07092010

Forestry investments have all gone rotten

Another Managed Investment Scheme (MIS) operator has just gone to the wall in Australia (see here). This is essentially a complete collapse of the MIS sector. This time Willmott Forests Ltd went to the wall owing $120 million to its banks; 8,000 grower-investors (be they individuals, companies, trusts, etc, see here for one example list of creditors from a previous failure) have together put about $400m into a business that now owes $120m - i.e. $520m flowed 'through' the company and was spent one way or another...

The MIS Implosion

Now why has one market sector gone to the wall in such a dramatic fashion, there are few underlying issues that we think has caused this:

1. Unrealistic expectations of profitability - basically not enough was either known, or not enough 'due diligence' was done by those investing to ascertain the degree of real profitability possible. Obviously a large number of people have not heard of the Warren Buffet saying "if you don't understand it, don't invest in it". See here for lessons to be learned in understanding business finances from the MIS meltdown.
   
2. Investing in the schemes primarily as a way to minimize tax liabilities - investing in an instrument for its tax free status alone is just a bad idea, its the cart leading the horse. i.e. if the underlying investment is not sound, then the tax status doesn't matter - your capital is at a higher risk than the tax to be saved..
3. Low barriers to entry in the market - the sheer number of providers of these schemes should have raised big Red Flag's - i.e. its a bubble. Growing tree's is not a patentable undertaking; it can be undertaken globally and it indeed is. There are countries worldwide much better suited to growing timber better and quicker.
4. False assumption of safety in numbers - there was almost a 'feeding frenzy' around investing in these schemes to make money and save on tax; i.e. everyone else is doing it, it must be safe. People should remember the saying "there is no wisdom in the crowd".

Was MIS actually Green?

Well, I think the jury is still out on this; but, if one thinks about it in terms of the big picture, its obvious that its in very shaky ground. For instance, water supply in Australia is in a constant state of being marginal over most of the land, tree's require large amounts of regular water during their lifetime to grow at an effective rate. Now this is okay if those trees are grown in known water rich areas, but when land that was previously used for agricultural purposes are used for growing trees, we create problems in supply certainty with food crops.

Also the intensive forestry techniques practiced radically alter the very nature of the environment against the native wildlife. Plus intensive forestry is a massive fire risk. It is quite likely that over a 30 to 40 year span a forest will encounter a fire event.



As for them acting as a carbon store; that only works fully if the trees are actually mulched on mass and dug into the soil to enrich the soil itself. As soon as you get into industrial wood production, the overhead of turning trees into wood wipe out most of the carbon gain (i.e. getting to factory, cutting, planing, storing, transporting to machine shops, making into goods and transport to the consumers, etc). The best way to preserve the carbon in wood is to reuse it, but that hardly happens these days.

Conclusion

If there was ever a case of following the old saying "too good to be true" the MIS sector was certainly it. Basically you should only invest in such schemes if you fully understand them, fully understand the risks and can afford to loose all the money you have invested.