Introduction
The National Farmers’ Federation (NFF) described Australian farmers as being ‘among the most self-sufficient in the world’. The NFF added, however, that government must support farmers to remain resilient, providing policy settings that ‘assist farmers attract new capital and manage risk.’
6.1
The 2030 Roadmap argues that over the coming decade Australian producers need to ‘become increasingly sophisticated in their approach to governance, risk management and planning for the future.’ Hopefully, this planning will help unlock the investment needed to fund accelerating growth, as well support a new generation of farmers to step into business ownership positions.
This chapter will consider finance options including: loans; insurance and other risk management tools; and foreign investment. In addition, the future of farm ownership, including succession planning for family farms and the consolidation of smaller farms into larger enterprises will be discussed.
Review of the Evidence
Risk Management and Access to Credit
6.2
The NFF reported that in order to support a ’trajectory of aggressive growth’ the agriculture sector needed to overcome a capital shortfall of around $160 billion. The NFF suggested that improved planning and risk management will help producers attract more investment and debt finance. The NFF hopes, therefore, that by 2030 ‘every farm business will have a clear strategy for managing the inherent risks of farming.’
Loans and Credit Available to Farms
ANZ drew attention to debt in Australian agriculture businesses and pointed out that there is:
... an important distinction to be made between ‘good debt ‘or debt which adds to the productive capital base of the farm and industry as a whole, and ‘bad debt’ which is typically seen as debts which is taken out to cover drops in income in times of drought or poor seasonal outcomes.
ANZ added that figures show that ‘small and medium sized farmers are likely to use debt to cover poor profit outcomes. In contrast, large farmers are less than half as likely to take out debt to cover poor profit outcomes.’
WA Farmers suggested that banks were reluctant to lend to farmers and compared the lending scenarios faced by farmers and home buyers, stating:
... you can be a 23-year-old who's left university and has a job, or a tradie who's finished their trade, and they can go and borrow with a five per cent deposit to buy a house. But if you're in agriculture banks start looking very deeply at you once your equity level drops below 40 per cent. When you look at the long-term increase in asset values of farmland over the last 30 years, that's been tracking around three per cent. It's probably one of the more secure investments.
WA Farmers argued that banks should instead be helping ‘best and brightest’ farmers to expand their operations but that this was not happening due to outdated perceptions of agriculture within their sector. WA Farmers elaborated that some bankers have witnessed difficult times such as the millennium drought and so adopted a conservative attitude towards agriculture, but as a result they may be missing a boom period in agriculture.
The Australian Table Grape Association highlighted that due to the difficulties in gaining finance from banks growers often had few options but to sell crucial water rights:
Here in Victoria allocations of water are 42 per cent. Farmers who do not have enough money to buy the other 58 per cent are forced to shut down 58 per cent of their permanent plantings. If the bank refuses you finance, you must sell a liquid asset, which is your high-security water rights to survive for that season.
6.3
In October 2020, the Australian Government announced that it would increase the resources provided to the Regional Investment Corporation (RIC) by $2 billion in 2020-21. The RIC provides loans for farmers and farm related small businesses to encourage ‘growth, investment and resilience in Australia’s regional communities.
Risk Management
The NFF has described the agriculture sector as being ‘more volatile than any other sector in the Australian economy’. In order to build resilience to this volatility the 2030 Roadmap sets a target for 90 per cent of Australian farmers to be ‘employing multiple financial tools to manage risk.’
Rabobank stated that the ‘utilisation of appropriate risk management tools to mitigate the increased incidence and impacts of weather and climatic events will play an increasing role in ensuring affordable access to finance.’
The Australian Farm Institute (AFI) stated that there was a need for improved financial literacy among producers and stated ‘farm business management which strengthens financial resilience and delivers the capability to absorb production, market and institutional shocks is the most effective way to address multiple risks.’
AFI stated that the ‘Australian market for risk management tool such as weather derivatives and multi-peril crop insurance is still notably immature’. Rabobank acknowledged that the agricultural commodity derivatives market could have negative impacts when used for speculative purposes, but also that ‘the role of the derivatives market is becoming even more important now that the markets are becoming tighter and more volatile.’
WA Farmers stated that the agriculture industry has been trying to develop a strong risk mitigation system for forty years without success. Ultimately, WA Farmers suggested, ‘there is an insurance scheme out there ... it’s called land values, you buy rainfall and you buy rain security, if it’s too dry for your risk model then sell and pay double for more reliable rainfall.’
In July 2020, the Australian Government’s Future Drought Fund began supporting farmers and rural communities to ‘prepare for and become more resilient to the effects of future drought.’ The Future Drought Fund was established through an initial investment of $3.9 billion, which is expected to grow to $5 billion by 2028-29. The fund will make available $100 million each year to for drought resilience projects including improving soil and vegetation, accessing business management training and risk management tools, providing information to assist decision-making, and improving resilience of community facilities.
Farm Management Deposits
Box 6.1: The Farm Management Deposit Scheme
The Farm Management Deposit (FMD) scheme is designed to ‘assist primary producers to become more self-reliant, manage financial risks, and deal more effectively with fluctuations in their cash flow.’ The FMD scheme allows producers to make deposits into an FMD account and reduce their taxable income in the year the deposit is made with subsequent withdrawals being assessed as income in the year of withdrawal.
The depositing of funds in FMD accounts results in foregone taxation revenue for the Government. In recent years, this foregone revenue has totalled approximately $250 million per year, with the exception of 2017‑18 when foregone revenue grew to $500 million.
Between the financial years 2016-17 and 2019-20 there has been significant variation in the conditions for agriculture due to the presence, and then lifting, of drought on the East Coast. Despite the differing conditions the overall quantity of money deposited in FMD accounts during this period has remained stable ranging from $6.11 billion to $6.75 billion. The most recent figures available show that at 30 June 2020 there was $6.49 billion deposited in FMD accounts.
WA Farmers were critical of the RIC and the FMD schemes. WA Farmers described the FMD scheme as a failure as ‘there should have been a vast flood of money coming out of FMDs from the drought last year ... and that hasn’t happened’. WA Farmers suggested that if FMDs were abolished this would change farmers’ approach to risk and that ‘anything that helps focus people’s minds on managing their own risk is a good thing, anything that allows people to access capital to buy the neighbouring property before someone from overseas does is a good thing.’
Mutual Insurance
Mr Sam Davies, an agronomist and research extension specialist, stated that ‘mitigating environmental (yield) and price ($/t) risk will have massive flow on effects to farmers, and rural communities.’ Mr Davies advocated for income protection provided by a farmer owned mutual as the most effective way of reducing risk.
6.4
Latevo Farmers Mutual (LFM) is a grower owned entity that currently provides farm income protection to producers in the grains industry but is hoping to expand into other agricultural sectors. LFM outlined how, without income protection, farmers take a cautious approach to risk resulting in a reluctance to make potentially beneficial investments, stating:
Currently farmers take an ultra-conservative approach to crop inputs. Due to the uncertainty of seasons it is financially prudent to do so. Unfortunately, this leads to underutilisation of current best practice technology in fertiliser, nutrition and disease management.
In contrast, LFM elaborated, if a farmer has income insurance they can afford to take the risk of spending more on the crop inputs that could lead to a higher yielding crop. LFM explained that its business is currently structured to run at a profit 85 per cent of the time and 15 per cent of the time it runs a deficit. LFM explained that it is seeking government backing to cover shortfalls on a loan basis that would be paid back out of future surpluses.
Hall Chadwick, Chartered Accountants and Business Advisors, wrote in support of LFM’s proposal that ‘farm income protection is common in the United States, China, India, Europe, and Canada and is subsidised at varying levels by Government.’ Hall Chadwick called for the Australian Government to provide funding for a mutual totalling $1 billion over five years made up of $500 million to subsidise premium funding, $400 million to purchase re-insurance, and $100 million to help expand the mutual to agricultural sectors beyond grain.
WA Farmers also supported the idea of a government backed mutual fund, noting that many schemes had been trialled to assist farmers get through difficult seasons but that most have failed. Despite this, WA Farmers stated that:
... one of the few viable options put forward that could gain some traction in Treasury is some form of farmers mutual (like private health insurance mutual) set up for the express purpose of underwriting seasonal cropping and livestock replacement and management programs.
WA Farmers suggested that there are a number of ways to fund a $1 billion guarantee including redirecting funds from the drought support program or by only providing a mutual guarantee to farms who agree to withdraw from the Farm Household Allowance Scheme.
Additionally, WA Farmers suggested that providing farmers with income insurance would enable them to withdraw their savings from the Farm Management Deposit scheme. Farmers are taxed when they withdraw money from their FMDs and so WA Farmers stated that the Government would make $200m in tax revenue for every $1 billion withdrawn and this could be put towards the mutual guarantee. Similarly, to incentivise farmers to withdraw money from their FMDs, LFM advocated for a concessional 18 per cent tax rate to be placed on withdrawals made before June 2021. LFM estimated that if this could release around $4 billion currently held in FMDs, which producers could then invest into farm and crop improvements.
LFM suggested that another benefit of a government backed mutual fund is that it would assist farmers in accessing working capital loans as lenders would feel much more assured of the ability of the borrower to repay the loan. LFM reported that if the mutual was backed by the Australian Government that there were lenders who had indicated they would be willing to invest $2 billion in loans to Australian farmers
Farm Ownership
Succession Planning
Agriculture has an ageing workforce (discussed further in Chapter 7), with the average age of Australian farmer being 56 years of age. Succession planning, therefore, needs to take place to help bring through the next generation of agricultural business owners.
In its 2030 Roadmap NFF highlighted that succession planning can help maximise knowledge transfer while minimising capital withdrawal. NFF set a target that by 2030 ’90 per cent of family farms have documented business plans including succession plans.’
Similarly, Rabobank highlighted the importance of transferring farm ownership to the next generation, stating that ‘given the dominance of family farming in Australia, and the ageing of the farming sector, ensuring robust farm succession planning across the sector is a significant challenge.’ ANZ also drew attention to the scale of this challenge reporting that $400 billion in capital is required to fund generational change of farm ownership.
One inquiry participant highlighted two issues related to the Capital Gains Tax (CGT) implications of transferring farm ownership to children. First, this participant suggested that $6 million is too low for the upper limit of the CGT asset test, as many family farms have greater assets than this. Second, the participant reported that for most other taxation purposes a small business can have turnover up to $10 million but for CGT the limit is $2 million. The participant noted the impacts of these CGT arrangements are that:
At present the ownership change from parent to children is not fiscally sound, the CGT creating a debt burden upon the enterprise. There is a real possibility that the willing enthusiastic children, whom are the drivers of innovation and efficiency change in the agricultural industry, are in danger of never actually owning their property. Their generation and possibly the next could miss the opportunity waiting for the ultimate death of their parents so they may inherit the farm.
Box 6.2: Case Study in Farm Succession
Committee Member, Mr Ken O’Dowd MP, provided a submission, prepared with the help of a local accountant, which gave a real-life example from his electorate showing the Capital Gains Tax (CGT) implications of a farm being passed from a father to a son.
The property was initially purchased for $1,650,000 (including associated costs such as legal fees and stamp duty) and is now valued at $6,600,000. Part of the property was purchased prior to the implementation of CGT in 1985 and is thus exempt. On the remaining land the capital gain (market value minus purchase price) is $3,342,770.
As the father has owned the property for more than one year a 50 per cent reduction in the capital gain is applied, making the taxable capital gain $1,671,385. This total is added to the father’s taxable earnings for the year resulting in an estimated tax payment for the ownership transfer of $785,551.
As the father is passing ownership to the son there has been no money exchanged in the transfer yet the father has a tax bill of $785,551.
The alternative option for the father is to hold onto the property until his death and leave the property to his son in his will. This saves the father $785,551 and yet means he cannot retire and allow the next generation to truly take control of the family farming business.
6.5
Mr Robert Lester, a farmer from Western Australia, was advised by an accountant that passing his farm to his children would generate a CGT bill of around $2 million. Mr Lester added that:
We have consulted with more than one accountant. They have said ‘just let the kids wait for you to die’. As far as growing agriculture, the youthwhen I say ‘youth’ my children are in their thirtiesare the inspiration and the innovators who keep up with modern technology and different working practices. To think that they would not own any property until they’re in their sixties or seventies is pretty disappointing.
6.6
The submission provided by Mr Ken O’Dowd MP (See box 4.2) suggested changes to the how farm ownership transfers are assessed to provide:
...rollover relief to the owners of farm land being used to carry on a primary production business when they transfer land, at a time of their choosing, to a family member who will continue to use the property to run a farming business. Instead of the property being transferred at market value, the transfer would be treated similar to if they were transferred upon death.
Farm Consolidation
The NFF’s 2030 Roadmap highlighted that some degree of farm ownership consolidation may be necessary to hit the $100 billion target, noting greater scale enables increased resource efficiency.
ANZ estimated that, on current trends, by 2030 the number of broadacre farms in Australia will have declined by 16 800. ANZ added that larger farms are generally more profitable and drive increased production, stating:
... if you look forward to 2030 or 2050, at the rates of current consolidation, we may well be achieving a lot more value and output, but it will be from a lot fewer farmers, and that’s probably not what a lot of regional Australia would actually look forward to.
The University of Queensland also emphasised the increasing role that large farms will play in Australian agriculture:
I don’t actually see financing young farmers onto a farm as the main game for our future. I think that the individual farmer or small family farm is something that’s going to diminish through time ... increasingly we’re seeing corporate farms [and] corporate family farms.
WA Farmers also suggested that farm consolidation was an important and necessary part of productivity growth in the agriculture sector stating that Australia has ‘too many farms’. WA Farmers reported that currently 700 farms are producing 70 per cent of the grain in WA and by 2030 it is projected that 500 farms will be producing 80 to 90 per cent of the grain. WA Farmers added that governments and industry bodies should be ‘supporting the big getting bigger faster.’
Foreign Investment
Austrade and the Department of Foreign Affairs and Trade (DFAT) stated that attracting productive foreign investment into Australia was one of the key focuses for its portfolio. Austrade and DFAT reported that its current areas of focus for attracting foreign investment are:
Strategic intensive agriculture and innovation and export hubs
Advanced manufacturing and food innovation
Northern Australian agriculture, particularly aquaculture, diversified cropping and northern facing supply chains
Promotion of Australia’s agricultural innovation capabilities.
Austrade and DFAT added that its preferred model for foreign investment was a partnership between the investor and an Australian company. As an example of how this can work, Austrade and DFAT highlighted investment by a Canadian pension fund into a Northern Territory cattle operation which enabled the purchase of two additional properties and an extra 20 000 head of cattle.
Austrade highlighted Ferrero Rocher as another example of productive foreign investment in Australian agribusiness. The company began working with Austrade in 2010 and three years later announced a $70 million investment in hazelnut plantations in the Riverina, NSW. The company planted a million trees, which have begun being harvested, and the investment created 54 jobs.
Canegrowers reported that there had been significant foreign investment in the sugarcane industry and stated that ‘an environment which attracts investment is required for future development of either value adding opportunities or expansion.’
WA Farmers stated that foreign investors were becoming more successful in Australia as ‘their ability to run large-scale cropping enterprises has improved dramatically with the size of farming and the ability to manage bigger equipment.’ WA Farmers also suggested, however, that if foreign ownership in agriculture continued to grow to levels of 15 to 20 per cent it could cause a community backlash. WA Farmers added that the best course to avoid this backlash was to ‘allow the next generation of farmers to be able to buy the neighbouring property when it comes up.’
In its 2016 report into Agricultural Regulation, the Productivity Commission (PC) stated that ‘foreign investment has been, and will continue to be, critical to the competitiveness and productivity of the Australian agricultural sector.’
In 2015, the Australian Government lowered the thresholds for foreign agricultural investments requiring review by the Foreign Investment Review Board (FIRB). The PC recommended that the changes be reversed and the threshold for review by the FIRB restored to its previous level of $252 million.
On 29 March 2020, the Treasurer announced that all foreign investment thresholds triggering review would be temporarily reduced to $0 due to the impacts of the coronavirus pandemic.
Committee Comment
6.7
Risk is an inherent feature of the agriculture business. Drought can push entire regions to the brink, pests and diseases can devastate crops, and fluctuations in the global economy can quickly erode profitability. Nevertheless, agriculture is also a sector with a history of success and strong growth prospects. It is an industry where strong risk management plays an important role in supporting successful long-term investments.
6.8
The Committee heard that there appears to be reluctance among some parts of the banking sector to lend to farmers. Investment will be required to drive the expansion needed to reach the $100 billion target, and while credit is not the only form of investment needed it should be part of the mix. If there is a reluctance to lend to agricultural businesses, greater use of risk management tools may help to overcome preconceptions and increase lender confidence. The importance of using financial instruments to minimise risk was emphasised by many inquiry participants and a target of 90 per cent uptake of risk management tools was included in the National Farmers Federation’s 2030 Roadmap.
6.9
Currently, one of the main risk management instruments available to producers is to place funds into Farm Management Deposits (FMDs). Many participants, however, questioned the effectiveness of FMDs and the fact they were lightly drawn upon during the east coast’s recent debilitating drought suggests that they may not be performing their intended purpose.
6.10
A number of participants advocated for the expanded use of farmers mutual funds to mitigate risk. By reducing risk mutual fund insurance products may provide farmers with the security needed to make investments in inputs and technologies that could increase the value and profitability of their produce.
6.11
As a mutual fund grows and diversifies its membership it increases its resilience to losses from any individual business. Some participants suggested, however, that an Australian Government guarantee of $1 billion was needed in the mutual’s early stages to provide the security to enable it to grow to a self-sustaining scale. Assessing the costs and benefits of such a guarantee is beyond the scope of this inquiry. It is, however, worthy of further consideration as part of a review of risk mitigation measures and the effectiveness of the FMD program.
6.12
The growth required to reach $100 billion is going to require significant additional investment in the agriculture sector. Global investment pools are an important part of the resource mix but the benefits of investment from these sources are most fully realised when they are channelled into partnerships with domestic businesses.
6.13
As this increased investment flows into the sector patterns of farm ownership may change. The productivity and competitiveness advantages of scale and integration are likely to result in greater farm consolidation. One potential benefit of these larger, integrated agricultural companies is that they may provide young people with more diverse and specialised avenues into a career in agriculture.
6.14
While a degree of farm consolidation is probable, the Australian family farm model is not going to disappear and one of the larger challenges facing the sector is encouraging the next generation to take ownership of farms. It is vital that the conditions are in place to facilitate ownership succession when the older generation is ready to retire.
6.15
Currently, however, the Capital Gains Tax (CGT) settings provide a very strong financial disincentive against transferring farm ownership on to a younger generation. For many farming families passing down ownership of the farm could result in a crippling tax debt. By contrast, waiting until the older generation dies and passes the farm on in their will creates no tax burden. As a result, the younger generation might not gain ownership of the family business until they themselves are approaching retirement age.
6.16
This situation must weigh heavily on current farmers hoping to pass the baton of business ownership on to their children. Presumably it also results in some younger people leaving agriculture to pursue other business opportunities. At a time when digital technologies are rapidly transforming farms policy settings should be encouraging, rather than discouraging, young people to take up key roles in agriculture. The Committee, therefore, believes there is a need to review the current CGT settings and consider how to remove the disincentives to transferring farm ownership to the younger generation at an appropriate time.
6.17
The Committee recommends that the Productivity Commission undertakes a review of the effectiveness and value of risk management programs in agriculture. In addition, the review should consider the costs and benefits of alternative approaches to risk mitigation in agriculture.
6.18
The Committee recommends that the Department of Treasury review the tax implications of the transferral of farm ownership within a family. The review should aim to remove financial disincentives and facilitate succession planning for retiring farm owners to transfer ownership to the next generation of farmers.