timber value.

Getting larger traditional farmers to plant trees was required but was never achieved to any great degree. They are agricultural producers mostly unwilling to forego their productive land and its annual income stream on a venture that costs upfront, gives no guaranteed return, and no return for decades. Most won't partake at all or to any significant extent on anything other than their poorest land. It is doubtful that any alternate tinkering of tax deductions and rebates, such as the UK model could have overcome these problems.
Posted by MWPOYNTER, Wednesday, 17 June 2009 10:06:27 PM
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To Horse

1) It is interesting you chose to ignore the results of a government inquiry into the tax advantage issue which although biased in favour of finding a tax advantage clearly failed to find a large advantage. You should read the "independant" outcome before just dismissing it and continuing with your own spin.

2) As for your table and conclusions you seem out of date on a lot of the numbers. I would propose the following changes based on the Gunns forestry projects which represent the benchmark in the industry.
Gunns cost per hectare including GST $7480 (2009 project price increased)

Tax deduction to a 46.5% top MRT payer $3,162 less 5% comm = $3000

Project costs (as per your numbers about 4000. I leave out land lease cost as I assume ownership of the land by the RE).

Promoters profit in year 1 $6600 - $4000 = $2600 (I have assumed ongoing management costs roughly equal harvest fees)

Cost of land purchased by RE about $4000/hectare. Annual capital cost at 7% per annum = $280 and over 13 year life = $3640.

The bottom line is that the promoter will make a loss on this business if there is no land inflation. In essence this is what the promoter gets out of the business. It gets a forestry land bank that hopefully appreciate in value over time otherwise his returns from this business will be less than zero.

So the taxpayer funds MIS to the tune of about $3000 per hectare. The government as you say could have used that money to pay the farmer $1900 per hectare to plant. But the farmer would also have to incur about $100/hectare per annum in upkeep costs which would amount to about $1300 over the life of the project which pretty much makes the 2 equivalent. There is also the question of whether the farmer would ever attempt such as exercise because he does not have the experience of a Gunns and would not get the same yield. There is no tax advantage and confirmed by government.
Posted by lordolean, Sunday, 21 June 2009 6:50:16 AM
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lordolean

The government inquiry into tax advantage in MIS was into NON-FORESTRY MIS. Suggest you at least read the intro. It had nothing to do with Forestry MIS. As you know the tax advantage by the ability to bring forward costs over the life of the project up to 11 years is signifiantly bigger than for nonforestry where it has to be within the same 12 month period

GOOD TRY But mate show me the proof that Gunns is doing any better job than Timbercorp,Great Southern and lets not forget Envirovest wasnt that a cracker. Given the total lack of transparency in the invest performance. The investor doesn’t know until its to late.

Have a good day guys!
Posted by horse, Sunday, 21 June 2009 10:34:55 AM
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Horse

The outcome is essentially the same whether its forestry or non forestry. Yes the inquiry was specifically about non forestry but the submissions and conclusions were equally applicable to forestry. Note also that this discussion disregards all of the other tax benefits and subsidies that are provided to farmers anyway which tip the advantage well in their favour anyway!!

As I have pointed out the ongoing costs of forestry are small relative to all of the costs that are incurred upfront. I am sure you are aware as you provided the costs breakdown yourself. Remember the $1900 for site prep etc. And at any rate these ongoing costs are paid for by the manager taking a return of about 10% at harvest so they are not as you say brought forward to the upfront payment.

So your answer merely swerves around the issue. No-one is getting any special favours. This argument really all comes from the fact that farmers dont like competition. In this case competition for land and they are happy to try and kill it off with any argument they can muster. Farmers are the most protected and heavily subsidised species on the planet so I always laugh when I see them crying poor.....

As for Gunns results you are right no projects have been harvested so you cannot tell. But as opposed to TIM and GTP and in line with FEA their initial thinnings are ahead of prospectus. But I agree you have to wait and see.

At any rate TIM and GTP have essentially killed it for everyone else so farmers are not really going to have to worry much about MIS in the future, so at least you can be happy about that.
Posted by lordolean, Sunday, 21 June 2009 11:12:45 AM
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lordolean

I couldn’t let this little unsubstantiated comment go without some facts again. You stated 'Farmers are the most protected and heavily subsidised species on the planet' Please see below the level of income support provided by Governments

Percentage of farm income provided by Government assistance
Australia 5%
USA 18%
EEC 38%
Japan 57%
Rep of Korea 60%
Source: OECD

As you can see Australian farmers are not heavily subsidised. They in fact have the second lowest protection rates in the World only beaten by NZ. And I think if you compare them to the car industry and other manufacturing industries such as CFT industries they would be substantially less. With regards to having to wait until the tree are harvest to work out how well Gunns have gone i beleive this not to be the case. According to Rob Hanson (a forester) in the Fin Review stated that yields good be accurately measured as young as five-seven years.

Lastly don’t underestimate the length the forestry lobby group will go to maintain these schemes. I would be surprised if they do disappear. These guys play hard ball, from personal experience, very hard ball against anyone who questions them.
Posted by horse, Sunday, 21 June 2009 2:11:42 PM
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Ah Horse

I think we may have found some common ground and I sense that we could actually come to like each other. Imagine that.

I agree with you that Australian farmers are less subsidised than international farmers (although still subsidised to some extent) and that car and CTF industries in Australia are more subsidised. But my statement was on a global scale and I still believe it remains true in that sense. Your table would seem to support that view.

As for yields you are right after 5 years you can get an idea. As I said the Gunns plantations that are thinning are around 7-8 years of age and are achieving yields above forecast. I was just stating that we have to wait for some more evidence to see that these early results can continue.

I think you will have much much less trouble with MIS forestry in the future simply due to the reduced flow of funds to the area. You have gotten your wish. My view for what it is worth is that we shouldnt stamp out the schemes altogether, they should be revamped and more realistic numbers disclosed, because we wont have a local timber industry if plantations dont continue in some form.

Good luck mate. I will make this my last post here.
Posted by lordolean, Monday, 22 June 2009 8:30:27 AM
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