Macquarie Forestry update 2013

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1 Macquarie Forestry update

2 Contents Welcome 3 Inventory measurements and growth models Investors Investors Investors Investors Investors Investors Investors Investors Investors 9 Woodchip price update 10 Asia Pacific woodchip update 11 Australian supply into the Asia Pacific woodchip market 12 Rainfall update 13 Fire update 16 Land update 17 Benchmark Disclosure 17 Geddes Management Pty Ltd 17

3 Welcome Welcome to the 2013 Macquarie Forestry update from the Macquarie Agribusiness team, designed to keep you up to date on your investment as well as key developments in the forestry industry. Despite continuing uncertainty surrounding some agricultural managed investment schemes, we would like our investors to be aware that all Macquarie Forestry Investments continue business as usual. The insolvency of a number of Australian forestry companies has led some people to question the viability of forestry investments in general and to ask us about the solvency of the Macquarie projects. Macquarie Financial Products Management Ltd and Macquarie Alternative Assets Management Ltd (Macquarie) are responsible for managing over 21,500 hectares of forestry plantations on behalf of retail investors across 18 managed investment schemes established between 2003 and 2011 inclusive (Projects). Despite the current depressed prices for timber, that if maintained will adversely impact the potential returns for investors, all of the Projects continue to be well funded and to operate in accordance with the scheme constitutions and the PDS s. Macquarie currently expects the first forestry project to commence harvesting at the beginning of 2014 in accordance with original expectations. The Macquarie Forestry Investments structure is different to many of the other forestry managed investment schemes that were established by others in the industry. Since 2003, Macquarie offered investors the opportunity to participate in retail forestry investments that provide exposure to both trees and land. Unlike many competing forestry investment projects, the Macquarie Forestry Investment structure does not rely on external bank debt to acquire land used for the Projects nor ongoing sales to support the operations of the Projects. Macquarie Forestry investors also benefit from the comprehensive risk management and operational framework of the Macquarie Group, a diversified financial services company and global provider of banking, financial, advisory, investment and fund management services. The strength of the AUD/USD exchange rate over the last 24 months has had an impact on Australian woodchip prices, which are globally traded in US dollar terms. Australia is the only country which sets its export hardwood chip prices in domestic currency, therefore a stronger AUD/USD exchange rate naturally places downward pressure on Australian woodchip prices. Additionally, the recent events surrounding the Australian forestry industry with many operators being forced to sell timber to generate short term cash flow has placed additional downward pressure on Australian woodchip prices. While the benchmark hardwood woodchip free on board (FOB) contract rate was unofficially set at $A per Bone Dry Metric Tonne (BDMT) in 2012, there have been a number of sales by Australian hardwood woodchip exporters through the spot market at prices significantly lower than this amount. A number of these spot sales have been made to China, which has seen an increase in its demand for imported woodchip over recent years. Contributing further to the downward pressure for Australian exporters has been the large volumes of supply coming out of countries such as Vietnam and Thailand which have been able to supply large volumes of low priced timber to China. A number of industry commentators have questioned the sustainability of such supply from those countries whilst the demand from China for imported woodchips is expected to continue over the next few years. This, and the weakening AUD are the main sources of hope for a recovery in the price of timber. Macquarie remains dedicated to delivering the highest standards in the development of the Macquarie Forestry Investments and we thank you for your continuing support. Bone Dry Metric Tonnes (BDMT) a measurement used in the forestry industry relating to a metric tonne of dried woodchips. Free on board (FOB) a trade term requiring the seller to deliver goods on board a vessel designated by the buyer. 3

4 Inventory measurements and growth models Future growth of forestry plantations using scientific models can be uncertain, given that models assume the continuation of average growing conditions (particularly average rainfall) and therefore cannot fully capture all types of possible agriculture risk. Future growth of agricultural projects, including forestry, will be determined by climatic and environmental conditions which can vary widely from the long term average. As a result, while inventory results can provide a guide on the projected yield at harvest, care must still be taken not to rely too much on inventory information (particularly earlier inventory measurements) due to the level of extrapolation involved in the growth models and the variability in growing conditions that may occur over the remaining years of a project. While growth models can never be relied upon with absolute certainty, the level of confidence becomes greater the closer the inventory measurements are taken relative to projected harvest ie a year three inventory measurement requires a greater degree of extrapolation than a year seven inventory measurement, and therefore greater care must be taken when relying too much on younger inventory results Investors Trees in the 2003 Eucalypt Project were established in June 2004, and are now into their ninth year of growth. The year seven inventory checks for the 2003 project were completed in June Mean Dominate Height (MDH) was measured at 16.9 metres, a 28 per cent increase from the year five inventory check. Growth model measurements estimate a projected standing volume of 210 Green Metric Tonnes (GMT) and a merchantable harvest yield of approximately 189 to 199 GMT per hectare, when allowing for harvesting losses. These measurements have been externally verified by the external expert, Geddes Management Pty Ltd (Geddes). It is important to note that the 2003 Eucalypt Project has been exposed to prolonged dry periods since planting and tree performance is known to be adversely effected by deficits in soil moisture. The above average rainfall experienced in 2010 and 2011 has the potential to promote tree growth by providing reasonable soil moisture. However there are additional external factors which could impact growth and Victoria as a whole has experienced below average rainfall from the last quarter of 2012 through the first half of Green Metric Tonnes (GMT) a term used in the forestry industry for a metric tonne of freshly cut timber, bark mulch, etc. Mean Dominate Height (MDH) the mean (average) height of the tallest trees in a sample. Merchantability of timber reflects the percentage of standing timber that can be processed into woodchips and later sold. The percentage of merchantable timber will vary between plantations and can also vary depending on the harvesting method used. Merchantability yields described in this report are based on a merchantability factor of between 90 to 95 per cent of standing timber. Actual merchantability may be higher or lower than these amounts. Standing Volume the actual GMT of wood at the point the tree is cut down, before harvest. 4

5 It was noted by the external expert, Geddes, that tree growth varied between properties. Some properties appeared to perform above expectations, while trees on other properties performed below expectations. Tree growth is predominantly related to rainfall, therefore this variation is attributable to the varied seasonal conditions across different properties. The 2003 project is scheduled to start harvesting at the beginning of Negotiations with Midway have commenced and we expect to have a harvest plan finalised by the end of August this year. We will keep you updated on the date harvest begins and how it progresses throughout Inventory measurements are performed every two years. The year nine inventory measurement for the 2003 Eucalypt Project is expected to be conducted in the second half of Due to this being closer to the harvest date, it will provide a better indication of the overall project performance. The results of the year nine inventory measurements will be reported to investors in the next annual newsletter Investors The year seven inventory analysis was completed in the second half of The inventory measurements were undertaken at an average tree age of 6.6 years. Growth projections for the Project are a standing volume of 213 Green Metric Tonnes (GMT) and a merchantable harvest estimate of between 191 and 202 GMT per hectare. The year seven inventory measurement is consistent with the 219 GMT per hectare figure reported to investors approximately two years ago. Generally, Geddes commented that the plantations were showing variable growth between properties, with a number of properties showing good growth and canopy closure. Geddes noted that although there had been growth variations between properties and sub-regions, it was clear that Midway, the plantation managers, have prepared, monitored and managed the properties in line with the industry-wide plantation forestry standards. The next scheduled inventory measurement for the 2004 Eucalypt Project will be the year nine inventory check, which will occur in the first half of The results of the year nine inventory measurements will be reported to investors in the 2014 annual newsletter Investors As previously communicated, replanting of a majority of the 2005 Eucalypt Project was required as a result of severe dry conditions and frosts which occurred at the time of planting. The year of initial planting was one of the worst recorded dry periods in the region. Very dry air during the season led to severe frosts that resulted in the freezing of plant tissue affecting early survival, with dry soil and continual frosts making it difficult for newly planted trees to survive. Due to these challenging climatic conditions, the plantation manager (McEwens) replanted some failed areas in Good survival rates were achieved for the required replanting and reasonable early growth was observed. With the return of higher than average rainfall over the last two years in Victoria, a large amount of the replanted areas have also continued to witness reasonable growth. The higher than average rainfall also resulted in some areas of the replanted trees being inundated for large periods of time. Efforts were taken to alleviate the impact of this inundation but unfortunately approximately 10 per cent of the entire project is now expected to produce a yield below 80 Green Metric Tonnes (GMT) per hectare. 5

6 Due to the levels of replanting, the 2005 Eucalypt Project contains a mixture of trees of different ages. The inventory measurements were undertaken at an average tree age of 4.7 years. Mean Dominate Height (MDH) has increased by 72 per cent since the last inventory check, to around 10 metres. Growth projections for the Project at an average tree age of 10 years are for a standing volume of 199 GMT and a merchantable harvest estimate of between 179 and 189 GMT per hectare, externally verified by Geddes Management Pty Ltd (Geddes). It is important to note that these estimates are based on tree growth of 10 years, which in some cases may not eventuate if the trees are harvested in accordance with the original time frames due to replanting of certain area in the Project. Accordingly, the harvest estimates for the 2005 Project will be materially lower than the projections originally noted in the Product Disclosure Statement. The next scheduled inventory measurement for the 2005 Eucalypt Project will be the year seven inventory check, which will occur in The results of the year nine inventory measurements will be reported to investors in the next annual newsletter Investors Trees in the 2006 Eucalypt Project were planted in 2007 and are now into their sixth year of growth. Geddes Management Pty Ltd (Geddes) reported that since the previous inventory in 2010, there has been a noticeable improvement in tree growth. A year five inventory measurement of the 2006 Eucalypt Project was undertaken in Growth projections for the entire Project are a standing volume of 245 Green Metric Tonnes (GMT) and a merchantable harvest estimate of between 220 and 233 GMT per hectare. Harvest forecasts based on 2012 inventory is approximately 15 per cent above yields based on the 2010 inventory. This is likely to be a result of trees responding to better soil moisture conditions following the break of the drought in Geddes reported no obvious signs on insect damage in any of the 2006 plantations and that grasses are mainly under control with sheep grazing being used in all seven properties as a means to control understory grass growth. Geddes also noted that Red Gum regeneration is present in parts of five out of the seven plantations for the 2006 project but stated that the Blue Gum trees are dominating the regrowth and it is not expected to impact plantation growth unduly. The next scheduled inventory measurement for the 2006 Eucalypt Project will be the year seven inventory check which will occur in The results of the year seven inventory measurements will be reported to investors in the 2014 annual newsletter. 6

7 2007 Investors Trees in the 2007 Eucalypt Project were established in June 2008 and are now into their fifth year of growth. The year three inventory checks completed in April 2011 showed tree survival rates of 997 trees per hectare, above the original targets of 900 trees per hectare, attributable to the good rainfall during the past two years. Mean Dominate Height (MDH) was measured at around nine metres. Externally verified growth projections for the Project are a standing volume of 232 Green Metric Tonnes (GMT) and an estimated merchantable harvest of between 208 and 220 GMT per hectare. Geddes Management Pty Ltd (Geddes) noted in their report that tree growth across a number of areas was favourable to expectations, with good to very good growth observed across a number of properties. It was noted however, that tree growth was poorer on some parts of properties with exposed edges. This is due to the fact that trees at the edge of the forest are less sheltered and act as a wind-break to the interior trees. Entering into their fifth year of growth, the plantations will continue to be monitored by the forestry managers. Appropriate data collection and analysis will be undertaken to ensure any potential problems can be quickly identified and attended to. There is a dedicated officer for the McEwens managed plantations to ensure corrective actions are completed as promptly as possible. There are risks in relying too much on year three inventory information due to the lengthy extrapolation required by the growth models to project the future performance of young trees. A level of caution must therefore be applied to these early inventory results. The next scheduled inventory measurement for the 2007 Eucalypt Project will be the year five inventory check which will occur in The results of the year five inventory measurements will be reported to investors in the next annual newsletter Investors Trees in the 2008 Eucalypt Project were planted in 2008 and are now into their fourth year of growth. Geddes Management Pty Ltd (Geddes) reported that most trees have experienced strong canopy growth. A year three inventory measurement of the 2008 Eucalypt Project was undertaken in Growth projections for the entire Project are a standing volume of 250 Green Metric Tonnes (GMT) and a merchantable harvest estimate of 225 to 238 GMT per hectare. Geddes did observe that the growth on some of the 2008 plantations had been affected by weed competition and insects. We continue to monitors the trees for disease, insects, weeds, wind damage and also ensure that fire breaks are maintained. There are risks in relying too much on year three inventory information due to the lengthy extrapolation required by the growth models to project the future performance of young trees. A level of caution must therefore be applied to these early inventory results. The next scheduled inventory measurement for the 2008 Eucalypt Project will be the year five inventory check which will occur in The results of the year five inventory measurements will be reported to investors in the 2014 annual newsletter. 7

8 Fire Breaks are gaps in the forest to help stop the spread of fire and allow access to the fire fighting appliances if necessary Investors The 2010 Eucalypt Project includes 2,417 hectares of plantations established on 10 properties in the Portland region. The year one inventory measures consist of survival counts. The overall weighted average stocking across the entire 2010 project was 911 trees per hectare, greater than the Product Disclosure Statement target of 900 trees per hectare. Geddes Management Pty Ltd (Geddes) observed that most properties had good survival rate and satisfactory second year weed control. Geddes also noted that the plantations were established during and after a very wet winter which caused operational delays with site preparation, mainly on the Anderson plantation which makes up 244 hectares on the 2010 Project. The survival rate was poor over approximately 60 per cent of the Anderson plantation and as a result this area was sprayed and replanted in The next scheduled inventory measurement for the 2010 Eucalypt Project will be the year three inventory check which will occur in The results of the year three inventory measurements will be reported to investors in the 2014 annual newsletter Investors The 2009 Eucalypt Project includes 602 hectares of plantations established on four properties in the Portland region. Trees on all four plantations are generally showing consistent growth, and a number of trees have developed strong canopy growth following the last two wet years. It is common practice that some trees will have to be replaced in their first year. Replanting work to replace trees that died in the 2010/2011 summer was effectively undertaken in the winter of Overall, stocking rates across the Project are satisfactory, with survival rates of 965 trees per hectare observed, externally verified by Geddes Management Pty Ltd. The next scheduled inventory measurement for the 2009 Eucalypt Project will be the year three inventory check which will occur in The results of the year three inventory measurements will be reported to investors in the next annual newsletter. 8

9 2011 Investors The estate was planted during the 2012 planting season, between May and September. The external expert, Geddes Management Pty Ltd, noted that generally planting results across all properties met Project Product Disclosure Statement expectations in terms of early tree survival and stocking. Mound preparation and weed control was satisfactorily carried out. The quality of planting in terms of tree straightness, planting depth and firmness met Project requirements. The first scheduled inventory measurement for the 2011 Eucalypt Project will be the year one inventory check which will occur in 2013, and will measure survival rates of the plantations against the 900 seedlings per hectare target. The results of the year one inventory measurements will be reported to investors in the next annual newsletter. Woodchip price update The price for Australian hardwood woodchips has been historically set through annual negotiations between major suppliers and Japanese pulp and paper manufacturers. However, recent changes in the forestry plantation industry due to the collapse of a number of large companies such as Timbercorp, Great Southern, and Gunns have resulted in an individual rather than consolidated negotiation process. Hardwood timber from broad-leaved flowering trees irrespective of physical hardness. Includes eucalypts, wattles and most rainforest species. The contract price for Australian plantation grown Blue Gum woodchip for export to Japan remained constant from 2008 to 2011 at $A free on board (FOB) per Bone Dry Metric Tonnes (BDMT). For 2012, the unofficial benchmark hardwood woodchip FOB contract rate to Japan was set at $A BDMT. It is believed that this price will be lower again in 2013 within the $A170 to 185 p/bdmt range. Throughout the course of 2012 and 2013 however, there were a number of sales by Australian hardwood woodchip exporters through the spot market at prices significantly lower than the benchmark, with some reported vessels being exported at $A150 p/bdmt or below. A number of these spot sales have been made to China, which has seen an increase in its demand for imported woodchip over recent years. A typical, yet simplified woodchip pricing table is provided below. This illustrates how prices derived from the FOB per dry metric tonne price are converted back to a stumpage price per green metric tonne (GMT). The stumpage price is the price received per GMT by investors for their timber after all costs associated with harvesting, chipping and delivering the timber to port are considered. A per hectare return can be estimated by multiplying a stumpage price by the merchantable estimated GMT per hectare. Bone Dry Metric Tonnes (BDMT) a measurement used in the forestry industry relating to a metric tonne of dried woodchips. Free on board (FOB) a trade term requiring the seller to deliver goods on board a vessel designated by the buyer. 9

10 Investors should note that the below table is just an example and that negotiations are currently being held with Midway to determine a stumpage price for the 2003 project. Part of these negotiations is agreeing reasonable chipping, harvest and transport costs. Harvest costs will differ from plantation to plantation and are influenced by the size of the trees, the gradient of the land and ease of harvest. For the purpose of this example, we have used an illustrative transport cost of $0.14 p/km and an average distance to port of 140km, which is consistent with the average distance to port for the 2003 project. The table below also highlights the impact on stumpage prices when the FOB price moves from $ BDMT, the contract rate to Japan from 2008 to 2011, to $160 BDMT. As chipping, harvest and transport costs are generally a fixed cost per GMT, in percentage terms, a change in the FOB price has a magnified impact on stumpage prices. Simple illustration of woodchip pricing: FOB price $/bdmt 160 less: port costs (20) less: moisture content 50% FOB price $/GMT 70 less: chipping costs (15) Mill door price $/GMT 55 less: harvest costs (27) less: transport costs (19.6) less: other costs (3) Stumpage price $/GMT 5.4 FOB price $/bdmt less: port costs (20) less: moisture content 50% FOB price $/GMT 93.7 less: chipping costs (15) Mill door price $/GMT 78.7 less: harvest costs (27) less: transport costs (19.6) less: other costs (3) Stumpage price $/GMT 29.1 The competitiveness of Australian woodchip exports has been impacted by the strong Australian dollar which is making it harder for exporters to compete with overseas suppliers. Contributing further to the downward pressure for Australian exporters has been the large volumes of supply coming out of countries such as Vietnam and Thailand which have been able to supply large volumes of lower quality and lower priced timber to China. A number of industry commentators have questioned the sustainability of such supply from those countries, and how this will impact the demand from China for imported woodchips which is expected to continue over the next few years. The woodchip market continues to reflect that a premium is paid for plantation based hardwood woodchips over native forest based woodchips. Market acceptance of native (ie non-plantation) fibre has been weakening in recent years, as discussion around climate change and sustainability takes on a greater prevalence across the globe. A number of paper manufacturers have been seeking a higher proportion of their woodchip to be sourced from sustainable forests. This has been evident in recent years where export volumes of native timber have reduced considerably. Tonnes 350, , , , , ,000 50,000 Australian woodchip export volume and price to China and Japan Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Japan Quantity Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 China Quantity Japan FOB/bdmt China FOB/bdmt Price (AUD) 10

11 Asia Pacific woodchip update The Asia Pacific hardwood woodchip market has experienced fundamental changes on both the supply and demand sides over the last five years. During the last 20 years, Japan has been by far the largest importer of hardwood woodchips in the Asia Pacific region. The global paper and paperboard market experienced a dramatic fall in demand for paper and paperboard products during 2009 which brought forward decisions to close down older and less competitive production units in Japan. Contrary to this decline in Japanese demand for paper and the closing of paper mills in Japan, the number of paper mills in China entering production has increased since This has resulted in China increasing its market share of Asia Pacific woodchip imports from seven per cent in 2008 to 36 per cent in It is expected that the overall size of Japan s position in the market will continue to decrease, particularly if demand from China continues to increase. At this stage, Japanese purchasers appear willing to acquire woodchip imports at a premium to purchasers in China in exchange for having increased certainty of supply and quality. Vietnam and Thailand have emerged as significant suppliers in the Asia Pacific region with a collective share of 46 per cent of the region s hardwood woodchip exports in This is a significant increase from 2008 when the combined countries exported 17 per cent of the Asia Pacific regions woodchips. Export volumes from Vietnam increased from 2.2 million BDMT in 2009 to 5.4 million BDMT in 2011 while export volumes from Thailand increased from less than 1.0 million BDMT in 2009 to 2.4 million BDMT in As stated previously, industry commentators have questioned the sustainability of such supply from these countries. In an attempt to address its consumption needs, China has been expanding its own efforts in pulpwood plantations. While this may ease the country s net deficit of hardwood pulpwood over the longer term, China is still expected to remain a significant net importer of hardwood fibre during the next decade. Pulpwood relates to logs which are below sawlog quality, but are suitable for manufacturing pulp, paper and panel products. 11

12 Australian supply into the Asia Pacific woodchip market Australia has been the largest woodchip supplier in the Asia Pacific region for the last 20 years, however was overtaken in 2011 by Vietnam who supplied 5.4 million BDMT compared to Australia s 3.5 million BDMT. Exports of hardwood woodchips from Australia fell 31 per cent in 2011 from 4.6 million BDMT exported in This large drop in supply stabilised in 2012 with 3.3 million BDMT of hardwood woodchip exported, a drop of only five per cent. Plantation fibre has traditionally commanded a price premium over native based fibre and is preferred by the pulp and paper industries, as it typically gives higher pulp yields. This is due to the uniformity and consistency it delivers when processed. The woodchips produced by the Macquarie Forestry Investments are plantation based fibre, meaning investors have the potential to benefit from any premium paid for plantation based product over native based timber. The ability for Australian woodchip exporters to supply the markets is impacted by a number of factors, including the level of competition from other international woodchip suppliers. Australia s proximity to Asia provides Australian timber suppliers with an advantage relative to their competitors based in the Americas and South Africa, in terms of shipping distance and time to the Asian regions (see Figure 1 below), however, competitors in South-East Asia (for example, Thailand and Vietnam) have a proximity advantage over Australian suppliers to markets such as China. Figure 1 average shipping distance times to major selected ports Mobile - Japan 28.7 days Mobile - China 32.8 days Macapa, Brazil - Japan 33 days Macapa, Brazil - China 34.6 days Geelong - Japan 17.3 days Geelong - China 17.2 days Portland - Japan 17.5 days Portland - China 17.4 days Coronel, Chile - Japan 30.0 days Coronel, Chile - China 32.6 days Source: Poyry, Australian and Asia-Pacific hardwood woodchip market review. 12

13 Rainfall update The above average rainfall experienced by all plantation areas during 2011 extended through to September of All plantation areas except the Otways area received above average rainfall between January and September of 2012, but witnessed a continued dry spell in the last quarter of This dry period has continued into 2013 and ultimately resulted in large areas of Victoria being impacted by bushfires. According to the Australian Bureau of Meteorology, the dynamical seasonal outlook model indicates an increased likelihood of La Niña forming during the next few months with a 60 per cent chance of exceeding the median rainfall for July to September in Southern Victoria. Table 1 below, illustrates the amount of rainfall received across the Macquarie Forestry Investment catchments from 1 January 2012 to 31 May In the majority of circumstances, rainfall has been below average for the period. Table 1 Rainfall data across selected Macquarie Forestry Investment catchments (January 2012 May 2013). Region 1 January 2012 to 31 May 2013 Period Average +/-(Period v Average) Casterton % Gippsland % Strezlecki % Ballarat % Hamilton % Otways % 13

14 As shown in the below graphs, the below average rainfall for the 2012 calendar year can be largely attributable to the low levels of rainfall during the last quarter of 2012 which has continued into the first half of The plantations are witnessing very minor signs of drought stress but this should have no material impact on final harvest yields should average rainfall conditions return in the near future. Monthly Rainfall charts across selected Macquarie Forestry Investment Catchments (January 2012 May 2013). 120 Casterton monthly rainfall January 2012 to May Rainfall (mm) Actual Average 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Month Gippsland monthly rainfall January 2012 to May 2013 Rainfall (mm) Actual Average 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Month 14

15 Strezlecki s monthly rainfall January 2012 to May 2013 Rainfall (mm) Actual Average 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Month Ballarat monthly rainfall January 2012 to May Rainfall (mm) Actual Average 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Month Hamilton monthly rainfall January 2012 to May Rainfall (mm) Actual Average 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Month 15

16 Otways monthly rainfall January 2012 to May Rainfall (mm) Actual Average 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Month Source: Australian Bureau of Meteorology. Fire update During the first quarter of 2013, bushfires were present across various parts of Australia including the state of Victoria. Properties in the 2005, 2006 and 2008 Macquarie Eucalypt Projects have been impacted by bushfires during this period, affecting approximately 65 hectares of the 2005 project, 48 hectares of the 2006 project and 50 hectares of the 2008 project. ARC Natural Risk Pty Ltd, an agribusiness loss assessment company, has been commissioned by Rural Affinity Insurance Agency Pty Ltd, the insurer for the plantation, to assess the damage to the plantation caused by this bushfire. A claim has been lodged with the insurer for all areas impacted except for 40 hectares of the 2005 project where we are exploring market opportunities for the impacted trees. We expect to receive insurance proceeds from the insurer in the coming months which will be paid to insured investors who were impacted by the fire events. Removal of debris has commenced for the fire impacted areas with trees being heaped into windrows to reduce their moisture content before they are extinguished next winter. All impacted areas have been mapped except for 40 hectares of the 2005 project and advisers have been informed of their clients who have had lots affected by the fires. Once the claims have been honoured by the insurer, impacted investors will be notified accordingly. 16

17 Land update The onset of the global financial crisis (GFC) in 2009 and the subsequent collapse of a number of large operators of agricultural managed investment schemes led to a flattening of rural land prices and in some parts of Victoria, a decrease in land price. The recent administration and subsequent liquidation of the Gunns group of companies could place more pressure on forestry land prices as was the case during the industry restructuring after the collapse of Timbercorp and Great Southern Plantations. The value of rural land is directly related to the revenue the land is capable of producing. Previous woodchip prices of $ BDMT meant that forestry plantations were highly profitable, and in turn supported the value of land on which forestry plantations were established. As indicated in the Woodchip Price Update section of this newsletter, stumpage prices have fallen recently and this is expected to have a direct impact on the value of forestry plantation land. Due to the current commerciality of forestry plantations it is also expected that after harvest, some of the land will be converted back to bare land for other agricultural uses. This involves clearing the land of tree stumps and levelling out the soil, costing approximately $1,500 to $2,000 per hectare. Such costs are considered when valuing land that is to be converted. Colliers International noted in their National Rural and Agribusiness Research Report 2012 that the total value of agricultural land in Australia decreased 12 per cent in This is the first time since 1993 that the total value of agricultural land in Australia has decreased. The report also notes that major banks and rural lenders have taken a more conservative approach since the GFC and are reluctant to extend new credit to farmers wishing to increase their land holding. Many of the transactions over the last 12 months have been distressed asset sales which have resulted in legitimate sales being held back from the market until market conditions and sentiment improves. Colliers International Valuations sees rural property markets in general being more likely to track sideways in the short to medium term. Benchmark Disclosure In accordance with the recommendations issued by the Australian Securities and Investments Commission (ASIC) in Regulatory Guide 232 we have prepared a review of the Macquarie Forestry Investments against ASIC s benchmarks and disclosure principals for agribusiness schemes. Our review is available on our website CFSInvestor/login.aspx?id=AGR2. We will update this information annually and at any earlier time where there is a material change to the information. These updates will also be made available on our website. Geddes Management Pty Ltd Geddes Management Pty Ltd is a South Australian based independent management consultancy company, specialising in plantation forestry. David Geddes, principal of Geddes Management Pty Ltd, has a Bachelor degree in forestry and is a qualified forester with more than 38 years of practical plantation forestry experience in Australia including; nursery management, site selection, site preparation, plantation management, forestry research, harvesting and timber processing. David has been providing independent hardwood and softwood plantation consultancy services since Geddes Management Pty Ltd has consultancy experience in all plantation regions of Australia. David Geddes is currently Chair of the South East Resource Information Centre, past President of Australian Forest Growers and is the former Presiding Member of the Natural Resource Management Board in SE South Australia. He is also a member of several professional associations including the Institute of Forester of Australia, the Australian Institute of Management and the Australian Organisation for Quality. David has accreditation through the Institute of Foresters of Australia as a Registered Professional Forester. Geddes Management Pty Ltd is not in any way related to MAAML, Midway or McEwans but has been engaged as an Independent Forester for the Eucalypt Projects to inspect and review a sample of plantations in each Project and is paid a fee in respect of these services. 17

18 Keep up to date You can keep up to date with your Macquarie Forestry investment by visiting our website: Please feel free to contact us via at if you have any questions, or suggestions regarding what you would like to hear about in the next agribusiness newsletter Macquarie Agribusiness GPO Box 804 MELBOURNE VIC 3001 This information has been prepared by Macquarie Alternative Assets Management Limited ABN , AFSL , (MAAML) and Macquarie Financial Products Management Limited ABN , AFSL , (MFPML) and is current as at 18 July This information has been prepared for general information purposes and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This newsletter has been prepared in good faith with all reasonable care. However, certain parts of the information in this document may have been obtained or may be based upon information obtained from third parties which may not have been checked or verified and consent may not have been obtained from all relevant stakeholders. Macquarie believes these sources to be reliable but does not make any representation or warranty that the information is accurate, complete, verified or up to date. To the extent permitted by law, none of MAAML, MFPML, any other company in the Macquarie Group or their respective directors, employees, consultants and agents makes any warranty as to the accuracy or suitability of this information or accepts any liability for errors or misstatements, negligent or otherwise or any loss or damage suffered by any person arising out of or in relation to this newsletter. Past performance is not an indication of future performance and no guarantee is given in respect of the performance of, or return of capital from, an investment or any fund. Investments in the Macquarie Forestry Investments are not deposits with, or other liabilities of, Macquarie Bank Limited ABN (MBL) or any Macquarie Group company and are subject to investment risk, including possible delays in repayment and loss of income or principal invested. Neither MBL nor any other member of the Macquarie Group guarantees any particular rate of return, the performance of, or the repayment of capital from the Macquarie Forestry Investments. For the purposes of the newsletter the Macquarie Group shall mean Macquarie Group Limited and its related bodies corporate. Macquarie Group. 18

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