Image for Special Timbers: The Broken Business Model

The iconic Tasmanian special timbers industry is destined to follow Ford Australia into commercial oblivion.

In fact the current special timbers business model makes the Australian car industry look positive, innovative, competitive and profitable.

A major turning point was in 2010 when Forestry Tasmania (FT) made two changes to their business practice that fundamentally transformed the industry:

a. They declared areas of forest specifically managed for the production of special timbers including blackwood, designated as Special Timbers Zones (STZs) will henceforth be “non-profit non-commercial” production; and

b. Because these dedicated production forests are now declared non-commercial, FT considers they are subject to Community Service Order (CSO) costs. These costs “include fire protection, pest control, forest and land management, tourism, development and maintenance of public road access and conservation of natural and cultural values”. These costs are to be borne by the Tasmanian taxpayer and not classed as normal costs of production. ( )

See also “Notes to the Financial Report, Statement of significant accounting policies 2(s) Obligations for non-commercial zones” in Appendix 1, Financial Statements, Forestry Tasmania 2011-12 2.3MB pdf,  ( ).

FT does not apply these rules to other areas of production forest where these same management costs are included in the price of goods and services. It is certainly not clear what other costs FT classifies as special timbers CSO costs, such as the costs of planning, harvesting, and regenerating the STZs; the cost of running Island Specialty Timbers ( ) or the costs of managing the ex-Lake Gordon Huon pine stockpile. FT declares that these CSOs are “currently unfunded” (Appendix 1, Financial Statements, Forestry Tasmania 2011-12 ), but in fact FT already deducts these costs from their revenue before they declare any profit and dividend.

I only became aware of these changes recently while doing some research. Given that FT is the major special timbers producer, that blackwood comprises approximately 80% of special timbers production and the campaign over the past two years to establish a Tasmanian Blackwood Growers Cooperative ( ) these changes do no credit to Forestry Tasmania and State forest policy whatsoever.

What can be estimated from examining FT’s accounts is that over the past three years approximately $5.1 million dollars in special timbers CSO costs have been charged directly to the Tasmanian taxpayer by Forestry Tasmania. Special timbers revenue over this period was approximately $4.9 million. How much of this revenue came from STZs is unknown as FT does not assign revenues to STZs. This amounts to a massive 50% to 75% taxpayer subsidy to the special timbers industry. What other Tasmanian industry gets this level of protection and support? Tasmanian taxpayers are nothing if not generous. These timbers aren’t just special, they must be extraordinary!

But the situation is anything but clear despite assurances of greater transparency. FT does not separately and comprehensively report the financial performance of its special timbers business activities. Perhaps Forestry Tasmania isn’t so proud of how much Tasmanian taxpayers subsidise the industry.

These recent changes at FT together with their existing pricing and sales processes create the perfect commercial storm – the category 5 tornado to destroy all special timbers value and assets. FT determines its log prices by “administered pricing”, which is the “price of a good or service as dictated by a governmental or other governing agency. Administered prices are not determined by regular market forces of supply and demand.” In other words private businesses, which are subject to supply and demand forces, cannot compete in markets controlled by administered pricing. FT provides no details of their sales or log-pricing policies and processes on their website. In fact the FT website gives one the impression of an organisation completely disinterested in money and commercial performance.

Combining a deliberate non-profit objective and significant public subsidy with administered pricing creates the formula for a commercial and policy disaster for the special timbers industry, and the ultimate weapon against private growers and a blackwood growers cooperative.

Many people still believe that growing trees for wood production should be a social service not a business. The reality is the vast majority of wood produced in Australia is now grown by private businesses. Growing trees for wood production is now officially a commercial, profit-driven business. This is true for all producers. And the first rule in all business is profitability.  Profitability trumps sustainability every time; being sustainable while losing money is definitely not sustainable.

Secondly if a forest is designated “production forest” then all reasonable costs associated with that production must be covered from the sale of goods and services from that forest. That is the rule that currently applies to private forest growers and should also apply to STZs!

Thirdly a GBE like FT that competes in the same product/service markets as private businesses, should not engage in any activity or behaviour that provides a competitive advantage to which private businesses do not have access, nor compromise the commercial interests of private businesses. This behaviour is called “anti-competitive” and is illegal. A designated “non-profit, non-commercial” production forest could very well be classified as anti-competitive.

So how is a “non-profit, non-commercial” production forest business actually managed? How are prices set and costs controlled, and what forces drive these if the profit motive is absent? Is the price set by whatever loose change the customer has in his pocket at the time? Clearly special timbers prices have nothing at all to do with market demand and supply. FT provides no details whatsoever on how it manages STZ costs. Perhaps it doesn’t. What about sales processes? Are they by tender, auction, handshake, roadside stall, 100-year supply contracts?  Who knows? Again nothing to do with markets, but definitely compromising of private grower’s commercial interests.

And finally what message does this lack of proper business processes in the special timbers industry send to the market? The message is that Tasmania’s premium timbers are of so little value that they must be strictly controlled and subsidised to reach market. It makes no business sense at all. Quality is quality and attracts a premium price and a high profit margin. Either these timbers are as good as we say they are and attract the appropriate market price and profit or there is no business. Any other logic does not work in the commercial world.

Instead of seeking better market prices, greater production efficiencies and market prestige for their special timbers, Forestry Tasmania is heading in the opposite direction and consequently destroying the special timbers industry. And as for the Fine Tasmanian Timber Chain of Custody ( ), which “is an innovative and credible program that guarantees that exotic Tasmanian timber has been legally sourced from sustainably managed forests and represents a responsible purchase decision”; well that chain now has a few more links that connect to the shackles of the unemployed Tasmanian teachers, nurses and police officers, the underfunded hospitals, schools and roads thanks to the drain on the State Treasury.

And what about the anti-competitive aspects of this business practice. Blackwood is widespread on farms in Tasmania. Some farmers grow and sell blackwood to try and make money. A few farmers even manage their blackwood for wood production, while a handful have invested in blackwood plantations. FT’s practices disadvantage Tasmanian farmers in three ways. Firstly, unlike FT, farmers cannot get a refund from the Tasmanian taxpayer for their blackwood management costs. Secondly having to sell their blackwood into controlled and undervalued markets. And finally Tasmanian farmers are effectively prevented from developing the commercial potential of blackwood as their peers ( ) in New Zealand are successfully doing.

Establishing a blackwood growers’ cooperative under these conditions is impossible. Blackwood is the only Tasmanian special timber species that could be profitably grown on Tasmanian farms if proper business conditions existed. The blackwood industry could potentially grow to become an iconic profitable Tasmanian business alongside our wine, beef, dairy, cherry, truffle and saffron industries but not while the market is dominated by heavily subsidised blackwood. The $5.1 million already given to the special timbers industry could have funded the blackwood growers coop for 15 years, halfway towards it becoming profitable and self-funding.

FT claims that the special timbers industry deserves special treatment because it “generates $70 million each year and employs more than 2000 people (Special Timbers Strategy 2010, 8.8MB pdf ).” On the basis of this logic all public native forest should be designated non-profit non-commercial since the woodchip industry over the past 20 years has generated billions of dollars and employed many more thousands of people. Where is the consistency? As private forest growers well know value-adding and profitability begins in the forest not the sawmill, the factory, workshop or slipyard. The FT Special Timbers Strategy 2010 states as an objective “ensure that prices received by Forestry Tasmania for special timbers represent an adequate return that reflects the market value of the end products and the cost to Forestry Tasmania of managing the forests from which they are obtained.” I’m sorry! Shouldn’t that read “... cost to the Tasmanian taxpayer”?

What’s more, under the Tasmanian Forestry Agreement (TFA) funding arrangements (124 KB pdf, ), the Commonwealth Government is about to spend $2 million to “undertake a Special Species Timber Study” ie. a wood resource review on the STZs. This will ensure that this impost on Tasmanian taxpayers and farmers, as well as the supply of special timbers, are sustainable. I’m not against a review of the STZ resource, but within the context of these negative impacts on the Tasmanian community and economy I think the priority for that $2 million must be on ensuring FT’s special timbers business model is profitable and not anti-competitive.

Under current policy and practice Tasmania’s iconic special timbers industry is in serious trouble. The TFA offers a rare opportunity for change. FT Chairman Bob Annells says that FT must change to become commercially, socially and politically relevant (Sunday Tasmanian 2/6/2013). Well, Mr. Annells, here is a free three course lunch – entree, main and dessert, plus a complementary drink. Mr. Annells can score points on all three accounts by changing the way FT manages its special timbers business.

Meanwhile the next time you buy that Tasmanian wooden boat, piece of blackwood furniture, blackwood guitar or Salamanca wooden trinket please remember the direct cost to the Tasmanian community and the farmers denied the opportunity to make a decent return growing blackwood. Those businesses that do buy their blackwood from Tasmanian farmers should label their products “Guaranteed 100% teacher, nurse, police officer and hospital bed friendly”.

I do not wish to see a consumer boycott of the special timbers industry, but the industry must seek a win-win-win resolution to this problem - a win for the future of the iconic special timbers industry, a win for the Tasmanian community and a win for Tasmanian farmers. We can all help by writing/emailing or phoning Forestry Tasmania and our local State politicians (as FT shareholders) and asking for Forestry Tasmania to manage all of its special timbers activities on a profitable, fully-commercial, transparent and sustainable basis. Let’s all do this well and take pride in it.

Gordon Bradbury is a forester, blackwood advocate and would-be director of the Tasmanian Blackwood Growers Cooperative. He is passionate about the future potential of the blackwood industry in Tasmania, and persists in knocking his head against numerous obstacles in the quest to achieve his dream of a profitable, iconic, sustainable blackwood industry. He now needs your urgent support. He invites readers to visit his website for further details

• ABC: Gunns woodchip mill open for business again

After being closed for the past two years, the Gunns woodchip mill at Longreach in Northern Tasmania is once again open for business.

Gunns closed the mill in 2011 before going into administration in 2012.

But the receivers and managers of Gunns limited, Korda Mentha, have reopened the mill after securing new contracts with Japanese customers.

Receiver Bryan Webster says the first load of woodchips will be shipped to Japan next month.

“We’ve got about 10 ships locked away between post-appointment and through to March next year,” he said.

Gunns’ general manager of forest products Bryan Hayes says the contracts to send woodchips to Japan have been negotiated with old customers.

“Provided we could give security of supply, those customers have been happy to come back to us,” he said.

The wood is coming from 40,000 hectares of Gunns-owned plantations in the north-east and north-west of the state.

Mr Webster says re-opening the mill has allowed Gunns to employ 100 new contractors.

“Prior to appointment there was approximately 20 contractors employed. Now there’s about 120, so they’re involved with the harvesting, haulage, chipping of the woodchip logs as well,” he said.

Some of the contractors delivering wood to the mill are old hands, like Donald Beams.

He has been working for Gunns for 41 years.

Read the rest, ABC here

SkyNews: Gunns woodchip mill up and running again

• John Lawrence, in Comments: One major problem with the commerciality of special timbers appears to be that price control reminiscent of central planning in the Soviet Union should apply. The following is an extract from the TFA Leg Co hearings on Tuesday 5th Feb 2013 by one of the noisier representatives of the special timber industry. The market mechanism is ditched in favour of price control. It is really quite a perverse view of how the world should operate.

Richard Colbeck: Sham deal to shut forestry morphs into $100m Labor fund to buy seats

Kim Booth: Local businesses should be first priority for Gunns assets

Forestry Tasmania: Bioenergy - A future forest industry for Tasmania?

Loss of trees linked to higher death rates in humans

ABC: Green groups sound warning over woodchip return