It's not a good idea to modify the forest automaterial, because it is updated automatically by the plugin, to consolidate all materials of the Geometry list. Also, as general rule the Consolidate checkbox must be on, specially using the library.
I just tried it the procedure described in my previous post, and everything works fine; the material assigned to the Geometry parameter is normal, not XRef. What library element are you testing ? If you like, post the scene here and we'll check it.
Edit: ok, i can reproduce the problem creating a custom library, not with the standard ones. I'm checking it, please hold on.