It looks like your using a mesh terrain (rather than a heightmap terrain). Mesh terrain has an option to use its bounding box as its surface, but you would want this turned off in this case. You would use it to save resources if your terrain object only needed a flat surface on top. In your case you want the actual mesh to be the surface for planting.
Select the terrain in the scene manager.
In the modify panel, un-check to "use bounding mesh" option.
Now plant on the terrain.
