COMMONWEALTH OF AUSTRALIA
Official Committee Hansard
SENATE
SELECT COMMITTEE ON AGRICULTURAL AND RELATED
INDUSTRIES
Reference: Food production in Australia
WEDNESDAY, 7 OCTOBER 2009
CANBERRA
BY AUTHORITY OF THE SENATE
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SENATE SELECT COMMITTEE ON
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009
Members: Senator Heffernan (Chair), Senator O’Brien (Deputy Chair), Senators Fisher, Milne, Nash and
Sterle
Participating members: Senators Abetz, Adams, Back, Barnett, Bernardi, Bilyk, Birmingham, Mark Bishop,
Boswell, Boyce, Brandis, Carol Brown, Bushby, Cameron, Cash, Colbeck, Jacinta Collins, Coonan, Cor-
mann, Crossin, Eggleston, Feeney, Ferguson, Fielding, Fierravanti-Wells, Fifield, Forshaw, Furner,
Humphries, Hurley, Hutchins, Johnston, Joyce, Kroger, Lundy, Ian Macdonald, McEwen, McGauran, McLu-
cas, Marshall, Mason, Minchin, Moore, Parry, Payne, Polley, Pratt, Ronaldson, Ryan, Scullion, Siewert,
Stephens, Troeth, Trood, Williams, Wortley and Xenophon
Senators in attendance: Senators Colbeck, Heffernan, Milne, O’Brien and Sterle
Terms of reference for the inquiry:
To inquire into and report on:
Food production in Australia and the question of how to produce food that is:
a. affordable to consumers;
b. viable for production by farmers; and
c. of sustainable impact on the environment
WITNESSES
ADAMS, Mr Jim, Chief Executive Officer, Timber Communities Australia........................................... 116
AJANI, Dr Judith Ingrouille, Economist, Fenner School of Environment and Society, Australian
National University ............................................................................................................................................ 2
BAKE, Mr Glenn Keith, Farm Services Manager—South, National Foods Ltd ....................................... 78
CORNISH, Mr David Robert, Private capacity............................................................................................ 41
DAVENPORT, Mr Alan John, Chairman of Dairy Council, Tasmanian Farmers and Graziers
Association ...................................................................................................................................................... 103
DENNIS, Mr Bruce, Private capacity ............................................................................................................ 24
GULSON, Mr Frederick Theodore, Legal Executive, DC Legal Pty Ltd................................................... 24
HANSARD, Mr Allan, Chief Executive Officer, National Association of Forest Industries................... 116
O’MALLEY, Mr Conor Stephen Francis, Group Executive, Corporate Services and Logistics,
National Foods Ltd........................................................................................................................................... 78
OLDFIELD, Mr Chris, Chief Executive Officer, Tasmanian Farmers and Graziers Association......... 103
SCHIRMER, Dr Jacqueline, Research Fellow, Fenner School of Environment and Society,
Australian National University, and Cooperative Research Centre for Forestry...................................... 13
STEPHENS, Mr Michael, Deputy Chief Executive Officer, National Association of Forest
Industries ........................................................................................................................................................ 116
THOMAS, Mr Kerry James, Private capacity.............................................................................................. 71
WAUGH, Mr Ashley James, CEO and Managing Director, National Foods Ltd...................................... 78
WILLIAMS, Ms Penelope Jane, Private consultant................................................................................... 103
WINGROVE, Mr Gary, National Managing Partner, Advisory, KPMG .................................................. 54
Wednesday, 7 October 2009 Senate ARI 1
Committee met at 9.02 am
CHAIR (Senator Heffernan)—I declare open this public hearing of the Senate Select
Committee on Agriculture and Related Industries. The committee is hearing evidence on the
impact of MISs and issues related to the dairy industry within its current inquiry into food
production in Australia. I welcome you all here today. This is a public hearing, and a Hansard
transcript of the proceedings is being made. Before the committee starts taking evidence, I
remind all witnesses that in giving evidence to the committee they are protected by
parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on
account of evidence given to a committee. Such action may be treated by the Senate as a
contempt. It is also a contempt to give false or misleading evidence to a committee. The
committee prefers that all evidence be given in public, but under the Senate’s resolutions
witnesses have the right to request to be heard in private session. It is important that witnesses
give the committee notice if they intend to give evidence in camera. If a witness objects to
answering a question, the witness should state the ground upon which the objection is taken and
the committee will determine whether it will insist on an answer, having regard to the ground
which is claimed. If the committee determines to insist on an answer, a witness may request that
the answer be given in camera. Such a request may of course be made at any other time.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 2 Senate Wednesday, 7 October 2009
[9.03 am]
AJANI, Dr Judith Ingrouille, Economist, Fenner School of Environment and Society,
Australian National University
CHAIR—Welcome. I invite you to make a gracious opening statement before we ask you
some gracious questions. Do you have any comments to make on the capacity in which you
appear?
Dr Ajani—I am approaching nearly three decades of forestry industry research and policy—in
the Public Service, as a consultant, and now at the Australian National University. I also wrote
The Forest Wars, which was published by Melbourne University Press in 2007, copies of which
are in this bookshop. I would also like to note, before going into the three main points of my
introductory statement, that I put in a substantial submission to the inquiry of the Parliamentary
Joint Committee on Corporations and Financial Services into agricultural MISs.
I have three main points that I want to make in my opening statement. The first is that
embedded in the plantation MISs is a fundamental flaw. They are disconnected from wood
market realities and, under these schemes, investment is primarily driven by the demand for tax
minimisation whilst the responsible entities get most of their money upfront by selling high-cost
investment products, which means that they bear quite a smaller degree of the risk from the
wood market.
An effect of this arrangement is a planting boom ending in bust. In other words, the MIS
frame for plantation investment left unattended will probably see a resurgence in planting
followed by another bust. The second effect of this arrangement is that we have a serious
misallocation of agricultural land and water away from food farming. The third major effect is
the public purse is poorer as a result.
I have a two-page document that I wish to table. That document shows Australia’s hardwood
chip production in bars—the bottom bar shows the native forests that are exported globally,
principally to Japan; the next bar above that shows the native forest cut that is used domestically
for paper production; the third bar shows the plantation chip export component; and the topmost
bar shows the plantation chip component for domestic processing into paper. You can see there a
trend up since 2000. You can also see some displacement of the native forest resource by the
plantation resource, although that is a bit wobbly at the moment.
Most importantly though I want to draw your attention to the line that sharply increases. That
is the Bureau of Rural Sciences’ projections of eucalypt chip log supply—in other words, logs
for chipping. I particularly want to draw your attention to a very substantial increase in
hardwood chips from Australia’s eucalypt plantations that will bear down on us very quickly.
The next page starts to build the market implications of this. The first point to note is that
Japan is the major market for hardwood chips, and we are talking now in the next few years
because that is when our resource volumes are going to be increasing dramatically. Japan’s
importing of hardwood chips has flattened dramatically, and that is what figure 2 is about. We
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Wednesday, 7 October 2009 Senate ARI 3
see from the mid-1990s there has been virtually no growth in Japan’s imports of hardwood chips,
and it is unlikely to change in the immediate future. So, effectively since the launch of the
Plantations 2020 Vision to triple Australia’s plantation estate, which saw a substantial increase in
investment in hardwood plantations, we have seen absolutely no growth in the major market for
Australia’s hardwood chips—and 85 per cent of Australia’s chips are exported to Japan.
In my view, and I have been saying this for some time now, Australia is poised and positioned
to go through a hardwood woodchip glut. We have surging plantation resources coming at the
time when the market is absolutely flat. We can expect some continuing displacement of native
forest chips, but again this is a highly political issue with the three south-eastern state
governments not being particularly interested in that policy and of course China, which everyone
concentrates on, is not coming to the rescue yet and in my view is unlikely to be a major
importer of hardwood chips from Australia without some sort of price negotiations to China’s
advantage.
My next and final point concerns the plantation managed investment schemes and the
emissions trading scheme. The first and most important point to note here is that reforestation,
which is defined by the Kyoto protocol as planting trees on land already cleared at 1990, is the
only land-use activity in the proposed emissions trading scheme that can earn a credit. That is for
people who are investing in reforestation who decide to opt in. At this stage there are two
approaches that the government has proposed for opting-in investors. These approaches were
described in the white paper after ironing out some problems in the green paper. The first
approach is where trees are planted for the carbon market and are not to be logged. Credits are
earned for carbon uptake up to a certain level which will be set in regulations and then the
plantation must be maintained as forested land for 100 years. In my view, it is unlikely that this
form of planting will impact seriously on food farming, because of the loss of revenue after the
initial planting. But there are other important environmental issues here which I can touch on
lightly but not in a great deal of detail, because that is more for ecologists to answer.
The thing that I want to concentrate on is plantations for wood production. These are
plantations that are planted, logged, planted, logged et cetera and for which the government is
proposing to use what it calls an average crediting approach where the growers need to maintain
land as plantations for 100 years. Under the average crediting system, growers do not incur
debits when they log their plantations. But this means that once a plantation is established the
CO2 price will have no effect on a grower’s decision to log or to not log the plantation. Logging
has of course collateral damage for climate. The effect of the ETS in this situation will be to
increase the profitability of plantations. That will guarantee that the plantations will remain
available for wood production irrespective of the carbon price. So, in my view, the MIS
framework will be used as the mechanism for extending plantations into the carbon market and
we are likely to see a resurgence in plantation establishment.
CHAIR—Thank you very much. We will go to Senator Milne.
Senator MILNE—Thank you, Dr Ajani. I note that you made your submission to the joint
inquiry as well and that apparently that inquiry, by recommending that the scheme continue, has
not agreed with any of your conclusions. What I am interested in is this. I am assuming that what
you have tabled is similar to the submission which shows that the 2007-08 woodchip production
added together comes to 10.5 and you have got the projected supply 2010-14 at 13.8. I am
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ARI 4 Senate Wednesday, 7 October 2009
assuming from that that we could stop all native forest woodchipping and still have more
woodchips than we currently produce. Is that correct?
Dr Ajani—Yes, that is right, Senator Milne. We can also see that in figure 1 in the document
that I tabled this morning. The bottom bar is the native forest chip export volume. If we were to
move that whole projected plantation resource line down to the bottom of the graph, we would
see that our total volume of chips from plantations would be able to meet what we currently
export from native forests and from plantations. That is by 2010-14.
Senator MILNE—Given that the demand in Japan is flat, that it is 85 per cent of our market
and that we could in fact service that market from plantation woodchips, the ending of native
forest woodchipping is more than feasible. Say that in fact it does not happen and we continue to
subsidise native forest woodchipping. Are you suggesting that we will have a megadisaster in
terms of this massive proliferation of plantations? Can you draw this out for me? Let us assume
that the native forest logging continues to be subsidised as it is. What is the likely fate of those
plantation chips, given that people were told they would provide a competitive plantation sector
delivering substantial rewards?
Dr Ajani—According to the Bureau of Rural Sciences projections for 2010 to 2014, the
resource capacity for Australia’s plantations to displace entirely the native forest chip export
volume is there and basically on our doorstep. From a policy perspective, there are two issues
here. One, of course, is the environment issue, and I am not qualified to comment on that except
to say that there would be many ecologists who would say it would be a good thing to have our
chips supplied from existing plantations rather than to continue to log native forests. But on the
economic and industry policy side of things, a plantation based forest industry is far better
positioned from a competition perspective than a native forest based industry, simply because of
the quality of the resource and the processing efficiencies associated with the plantation
resource. We have a glut situation and it seems to me that a very good policy frame for
addressing this situation from all perspectives is to look at facilitating the substitution of
plantations for native forests.
I should just add here that we have gone through exactly the same issue with the softwood
plantations and the sawn timber market. The sawn timber market was given a significant lift in
productivity with the planting of softwood plantations, particularly from the mid-1960s through
to the mid-1980s. Australia’s saw milling industry is in a far stronger position today because 80
per cent of its sawn timber is now based on plantations, primarily softwood plantations. But the
substitution process between the native forest saw milling and the plantation saw milling was
long and drawn out. It was particularly ugly and particularly damaging for the plantation sector.
Senator MILNE—Can I take from that that, if we do not stop the native forest woodchipping
and it continues at the same rate with the glut coming on from the plantation sector, we will
actually be subsidising native forests to undermine the price for plantations? That means they
will presumably opt in to the Carbon Pollution Reduction Scheme, so we will have the perverse
outcome that we are using forests established for wood production as carbon and the carbon
dense forests as wood supply.
Dr Ajani—The substitution process will not, in my view, happen as quickly as if free markets
were operating. In other words, what we are facing here is a still highly profitable native forest
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Wednesday, 7 October 2009 Senate ARI 5
based chip industry that has access to relatively low priced royalties, and so it does have a lot of
fat to work through here and a lot of opportunity to play off both the native forest resource and
the plantation resource as it sees fit with respect to its own corporate interests. I am speaking
here in particular of Gunns. In my view, there will not be a freely flowing movement out of
native forests and into the higher quality plantation resource. There are some implications of that
from a carbon perspective, and there are some implications from an industry efficiency
perspective too.
Senator MILNE—I have a final question in relation to the 2020 vision trebling the plantation
estate. You said in your submission that it was never a justified policy; it was a policy embraced
by government without any real analysis. Given the situation we are now in, do you consider that
that should be ended immediately?
Dr Ajani—I have argued this for some time. If I remember correctly, an earlier Senate report
put as the first recommendation to scrap the 2020 planting target and put something in that made
sense from an ecological and an economic perspective.
Senator MILNE—Thank you.
CHAIR—I actually want to go to the cost of this to the taxpayers but, before we do that, one
of the things that has occurred to me is that on the prospectuses of most of these MISs—like
Great Southern and Timbercorp—there was a huge investment for the taxpayer and for the
investor there was no prospect of a profit other than a tax deduction. Even the prospectus said
that, when you have done the rotation, you will get about your investment. If it is $9,000 a
hectare, you might get $11,000 over the life of the investment, plus it gave enough money to the
shareholders to actually buy the land to actually put the forests on. I understand from my
figurings that three or four years ago there were about five million tonnes of surplus chip
potential in the rotations that were already in the ground. Would that be about where it is? It
looks to be approximately that from your graph here, because it seems to me that the global
market for export of old growth was about five million tonnes or a bit better. A lot of that
hardwood old growth was associated with getting the land available to put the plantations on, so
there was a really inefficient harvesting of the logs in the hardwood forests. Now we have got all
that done and we have got all these plantations in the ground. Four years ago, it was five million
tonnes of surplus and I think a lot of that surplus was in Western Australia. One day I said to
John Gay, ‘You ought to get over there to Western Australia and buy some of that up because the
Japs will play them off against you down in Tassie,’ which I think they did. Isn’t this surplus
now about to blossom?
Dr Ajani—Yes, it is about to blossom, and it opens up a very big play as to how the
government wants to shape the forest industry and also its approach to environment here,
particularly with respect to biodiversity and climate change.
CHAIR—Let us take this further. We are then competing. If we get a pulp mill up here like in
Tassie, how will that alter the surplus? What will that do to the figures and will they compete if
Japan is drawing chips out of Indonesia, some of which are illegally obtained, and Brazil, which
is also precariously forested? Are we in a position to compete? Are we in the wrong market with
the chip market and the pulp market?
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ARI 6 Senate Wednesday, 7 October 2009
Dr Ajani—From a resource perspective, if we are looking at 14 million cubic metres per
annum coming off our hardwood plantation estate, that is a low productivity. We have got
around a million hectares of hardwood plantations in Australia—not all of them are MISs, but
we have a million hectares. The BRS is projecting around 14 million cubic metres per annum
coming off. That is only a mean annual increment of 14 cubic metres per hectare per annum.
That is particularly low. With our softwood plantation estate we would be looking nationally at
about 17, and that is nothing to write home about. We should be going for 20 or so. In the
prospectus documents they have been using 25 cubic metres per hectare per annum. So the
government projections are certainly not rosy projections of wood volume. We are talking about
something here that is quite conservative. We have got productivity improvements without any
expansion of the plantation estate, which will be significant, built on an MAI—a mean annual
increment—of only 14. That is my first point: there is significant wood growth opportunity on
the existing estate through productivity improvement. Just to put this into perspective, 14 million
cubic metres per annum will be coming off hardwood plantations and we export now around 10
million cubic metres per annum from hardwood plantations and native forest. A pulp mill will
use three or four million cubic metres per annum. We can have a pulp mill and still meet all our
existing export volumes now.
CHAIR—Yes, that is for sure. I just wonder whether that is the way you would take up the
surplus, though—and then what would the pulp mill in the marketplace do to the rest of the
global market? Would it be insignificant?
Dr Ajani—I am an economist. I tend to not be too prescriptive about these things and paint
them more as opportunities. The issue for a pulp mill for Australia—and it may be changing a
little bit—is that we have to compete globally because our domestic market is effectively
stitched up. That may have changed a little bit with PaperlinX’s divestment. But ideally the best
structure for a hardwood pulp mill for Australia is exactly the way the softwood industry has
structured their pulp and paper industry, where most of the pulp goes into processing for paper in
Australia and most of that paper is sold within Australia. The issue that has been here since day
one, even before the Wesley Vale issue, is that for a hardwood plantation pulp mill, or a native
forest pulp mill for that matter, because of the marketing arrangement on the paper—in other
words, it was always stitched up by Amcor, or APM as it was originally—any new player in the
hardwood paper market was forced to go into the export market. And that is a very difficult
market to play.
CHAIR—Yes, it is. I want to bring you to the terms of reference for this particular committee,
because we are a bit off message. We are looking at the effective use of capital in agriculture.
Obviously the biggest investor of capital in the forest industry is the government and the
taxpayer—or the government on the taxpayer’s behalf. We are now faced with some dramatic
failure in MIS, especially non-market MIS. There are some success stories, with tax driven
incentives. I also note that the former CEO of Great Southern, under a new guise, has floated a
company to buy back the misery that he has imposed on all the investors. He is buying back their
debt and proposing to go and prosecute to recover the debt. So for $10 million he has bought
$30-odd million worth of debt. He is taking them to court, having imposed the misery on them,
to make a profit out of their misery as well.
I have to say that, bearing in mind the use of taxpayers’ money, we have now seen new
corporate opportunities arise out of adversity and had some overseas offers to buy these forests,
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Wednesday, 7 October 2009 Senate ARI 7
which would end the MIS argument. But aren’t we going to transfer the taxpayers’
contribution—which could be billions of dollars; I am unaware of the exact figure—into the
profit bottom line of an overseas corporation by allowing them to buy these things at a fire-sale
price? Isn’t that a poor use of agricultural capital?
Dr Ajani—Yes, I agree that the plantation MIS framework, which involves taxation and
financial engineering to implement, presumably, a government policy of planting expansion, has
some very big implications for the public purse. The corporations and financial services
committee has recommended that grower investors in non-plantation MIS agricultural operations
only be able to deduct their investment costs off their earnings from the same business. But that
recommendation was not made for the plantation MISs. If that recommendation was made for
the MISs for plantations then basically I think the problem of resource misallocation would be
solved.
CHAIR—So it would be more market focused then?
Dr Ajani—Yes, it would absolutely be more market focused and there would be a hesitation.
If you go to table 1 in my submission to the corporations and financial services inquiry then you
will see that I have set out the costs to MIS investors and the costs to actually do the job--so the
real industry costs. The costs to actually plant a hectare of trees and manage them over the full
rotation is around $2,000 per hectare. Through most of the life of these MIS plantation schemes
the cost to the grower-investor of doing that job is around $9,000—and they do not own the land
of course. That full cost of $9,000 is fully tax-deductible upfront, and if you make a loss in the
future then there is another little bit to this arrangement--that is, because the taxation
commissioner, in 2000 I think it was, given the change in the tax act for non-commercial losses,
ruled that plantation MISs qualify with respect to non-commercial losses further down the track.
CHAIR—In other words, it protects the investors—$9,000 is a continuing tax deduction when
in fact under ordinary tax laws because it is noncommercial it would not have been a tax
deduction.
Dr Ajani—That is right.
CHAIR—We have received evidence—as you would be aware, I guess—in Perth that the
$9,000 figure, which varies from area to area, enabled Great Southern, according to the former
chairman and non-executive director of Great Southern, when they got into full greed mode, to
actually go and acquire the land for nothing as it were because there was enough surplus in the
upfront charge to buy the land to put the trees on, which the investor had no interest in the
capital appreciation of. So why anyone would have invested in an MIS, given the role of
financial planners and accountants, I do not know; it is just a mystery to me.
Senator O’BRIEN—Are you saying that the changes to the law with regard to forestry MISs
requiring 70 per cent of the investment to be committed to the productive rather than the
professional, if I can put it that way, side of MIS have had no impact?
Dr Ajani—I cannot answer at that level. I do know though that, even at 70 per cent of $9,000,
that is significantly more than the actual cost of doing the job. So the problem here is that the
deductions back onto the public purse are real. The problem, even at 70 per cent, is that you still
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need quite high assumptions on wood price and wood yield to basically get these schemes over
the line in terms of getting a six per cent return—which is what the prospectus documents have.
Senator O’BRIEN—I would like to test that. If it is unlawful to sell a product where you are
not using that 70 per cent of the investment for that purpose and that sort of investment does not
fit within the scheme then it would be interesting to know whether you suggest that people are
simply cooking the books, as it were, and having a fabricated set of cost structures to meet that
test or whether the $9,000 figure covers something else now than that which it did before the
change in the regulatory arrangements regarding the structure of forestry MISs.
Dr Ajani—To a certain extent figure I think the 70 per cent rule is a bit of a red herring. The
issue here is that a large part of the money, as I understand it, is also invested such that the
prospectus company can earn income in share sales, interest et cetera with which they are then
able to buy the land and satisfy the taxation arrangements. I am not a tax accountant so I cannot
actually comment on these things. But I think the really crucial thing here is that you have an
arrangement which has got two fundamental problems—you have investors who are not
growers, if they were then they would not invest, in a wood market per se but rather are looking
for a tax minimisation opportunity, and they want that upfront, and then you have responsible
entities, who have been able to structure high-cost investment products where they get their
profits upfront and bear very little of the market risk further down the track. It is a recipe for a
planning boom and bust. This is the fourth parliamentary inquiry into MIS schemes where
plantation MISs have featured substantially, and yet we still have no recommendation to see the
end of these schemes for plantation MISs. If we do see a continuation of theses schemes then, in
my view, we will go through another boom and bust.
Senator O’BRIEN—Is that despite whatever regulatory changes might be made? Is that what
you are saying: that it is not possible to correct them?
Dr Ajani—At this stage it looks as if the regulatory changes are quite tokenistic.
Senator O’BRIEN—You are referring to the findings of the joint committee, are you?
Dr Ajani—Yes, and they are only recommendations.
Senator O’BRIEN—In relation to the volume of plantation chips, your chart is showing
somewhere about 13 million cubic metres of projected chip supply, on a conservative estimate or
otherwise, and that is about 2½ million cubic metres more than we are using or exporting now.
My understanding is that the proposed northern Tasmanian mill would use something in the
vicinity of 3½ million tonnes, which would guarantee the sale of those tonnes into an Australian
entity rather than into a competitive international market. Wouldn’t that, to that extent,
potentially lock up any surplus for the foreseeable future in that market? That seems to logically
flow from the figures that you have put before us.
Dr Ajani—In that particular graph all these figures need some adjustments to bring them into
line with the trends. What I have done on that wood supply projection also is reduce them for
processing losses in chip production, so there are little bits going on there that are not in this
graph. The issue there is that if we are looking at building another pulp mill based on plantation
resource which meets all the environmental requirements, we are looking at five years down the
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Wednesday, 7 October 2009 Senate ARI 9
track and we are also looking at the potential for productivity improvements. There are all sorts
of things that are available to us if we need to boost up supplies without necessarily planting
more trees. It is a little bit more flexible—
Senator O’BRIEN—Planting more trees could mean expanding the area covered by the
resource or replanting. I am assuming you meant the former, not the latter.
Dr Ajani—There is more flexibility here. We have got a lot of resource which we can play
around with here, and that is the crucial thing; and a lot of strategies where we can do the
finetuning.
Senator O’BRIEN—Fair enough. You have for some time been a proponent of the idea of
replacing native forest logging with plantation. Shouldn’t we be investigating ways of using our
tax and other systems to encourage investment in plantations which are managed for more than
just chip? And don’t we need to finetune some of these for long-term investments? I think that is
why MIS was encouraged for plantation, because it was trying to encourage people to put in
money where they would get no return for a decade or more, which does not quite apply for a lot
of non-forestry MIS and for that reason might be differentiated. But shouldn’t we be looking at
how we finetune systems to encourage investment into plantation resources managed for
hardwood sawn timber purposes?
Dr Ajani—In my view, the whole approach to wood industry policy in Australia has been
driven for decades, and for decades too long, by a wood-growing mentality rather than by the
manufacturing arm of the industry which takes it closer to the market. I think we should have
people—bureaucrats et cetera—looking at our whole forestry policy from an industry policy
perspective and an environment policy perspective, because I think the two have a greater
capacity to be in harmony than we have been led to believe. Our wood industry policy could be
driven by our interests for manufactured wood products and by a keen sense then of what the
market for wood really is, because it is not as rosy as many people say: there is a lot of wood-
saving technology going on at the moment. But if we drove wood policy from the manufacturing
end, the market end, and flowed it back into ‘What wood do we require?’ rather than going forth
and planting trees without any regard to the market, which is where the 2020 Vision got into
problems, then I think we would have a far more sophisticated approach to forestry. My second
point here is that we read time and time again that the government needs to plant trees, either
directly as we used to do or indirectly through the taxation system, and the reason for that is an
argument that the market is failing because growing trees takes a long time.
The market does not fail because it takes a long time to realise an income from an investment;
that is just risk, so we should be paying a higher price for that risk. There is no demonstration, in
the debate about why the government needs to be involved in growing wood, of real market
failures here. These are real inequities in information, in particular between the major parties in
the wood-growing scene. I argue that we need to go back and ask why the government needs to
get so forcefully involved in growing wood when it does not get so forcefully involved in
growing wheat or so forcefully involved in a whole lot of other industries. We do not set targets
for other industries to triple production, yet we do for wood, strangely.
Senator O’BRIEN—We do involve ourselves in the growing of wheat in a variety of ways as
government. The flaw in that argument, if I could be so bold, is to say that, if wood produced in
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this country competes with unsustainably logged timber in other parts of the world and that leads
to environmental devastation in those parts of the world, it is not a responsible way for us to
approach the production of an essential for building. Neither, I suggest, is it responsible for the
environment movement to promote steel and concrete as building alternatives against a
renewable resource—timber—but we see that more and more often as an approach from some
sectors of the architecture profession, which seems to be saying that if it is wood it is bad and if
it is another material, sustainable or not, it is good. We have all of those problems in addressing
issues such as our balance of payments, self-sustainable production of building materials, our
contribution to the harvesting of the world’s forests and a whole range of other issues which
have to be overlaid into the simple economic framework that you were talking about.
Dr Ajani—For Australia to make the best contribution with forests from an environmental
perspective, the thing that we would concentrate on is getting as much of our plantation resource
as possible into manufacturing facilities across the board: sawn timber, wood panels and paper.
If we did that we could supply—
Senator O’BRIEN—And veneers as well.
Dr Ajani—Yes. And if we did that we would meet virtually all our wood needs without
importing anything.
Senator O’BRIEN—Except for specialist timbers which we cannot replace in plantations.
Dr Ajani—Yes. That is why I said ‘virtually’. Essentially, what we are looking at here is
around 95 per cent by volume of our wood needs. If we went down that path, not only would we
not be using native forests but we also would not need to import, whether it be from rainforests
or anywhere else. So that is the most important contribution we can make.
Senator O’BRIEN—This is a long debate—
CHAIR—We are going to have to wind up. I ask whether, being market focused in forestry,
there is something to be learnt from the Wilmott-Visy model, which is obviously market focused.
Should we be learning something from the way they turn a forest into a product?
Dr Ajani—I think the way Visy approached the Tumut pulp mill is a very good model.
Essentially, it is a model where they have fed into their constructed pulp mill. There were
environmentalists at that pulp mill opening. Pulp mills are not all bad news if they are done
properly. We will leave ‘properly’ to one side because I am not the expert there. It was a clever
investment where you had pulp from plantations fed in with recycled paper to make packaging
board, sold largely for the domestic market through a network of distribution operations
throughout Australia.
CHAIR—There is the 70 per cent rule which Senator O’Brien has referred to. At 70 per
cent—that is $6,300 or thereabout, still double the cost of doing the real job—it is a very
generous appreciation of taxpayers’ money. The other thing we did not do, which of course was a
fundamental flaw, was interpret the interception of the runoff in these plantation forests. Would it
be fair to say now that there is enough in the rotations Australiawide not to have to clear—that
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there was a race to clear native forest to get plantation in? That race should be over now, should
it not?
Dr Ajani—Yes. My understanding is there is still some clearing happening in Tasmania, but
certainly that is cutting off. It is exactly the same story as the softwood story: they clear stock
when the plantation estate reaches some sort of market saturation level. Another incentive, too,
of not planting by clearing native vegetation is that investors cannot then opt in to earn carbon
credits through the proposed ETS.
CHAIR—A lot of the failure of Timbercorp and Great Southern was driven by greed. As you
say, originally all this was set up for the 2020 vision, which sounded like a good idea at the time.
Then it quickly grew into a river of gold where they said, ‘God, what are we going to do with all
this money? We’ll get into all the other little bits and pieces,’ including the greatest cattle scam
of all time. Should the federal government try and retrieve some of the investment in this
industry, which is billions of dollars, rather than let an overseas company take a profit out of our
misery? In some way should the government step in to sort this out?
Dr Ajani—I think the government should step in to this issue and sort it out by terminating
the plantation MIS schemes. That is basically containing the damage. The next step of
controlling the damage or reducing it is bringing the native forest resource into relief—in other
words, retiring it from the wood supply role. That will basically deal with a substantial part of
this problem. With respect to land ownership and who owns it—Australia or overseas—that is a
bigger issue I do not want to comment on here.
Senator MILNE—I notice in your charts you look at the connections between the forestry
industry lobbyists, the bureaucracy and the plantation MIS companies. Yesterday I asked one of
the witnesses about the so-called independent foresters who turn up in the prospectuses of the
MIS companies saying that the projected growth rates and therefore returns are achievable and
have been achieved, even though they had evidence at the time that they were making those
statements that they were not true. Yesterday the company providing that advice was named as
GHD, wasn’t it, Bill?
CHAIR—Yes.
Senator MILNE—Do any of the people in that diagram have connections to GHD? How do
they fit into this, given that they provided this advice knowing, especially in the case of Great
Southern, the independent forester was saying that the returns could be achieved even though he
would have been aware that the sale of the first plantings had been supplemented by additional
investment dollars to give dividends that made it appear as if those returns had been achieved
when they had not?
Dr Ajani—There was one person in table 3 of my submission that acted in an earlier life as a
forest adviser to one of the plantation MIS operations, but I cannot remember which one it was.
Senator MILNE—If you recall that could you inform the secretariat please.
Dr Ajani—Certainly.
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ARI 12 Senate Wednesday, 7 October 2009
Senator MILNE—Thank you.
CHAIR—Thank you very much for that. We are very grateful for your submission and
appearance.
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Wednesday, 7 October 2009 Senate ARI 13
[9.49 am]
SCHIRMER, Dr Jacqueline, Research Fellow, Fenner School of Environment and Society,
Australian National University, and Cooperative Research Centre for Forestry
CHAIR—Welcome. I invite you to make a brief opening statement. We would love to ask you
a few questions.
Dr Schirmer—I am here to talk about the research that I and the team of researchers that I
worked for have done for both the Fenner School and the CRC for Forestry. I would like to
cover the impacts of the expansion of plantations on rural communities, particularly on jobs,
population and land prices. The research that we have done has not looked at things like the
investment structures. They are very important, but we are social scientists, so we have not
focused on those.
I guess the key issue from our point of view is that there are a lot of claims made about the
impacts of the expansion of plantations or other land-use changes on rural communities—we
hear a lot of claims on either side that there will be hundreds of new jobs and that there will be
hundreds of jobs lost—but very rarely do we see very good independent evidence that tells us
what happens. There is a good reason for that and that is because doing good research on that
front is actually quite challenging. To answer a simple question like, ‘Does the expansion of
plantations lead to a decline in rural populations?’ you have to think about all the other changes
going on in that rural community at the same time that are affecting it and try to figure out what
would have happened if plantations had not gone in and whether the plantations have make that
change different.
When you get to that point you still have another question to answer and that is: what is the
actual impact of the change you have found on different people in the community? One of the
key challenges there is that not everyone is impacted in the same way. Say we find that the
plantation sector leads to increased jobs in one town but a decline in another then clearly some
people are gaining and some people are losing. In all of the work that I do sometimes it ends up
a little more messy than people would like. They want a simple answer to these questions, but
the reality is that some people benefit and some people do not from these sorts of things.
I turn to some of the key things we have found in recent years on some of the key issues that
the committee is looking at. The expansion of plantations has led to an increase in land prices.
That tends to happen over a short period of time when the plantations are expanding rapidly.
Land prices definitely increase more rapidly than usual during that time. There is no question
about that. When we compare that to the rate of land price change in nearby areas and areas
further away that do not have the plantation expansion, we see it as being incrementally higher,
so a lot of the land price change would have happened anyway but plantations drove it that bit
higher.
Certainly we have found that plantation companies have been paying higher than average
prices for land parcels. This benefits people who are wanting to sell land, but it is a cost for
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ARI 14 Senate Wednesday, 7 October 2009
people who are trying to expand their farming properties, so some people benefit and some
people lose from that rise in land prices.
In terms of production of food, there is very little good research done—and we have done only
a very limited amount ourselves—on whether we see a decrease in production of agricultural
commodities in the areas where the plantations have gone in. What we have found with our
limited research is a greater than average decrease in sheep numbers in areas where you have
had a really rapid expansion of plantations and in Tasmania only we have found a decrease in
beef cattle numbers. We have not found any decrease in dairy, horticulture or viticulture, even
though often the land that is good for plantations is in high-rainfall areas, which are also useful
for those types of commodities. Because it is sheep and beef that are mostly affected it has a very
small impact nationally, but locally it can be very important.
In terms of employment, once plantations are mature and you are harvesting them, hauling
them and, in the case of hardwood plantations, turning them into woodchips they will generate
more employment than broadacre sheep grazing and broadacre beef grazing but substantially
less than intensive land uses like dairy and viticulture. You only get that higher employment
once the plantation estate is mature. So, while the plantation estate is being established, as it has
been in recent years, employment is lower than in the agricultural sector.
The other issue with employment is that, once plantations reach that steady state of harvesting,
they will generate more employment than some land uses but less than others. It is in different
locations. Whereas a sheep farm may generate a lot of employment in small rural towns,
plantation industry workers tend to be located in the larger regional towns. So you see a shift of
employment out of smaller rural land areas and into larger towns. There are benefits for larger
towns, but you may see a net decrease in employment in the smaller rural areas as a result of that
change in the pattern of employment.
In terms of population, which is something discussed a lot, we are seeing a decline or an
increase in rural population. What we see there is that, when land is sold to a plantation
company—and most of the plantations that have been established in recent years have been on
land that the companies have bought—the previous residents usually shift away. In the majority
of cases, they get new residents living in the housing on the property, but it takes up to two years
to do that and they are different people to the ones that lived there before. We do still see a small
net loss of population, between seven and 19 per cent, depending on when you look at that. But
when we take that to local government area scale and we say, ‘Is that loss of population that you
see on the plantation properties different to what you would have seen based on the changes that
would have happened otherwise?’ we do not actually see any differences. That is largely because
we are seeing constant farm amalgamation in most of these regions, which is also associated
with loss of population on farming properties. Plantations have not accelerated that at all, but
they have led to a turnover in population. So you have had the traditional farmers leaving and
new residents shifting onto these properties, and they do not always integrate well into rural
communities. That is a significant issue for rural communities.
CHAIR—Is that because they are pot smokers?
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Dr Schirmer—In some cases, there have been some incidences where people have said they
are undesirable residents, yes. One of the issues we are currently working with is what is the best
way to encourage residents who will integrate well into rural communities.
Senator O’BRIEN—Is that as distinct from people who drink a lot of beer and drive their
four-wheel drives through national parks?
CHAIR—Don’t take the bait!
Senator O’BRIEN—I think we should not categorise people quite so severely.
Dr Schirmer—A key challenge on that front has been that a lot of the housing on properties
that have been sold is in fairly poor condition so it is difficult to attract people to rent or buy the
housing. So you can end up in a situation where the people you attract are not necessarily the
ones that people are happy to live with. We are about to set up a study trying to look at this in
more detail, but, where you are closer to a town, you can attract professionals, local farmers,
contractors. You can get some great people in who really support the community groups. In other
situations, you do not. So we need to think better about how to get the good people in.
Those are some of the key findings we have had. We have looked at the short-term impacts of
the collapse of Timbercorp and Great Southern. In the short term, since they have gone into
receivership, there has been some loss of jobs. There have also been a lot of particularly
contracting businesses who are subject to a lot of debt because they were owed money by one of
the two companies and that has not been repaid. In the short term, these businesses have been
under a lot of stress and losing workers. In the long term, what happens to them depends on how
rapidly new management arrangements come in and how rapidly that turns into ongoing
business, particularly for the many small firms that have built up to service the plantation
industry. There are a lot of those small businesses. We cannot predict what will happen under the
new management arrangements that are beginning to come into place, but in the short term there
have certainly been significant negative impacts.
CHAIR—If we learn from National Foods, it will be interesting. Did you look at the use of
the agricultural capital and its impact and whether, if the generosity of the taxpayer is supporting
a tax driven forestry scheme in Bombala or Delegate or somewhere—although that is mainly
Wilmotts—that capital could have been better redirected? None of what you have said surprises
me. It just seems common sense. For instance, look at the phenomenon of the car subsidy. We
have just put some billions of dollars into subsidising and propping up the car industry. Would
there have been a better way to put billions of dollars into the rural industry than just flicking it
into upfront tax deductions for investors, most of whom are going to lose their money?
Dr Schirmer—We have not looked in detail at that. I guess when you come to look at things
like rural population change, it becomes a little less tangible to be able to exactly compare what
would have happened directing policies to different situations. It is a little more difficult to say.
CHAIR—Did you look at the impact of plantation forestry? You say locally it is give and
take—you swap shearers for forest workers or whatever. I have to say that the Australian flock
has been impacted by this. We have gone from 210 million sheep to 68 million, so the meat job
is going to be under pressure. In terms of the water impact, the interception impact, I think
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ARI 16 Senate Wednesday, 7 October 2009
plantation forestry in the Murray-Darling Basin has taken about 1,000 gigs gross and 700 gigs
net out of the system, which in turn leads to less activity down the river for irrigators and loss of
production down there. Did you look at the balancing of that?
Dr Schirmer—We have not looked at water impacts; we have looked at—
CHAIR—Why do you think everyone ignores the water impact? Did you not think of it?
Dr Schirmer—We have been very interested in trying to get research going. We need quite a
bit of funding to get the combination of the ecological science and the social science.
CHAIR—You might not be losing the jobs at Delegate but you are losing them at Leeton, if
you know what I mean.
Dr Schirmer—We have looked at some of the issues—for example, what are the flow-on
impacts of employment through the direct displacement of different types of agriculture? We
believe a lot more research needs to be done in some of the areas, including the ones you are
talking about.
Senator MILNE—I have a couple of questions. I note what you are saying, particularly in
relation to dairy production. I want to take you to north-west Tasmania where, as you would be
aware, I released a report earlier this year on the communities of Preolenna and Meunna. Whilst
it would be reasonable to say that dairy production in the north-west region of Tasmania had
expanded during the period that the MIS plantations had expanded, you could not draw from that
conclusion anything about plantations in the sense that Circular Head had a massive expansion
in dairying because of farm amalgamation, huge investment and so on. A number of dairy
farmers were lost from the Meunna and Preolenna areas.
The second point you made about population was that people move back into the houses on
the farms. In most cases, when small farms are bought by a plantation company they go in and
they bulldoze the fences and the houses and you end up with no housing on those properties. In
the case of Meunna there are very few residences or borders to properties—there is nothing left.
In fact, there is a plaque there saying, ‘This is where the community used to be.’
With respect to your other point about scaling up a region to state wide or nationwide in terms
of population trends you would not see much difference but, on a local scale, it has meant that
you have lost things such as a bus run, a Post Office run and those sorts of things. I am a bit
concerned about your research because you have drawn your conclusions and, even at a regional
state wide or national scale, they do not reflect the real changes as to where people are living and
what impact a few people make to the provision of other services such as schools and Post
Office runs and the like.
Dr Schirmer—I will deal with each of those points in turn, firstly, the point about dairy
farmers. Yes, absolutely, particularly up the back country in north-west Tasmania, some dairy
farms have been sold and a plantation has been established. Other land has gone from beef
farming to dairy. We have to look at whether the expansion of dairy seems to have been different
in the areas which had more plantations than the ones that had less. We do not see a difference in
that. It is very important to look at it that way because if we say that an individual farm going
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Wednesday, 7 October 2009 Senate ARI 17
from one use to another means that there has been a decrease then that is not really the full
picture. Farms are changing land use constantly. There is quite often a sale and shift from one
land use to another.
On the second point about loss of infrastructure, it is actually very rare for housing to be
demolished on plantation properties. It was much more common in the early years of plantation
expansion and it is also more common in local government areas where there is a policy that
housing cannot be subdivided off the property. So I would disagree that there is a wholesale loss
of housing off plantation properties. We have done some quite extensive work where we have
also done ground checking to check that we are getting the right information, where we have
surveyed landholders, not just the plantation industry, to see what is actually happening to the
housing on those properties.
CHAIR—So they are subdivided, are they?
Dr Schirmer—In some areas. It depends on the subdivision policies. For example, say you go
to the Green Triangle, most of the housing in a lot of Victoria—and in a lot of South Australia
but particularly Victoria—has been subdivided off the property and sold. In parts of Tasmania,
local government areas do not permit subdivision so more of the housing is rented and,
anecdotally, we hear a lot more stories of problematic outcomes with that.
In the survey that we did, we found that about four per cent of the housing had been
demolished. That is, there is still some housing being demolished. It is usually where the houses
are in very poor condition or where they have been trying for several years to get someone to
live there and they just cannot get someone in. So on the infrastructure point, there certainly was
more demolition of housing in the early years of expansion and that has pretty much stopped,
which I think is a very good thing. It is a good shift to see. For the last 10 years at least, there has
been very little demolition.
CHAIR—There is a phenomena in the bush at the present time. You may be a social studier.
There were the old Cobb & Co. stops. There was a village every 10 miles along most routes—I
will not name them, but I can take you to them. They have filled up with people who cannot
afford to live in other places. Mostly, because of their situation, they are unable to get work, so
they become these enclaves of underclass. Isn’t that a problem?
Dr Schirmer—It is. Yes.
CHAIR—So what should we do about that? You do not have to go to Tasmania; you could
just take the road down there, south, past Cooma, and I could show you some social impacts
there.
Dr Schirmer—Yes, it is a broader question. What we are doing in our work, which is mostly
focused on looking at the impacts of plantation and how we can encourage use of this housing in
a way that attracts a population that people want to live next door to. That is the only context in
which I have been looking at it. It certainly is a broader problem, as you say.
CHAIR—Are you able to make a judgment on whether the billions of dollars that have been
poured in by way of tax generosity were a worthwhile investment?
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ARI 18 Senate Wednesday, 7 October 2009
Dr Schirmer—I usually leave that to others to do because I look at the impacts at the local
level and point out—
CHAIR—Do you think anyone has made that judgment? Do you know of anyone?
Dr Schirmer—I think a range of people have very different views on it.
Senator STERLE—We have heard them all.
CHAIR—Wouldn’t that fit into your social equity argument? Are you too timid to look at it?
Don’t you want to get into a blue or talk to a room of people who agree with you?
Senator STERLE—Chair, I do not think that statement was called for. Dr Schirmer has gone
out of her way to come and talk to us.
CHAIR—You can take the bait if you want to. You do not have to take the bait.
Senator STERLE—Have a go at him! Have a crack at him! Throw something at him!
Dr Schirmer—I was going to go back to the third part of Senator Milne’s question.
CHAIR—Senator Milne, we are back to you. She did not take the bait!
Dr Schirmer—You mentioned population and that you felt that, because we drew our
conclusions at a larger scale, we were missing the local-scale impacts. I can understand your
point. However, when I say that we take it from a small-scale to a large-scale population, I am
talking about from the individual property scale to the local government area scale. If we go to
the local government area scale, we simply do not see differences in the population loss from
plantation areas and others, but we do at the individual property scale. Then again, if you
compare a farm that has been amalgamated, where a farmer has bought out the neighbour, that
will lose population; if you look at plantation properties being bought, you will see a small net
loss of population as well.
Senator MILNE—Did you look at the loss of school bus runs, postal runs and those sorts of
things or it just at the population statistics?
Dr Schirmer—We have looked at services and things like membership of community groups.
In one study, in the Great Southern, we looked at school enrolments to see what was happening
there. What we have found is similar to the population story, and that is that we are seeing a
decline in things like school bus runs in so many areas around Australia and in so many rural
communities. We do not see that happening any more in plantation expansion areas than in any
other rural areas. Specifically—and you will see this in the submission—there is some reporting
of some of these findings on community groups. We found that when people shift off plantation
properties, between 20 and 30 per cent cease their membership of rural fire brigades or sporting
groups, about 20 or 30 per cent change in their memberships. So they are shifting their
membership to a new area, which means some groups are losing out and some are gaining.
Between 40 and 60 per cent, depending on the type of group you look at, are not changing their
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membership. So we are definitely seeing a potential loss of membership of local groups. It
depends as to whether we can get the new residents to join them.
CHAIR—Without being too impolite, does that mean that the demography of who moves in
is one of more takers than givers?
Dr Schirmer—It seems to vary by region. We are about to start a study to look at where we
see the new residents joining groups and where we do not. We hear very different stories from
different regions. There does not seem to be a single story. In some areas we hear people saying,
‘None of the new residents have joined our local groups,’ and in others they say, ‘They have and
it hasn’t been so bad.’ We need a bit more information to figure out what is going on and how we
can encourage the good outcomes and minimise the negatives.
CHAIR—And, of course, some of them might be suffering from the outsider syndrome when
they come in.
Dr Schirmer—Yes. There is a lot of work done on the issues of integrating new people. With
the influx of sea changers and tree changers into a lot of areas we see similar sorts of debates
going on.
Senator STERLE—This has been very interesting. The evidence we have taken over the last
couple of days of hearings—and this has been going on for a month or so—is that all those
opposed to any form of MIS blame everything on MISs. Everything bad that happens in their
community is all the MISs’ fault. I am not going to sit here and say I am a great supporter of
MISs. I am not, but I think there are some good stories and some bad stories. We have to
differentiate between the absolute crooks and shonks who hide behind boards or whatever titles
they may have and the people who seriously want to make it happen and want to do the best for
Australia and rural Australia.
In terms of the declining small towns you are talking about, I cannot talk about what is going
on out here in New South Wales and Victoria, but I can tell you about WA. We have seen a
substantial decline in small country towns over the last 15 years due to a number of factors that
cannot be blamed on MISs. Your evidence has been helpful today, because every region does
have a different story to tell. We talk about the demise in membership of sporting groups. In the
Pilbara in Western Australia you cannot blame MISs, because it is fly-in fly-out. Postal runs have
decreased and school bus runs have decreased because miners do not live in the towns. It has
been very helpful that you have made it very clear each region has a different reason why there
is an increase or decrease. But I want to talk about the land use issues more. Could you go into
that a little bit more for us? What other factors have contributed to changes in land use in
farming?
Dr Schirmer—Do you mean in terms of what that leads on to for the rural community?
Senator STERLE—Exactly.
Dr Schirmer—I have done one comprehensive study which looked at not just the expansion
of plantations but also the effects of things like shifting from sheep to cropping and increasing
dairy, and it varies. One of the biggest changes we are seeing is actually the one people do not
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ARI 20 Senate Wednesday, 7 October 2009
tend to talk about much, which is the shift from grazing to cropping going on right across the
country. That has been associated with some decline in population, because cropping tends to be
quite labour efficient. You see a lot of farm amalgamation going along with that. We are seeing
more and more cropping contractors living in large regional towns. Again, you see a shift and
some people winning and some losing.
CHAIR—The single enterprise people eventually get a pain in the guts. When you get three
or four crop failures and you have no fat lambs you learn the hard way.
Dr Schirmer—There are certainly a whole range of factors that come into it. When you see a
shift down in the Green Triangle region or around Corangamite, say, you see a lot of increase in
dairy farming, and there has been a lot of debate about the impacts of dairy versus plantation
expansion. Certainly dairy farming provides a lot more jobs, and the downstream processing
provides a lot of regional jobs as well. Again, it is that balance of which land use is going in. If
you see a land use change, for example, from sheep to dairy or beef to dairy, which is more
common, you will see an increase in jobs and an increase in activity, and the biggest challenge
you are likely to have is trying to find enough labour to actually work on that dairy farm. If you
see a shift from beef to plantations you will see a short-term drop in employment, and then later
on it will increase again but the jobs will be in a different spot. Those are the sorts of patterns we
see. Are there more specific ones you are interested in?
Senator STERLE—No, that is fine. There was a classic example yesterday where a witness,
a passionate dairy farmer from north-western Tasmania, came to us and just was feral against
any MISs being on dairy land. I would not want to stand between a farmer and bucketload of
dough, so I do not think it is fair for the government to decide who can sell land to whom and for
which uses. Do you have any views on that?
Dr Schirmer—That is one that has come up in some of our research. In work that I did a few
years ago now, that issue came up in Western Australia. There was a proposal by one of the local
government areas, the Shire of Plantagenet, to introduce restrictions on whether farmers could
sell their land for plantations or not. That caused one of the biggest debates I have ever seen in
the farming community. They were proposing to put restrictions on how a farmer could sell their
land and what purpose it could be used for, and in the end of that debate the farmers in the region
decided that even the ones who really disliked expansion of plantations did not want that sort of
restriction put on their land. Having watched that local debate quite closely, I can say that I think
that, even where there is an absolute dislike of plantations and of some things, placing those
sorts of restrictions on land where that has a lot of implications for farmers and potentially for
their land prices is potentially not a good way to go.
Senator STERLE—It is all very well for people. The latest craze in Australia is people telling
everyone around a barbie how much their house is worth. It is the same old case: your house
may be worth X amount of dollars today, but if you sell it is going to cost you even more to
upgrade. Vice versa, when it goes down it all goes down quid pro quo. The arguments of farmers
wanting to stop other farmers selling their land to other land users are ridiculous. If there is a
denigration or destructive argument down the track over the aquifers in certain parts of New
South Wales, that is a fair enough argument, but just to blatantly get out there and say that they
want the government to stop farmers selling their land to plantation companies is a shocker.
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Dr Schirmer—The key issue is that that sort of policy, if implemented, can lead to a farmer
on one property having really high land prices because their land is still available and the one
next door having very low potential to sell their land, so you end up with a very inequitable
situation. That is one area where I think the equity implications are quite clear and where that is
well established.
Senator MILNE—The point that was being made yesterday was about the fact that there was
a tax deduction and, therefore, an artificial inflation in land prices because of investment dollars
coming from elsewhere. The argument was about the tax deduction, because the implication was
that without the tax deduction everybody could compete for land on a level playing field.
Senator STERLE—The witness, in the end, was totally against any land being sold.
Senator MILNE—She was.
Senator STERLE—Let’s get the full story out.
CHAIR—As the chair, I will bring some decorum to this debate.
Senator O’BRIEN—No, no.
CHAIR—The committee has agreed that that is not possible! But I agree that it is not about
trying to control who you can sell land to. It is about what incentives the buyer has that the rest
of the market does not have.
Senator MILNE—That is right.
Dr Schirmer—Certainly, as I said earlier, our research has shown that demand for land from
MIS has driven land prices up and that that has led to benefits for those wanting to sell land and
to costs for those who want to expand their properties.
CHAIR—And that is just life on the land for you.
Dr Schirmer—Yes.
Senator O’BRIEN—In the various research projects that you and your colleagues have done
on this subject, have you interviewed those who sold their properties to MIS schemes? What
have they told you about the marketing circumstances? I put to you what has been said to me by
some of the companies. They are offering a price higher than what others would offer where
people in some circumstances had been trying to sell properties and neighbours were offering a
lower price to be paid to them over a period of time. Is that something that you have come across
often?
Dr Schirmer—Yes, it is. We did one study where we surveyed landholders, both those who
leased their land to plantation companies and those who sold their land. We undertook a series of
interviews with some of these people and then surveyed a much larger number of them so that
we got some data from a pretty big group, and we found that when it came to leasing the
majority of landholders at that stage were very satisfied with their leasing arrangements.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 22 Senate Wednesday, 7 October 2009
CHAIR—Do you plan to visit now?
Dr Schirmer—That is a good question. I have talked to a small number of those landholders
since, because I have kept in touch with some of them, and some are feeling quite confident that
things will work out all right and some certainly are not. It really depends on the situation that
they are in. While the majority of those who have leased land to companies that have not gone
bankrupt have been very satisfied with the decision, interestingly enough, those who sold land to
the plantation companies were more satisfied. They said they had a bit more freedom to then go
out to buy a new property which suited their farming needs and that sort of thing. So there has
actually been a fairly strong preference from a lot of the farmers that we talked to that they want
to sell rather than lease their land simply because it then gives them the freedom to pick and
choose their farming land and not be encumbered with a particular lease for 15 or 30 years. We
have certainly looked at that. I am trying to remember part of your question.
Senator O’BRIEN—It has been suggested to me that there was a cohort of people who could
not sell their land and whose only option was perhaps a neighbour who was offering a very low
price and payment over a period of time.
Dr Schirmer—Yes, to an extent. I would say that makes up part of it, but I think that may be
exaggerated. When, say, the plantation sector moves into a new region, if it has been a depressed
region, there have been low returns for a while and they hit the market at that low point, then
yes, you would have a certain cohort of farmers who have been trying to sell their land for a
while, but that goes pretty rapidly. We actually found a lot of people buying and selling as part of
their overall farm strategy. It was not that they had been sitting there, waiting to retire for years,
which is what you often hear people saying has happened. Certainly there are some who are like
that; there are a lot who are not.
Senator O’BRIEN—They remain in farming and transfer to another property?
Dr Schirmer—Yes, quite a lot. We were quite surprised at how many remained in farming
when we did that survey of landholders. I would have to look up the report to get the exact
figures for you, but we saw a real mix of outcomes and a lot of people staying in farming—
taking that money and shifting onto a farm somewhere else or taking the money and just using it
to invest in upgrading infrastructure on another property.
CHAIR—And when the forester comes in he spikes the market. Woolworths went into Forbes
yesterday and spiked the market by 30c a kilo, bought what they wanted and pulled out of the
market, and the market went boom. That was yesterday. The same thing happens in forestry.
Lamb went to 470c a kilo and finished up at 430, if you want to know.
Senator O’BRIEN—Once under trees, the land tends to stay in that ownership for some time,
doesn’t it?
Dr Schirmer—It has in Australia so far. We are, however, seeing pretty different patterns over
in New Zealand, where there have been a lot of softwood plantations that are not even mature
being harvested so the land can go into dairy, because prices for dairy are so high over there.
Again, it depends on the relative demand for land. In New Zealand the prices being paid for
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 23
dairy land are so high it is worth clearing an immature plantation to put it back into dairy. We
have not seen so much of that in Australia.
Senator O’BRIEN—No. We did notice in our inquiry into dairy in Tasmania a number of
New Zealand accents.
Senator STERLE—Yes, a substantial amount.
Senator O’BRIEN—I think your evidence is probably an indication of why we are seeing
New Zealand dairy farmers coming to Australia—because of the price of land.
CHAIR—Dr Schirmer, you are not one of the Lockhart Schirmers, are you?
Dr Schirmer—No. I have relatives out at Forbes.
CHAIR—There you go. There are a team of Schirmers at Lockhart.
Dr Schirmer—They probably are relatives.
CHAIR—West of Lockhart, the crops need a rain desperately, as they do west of Forbes.
Dr Schirmer—Absolutely, yes.
CHAIR—Thank you very much for your evidence.
Proceedings suspended from 10.22 am to 10.46 am
AGRICULTURAL AND RELATED INDUSTRIES
ARI 24 Senate Wednesday, 7 October 2009
DENNIS, Mr Bruce, Private capacity
GULSON, Mr Frederick Theodore, Legal Executive, DC Legal Pty Ltd
Evidence from Mr Gulson was taken via teleconference—
CHAIR—I welcome Mr Frederick Gulson, via teleconference, and Mr Bruce Dennis. Do you
have anything to say about the capacity in which you appear?
Mr Dennis—Up until 30 June I was working in my own firm, Dennis and Company, and was
involved in the research in relation to this. I am not currently working in law at the moment, but
I have certainly done the work up to 30 June. DC Legal is a company which has taken over the
conduct of these Great Southern matters.
Mr Gulson—I am director of Katanga Developments Pty Ltd. We are under contract to DC
Legal to provide them with forensic and other services in respect of the Great Southern matter.
CHAIR—I remind witnesses and those present that the committee has issued a summons to
both Mr Gulson and Mr Dennis requiring their attendance at today’s hearing. I now invite you to
make a brief opening statement, and the committee will then ask questions.
Mr Dennis—Yes. I was approached last year to act in relation to a number of clients who
were concerned about Project Transform. That project appeared to reveal a number of
inconsistencies in the way in which Great Southern had previously marketed their woodlots and
their beef cattle projects compared to what was being presented in the reports seeking to
persuade people to exchange their woodlots and beef cattle interests for shares. Mr Gulson had
done a tremendous amount of work prior to talking to me on the matter as well. I also spoke to a
David Marshall, formerly of van Eyk. From that we accumulated a great many documents from
the website of Great Southern Ltd and came to the conclusion that, for instance, with the
woodlots it had always been marketed as a management objective to get 250 cubic metres per
hectare per 10 years of wood growth. Yet it appeared from looking at the GSL investment update
for May 2008 that the results were that the 1994 project showed 123 cubic metres, the 1995
project showed 166 cubic metres and the 1996 project showed 197 cubic metres, and it was
estimated that the 1997 project would show only 135 cubic metres, the 1998 project 157 cubic
metres and the 1999 project 162 cubic metres. So there seemed to be a pattern of actual results
very much less than the projected results in the marketing program from Great Southern Ltd.
Notwithstanding the riders in the disclosure documents, both Mr Gulson and I formed the view
that the results were so dismal that that really should have been revealed more significantly.
There was another thing that became apparent. The 1994 crop, for instance, was bought in full
from investors by a Great Southern Ltd subsidiary in July 2005 for $6.4 million. The crop that
was harvested gave a loss to that subsidiary of about $4.3 million. That would have meant that
investors would have only received $2.1 million if that subsidy had not been put through by
Great Southern Ltd. The effect of that was to give credence to new investors after July 2005 to
think that the investments were showing a good return. We also formed the view then that it was
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 25
an unfair approach if that was not fully let out, not only to the market but in the marketing
programs and so on.
I spoke to a Mr Neville Hill, who was formerly of Great Southern Ltd, in relation to the
matter. His take on it was that it showed that Great Southern Ltd was an ethical company and
had made sure that investors had not suffered compared to the money that they had invested and
the expected returns. Mr Hill, I think, was a sales manager. The problem with that approach is
that, in not disclosing that to new investors, it was an unsustainable model of how this could
proceed.
After we analysed all the documentation for Project Transform, we formed a view that the
company was actually doomed and, no matter what it did, it was not actually going to survive.
We wrote some letters out to clients about our thoughts on this. Some of these letters got into the
hands of Great Southern Ltd for comment. They sent them to their lawyers, Freehills, who put
their comments, which were of course adverse to our comments, on the Great Southern website.
That formed part of the information that investors would rely on in deciding whether or not to
vote in favour of Project Transform.
CHAIR—That is what you call buying an opinion.
Mr Dennis—I do not know about that, but they took the trouble to also report me to the Legal
Services Commissioner for having these opinions, alleging that I did not have sufficient
evidence to back up my opinions. I have been in negotiation with the Legal Services
Commissioner ever since. I wrote to them saying, ‘Now that Great Southern has gone into not
only administration but receivership, what do you say?’ I have not heard since then, but that was
my prediction as to what was going to happen.
There was also senior debt, of about $106 million, to be retired in October this year. They
never would have been able to do that. Even if they had gotten through the May crisis, they
never could have lasted the October crisis, no matter what they did—in my opinion.
About 200 clients instructed DC Legal. One of them was a Mr Grima. Of all of them, only Mr
Grima has been sued in the District Court of Western Australia. He had about a half-million-
dollar exposure to Great Southern Finance Pty Ltd. That debt has been on-sold to the Bendigo
and Adelaide Bank. The situation we face with that case is that it will be a very expensive case to
run. I was kind of hoping ASIC would intervene in that case, as they have in other similar
matters that involve a great number of people, to assist Mr Grima in defending this matter. Mr
Grima has to show that the original loans to himself from Great Southern Finance Pty Ltd are
not enforceable. To do that, he has to show that Great Southern Finance Pty Ltd, with its
common directors, knew that what Great Southern Pty Ltd was doing was misrepresenting the
whole projects there.
Our complaint about the beef cattle projects is that, by 2007, they knew that they wanted to
put together Project Transform but they did not let the beef cattle investors know that they had a
plan in the back of their minds to exchange the progeny from the beef cattle project for shares.
We have a basic problem with Great Southern Ltd in that they had an unsustainable model. It
was doomed to fail. They had information from their own auditors saying that there was a real
AGRICULTURAL AND RELATED INDUSTRIES
ARI 26 Senate Wednesday, 7 October 2009
risk that they could not continue as a going concern. Then they put together in October last year
Project Transform, to seek to give people shares in exchange for their wood lots, the ones that
were due to mature soon and have a cash flow, not only to get the cash flow from the trees but
also to release the value of the land. One of the reasons was to diversify. But the land was only
showing a land rent of about $200 per hectare, which was probably not a very good return on the
land, so if they could get access to the land and sell the land they could perhaps cash themselves
up. Meanwhile, unfortunately, they had put themselves severely into hock with the banks. That
led to their receivership in May this year. That led to their appointing administrators just before
the banks appointed receivers. I have not seen it yet but I have heard from Darren Weaver of
Ferrier Hodgson, the administrators, that he has a 400-page report drafted and ready to be
circulated. I would submit that it would be a good idea for the committee to get hold of that
report once it has been circulated. That is in large part investigating everything leading up to
Project Transform.
I come to the other things of interest that I want to mention. DC Legal have a client, a Mrs
Spiteri, whose loan was assigned to a crowd called Javelin Asset Management. Research shows
that that is a $2 company, incorporated by a Mr John Young and his wife, who acquired part of a
loan book for about $10 million for $38 million worth of loans. But they are not offering Mrs
Spiteri any discounts. They are wanting to sue her for the full value. Mrs Spiteri is
contemplating, but has not yet decided, whether or not she should be a lead applicant in a class
action seeking to set aside that loan. Again, it is still about common directors. There is Mr John
Young, who is fully aware of all of the past of Great Southern Ltd and is fully aware of and a
common director with Great Southern Finance, from whom he acquired the loan book just
before the company went into administration and receivership. I think that is another matter for
ASIC to investigate.
Senator STERLE—Can I ask how much Mrs Spiteri’s loan was for?
Mr Gulson—Just over $200,000.
Mr Dennis—It is of course an important thing for Mrs Spiteri to consider whether or not she
becomes a lead applicant, because she may be personally liable for adverse legal costs should
she lose. Again, I see it as something where it would be preferable if ASIC were to become
involved to seek to assist in fleshing out the truth of all of this, as of course this committee is
doing, so that unnecessary litigation would not need to go ahead. The cost of the litigation would
probably be as much as what poor Mrs Spiteri owes.
Another thing I was going to mention is that there was a previous, unrelated project called
Palandri Wines. I believe in some way Great Southern might have acquired if not the grounds of
Palandri Wines but the expertise of the staff of Palandri Wines because there is a Karen Mort,
who appears in the loan aspects of the matter, both in Palandri Wines and in Great Southern
Finance Pty Ltd, and the process appears to be the same. These loans were not low-doc loans.
They were no-doc loans. Everyone who applied to invest in Great Southern Ltd was given a loan
from somewhere or other to invest in the project. This was part of a highly marketed set of
projects whereby there was about 10 per cent per annum given to investment advisers and up to
another 10 per cent per annum provided for a marketing allowance for those investment advisers
who sold a lot of the product.
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 27
How it was that Great Southern Ltd expected to make a profit when from every dollar they
raised they only got 80c to invest to start with I do not know. Then their whole model was based
on large returns which they knew over a 10-year period just were not going to occur. Buried in
their documents their experts say that they could easily estimate what the returns would be on,
say, wood lots after three or four years. My basic point is that this was an unsustainable managed
investment scheme doomed to fall over in the end. It was greatly relying on the public purse for
tax deductions and was marketed as such by many of the accountants. The clients that I have
were all told: ‘You’ll get an upfront tax deduction, but we expect that you’ll make a profit.
You’ll double or maybe triple your money over a 10-year period.’ That was the sort of thing that
was said. Many investment advisers would take a large document and just distil it for their
clients.
I talked to one financial adviser who seems a very credible witness, Ross Tarrant from
Wollongong. He was flown over to Western Australia, shown the ground, taken on trips and
wined and dined. He put his own money where his mouth was and took out about a half a
million dollars worth of investment in the beef cattle projects. He was certainly very convinced
about the whole situation and rounded up a great many of his clients from the Wollongong area.
They have lost all of their money and all of them are under severe pressure from the Bendigo
and Adelaide Bank to keep their payments up, under threat of being blacklisted for their credit,
sued and bankrupted. Some of the letters have said, ‘We’ll seize your assets and your house,’ and
so on.
In the situation with the beef cattle, they swapped their interest in progeny for a fistful of
valueless shares, and the Bendigo and Adelaide Bank in their latest letter have tried to assert that
they did no due diligence on Great Southern Ltd whatsoever but just relied on each individual’s
assets and liabilities and the statement buried somewhere in the documents they signed that they
were aware that any investment in agricultural matters is risky. It seems to me that there needs to
be quite a lot of asking of the people involved at the Bendigo and Adelaide Bank if it is really
right that they did no due diligence on this. They have $600-odd million of their money tied up
in this project and they are relying on the investors’ good grace to keep paying their payments,
knowing that they have lost all their money.
CHAIR—Mr Gulson, you have got anything you would like to add?
Mr Gulson—Not really. I thought that was a fairly comprehensive thumbnail sketch. The only
thing I would like to point out is DC Legal has over 1,000 clients, over 200 of whom have the
loans which Bruce has been talking about.
CHAIR—The Mr Marshall that you talked about actually predicted this was all going to
happen five or six years ago in evidence that he gave to an inquiry with Senator Murray. I
presume you have seen the evidence we received of a chairman and a non-executive director
resigning over what they thought was unconscionable behaviour. They did what Mr Marshall
said they would do: cash out before disclosing to the market the apparent failings of the 1994,
1995 and 1996 maturing forests. I am very familiar with the paperwork that was involved in
coaxing people to invest, with a discount subsidising the dividend to make it look as if it worked.
That built into the program a sort of ponzi arrangement to get the next lot of money in, and
obviously we will be calling Bendigo Bank and ASIC.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 28 Senate Wednesday, 7 October 2009
Part of the reason of the failure and the waste of capital by taxpayers was the upfront tax
deduction, which actually did not cost you anything because you borrowed the money, so you
got a tax deduction apparently interest free. We have evidence of people who went into the more
complex MISs that borrowed $50,000 upfront and now owe $220,000 because they have also
borrowed all the follower fees and capitalised the interest. For their $50,000 tax deduction they
now have something that is valueless, yet they have a $220,000 bill. Do you think that the
government should directly intercede in this process on behalf of taxpayers, because taxpayers
are the biggest investors in this loss? Do you think there is a role for the government to directly
come into this and say, ‘We’re going to sort this out’? For instance, I think they ought to fund
that woman’s legal costs.
Mr Dennis—Yes. I believe that there is a role for ASIC to perhaps even take over the
litigation in this. There are other matters where ASIC has seen that the public has suffered
because of misrepresentations in relation to loans, has intervened and has sought binding
declarations from the courts that loans are not enforceable. The benefit of ASIC doing this is that
it has a lot of resources and it has a lot of expertise—it has corporate lawyers and so on. It seems
to me that any individual person who is being sued will just be picked off one at a time.
Senator STERLE—Conveniently.
Mr Dennis—It needs an equaliser. Certainly, this committee has virtually the powers of a
royal commission and can bring witnesses in, but you probably do not have unlimited time and
unlimited resources to actually put this together. I was involved in the HIH royal commission
where one counsel assisting the royal commission, Mr Martin, and his staff managed to unearth
a huge amount of information very quickly merely because people had the position of privilege
where when they were giving evidence, as you do here, they were not subject to laws of
defamation and so on; they could speak freely. I also believe that, if someone is talking to an
ASIC investigator, they can speak freely and let the truth be known. There is a lot of information
to be had from the former employees of Great Southern Ltd, I believe.
CHAIR—I think you may be incorrect there. One of the things we learned in an earlier
hearing into fertiliser was that with ASIC, and certainly with the ACCC, there was a bit of
vagary around whether there was protection from litigation under the process. You are certainly
protected here.
Mr Dennis—Yes. I just see that, from what I can gather, this is a matter where obviously the
bank has got a lot at stake—there are $600 million at stake. They will put in whatever resources
are necessary to fight whoever wants to fight; whereas any individual would not have that
capacity.
CHAIR—That is absolutely correct. Can I just take you to the Project Transform arrangement
and Mr Gulson’s and your knowledge about how that came about. We have received evidence—
and we are not right into this yet—of people getting a knock on the door on the day of the
meeting from someone saying, ‘We have got a deal for you if you’ll vote yes to Project
Transform.’ Do you have clients who were offered an inducement to vote yes?
Mr Dennis—Yes. Mr Grima—I think I have already given you a copy of an affidavit he has
filed in Western Australian proceedings—was offered an inducement to change his vote. His
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 29
vote was in the negative because of his half-a-million dollars. They made a number of
representations to him to vote in the positive, and his own investment adviser said to him, ‘Look,
you might as well because if it all falls over your loan is with Great Southern Finance Pty Ltd
and you will have a pretty good defence not to pay that loan back.’ Unfortunately, the investment
adviser was not aware that loan had been assigned to the Bendigo Bank in Adelaide.
Mr Gulson—There were also a number of other investors who were rung up several times on
the Sunday night and urged to change their votes. So it brings into play the whole integrity of the
voting process. It is meant to be run by Computershare, yet the other side knew what the voting
was doing and who was doing it. In both cases that I am aware of, they declined to change their
vote.
CHAIR—I am the welder and you are the lawyer, so can you tell me, on the legal side of
offering an inducement, whether there is a crossover point when an inducement becomes a
criminal inducement.
Mr Dennis—I am not sure, but my view is this: if that inducement is not offered to all of the
people who are going into it and they are in a situation where it is a prospectus and they are
swapping their beef cattle interests for shares, in my opinion, there will be some breaches of the
Corporations Law involved in making those specialist offers just to someone who can tip it over
the balance. If one looks at the letter of I think 12 October—it might have been 12 January—
they knew what the voting was when they adjourned the meeting. In December they adjourned it
to early this year and they knew that they needed 70 per cent and they had about 69 per cent.
CHAIR—So they adjourned the meeting to get the vote?
Mr Dennis—They adjourned the meeting to get the vote—that is right.
CHAIR—Would you be able to make available to us the names of people, if they consent,
who were approached in a secretive way to change their—
Mr Dennis—Certainly. Certainly Mr Grima is very happy to give whatever assistance is
needed.
CHAIR—From your understanding and the likes of the witness in Wollongong, who put in
half a million—and I know a gentleman in North Sydney who did a similar thing; he was an
accountant who knew nothing about cattle—
Senator O’BRIEN—He has learnt a lot!
CHAIR—He has learnt a lot in the meantime. We now have evidence of farms being traded
internally. Mr Buntine was put on as the manager of the cattle scheme. We will attempt to get Mr
Buntine to give evidence. He is now employed by the liquidator, McGrathNichol, because, as
they said to me, he is the only one who knows where the cattle are. There has been evidence of
cattle being transferred in lieu of cash for lease payments on properties with Mr Buntine. I would
have thought that a sensible financial adviser would look at a prospectus which said: ‘For
$5,000, we’re going to lease you four cows for seven years. You give us near enough to 50 per
cent of the income from the calves, for administration and all the things that happen, and you get
AGRICULTURAL AND RELATED INDUSTRIES
ARI 30 Senate Wednesday, 7 October 2009
50 per cent.’ I lot of the early investors thought all that was happening with some nice Angus
cattle in a green paddock on King Island when in fact it was all up in the Northern Territory, in
the Kimberley et cetera, where if you get 60 per cent calving you are doing well. On my
figuring, at a 100 per cent calving, the best the investor could have got back was slightly less
than they put in. On the average of calvings, for every $200 they put in, the best they could get
back was $100. Does that say something about the lack of advice to clients by people such as the
man at Wollongong or does that say something more about the selling of the project by the
super-salesmen at Great Southern?
Mr Dennis—The man at Wollongong has a farm himself. He knew quite a lot about it. He
was assured that these were premium cows, and King Island was certainly mentioned; so, too,
was the Southern Highlands area in New South Wales and so on. It was minimised as anything
to do with—
CHAIR—Fourteen per cent of the cattle were in the south; the rest were in million-acre
paddocks up the top.
Mr Dennis—But that was not how it was sold.
CHAIR—That is my point.
Mr Dennis—I do not think it was the financial adviser’s fault in that instance, because of how
it was sold to him. The big selling point, of course, was the tax deductibility and the no-
documentation loans. You could just dial up. If you had a half-million-dollar income this year or
maybe you have a divorce settlement coming and you need to minimise your income—whatever
reason for which you need no income that year—you could just sign some documents and, lo
and behold, you would have a nil income.
CHAIR—Obviously that is an issue for not only ASIC and others but us—to consider—
Mr Dennis—The future of these sorts of things.
CHAIR—the implementation of misuse of good capital in agriculture. On the transform
arrangement for cattle, to best of your knowledge, Mr Gulson, in the way that was performed at
the last minute, where they got the vote at a meeting to change the constitution, having deferred
the annual general meeting until they got the vote, with a bit of inducement—early morning
doorknocking—and they then moved, with success by point something of a per cent, a 75 per
cent vote, to change the constitution, shouldn’t that amendment to the constitution have gone to
the authorities before they enacted it?
Mr Dennis—There should have been a 14-day period, as I understand the law, where you give
notice to ASIC to see if ASIC has any—
Mr Gulson—It is 14-days notice, I think.
CHAIR—But, in fact, they just proceeded with the meeting.
Mr Dennis—They just slammed it through.
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 31
CHAIR—Wham bam, thank you, M’am.
Mr Dennis—Another issue in this is the position of so-called ‘independent advisers’. KPMG
and Allens Arthur Robinson advised Great Southern on the 2005 acquisition of the wood lot
harvest that assisted showing a good return to investors, and yet it is the same KPMG who gave
the so-called ‘independent report’ to the so-called ‘independent’ directors on GSMAL advising
investors they should accept Project Transform—
CHAIR—That is what you call buying advice.
Mr Dennis—and KPMG then used the existing so-called ‘independent’ agricultural
investment people to give them a report. I have no criticism of that, because they came back and
blew the whistle on it, saying how dismal the returns really were, but if one looks at the previous
reports from that same organisation when one was selling it was a rosier picture.
CHAIR—As I recall from Mr Marshall’s evidence back in 2001, 2002 or whenever it was, he
predicted all this. He predicted that they got the wrong advice, so they went and bought different
advice. He said that in the proceedings.
Mr Dennis—Yes. He got sued and was injuncted from adversely commenting against Great
Southern, as I understand it.
CHAIR—That cannot come out of this room, so keep your trap shut as you walk out the door.
He demonstrated that the original advice was not the advice they wanted, so they went off and
got other advice which more suited the purpose.
Mr Dennis—Yes, basically.
CHAIR—In other words, the advice was as good as the money that paid for it. With the
transform arrangement for the cattle, having completed the transform arrangement with that
process, how will we ever know whether the cattle that were leased existed?
Mr Dennis—That is going to be hard.
CHAIR—As I understand it, McGrathNicol have employed Mr Buntine. Good luck to him if
he can see a quid in it. And obviously he can—I have had a conversation. There was so much
money pouring into this scheme that he received instructions to go out and get more country and
more cattle rather than sending the money back to the people who were proposing to invest it for
their tax deduction. So there was a rush to get hold of a heap of cattle, and there was that
generous spotter’s fee for Wrotham Park and those places where they bought the three
properties. From my understanding—and I like to go and talk to people on the ground on the
place, which is why I know so much about Cubbie Station—there was no muster to guarantee
that what they were paying for was actually there. It seems to me that you could make a case that
some of the cattle that belonged to the investors—at least 50 per cent of the carving—were, as it
were, misappropriated in the transform arrangement.
Mr Gulson—There are possibly two ways in which you could see what might have been.
Those are, firstly, the pregnancy book—that is the stock book which they keep on the station—
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ARI 32 Senate Wednesday, 7 October 2009
although our inquiries show that they had a regular turnover of managers on these stations, so
they might be incomplete or might not exist. Secondly, there are the transport companies. Where
the cleanskins went, where the marked cattle went—you might be able to get some idea of what
has happened with the dispersal of the cattle. Our inquiries have indicated that thousands never
made it to branding.
CHAIR—My understanding from talking to a gentleman who was standing on the wharf,
loading the cattle, was that there was a peculiarity about live export trade where you do not
actually have to have a tag if they allegedly come from the property of origin and, if you happen
to have bought a property that was convenient for that purpose, you could just say they were
from the property of origin. I went to have a look. There are plenty of cleanskins getting loaded
live for the northern export. This could turn out to be the greatest cattle scam of all time.
Senator STERLE—Mr Dennis, back to your opening statement. Very clearly, we have
investors who have outstanding loans and the new owner of the loan book is contacting them
one-on-one—small numbers so they can avoid any class action. Would that be right?
Mr Dennis—Yes. They are trying to do that.
Senator STERLE—So are they threatening or demanding repayment of these loans upfront
or lump? What are they doing?
Mr Dennis—Those people who have fallen into arrears are getting demands for the whole lot
to be accelerated and payed all at once now.
Senator STERLE—When you say accelerated, does that mean tomorrow, over the next five
years?
Mr Dennis—Each person is being addressed differently. They put a lot of resources on to try
and counsel, cajole, assist. I think also the bank does not want too much adverse publicity over
of this.
Senator STERLE—I could imagine they would not. So they will approach these individuals,
who would no doubt feel absolutely threatened.
Mr Dennis—Yes. One of them had their credit cards cancelled, for instance. They were in
default, they were reported to a credit reference authority and had a letter saying, ‘You can’t
draw any further limit on your credit card, it is now in reduction.’ That certainly was something
that panicked one of my clients and I had add to ring up the bank on their behalf to say, ‘I think
you are overreacting. This loan is in dispute.’
Senator STERLE—Is that normal practice, in your experience, for banks to do that?
Mr Dennis—No.
Senator STERLE—This would be a one-off?
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Mr Dennis—That is the only one in this instance, but it certainly worried the life out of this
person. It was a small businessman who could see his whole business going down the gurgler,
not being able to lease any new equipment, those sorts of things.
Senator STERLE—I can imagine the fear that must be going through their minds at this
stage.
Mr Dennis—He took it so seriously he brought his payments up to date so he would not be in
default. The cost of having a dispute with the bank, the pain of that, was more than the pain of
just keeping the payments going every month.
Senator STERLE—Sure. So to your knowledge of the clients you have, are the banks
demanding that the loans continue to be paid back at a quicker rate or is there any offer of deals,
that you may owe X amount but if you fix it up now we can settle for a lower rate?
Mr Dennis—There have been some deals. For instance, a client in Melbourne had four
grandchildren so took four wood lots and borrowed the money. Her financial adviser told her
that, although she was on a pension, the profits from this would cover it and it would just be a
small amount to pay each month and then that would be in trust for her four grandchildren. That
has of course fallen in a big leap and they offered that they would take half. That sort of deal is
on if you can show financial hardship. I do not know what happened in the end with that, but
certainly that sort of deal was a possibility. I did not end up having instructions from that client,
it was more a telephone inquiry of ‘what should I do? Should I take the offer or not take the
offer?’ I basically said, ‘It’s up to you. You should talk to your financial adviser who put you into
this in the first place, because I think your financial adviser might help you a bit with this as
well.’
Senator STERLE—Of all the thousands of outstanding loans, it is amazing how a pensioner
gets found out pretty early or approached pretty early.
Mr Dennis—Everyone who applied for a loan had to give a statement of assets, liabilities and
so on. It would have been on there—pensioner, assets, housing commission home—but still give
them a loan. She did not need any tax deduction. There was just no point her going into that
really.
Senator STERLE—No wonder the banks do not want to draw any attention to themselves.
Going back to this, we have possibly thousands of Australians out there, ranging from pensioners
to mum and dad investors to small-business people to whatever, who we would assume will be
eventually contacted by the banks.
Mr Dennis—Banks or Javelin Asset Management.
Senator STERLE—Let us talk about Javelin Asset Management, because they are the ones,
demanding their repayments, activated once again and paid back at a quicker rate.
Mr Dennis—That is the position Mrs Spiteri finds herself in with Javelin Asset Management.
They are seeking repayment of everything because she fell into arrears with the loan.
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ARI 34 Senate Wednesday, 7 October 2009
Senator STERLE—So if Javelin Asset Management were to approach every client who fell
into arrears, that would certainly open the doors for ASIC to come charging through.
Mr Dennis—I would have thought so, yes.
Senator STERLE—But at this stage, because there are only the odd numbers being
contacted, it does not come to ASIC’s attention. Is that correct?
Mr Dennis—I am not sure. I think ASIC on their little roadshow that was on my Google alerts
actually had something to say at a meeting in Bendigo only last week warning potential investors
in managed investment schemes to read every scrap of every page of their disclosure documents
and not just rely on what their financial adviser might summarise for them. They are basically
saying that if anyone read through these documents with a fine tooth comb you would not invest.
CHAIR—Would it be fair to say that a non-sophisticated investor, such as me probably,
would not make head or tail of a document that is a foot thick.
Mr Dennis—No, they probably would not pick it. It is easy for a trained ASIC lawyer to say
that, but I would have thought that the beef cattle scheme sounded all right. When somebody
explained to me, ‘You’re going to get half the progeny and over a 10-year period or a seven-year
period you are going to double your money,’ it sounded great. But then I talked to my brother-in-
law who owns a beef cattle station at Quirindi near Tamworth and he said, ‘Oh, can I have some
of those investors. I will lease as many cattle as you like on that deal.’
Senator STERLE—Our time is getting away from us. Mr Gulson, you have 1,000 clients, of
which there are 200 that could be in this same position?
Mr Gulson—Yes, over 200. We are together—DC Legal, Mr Dennis and I.
Senator STERLE—So of your over 200 clients in that situation you have Mrs Spiteri?
Mr Gulson—Yes.
Senator STERLE—How many others have been approached by Javelin Asset Management
demanding repayment as soon as possible?
Mr Gulson—There are several to my knowledge but we are not getting them all at the
moment. There is a mail block, but I am getting rung up about it on a regular basis. We have got
the letter and we ask them to send the letter through so we can write directly to Javelin Asset
Management. DC Legal does that. Then things go quite again for a little while whilst Javelin
Asset Management work out what it is doing.
CHAIR—Have you tabled any of those documents—the demand letters—with us?
Mr Gulson—I think Bruce has got some with him now, but I am not sure.
Mr Dennis—I did send them to you directly. They are the ones I sent you so you have
received those already.
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CHAIR—Okay, we will table them.
Senator STERLE—And you are acting individually for those people, but if the whole lot
were contacted then there would be a different line of action, wouldn’t there?
Mr Dennis—That is right.
Mr Gulson—Correct.
Mr Dennis—The advantage of Mrs Spiteri or somebody starting off a class action is that then
the Federal Court would give directions that each person in the same position would have to be
given notice of the class action and then would either opt in or opt out of a court case. So they
could make a decision whether or not they wanted to be in it. At the moment we do not have a
clue who the Javelin Asset Management loans are with. We mainly contacted financial advisers
everywhere and said, ‘Do you have any clients with Great Southern?’ That is how we started
accumulating clients in Great Southern. But even the financial advisers on the whole are not sure
if a loan was assigned to Javelin Asset Management until a client gets a letter from Javelin Asset
Management. It seems a very strange situation where just at the death knell of a company some
$38 million of a loan book gets sold for $10 million. It just seems to need investigation by ASIC
or by itself.
Senator STERLE—Sure, and for all we know there could be other mum and dad investors or
Australians out there who have been contacted by Javelin Asset Management and had some
other offer put to them to pay up at a lesser rate and who have probably paid. We would not
know.
Mr Dennis—That is possible. And of course having acquired the loan book for about 25c in
the dollar they can do fifty-fifty deals all over the place and still make a very good profit.
Senator STERLE—Yes, it gets murky.
Senator O’BRIEN—I have one matter that I would like to pursue. It was suggested that in
the Project Transform arrangements Computershare had control of a voting process but people
involved in the voting process were being contacted by Great Southern representatives, knowing
how they were voting, with the intention of persuading them to change their vote. The
suggestion was that that should not have happened and the implication in what was said was that
Computershare must be doing something wrong. Can you elaborate on that?
Mr Dennis—I am not sure that is right. I think, though, that it seems very strange that that
would happen in an externally managed situation. I am not saying that Computershare
necessarily did anything wrong—they probably gave copies of all of the proxies to Great
Southern Limited, I imagine. I am not trying to allege that Computershare did something wrong;
I am just saying that the whole process seems very irregular—where you have differential offers
made to the larger investors to give them a special deal.
CHAIR—Calling off the meeting because you have not got the numbers is not what I would
say—
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ARI 36 Senate Wednesday, 7 October 2009
Mr Dennis—They had another reason to. They had to come up with a change in what they
were saying at the next meeting. It is perhaps worth tabling the letter from KPMG, dated 12
January 2009. I have a spare copy of that. It is basically a supplementary expert report. That
supplementary expert report from KPMG set out what the voting was from the adjourned
meeting.
CHAIR—Is that the expert report on wood or cattle?
Mr Dennis—It is talking about wood but it mentions cattle as well.
CHAIR—I can assure you that people at KPMG have no idea about the cattle scheme, nor do
Great Southern. They were relying on field managers to have any idea of where the cattle were
and what they were worth. I talked to Elders in respect of transferring cattle in lieu of cash
because they were running out of cash for lease payments of properties. I asked the gentleman,
‘Who counted the cattle and who valued them?’ and the phone went dead.
Mr Dennis—That sounds like insolvent trading, doesn’t it? When you cannot pay something
and you are starting to exchange your cattle, especially if those cattle are already leased to
investors—
CHAIR—Especially if you can stick them on a boat and get rid of them.
Mr Dennis—they are not your cattle, in a sense. I will table that report but, interestingly, at
the end of it I believe it says that they had full access to everything.
CHAIR—Can I instruct you on that also? I actually spoke to the person—their name escapes
me at the moment, but I have it in the office—who was in charge of the welfare of the cattle,
whose job it was to go around and make sure they were being be watered and fed. By the way,
having sacked a lot of the staff, troughs were not getting filled. Obviously that is a daily task if
you have the staff. If you just have fly-in, fly-out contractual management, it becomes a bloody
nightmare, which it did. I said to the guy who was in charge of looking after the welfare of the
cattle, ‘How did you get to see them?’ He said, ‘You just fly in and go to a few water points.’
You would see perhaps 10 per cent of the cattle that were allegedly there. There was no muster.
Mr Dennis—No.
CHAIR—This could be the greatest cattle scam in all history.
Mr Dennis—Yes, the cattle may not have even been there. That is true.
CHAIR—How would we know?
Mr Dennis—All I know is that we also had an investigator who was ringing around the
stockyards and so on who said that a lot of the cattle that were brought to the stockyards were in
poor condition.
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Wednesday, 7 October 2009 Senate ARI 37
CHAIR—Yes. That happened in Dubbo and the cattle that came out of the back of St George
where there was a drought. Bear in mind that the investor is paying all the agistment costs and
the transport costs.
Mr Dennis—Yes.
CHAIR—It just cannot help us.
Senator MILNE—Chair, I have to go in a minute, so can I ask one question?
CHAIR—Yes, away you go.
Senator MILNE—As you would be aware, there was a joint committee looking, in part, at
ASIC’s oversight of these schemes, and there have been some minor recommendations made. In
your view, was ASIC derelict in its duty in relation to overseeing these schemes, and what is it
that now has to be changed given that these MISs are going to continue?
Mr Dennis—It is very hard to just say that ASIC were derelict in their duty when they rely on
auditors, experts and so on. I think ASIC should be entitled to rely on the audit reports that are
prepared on behalf of listed public companies and not have to go and re-audit every single listed
public company that we have here. But where there is a managed investment scheme situation
where clearly the public purse is being assailed on to give these huge tax deductions, it seems
very intelligent for the government to put more resources into ASIC to look a lot more closely at
any managed investment scheme to ensure that it is proper, fair and has at least half a chance of
making a profit.
Senator MILNE—In terms of these auditors that audited the books of these schemes and
more or less said, ‘They are all beautiful, the returns are great and you should keep on investing
in them,’ are there a wide variety of them or is there are a consistent number of auditors turning
up with the schemes?
Mr Dennis—I have only looked at Great Southern. I am aware that there are, of course, a
number of other managed investment schemes which have fallen over. In this one Ernst and
Young are involved, but they had qualified their last audit report to say there was a real question
mark over Great Southern continuing as a going concern. You had to be quite good at reading
and comprehension to get to that, though, when you were looking at the documentation for
Project Transform. You had to read the whole thing all the way through to get to that. It was not
highlighted in red at the front of the document like I think it really should have been.
Senator MILNE—I guess we can take it from that that one of ASIC’s roles ought to be to call
some of these auditors to account and change the rules about how transparent recommendations
or conclusions need to be.
Mr Dennis—I think APRA should also have a role, because these managed investment
schemes, with so much money involved in them, really economically skew the whole investment
in agriculture. Possibly the whole thing became too big. There is Gunns, Great Southern and
Timbercorp. If you add all of that up and you project it into the next century, are we going to
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ARI 38 Senate Wednesday, 7 October 2009
turn all of our agricultural land into tree lots? It does not seem to be demand led; it seems to be
tax deduction led, unfortunately.
Senator MILNE—Yes, that is absolutely right. You will not get any disagreement from me,
but unfortunately we have not been able to persuade everybody else in the parliament to that
effect yet. Thank you for that.
CHAIR—There are proceedings in court. Who is ABL Nominees Pty Ltd?
Mr Gulson—That is the Adelaide Bank Ltd.
Mr Dennis—Yes. That is a subsidiary of the Bank of Bendigo in Adelaide that they have used
to kick off these proceedings instead of having it in the list looking like the Bank of Bendigo and
Adelaide. ‘ABL’ looks a bit more innocuous.
CHAIR—Is this matter of ABL Nominees and Christopher George Groomer and Pauline
Judith Grima currently before the court?
Mr Dennis—That is right. That is the one in Western Australia.
CHAIR—So we had better not talk about that.
Mr Dennis—That is the one I was talking about—Groomer and Grima.
CHAIR—So we should not talk about that.
Senator O’BRIEN—Anymore.
Mr Dennis—Probably not.
CHAIR—Okay, thanks. We will err on the side of caution. I now have the details of the
Spiteri matter and will make them available to the committee.
Mr Dennis—That has not been filed in court yet.
CHAIR—It has not been filed in court. Would it prejudice the case if it were discussed?
Should we err on the side of caution?
Mr Dennis—I think we have discussed the Javelin Asset Management issues enough in
general terms.
CHAIR—Okay. So would it be fair to say that, in the opinion of DC Legal Pty Ltd, it would
be sensible for this committee to call Bendigo bank?
Mr Dennis—Yes. This is my opinion, anyway.
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Wednesday, 7 October 2009 Senate ARI 39
CHAIR—Even a basic question like, ‘Was due diligence undertaken in relation to the
purchase of the loan book from Great Southern Finance?’ and those sorts of questions would be
reasonable questions to put?
Mr Dennis—Yes, absolutely.
CHAIR—We could also ask: what was the process to let Mr Young, the former CEO, resign,
having cashed out before the market fell, which was seen as insider trading, then go and buy the
loan book?
Mr Dennis—All of that. I think Mr Young himself would be an interesting witness.
CHAIR—We may well attempt to speak to him, and obviously to Mr Buntine, because on the
word of not only the administrators but the liquidators there are very few people whose
knowledge of the cattle scheme they can rely on. It is quaint that Mr Buntine, who was the
manager of the process put on by Mr McLeod, who is his brother-in-law, because he had some
knowledge in the field, then became a major operator, as it were, with a serious financial
interest, even though he was managing the show. He was leasing country and cattle to Great
Southern and then became the servant of the liquidator because they think he is the only one who
knows where the cattle are. I have had private conversations, which I will not repeat, with
various people in various law firms and accountancy firms who said they had no bloody idea,
and yet they were running the show.
Is there anything further you would like to add? The difficulty for your Mrs Spiteri and others
is that when you go to court it is not so much about the truth as about the law. If you have a
smart enough lawyer, you get the lawyer to avoid the truth and spend a lot of money so that you
eventually put people out of business that way. It is very difficult. I agree with you that we
should be talking about the government, ASIC or someone getting involved to test all this out. I
have had experience with people in tears on the phone—for one bloke it was over $1 million;
some people with do-your-own superannuation funds were absolutely penniless because of this.
People thought they were being given good advice—a $50,000 up-front loan and owe $225,000,
with no capacity to pay. ‘Sell your home, mate.’
Mr Dennis—Certainly some of the financial advisers did not reveal the extent of their
commissions, it would appear from the questionnaires that I have read. That is another issue: the
whole financial investment industry. We have not focused on that. We have just focused on—
CHAIR—Mr Dennis and Mr Gulson, if you have other evidence or paperwork that you would
like to present which would fortify your presentation today, we would be very interested to
receive that.
Mr Gulson—Thank you very much.
Senator O’BRIEN—We need to receive the document you offered.
Mr Dennis—I have the document here.
CHAIR—The KPMG document.
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ARI 40 Senate Wednesday, 7 October 2009
Mr Dennis—It was made private and confidential to the independent directors of Great
Southern Managers Australia Ltd, but it was circulated with Project Transform documents that
we downloaded from the website.
CHAIR—We thank you for your evidence today.
Mr Dennis—Thank you.
Mr Gulson—Thank you.
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Wednesday, 7 October 2009 Senate ARI 41
[11.42 am]
CORNISH, Mr David Robert, Private capacity
CHAIR—Welcome. Mr Cornish, we will be interested to hear the agribusiness finance
perspective of all this.
Mr Cornish—I come here as an interested person. I do not represent anyone but myself.
CHAIR—Would you like to make an opening statement?
Mr Cornish—Yes. This is my first time at doing something like this, so please, Senators, give
me some guidance. That would be greatly appreciated. I am obviously aware of the terms of
reference for this particular inquiry. I will try to answer some of those questions, but I also want
to flesh out some of the other issues around the managed investment schemes, which I think is
pertinent to the whole question of the value of MIS to these points. Firstly, I would like to thank
the committee for the opportunity to appear today. Up front, I state very clearly that the
comments I am about to make are personal comments and in no way reflect the belief of either
my current employer or my previous employers.
I feel it is worth understanding a little bit about my background. I have 20 years experience in
the field of agribusiness finance. This experience included roles at the National Australia Bank,
Australia’s largest lender to rural Australia, as a rural economist. I was an agribusiness credit
adviser, a marketing manager and performed senior banking roles within regional New South
Wales and Victoria. I developed for the National Australia Bank its first agribusiness dedicated
credit analysis program, plus a training program for new bankers. I was the initial CEO of Rabo
Financial Advisers, a wealth management arm of Rabobank. I spent five years as a consultant
with Mike Stephens and Associates, focusing on farm investment performance and investigating
investment opportunities for corporate Australia. I believe this gives me a broad insight into the
financial viability drivers of many agribusiness industries across Australia. I hold a bachelor of
agricultural economics degree, majoring in econometrics, and a bachelor of business degree,
majoring in accounting, and a diploma of financial planning
I first became aware of the MIS industry during my time at the National Australia Bank, when
the national credit office would pass on the latest proposal for me to review. At that stage they
mainly centred around ostriches, emus, wine and nashi fruit. The reason I raise this is that, for
some reason, the failure of the latest group of MIS companies has been blamed on the GFC. I
can assure you that these schemes have continued to fail, no matter what the economic cycle is,
due to the fact that the majority are based on highly speculative returns that never eventuate.
The other important factor is that the unsuitability of these schemes as long-term viable
structures for investing in agriculture has been well known and documented for some time. A
RIRDC report completed in 2000 found that the overall performance of MISs was mediocre,
with poor-quality management and high commissions to promoters limiting returns to investors.
Another RIRDC report in 2004 stated that one independent assessment of schemes offered to the
public in 2003—and you mentioned the person’s name before—found that less than 10 per cent
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ARI 42 Senate Wednesday, 7 October 2009
were sufficiently sound investments to warrant their recommendation. Even ASIC in 2003 made
the following points about agricultural MISs: (1) the questionable commerciality of schemes; (2)
at times poor quality and absence of disclosure; (3) occasional inappropriate and misleading
advice; and (4) payment of high commissions in excess of normal retail investment schemes.
Again, I will just go through a few points as they relate to the terms of reference—first, the
misallocation of resources. It is my belief that for the government intervention to be justified
there must be some net benefit to the Australian community from a social, economic or
environmental base, because, if history has taught us anything, government interference of any
nature that distorts markets and results in misallocation of resources will deliver suboptimal
outcomes for the Australian community.
In 2006, as part of the MS&A submission to the then MIS inquiry, I investigated what cost-
benefit study was carried out to support the use of business structure as it pertained to the timber
industry. What I found was disturbing, to say the least. There was no credible economic
modelling done to justify the 2020 Vision, yet the 2020 Vision is continuously used for the
justification of the MIS policy. To quote from my 2006 report:
The 2020 forestry vision would seem lightweight in its economic analysis. There is a significant body of evidence from
eminent academics such as Professor Gordon MacAulay and Dr Judy Clark—
now Dr Ajani—
that shows we have enough plantation wood to meet our Pulp chips requirements without the need to subsidise its growth.
Current Federal Government Plantation Taxation policy is wedded to the need to achieve the so-called ‘2020 Vision’.
Unfortunately, there does not seem to have been any independent and robust analysis to the cost benefits of achieving this
vision.
The report continued:
Personal communication with the authors, Centre for International Economics, reinforces the fact that they were never
asked to analyse the economic net benefits of the plan, just to provide a strategic plan to achieve the set goal. Justifiably, it
is not surprising therefore that they have delivered a ‘whatever it takes to achieve this strategy’ attitude in framing the
required outcomes of the report.
In the plan that is the 2020 Vision, one of the most important statements in the whole document
is made on page 19. The report quotes it:
‘Care would need to be taken to ensure that any incentive offered would not distort investment decision’ Clearly, as we
have identified, the current taxation policy is distorting investment decision.
It is our concern that government policy, which is based purely on a production target at the expense of profitability and
long term sustainability, can have disastrous consequences.
We have seen that not only in the MIS industry but in the grape industry and the wool industry,
and I could go on.
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Wednesday, 7 October 2009 Senate ARI 43
I think the other important issue is around asset redundancy as well. The costs to put land back
from trees to pasture has been estimated to me to be around $2,200 per hectare. As my report
said:
Given this, there is a strong likelihood that where growth rates have been uneconomical this land will become redundant,
as it will be too expensive to revert back to pasture, unless the government provides assistance! Why do we as a nation,
wish to go down this road, and … so destroy the current social and economic infrastructure that currently supports viable
and profitable agricultural pursuits?
Unfortunately, due to a plane delay because of fog in Canberra I missed Dr Schirmer’s evidence,
but certainly in her report she talks about the changing face of population dynamics with regard
to the inclusion of timber in a local community—in other words, the effect on smaller centres
versus larger centres. Certainly, for someone who has lived in smaller centres, you must
appreciate that, while one or two families might not mean much in Hamilton or Mount Gambier,
to Casterton or Coleraine—which are between the two—that could be the difference between
having and not having a bus, a nurse or a teacher. So I think some of those significant dynamics
that this change in industry has created have not been factored in.
Senator O’BRIEN—She did say that there are other factors that had just the same impact,
including the takeover of one property by another. And Senator Heffernan mentioned the buying
of a bigger tractor instead of two. All of those things have similar impacts on those small
communities.
Mr Cornish—Yes. I will cover that off, because I think it is a really important question. You
need to include the wealth creation. Population is important, but are we actually utilising that
land to create more wealth in those local communities which allows the families to be more
sustainable? That is what I think is missed in some of her analysis.
On food production: in the next 50 years—and I suggest you get a copy of this; there is a bit in
it about today and about the MIS and food production—we need to produce as much food as we
have produced up till this point. It could be argued therefore that the need for food security now
outweighs the need for woodchip security. Government policy must now ensure that the
continued removal of the prime Western District country of Victoria—food-producing country—
is stopped and in some cases reversed.
On the impact on land value and resources: the argument that MIS industries bid up the price
of land has been substantiated by the research carried out by the Bureau of Rural Sciences in its
Socioeconomic impacts of plantation forestry of November 2005. This was substantiated by Dr
Jacqueline Schirmer’s submission to this inquiry. However, in reality we are asking the wrong
question. The question should be: does the government support provide a competitive advantage
to one player versus another? It could be argued that, if one nong wants to come along and pay
over the odds for a block of land using his or her own money, they can. Many ex-New Zealand
dairy farmers—and, by the way, I am a New Zealander, so I can say these things—are now
realising, the hard way, the errors of their ways. But when a player comes along with someone
else’s money, which is subsidised by the Australian taxpayer, to do the same thing then we have
a major issue. This is exactly what we saw happening with the MIS industry.
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ARI 44 Senate Wednesday, 7 October 2009
With no moral or financial hazard involved in the purchase decision, I believe the price of the
country has risen to levels that are commercially unviable—how much at this stage we can only
speculate. I wrote this a couple of days ago and I think I have actually got some facts on it now.
The recent sale of Timbercorp almond assets has been reported to have been at a 65 per cent
discount to the last valuation. Olam, a Singapore based company, purchased the groves plus
water for $128 million. The last valuation price reported was $375 million. The most disturbing
fact is that the taxpayer money that was used in the original purchase has now gone to benefit
offshore countries. With regard to the timber industry, I just found out that Timbercorp has sold
both the trees and the land to Global Forest Partners for $3,750 a hectare. I am a bit old-
fashioned; that works out to be about $1,500 an acre. That country that it originally purchased
was bare and was at least $2½ thousand an acre. That shows that we have had a 40 per cent
reduction in just the bare land value, not including the trees. I think that adds facts about what it
is doing to land prices.
On capital: the greatest myth that is continually thrown up to support these schemes is that
agriculture needs more capital. Nothing could be further from the truth. The capital market for
Australian agriculture is as strong as that of any industry in Australia. Further, behind home loan
lending—based on Reserve Bank data—lending to agriculture was the second-fastest-growing
lending category for the period 1997 to 2004. I am not trying to be tricky about stopping in
2004; I just have not updated it since then. The availability of capital can be identified by the fact
that capital assets such as land and water in many situations are highly overpriced given their
earning capacity. The last thing Australian agriculture needs is increased demand for these scarce
resources, thereby driving the prices up further. In my experience, the only place where there is a
lack of capital is in the industries that cannot provide an economically sound return.
I just want to cover the investor too, especially following on from the comments of the
previous speaker. The very public implosion of both Timbercorp and Great Southern adds further
weight to the arguments I made in my 2006 submission regarding the unsuitability of the MIS
structure for direct investment in agriculture. The inability to unwind these schemes in an orderly
fashion ensures that except for the administrators and lawyers everyone loses. It has been held
that the failure Timbercorp and Great Southern can be simply put down to poor management, the
global financial crisis and too much debt and that they are the exception to the rule.
However, this does not account for the failure of other MI schemes, such as Queensland
Paulownia Forests Ltd. This was a document that was circulated to all financial planners and I
was on the mailing list. It has two independently rated research advisers reporting on it. It was
projecting an IRR geared pre tax of 32.64 per cent and an IRR ungeared pre tax of 18.74 per
cent. It was given what is called an investment rating by these independent research companies
of AAA, AA+ and AA-. For the person in the street, they are the type of credit ratings you give
the National Australia Bank. The Australian government is, by Moody’s, AAA or AA.
CHAIR—Tell us the bad news. What happened to it?
Mr Cornish—They went into receivership owing $100 million, and nothing became of the
investment. Some of you may be aware of Enviroinvest. Some talked about shopping of opinion.
I know from personal communications with Professor Bill Malcolm from Melbourne University
that he was asked to look at the projections for the Enviroinvest cattle scheme, which became the
forebear of Great Southern. He refused to accept the assumptions that were made by Lonsec. I
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 45
could not find it before I left, but Adviser Edge came out with another independent report saying
it was a good investment.
SAITeysMcMahon then Orchard Funds MIS is another one with a AA- report projecting
returns of 10 per cent to 12 per cent. As you can see—and this is a big bugbear of mine—unless
you dig for this stuff you will not know about it. One year their return has been minus 13 per
cent and in three years minus 6.42 per cent.
Senator STERLE—Have you found any good ones?
Mr Cornish—I will talk about that. Palandri is another one that you are probably well aware
of, which is in the wine industry. These all occurred before the GFC. I hope this answers your
question. I would go so far as to speculate, because I do not have the hard data, that no stand-
alone MIS company has lasted more than 13 years. I cannot find a stand-alone MIS company
that has survived longer than 13 years. They have to have a parent company that can prop them
up, obviously with a vested interest in either the production or what they can get off it.
Senator O’BRIEN—Such as Gunns.
Mr Cornish—Gunns, exactly.
Senator COLBECK—So if a business has a market based focus for the product that is being
grown in the MIS it has a different circumstances to what a stand-alone MIA does?
Mr Cornish—I will give you an example. One of Elders’ subsidiaries, ITP Elders, made an
$11 million loss this year. Elders being Elders was able to write a cheque out and prop up their
unprofitability. So rather than saying it is having a commercial focus—and, as we have seen,
Gunns have a commercial focus accordingly—it is more about their ability to subsidise or prop
up these companies where they are not performing to expectations.
CHAIR—Mind you, Elders has got a pain in the guts themselves.
Mr Cornish—Yes, they have another pain in the guts, but the reality was that one of the
biggest pains in the guts came from their actual MIS industry. In other words, I would surmise if
that company was actually a stand-alone company it too would have gone into receivership or
whatever. I am not certain what they do. I am trying to show that it is not just me saying this.
There are several independent witnesses who have been continually saying this since 2000. As
my submission says:
The overall lack of underlying commercial validity of most MIS was noted by Lacey and Watson that, ‘one independent
assessment of schemes offered to the public in 2002-03 found that less than ten percent were sufficiently sound
investments to warrant their recommendation. These assessments are based on schemes that have been given product
ruling by the ATO. Product Ruling may have provided greater tax certainty for individual investors in projects, but from
the community’s point of view resources are wasted if investors are being encouraged to invest in non-commercial
projects by optimistic forecasts and/or inadequate regulation.’
AGRICULTURAL AND RELATED INDUSTRIES
ARI 46 Senate Wednesday, 7 October 2009
To put it simply, the structure of these schemes and the activities they are involved in means that an investor is highly
unlikely to ever receive a consummate return for the risk they take even given the tax benefit of the schemes. After a time
the investor will wake up to this fact and will no longer invest in the scheme.
These Ponzi like schemes mean that there is no future cash flow to the promoter and the scheme
fails. It goes on:
This is a systemic structural problem and will continue to happen GFC or no GFC.
I have some preferred options. Obviously, I do not want to bore anyone, but—
CHAIR—We remember the emus and ostriches, don’t worry!
Mr Cornish—Senator Milne made a very important point: it is easy for us to rake over the
coals and say ‘I told you so’ and all that. Certainly that is not the reason why I am here. We have
had this issue. The balloon has gone up. I am here to say: what is the opportunity now for us to
make certain that we are investing better in Australian agriculture? I would still say that, as
things stand today, the economic argument that forestry timber needs a special structure is
questionable. I still have not seen the economic or financial data that proves that—that we are
better off investing our resources in something that is going to give a higher risk, lower return
asset to a rural community.
CHAIR—If I can stop you there, we should start with the questions. Congratulations on your
Treasury submission; it is an excellent presentation and it is very instructive for anyone to read.
We are looking at how we spend rural capital to the best advantage, given the global food task,
which is going to double—and, as you say, that is a fantastic figure, that the gross of human
production from this point to the start of man is going to double in the next 50 years. You say in
the executive summary:
• Current taxation policy is not revenue neutral. We have estimated that the Australian Taxation Office (ATO) forgoes
nearly $2,000 per hectare, based on a Mean Annual Increment (MAI) of 20. Even given an optimistic MAI of 25, the
ATO forgoes $546 per hectare. This is a direct subsidy that ends up in the pockets of the MIS industry and provides
them with an unfair advantage in competing for scarce resources such as land and water.
• Independent forestry advice has shown that charging investors up to $9,000 per hectare is expected to deliver a loss to
the investor. Yet due to the government’s tax policy—
which brings into question the interpretation of part IVA—
the unsuspecting public is induced into these schemes by the availability of the upfront tax deduction.
• We have estimated that Great Southern Plantation charges, published in their 2006 Timber prospectus, are approxi-
mately 270% higher than the fees charged by AMP for a retail investment. Based on our estimation we believe that
Great Southern Plantation’s profit margin has averaged—
this is for the promoters, not the poor bloody investors—
… 592% greater than that of AMP.
Doesn’t that bring into question the tax office’s interpretation of part IVA of the ITAA—which,
by the way, another committee has looked at, looked over and flicked? Doesn’t it bring into
question the logic of part IVA in interpreting these schemes?
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 47
Mr Cornish—If you turn to pages 11 and 12 of the submission to Treasury, I quote Michael
D’Ascenzo, Commissioner of Taxation. If you look at what he said in his presentation to the
2002 Queensland Taxation Institute convention, I would have thought, especially if we are
looking at the Timbercorp and Great Southern schemes, that they would tick the box for every
point he makes there. So I do not understand why the legal interpretation is one versus, certainly,
what the ATO is saying—
CHAIR—What the commissioner thinks.
Mr Cornish—What the commissioner thinks.
CHAIR—Does that put into question the person—and we have had some of those people
head to jail—who gave the interpretation for the finding of the tax office in regard to the
scheme? Is it as basic as that?
Mr Cornish—To be fair to them, at an MIS love-in in Melbourne there was the ATO person
from Perth. I would suggest that they were put in a very unfair position. These guys are good at
understanding tax law, but what this required was an understanding of both tax law and the
investment cycles and risk-return of agriculture. Either by its laws or the way it is governed,
ASIC was entirely missing in this whole discussion. As I said, in 2006 it was well known that
Great Southern was subsidising the payment to growers. In fact, I wrote about it and went on
public radio about it. Yet why did ASIC wait till 2009, after the balloon had gone up, to
investigate it?
CHAIR—Your report says:
An ASIC report in 2003 made the following points:
• The questionable commerciality of the schemes.
• At times, the poor quality and absence of disclosure.
• Occasional inappropriate or misleading advice.
• Payment of high commissions in excess of norms for retail investment schemes.
Proposed policy changes must be able to resolve the current failures …
Yet they did nothing. There recently was an inquiry in this parliament where they dodged it
again. What does all that mean?
Mr Cornish—The feedback I got from the then coalition investigation in 2006 by Senator
Dutton—
Senator COLBECK—It is ‘Mr’ Dutton, although he might have to become that!
Mr Cornish—I apologise. The feedback I got unofficially was that, while we had won the
economic debate, it simply was not in the political debate. This was a political issue and had
nothing to do with the numbers.
CHAIR—Hopefully this committee will take the politics out of it.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 48 Senate Wednesday, 7 October 2009
Mr Cornish—I miscalculated some of those figures you reported, Chair, based on the current
figures that came from the buyback. I grossly overestimated the tax that the government would
get back from the investors. They put in $9,000, so that is $3,000 per lot. That means they
received a tax advantage of $1,455. Selling to this new company, they will receive $1,295 per
lot, which means they will pay a tax of $635. So the net effect, before we take opportunity cost
into account, is actually $820. Basically, the taxpayer is lending 56 per cent to Great Southern to
sell to this foreign company. On the comparison of the fees of AMP and Great Southern, I was
probably being a little bit unfair on Great Southern because I did not take land rental into
consideration, which would add another $7,000 to the costs that they need to pay out. In
summary, rather than a 270 per cent difference, there would be a 108 per cent difference between
Great Southern and AMP.
Senator O’BRIEN—We have taken some evidence about the use of the legislative
prescriptions to invest in wheat crops in Western Australia and New South Wales which had
operated quite satisfactorily. Should we take any lessons from that?
Mr Cornish—Yes, and I would suggest to hold your fire on the viability of it. I quite like the
scheme. When I was at the NAB, what we were trying to look at was what is called multiperil
insurance, which is big in the US, and I for the life of me could not make multiperil insurance
work from a commercial perspective—because we thought it would be a great product—unless
we received a subsidy from the government as you do in the US. Also, when you compare US
agriculture to Australian agriculture, what you must remember is that we are in a much more
volatile climatic and economic situation. In other words, a similar farmer in Idaho in the US has
a much lower standard deviation of rainfall and the government writes out a cheque for him if
things are going tough. That makes multiperil insurance a much more riskless product to offer in
an environment like the US than it would be in Australia. What I think the guys have done—and
I applaud what they are trying to do—is create an insurance-type scheme that is commercially
based.
Senator O’BRIEN—Risk spreading across—
Mr Cornish—Risk spreading. And I think that is a really terrific thing. I would still question
the long-term viability of it.
CHAIR—They are going to burn their money in the east this year.
Senator O’BRIEN—That is what is accepted in the model, is it not? You hope that there are
no failures, but you are spreading the risk across different districts.
Mr Cornish—The other issue I would differentiate—and I probably stand out here—is non-
forest MISs. I am not so fussed about them. People seem to be getting fussed about them. The
reason I am not fussed about them is that if an MIS industry goes up to Robinvale, does an
almond orchard, pours a bucket of money into it and it goes pear shaped, a good farmer can
come along—hopefully it is a next-door neighbour, though in this case it is an overseas farmer—
pick it up for a song and go on producing almonds. There is no net there. In the timber industry,
if I go and rip out all the infrastructure for alternative pursuits such as livestock or cropping—
because you have to understand that you do not need the stockie, the truckie or all that type of
stuff which is usually locally based, because it is much more contractual and you can cover a
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 49
much larger area of timber from further away—you cannot then say, ‘The timber industry was
no good; let’s go back to grazing.’
Senator O’BRIEN—That is happening in New Zealand. That was Dr Schirmer’s evidence
this morning. They are going back to dairy, not just grazing.
Mr Cornish—And again, looking at New Zealand agriculture, the social dynamics of New
Zealand, the population spread and things like that, it is not like you are out the back of
Casterton, where it is sometimes bloody hard to get a person to come out. You have much more
flexibility and it is a much more agriculture focused business. Where it would be interesting to
do some analysis now is where I think we were fine up till last year. As you also know, in New
Zealand in the last 12 months, dairy prices have fallen by 50 per cent.
Senator O’BRIEN—Let us put the proposition. I know north-eastern Tasmania. I have driven
in some areas where, clearly, what had been small grazing properties, probably for cattle and
maybe some sheep, were being converted into plantation. However, if the projected investment
into water infrastructure applies, that land, I suspect, will be much more valuable—assuming the
dairy sector recovers—as dairy land in the future. You could well see someone saying, ‘At the
end of the first rotation, it is worth our while to spend $2,000 to convert that pasture, because we
will be converting that on an ongoing basis into a good cash-flow business in dairy because
there’s water there.’
Mr Cornish—I agree. But take Balmoral and Willaura, small towns in western Victoria where
the average rainfall is 600 millimetres or less and it is much more variable and where trees have
gone in where no tree should ever go in. You do not have that option to go into dairy. There is
another issue. You can look at the reverse side and take the sugar industry. Using the type of
analysis that Dr Schirmer used, CIA looked at effective employment. Where you had those more
intensive industries such as dairy and sugar the multiplier of lost jobs was five or six. For the
sugar industry I think it was 18 per 1,000 acres with timber being five. Where the economics
stack up, yes, that will happen. My concern arises if you look at that marginal country. I say
‘marginal’ but it is not actually marginal country. It is actually good grazing country but it is not
so when you have got to add 200 per cent on the price of land to get it back to pasture.
CHAIR—It is about the capital value.
Mr Cornish—Yes. That is the problem. Non-forestry MISs get found out very quickly
because usually they have short cycles. If they are not doing the job you will know about it.
Senator O’BRIEN—And an MIS investing in forestry for the first decade is depending on the
cash flow coming from investors in another project. I guess that underpins your point that unless
the promoter is actually in another business with another source of cash flow they are susceptible
to a downturn, whether it is a downturn because the product rulings are not available or whether
it is a downturn because investors have lost confidence in the product or whether it is a downturn
because investors are not investing in products generally. All of those things make them more
vulnerable.
Mr Cornish—But I would argue what I suppose is another side of it, that if the MIS structure
for corporate investment is dependent on cross-subsidies from another company you would have
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ARI 50 Senate Wednesday, 7 October 2009
to question it. It is highly inefficient. It requires a lot of regulation tie-up. There are much better
structures for corporate investment. Wholesale superannuation funds are starting to get into
agriculture now. I did a lot of work talking to wholesale superannuation funds. The great thing
about working for them is that the first question they ask me is not what tax deduction can they
get and not how much do they have to pay the financial planners. It is: ‘Mate, how much is it
going to make?’ So as I am talking to those types of players I know they are investing in
agriculture with a market to make a dollar—and if one cannot make a dollar they will not invest.
So you have protection for the unsophisticated investor in ensuring that is how it is done. Under
the managed investment schemes, because of the need to try to pretend—
Senator O’BRIEN—I suppose the financial advisers are supposed to be their protection.
Mr Cornish—On that bit, I will put my ex-financial planner hat on. The reality is that if you
read what they do you see most financial planners see themselves as having to know the
customer and match the product. A financial planner will get together a recommendation of a list
or products that they can approve for their client and it will have a number of stars on it. The
reality is that a lot of financial planners will say, ‘We’ve had Mercer and we’ve had KPMG’—or
whatever it is. There are jokers and they have gone through such a list and have said to me that,
based on expert so-called ‘independent’ advice, which was paid for—
CHAIR—Who are these jokers by the way?
Mr Cornish—It’s primary investment research. Now this guy is with AAG. That is Marcus
Elgin’s group. There are about three companies that basically do this: Adviser Edge, AAG and
Longsec. They then become the Mercers of this world who say, ‘This is of investment-grade
quality. So you can go to your client and know that we have graded it as AAA.’ The financial
planner should be able to take comfort from knowing that my job is to know my client, that we
have a tax situation here and that these guys have said to me that this is financially viable. So if
you are asking me where the issue is I say it lies with these guys.
CHAIR—Did the chickens come home to roost for that mob?
Mr Cornish—No. Why will they?
Senator O’BRIEN—Only to the extent that their reputation is compromised. Is that what you
are saying?
Mr Cornish—Exactly. Everyone seems to be focusing on the financial planner. Everyone
seems to be focusing on the promoters. No-one is focusing on the guys who actually put their
stamp on it and say, ‘Listen, Mate, this is all right for you to put your money into.’
CHAIR—So what has ASIC had to say about that?
Mr Cornish—To be honest, I have not heard.
Senator O’BRIEN—Should we be making a recommendation in relation to those so-called
independent endorsers of the product?
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Wednesday, 7 October 2009 Senate ARI 51
Mr Cornish—I am glad you asked me that question.
Senator O’BRIEN—That is what we are here for.
Mr Cornish—That is one of my prime recommendations. At the moment, while they like to
call themselves independent and they will get hot and bothered if I say they are not independent,
the reality is they are paid by the promoter to review their scheme. The simple fact of the matter
is that, when the promoter lodges his submission for the ATO to look over, it would be very easy
for him to also write a cheque out that goes to ASIC, which would then have the job of
contracting out to registered providers based on a certain set of recommendations so they could
standardise it and make certain that it meets best practices. Then the adviser’s duty of care would
be to ASIC, who would be the payer, and not to the promoter. I think it is a very simple solution.
CHAIR—You are as independent as the person who pays you generally.
Mr Cornish—Yes. The only other thing I would mention is that I can look in every Saturday
paper and sit down and work out what my investment return is on my superannuation, what
NAB shares are doing et cetera. It is very difficult for you to get any information on either past
or current investment schemes. I think that in the 2002 Senate committee there was a
recommendation put that, like New Zealand, we set up a register in ASIC, or whoever is the
appropriate body, to ensure that this information is freely available to the consumer who is likely
to be investing.
CHAIR—To the best of your knowledge, do other countries—US, Canada, New Zealand—
allow this sort of stuff?
Mr Cornish—In the US, Ronald Reagan actually closed them down. It probably shows my
poor sense of humour that it makes me laugh—him of all people!
CHAIR—I am aware of that; I used that point.
Mr Cornish—I certainly say in my documentation that there are economic studies that show
that it put a cross-subsidisation into the high net worth investor, which allowed gains that were
unfair compared to those in lower tax ranks.
CHAIR—To put it in a sentence: are we unique globally in the way we allow this?
Mr Cornish—I cannot answer that definitely. I think the UK is really interesting and I like it
for a lot of reasons. They closed down this type of upfront tax deduction and focused on giving a
tax break on the end product.
CHAIR—Could you give us the details of that? Anything that you can table would be good.
Mr Cornish—It is in the recommendations in the report. If you think about it—and I think
this is a pertinent point—the current taxation law works against the investor. I say that because it
is actually attractive for the promoter to crank up the costs of these operations to the investor
because the bigger the dollars are up front the greater the tax deductions. This is an aside—and I
forget who said it—but there have been a lot of questions like this: ‘David, if I just want a tax
AGRICULTURAL AND RELATED INDUSTRIES
ARI 52 Senate Wednesday, 7 October 2009
deduction and I just want to throw my money away, I will go and donate it. There has got to be
more to it than this.’ I suggest to you that that is missing the point. When I was a banker in the
stock exchange branch in Melbourne, I used to have a lot of lawyers and accountants come in
who had a tax problem.
Senator STERLE—Did you say you were a stockbroker?
Mr Cornish—No. I worked in the bank, in what we called our stockbroker branch. I had a lot
of clientele like that. The issue was a cash flow problem. Either I had to come up with a $50,000
cheque to pay the ATO within the next three weeks or say, ‘David, can you give me a loan? I can
basically put it on the never-never and remove that $50,000 hole that I need to find for my cash
flow—basically so that I can go to Falls Creek to take kids away for the holidays.’ I am not
saying that it was every investor—we have to be careful to not stereotype—but it was a lot of
investors. If you think about why the great lump happens at the end of the financial year, it is
that a lot of these high net wealth individuals are saying, ‘I don’t want to pay tax’—
Senator STERLE—I have never had that problem.
Mr Cornish—‘David, are you telling me I can make 15 per cent return on an investment and I
can get a tax deduction? Mate, I’m in. Where do I sign? I have my job to do. Can you fix it up to
me?’
CHAIR—Would we be able to get copies of some of those—
Mr Cornish—Yes, I can give you copies. I will probably need them for the next inquiry. On
the points on the UK industry, it would remove the liability for the MIS promoter to profiteer at
the expense of the Australian taxpayer, because no longer is he grabbing the tax advantage up
front, putting it into his corporate entity and leaving the tax liability with the investor. You can
see how they swallow it but leave the liability with the other person. The scheme would have to
be profit focused. Currently, MIS promoters take money out of how many hectares they plant,
not how profitable it is. It would drastically reduce the amount of compliance and distraction
required of these schemes by the ATO, ASIC and senators as the benefit at the end of the scheme
becomes easily accessible. It would encourage best practice forestry to ensure profitability is
maximised. The tax reduction could be structured on a sliding scale to encourage long-term,
high-value wood lots rather than short-rotation woodchips.
I am not a forester, but my thoughts would be that what we want to encourage is where we can
compete in the world market, in high-value wood lots. I have not seen the MIS actually achieve
that. In fact, it is quite to the contrary. It would be available to anyone—you do not have to be an
MIS—thereby encouraging current farmers to plant a proportion of their hectares to wood. This
would make the forestry footprint within local communities much more in harmony with those
communities, rather than the us-and-them mentality that has arisen due to the growth of the MIS
industry. It is very disappointing and distressing to see that in local community meetings.
Trading in the forest projects—the so-called mythical secondary market—could occur at will as
there is no complication with up-front deductions. This would allow the development of a robust
secondary market—something that is yet to be achieved.
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Wednesday, 7 October 2009 Senate ARI 53
CHAIR—In summary, we are looking at a range of issues: the viability of agriculture, the
sustainability of the environment and the global food task. Yesterday we were looking at what
were basically family farmers who were dairy farmers. Do your remarks here summarise it: ‘Mr
Cornish believes that all taxpayers should ask the question: on what grounds has the federal
government concluded that corporate agribusiness companies need assistance while struggling
family farmers must compete in a corrupt trading environment?’ Doesn’t that summarise it?
Mr Cornish—That is an old quote. Yes. I have been involved in corporate farming. I actually
encourage corporate farming. I think corporate farming has a valuable place in Australian
agriculture. We have economies of scale; we have net benefits via the very basis of who the
corporates are. Why should we get any added advantage over a family farm corporate?
CHAIR—We will have to conclude. We are very grateful for your evidence. I would like to
put an end to it by saying that Mr Young in Broome a couple of years ago gave a presentation to
a forum on what a great thing these agrischemes were. I asked the question from the floor, from
his annual statement: why have you got all these people on your payroll who have all these
interest-free loans of up to $1½ million as part of your fixed administrative overheads for the
agrischemes, which cannot afford them? His answer was: ‘We’re competing with Macquarie
Bank for these people. Therefore, we have to give them these incentives.’ The simple statement
is: agriculture cannot afford those fixed administrative overheads.
Mr Cornish—I will just add to that. If you think this is over, I had a friend of mine
approached by someone wanting to get an MIS up. When he looked at the prospectus—he runs a
small boutique investment company—he said, ‘I can’t see the value in this. How are you going
to get people to invest in it?’ This guy is an old MIS industry stalwart. He said, ‘That’s simple:
we just put up the commission rate to the financial planners until they invest.’ That quote comes
from just three or four weeks ago.
CHAIR—Thank you very much for your evidence.
Proceedings suspended from 12.30 pm to 1.18 pm
AGRICULTURAL AND RELATED INDUSTRIES
ARI 54 Senate Wednesday, 7 October 2009
WINGROVE, Mr Gary, National Managing Partner, Advisory, KPMG
CHAIR—We will recommence proceedings and I welcome Mr Gary Wingrove. Thank you
for coming. I understand that you may wish to go in camera and at some stage in your evidence
the committee will consider that request at the time. I invite you to make an opening statement
and then we will ask you some questions.
Mr Wingrove—I would like to thank the Senate Select Committee on Agricultural and
Related Industries for inviting KPMG to appear before the committee. KPMG is one of the big
four accounting firms and provides audit, tax and advisory services to a range of corporate and
government clients globally. I am the national managing partner of KPMG’s Advisory practice
within Australia and I am also the deputy leader of KPMG’s Advisory practice in Asia-Pacific. I
joined KPMG’s Corporate Finance practice in 1997 with a background in auditing and finance
from South Africa and within Australia. My valuation expertise includes the provision of public
fairness opinions on mergers and acquisitions as well as the valuation of businesses, shares and
intangible assets.
KPMG has been referred to in some of the submissions made to the committee, and a number
of witnesses giving evidence at the public hearings have also mentioned KPMG, in particular in
relation to managed investment schemes. These comments illustrate that there is a need to clarify
the nature and role of the independent expert in managed investment schemes and to clarify
KPMG does not accept the validity of various comments contained in certain of these other
submissions and transcripts.
To assist the Senate select committee I would like to explain at a broad level the structure of
managed investment schemes, the role of independent expert reports and the purpose of these
reports in the managed investment schemes documentation. Managed investment schemes,
which are also known as managed funds, pooled investments or collective investments, involve
people being brought together to contribute money or to pertain an interest in a scheme. The
investors’ money is pooled or used in a common enterprise, and a responsible entity manages the
scheme. The regulatory framework around managed investment schemes is overseen by the
Australian Securities and Investments Commission.
In 1998 the Australian Taxation Office introduced product rulings in an attempt to provide
investors with more certainty in relation to taxation implications of managed investment
schemes. Product rulings set out the Australian Taxation Office interpretation of how the tax law
applies to a business or investment arrangement and any tax benefits flowing from the business
or investment. It is important to note that the Australian Taxation Office is bound by a product
ruling if the business or scheme is implemented as set out in the promoter’s product ruling
application to the Australian Taxation Office.
I would now like to move on to the role of an independent expert and the purpose of these
reports. The role of an independent expert is to provide a report for inclusion in transaction
documents to help security holders make informed decisions about transactions. The expert is
required to be independent of both the engaging party and the counterparty and the transaction
that is the subject of that opinion. The expert’s opinion is required to be based on reasonable
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Wednesday, 7 October 2009 Senate ARI 55
grounds and these grounds should be discussed in the report. It is important to recognise that the
report is general financial advice and clearly is not able to take into account an individual’s
particular objectives, financial situation or needs. The Australian Securities and Investments
Commission has published Regulatory Guide 111, which provides guidance to experts on how to
draft an expert report that satisfies the requirements of the Corporations Act 2001.
Experts’ reports are generally included in managed investment scheme documents where
security holders are required to vote on a proposed transaction. It is important to note that while
experts’ reports must be prepared in relation to certain transactions, many expert reports are not
required under statute. The Corporations Act requires an expert to express his or her opinion
using particular language which differs depending on the type of transaction. For example, in
relation to a takeover bid the expert must express whether the bid is fair and reasonable, while in
relation to schemes of arrangement the expert must express whether the scheme is in the best
interests of the members of the company. An expert may conclude that a scheme is in the best
interests of the members of the company if it is deemed fair and reasonable.
The words ‘fair and reasonable’ do not form a compound phrase but are, instead, two distinct
criterion that an expert analysing a transaction must consider. The term ‘fair’ is concerned with
value—namely, whether the value of the offer price or consideration is equal to or greater than
the value of the securities the subject of the offer. An offer is reasonable if it is fair. However, an
offer may be reasonable if, even despite being not fair, the expert believes that there are
sufficient reasons for the security holders to accept the offer in the absence of a higher bid before
the close of the offer.
When deciding whether or not an offer is reasonable, an expert may consider the following
factors: a bidder’s pre-existing voting power in securities in the target; other significant security
holders’ blocks in the target; the liquidity of the market in the target securities; any special value
of the target to the bidder, such as particular technology or the potential to write off outstanding
loans within the target; the likely market price if the offer is not successful; and the value to an
alternative bidder and the likelihood of an alternative offer being made.
Experts must by necessity rely on information supplied by third parties such as management
and independent valuers. Since an expert report is required to be based on reasonable
assumptions, the expert needs to critically evaluate the information provided and note any basis
for questioning the truth, accuracy or completeness of such information. However, an expert is
not expected to audit the third-party information provided to him or her. By way of example,
paragraph 78 of Regulatory Guide 111 states:
… the expert must review directors’ valuations and management accounts, partly to detect changes in the way those
valuations and accounts have been prepared from period to period … If there are no indications of irregularities or
omissions, an expert will ordinarily be entitled to take at face value valuations previously prepared by outside experts,
audited financial statements and the accounting records of the company. An expert may also rely on management accounts
if it has established reasonable grounds.
It is not unusual for an expert also to engage a specialist. The Australian Securities and
Investments Commission has released Regulatory Guide 112, entitled Independence of experts,
which specifically addresses the use and engagement of specialists. This occurs where the expert
does not have the requisite technical expertise in a particular matter. For instance, an expert may
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engage a geologist to assist with the preparation of an independent expert report in relation to the
mining industry. An expert must then critically review the specialist’s report and consider
whether the specialist has made assumptions and used methodologies which appear to be
reasonable. It is also necessary for the expert to consider whether the source data that the
specialist has drawn upon appears to be appropriate in the circumstances.
I now welcome any questions from members of the committee.
CHAIR—Thanks very much. Does your independent report of 12 January refer just to wood
lots or to cattle as well?
Mr Wingrove—I should say at the outset I was not involved in the preparation of these
reports.
CHAIR—No, but surely if they have sent you along here as the bunny for the day they will
have at least briefed you on what we are likely to ask you. Does this report—which is a KPMG
report—‘Update of opinions set out in our independent expert report and financial services guide
dated 13 October 2008’, refer to cattle and wood lots or not?
Mr Wingrove—To the best of my knowledge there were separate reports prepared for each of
those.
CHAIR—Do your offsiders know?
Mr Wingrove—No. There were opinions prepared in respect of eight schemes: six wood lot
schemes and two cattle schemes. Whether there were eight reports or whether it was all bound
up in one report, I would have to clarify.
CHAIR—I am amazed that you have not been briefed. Anyhow, we will go through it. It says:
We note that KPMG has completed—
This is in your report—
an independent expert report in respect of each scheme forming part of the scheme proposal—
This is Transform—
and has concluded in respect of each scheme, subject to our qualifying comments in relation to 98, that each scheme is in
the best interests of project investors, being growers or graziers,—
So I take it that it includes cattle, because that would be the graziers; you do not graze trees—
as a whole in the scheme.
I actually have not struck anyone at KPMG who understands the cattle industry yet. You may be
the first person. How can you say that if you do not know how many cattle are involved? My
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understanding of KPMG’s report to Great Southern for the purposes of Transform is that you had
to estimate, with the cattle scheme, where the investor would be at the end of seven years in
terms of return and say whether the share deal would be okay in lieu of that return.
Bear in mind that when Bloomberg reported the downward trend you were still saying the
shares were going to be all right. That was on the Bloomberg site. Bear in mind that Mr Young
jumped out of the company before full disclosure—that was evidence we took in Perth—quit his
shares and then the whole thing went to custard. My question to you is: how can you say that if
you do not even know? Can you explain to me how KPMG came to the conclusion that it was a
fair scheme for the cattle lessees to transfer from the lease arrangement back to shares if you did
not actually know how many cattle there were? I am at a loss to understand, since the Transform
arrangement, how we will ever know whether the cattle that were leased existed. Did you bother
to go to the trouble to find that out?
Mr Wingrove—There are a number of questions that have been asked.
CHAIR—There are. Would you like to have a crack at them?
Mr Wingrove—Let me go back to the first question. The role of the independent expert is to
express an opinion as to whether a particular transaction is fair and reasonable or in the best
interests of security holders.
CHAIR—It is.
Mr Wingrove—To enable that opinion to be prepared, the expert would be required to look at
a number of things, probably most importantly the valuation of what the investor held before the
transaction, and compare that to the valuation of the instrument or shares provided to the
investor after the transaction. In doing that valuation, one would need to have a view on cash
flows that would be derived from that investment.
CHAIR—You would certainly need to know if the stock existed.
Mr Wingrove—You would need to know the cash flows that will be derived from those assets
being in stock.
CHAIR—But if you were my accountant, I would want you to know that the cash flows that
were being derived came from a set number of stock, otherwise it is just a fantasy and you are
wasting our time here today. Did KPMG do a field audit to ascertain what was out there in the
paddock?
Mr Wingrove—KPMG appointed an expert livestock consultancy—
CHAIR—Who?
Mr Wingrove—That name is in my briefcase, which I can get for you. An expert livestock
consultancy was appointed to undertake work on the cash flows that would be derived from—
CHAIR—I hope it was not Mr Buntine.
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ARI 58 Senate Wednesday, 7 October 2009
Mr Wingrove—I could not answer that, Senator, I would have to look at the paperwork.
CHAIR—We had better get the answer to that.
Mr Wingrove—Yes. KPMG engaged an expert to review the cash flow—
CHAIR—Can you dig down throughout—
Mr Wingrove—Sure. The name of the organisation was Australian Livestock Services Pty
Ltd.
CHAIR—Who is the principal?
Mr Wingrove—I do not know.
CHAIR—Can we find that out now—make a phone call?
Mr Wingrove—So we engaged that party to do work on the cash flows that were prepared by
the company in respect of that cattle scheme and that expert effectively gave us comfort and we
were entitled to rely on those cash flows.
CHAIR—Could we see that document that comforted you to the point where you could have
this opinion?
Mr Wingrove—The support for that would be provided in our expert report.
CHAIR—It is in here, is it—the company document? He being the ‘field expert’, a phrase
that was in here—
Mr Wingrove—Their report would either be appended to that report or the one that predated
that report that was prepared back in—
CHAIR—Could you provide that report to the committee? I have not struck anyone, not a
single, solitary soul, that was involved in a total muster of any of these cattle. No-one ever had a
complete muster. So we will never know, because of the Project Transform arrangement,
whether the cattle that were leased actually existed, and yet you said that it was fair, based on the
deal that they were likely to get versus the return then for shares in lieu of.
Mr Wingrove—Yes, based upon evaluation, as I said earlier, of the cash flows that would be
derived by investment—
CHAIR—To arrive at that decision on the cash flows someone would have had to have a
muster to know whether the cattle existed. One of the places was offered for sale subsequent to
all of this happening and the guy declined to buy the place because the cattle alleged to be there
were not there. We have got one guy that has many hundreds of cattle that have completely
disappeared. He has been told that maybe they are in the Northern Territory but, ‘we are not too
sure where they are.’ You are involved in a cattle scheme here and I am interested to know how
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Wednesday, 7 October 2009 Senate ARI 59
you can justify that remark in your report about not understanding the cattle issue. That is why I
am interested to get this guy’s name.
Mr Wingrove—As I said earlier, Senator, an expert is entitled to appoint a subexpert in areas
where that expertise is required and in this case that is the usual practice as required under the
regulatory guides prepared by ASIC.
CHAIR—Now don’t take all this to heart. Obviously there are a lot of distressed people. They
have been totally misled by the scam. As the cash flow got short, are you aware of the
arrangements that Great Southern made where Mr Buntine in lieu of cash transfers leased
properties that he acquired to put cattle onto back to the investors? Are you aware of the
arrangements of swapping cattle for cash?
Mr Wingrove—I would not be aware of that.
CHAIR—Would KPMG be aware of it?
Mr Wingrove—No, we would not.
CHAIR—I am informed that that is not the case. Anyhow, we will deal with that later. In
terms of the Project Transform arrangements, your job was to gather information that satisfied
you, as a leading accountancy firm, so that you could give advice to who—Great Southern?
Mr Wingrove—To the directors of the responsible entity that appointed us.
CHAIR—Who was that?
Mr Wingrove—The entity that was responsible for the managed investment schemes.
CHAIR—And who was that?
Mr Wingrove—It is a Great Southern responsible entity.
CHAIR—Had Mr Young resigned at that point?
Mr Wingrove—I could not answer that. I do not know.
CHAIR—We may have to call you back when you are better informed. Can we suspend while
you find that out, just for a couple of minutes? We will suspend for five minutes and see if you
can get some names for us.
Mr Wingrove—Can I just clarify the questions that you are asking of us?
CHAIR—We want to know who provided you with the opinion that consequentially allowed
you to say that it was in the best interests of the growers and the graziers as a whole in the
scheme. We want to know who gave you that advice. You have identified the corporate entity.
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ARI 60 Senate Wednesday, 7 October 2009
Mr Wingrove—It is KPMG’s opinion that is based upon, as I said earlier, cash flows that
were prepared based upon a circumstance where one held beforehand an interest in a managed
investment scheme and afterwards held shares.
Senator O’BRIEN—Could I just jump in here to perhaps help. I am pretty sure KPMG does
not audit head-by-head counts of cattle but conducts this aspect of its business based upon some
advice that the entity owns the property or assets that it claims to own. Is that fair? If you were
reporting on a product to invest in, KPMG would be responsible for satisfying itself, and would
satisfy itself somehow, that the entity owned the assets it claimed to own that it was offering to
the investors. Is that right?
Mr Wingrove—That is not the opinion we were being asked to prepare here. If you were
auditing a company, then you would have responsibility for making sure that particular assets
existed in signing a set of audit accounts. In this case we were not the auditor. We were
preparing an opinion on a transaction. In preparing that opinion under the regulatory guide, as I
said in my opening statement, as an expert you are entitled to rely on the accuracy and
completeness of certain information.
Senator O’BRIEN—That is why I am trying to find out what that certain information was in
this case, given the assertions that are being made that in fact you were being asked to sign off
on something which had no possibility of making money because in all probability it did not
have the assets it claimed to have that were underpinning the investment product. That is an
assertion which I do not know about, and that is why I am interested to test what role KPMG
would have had in testing those propositions, if indeed anyone did.
Mr Wingrove—Our job would not be to assess whether this investment would make money
or would not make money. Our job was to provide an opinion for the directors to assist them in
making a recommendation to investors in these schemes as to whether they should or should not
vote in favour of what you have termed Project Transform, effectively converting interests in an
MIS into shares in the corporate entity.
In undertaking that work, any expert under the Australian securities commission guidelines is
entitled to rely on the information provided. That information would entail a set of company
accounts, a set of management accounts, a range of financial forecasts and so on. In using that
information to prepare an opinion, the expert is required to undertake a reasonable level of work
to satisfy themselves that the information they are using is a good enough basis to allow the
expert to form the opinion they are asked to form. To do that in this particular case, KPMG
appointed these livestock experts to assess the cash flows arising from those livestock that had
been provided to us to assist us in forming our opinion.
Senator O’BRIEN—So that entity would never, it seems, have been obliged to satisfy itself
that the assets claimed to exist actually existed or about the state they were in. Is that a fair
comment? To advise you, to fulfil their role to KPMG, they would not have had to satisfy
themselves about the state of the assets that the scheme purported to have?
Mr Wingrove—Senator, not having been involved I am not sure what scope of fieldwork they
did or did not do. But an expert, as I said earlier, under the regulatory guide is required to
undertake enough work to be satisfied that their opinion is based on reasonable grounds.
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Wednesday, 7 October 2009 Senate ARI 61
Senator O’BRIEN—So based on reasonable grounds—
Mr Wingrove—That could in certain circumstances entail inquiry, questioning of
management and questioning of people involved. It could in other circumstances involve
physical inspection of the assets.
Senator O’BRIEN—Sure. That entity would have had some responsibility to be certain that
the state of the asset was as described on the books of the company?
Mr Wingrove—Correct. Directors have that responsibility anyway as a matter of course.
CHAIR—In coming to that determination can I run you through this. I do not expect you to
know anything about cattle. I do not think there is anyone I have spoken to off the record at
KPMG or Great Southern who understands anything about cattle, and that is why they have put
Mr Buntine on the payroll, despite the fact that he was the biggest mover and shaker of moving
the cattle around and being financially involved—he is the only one apparently who knows
where the cattle were if they existed.
My understanding of the scheme is that for $5,000 you got four cows. A lot of the early bunny
investors were led to believe that they would be on King Island because Great Southern flew
some of them down there to have a nice glass of wine looking over the green when in fact all but
14 per cent of the cattle were in huge runs up north. You would be aware that Mr Buntine got a
huge spotter’s fee to buy Wrotham Park and those other two places up north, where you need an
entirely different management style. So for $5,000 you got four cows at about $1,200 a head.
About $200 a year was the financial cost to lease each cow per year for the seven-year lease.
The deal was that you were to get the calves under the scheme and the cows remained leased
property. For seven years you had the lease of the cows. There was a view that they were all
young bright Angus cows on their second calf, but in fact they were anything. When they bought
Wrotham Park it was walk in walk out. My understanding from talking to people who
subsequently no longer work there is that there was not a muster and allegedly they were tagged.
There is evidence that a lot of that did not happen. Anyhow, you got four cows for $5,000 for
seven years at a cost of $200 per year. Then you were to get the cash flow from the calves. About
half of the cash flow from the calves was to go to the management of the cows. Do you
understand this?
Mr Wingrove—I am following what you are saying, yes.
CHAIR—Were you aware of this before you stepped up to the plate here?
Mr Wingrove—I was aware of the work we have done, but I am not aware of the specific
details.
CHAIR—Were you aware of how the scheme worked?
Mr Wingrove—Not in immense detail, no, given that I was not involved in the transaction.
CHAIR—Is anyone at KPMG aware of how it worked?
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Mr Wingrove—The partners and the people involved in preparing the report would obviously
have been aware.
CHAIR—Shouldn’t they have come along today instead of you?
Mr Wingrove—I am here to represent the firm as the most senior—
CHAIR—Yes, I know, but with no knowledge. That is a pretty good way to represent the
firm! You have got the names have you?
Mr Wingrove—These are the names of the people who signed the expert report for
Australasian Livestock Services: Dr Ross Ainsworth and Dr Jeffrey Meeth.
CHAIR—I am familiar with Dr Ross Ainsworth. I have discussed this with him, and I will
deal with that later. He actually did say to me that his job was to oversee the wellbeing of the
flock and he may have seen 10 per cent of the livestock that allegedly existed. In going around to
water points on a million acre property you do not see all the cattle. He certainly would not be
able to confirm that all of the cattle existed.
So you have the rights to a calf from each cow. You pay $200 to get the rights to the calf per
year. In the first year they got 50-odd per cent calving and in the second year they got 60-odd per
cent calving, which is about average for up there. You calve them in the Top End in January-
February and get the calves off in September before the cow starts to get poor because of the low
protein. If you do not have the staff to put out the licks, your cows will get poor because the
grass is low protein, which Great Southern learnt to their distress.
So for your $200 you would get a calf and you would give half back to Great Southern for
managing the cow. Just say the calf was worth $400, but it would be closer to $300 because they
are seven months old Brahmin type cattle that have got a lot of growing to do. You could under
the arrangements keep the heifer calves, but this became such a nightmare it was not possible
because the drought came in and they had to move cattle—it was poor as wood from west of St
George so some of them ended up in the Dubbo saleyards. But just say you got the maximum
price of $400 and just say you got 100 per cent calving, you would just get back your money that
you paid for the cow—that is the best you could do. But given that between 50 and 65 per cent is
the calving rate, the best you could probably do in reality, after you have paid for agistment and
follow-up costs, would be to get $100 back for every $200 you put in.
Do you understand that? For every $200 you put in and on the average of the season and the
calving rate, there was no possibility—not a remote possibility—that anyone could have made
any money out of it, other than the promoters. This is not King Island; this is all over the shop in
the north. And this is with Mr Buntine leasing or in some cases buying properties to lease them
back to Great Southern to get the cattle on them so they did not have to send the money back to
the investors who wanted a tax deduction. There was no possibility of people making money.
Wouldn’t KPMG have at least taken enough notice and interest to look at what this was all about
before giving an opinion that said:
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Wednesday, 7 October 2009 Senate ARI 63
… KPMG has completed an Independent Expert Report in respect of each scheme forming part of the Scheme Proposals
and has concluded in respect of each scheme, subject to our qualifying comments in relation to the 1998 project, that each
scheme is in the best interests of project investors … in that scheme.
How the hell could it be in their best interests?
Mr Wingrove—Again, Senator, there are a number of questions you have asked there. The
first point to clarify is that the scheme being referred to in that statement in KPMG’s report is the
scheme of arrangement whereby people would exchange their interest in the MIS scheme for a
share in the company.
CHAIR—If I could interrupt you, this letter is dated 12 January 2009. By then, according to
the financial—
Senator O’BRIEN—Before you do that, what you are saying is that that was a statement that
you are better off transferring your interest in the MIS into company shares, not an assessment of
that particular cattle MIS?
Mr Wingrove—Correct.
CHAIR—That is exactly right. You had to assess where they would have been at the end of
that investment versus whether these shares would serve them as well. When you made that
decision that was well after, according to the financial analysts, Great Southern were in freefall
and the share price was falling. Could you give us the history—and you may take it on notice if
you want to—on when you started to give advice on Transform versus the financial in, I think,
February 08 when Mr Young, the CEO, resigned—was that right?
Mr Wingrove—I am not sure about that date.
CHAIR—I think it was 08. He resigned before the thing fell off the cliff, having sold his
shares for $30 million odd. We took evidence from a former chairman of Great Southern that
they considered that to be insider trading and they resigned as a consequence of all of that. You
then come along to give advice that it is in the best interests of investors to transfer their stock or
trees, in the case of trees, into shares when the Bloomberg site was already plotting the freefall
of Great Southern’s share value. What was the bottom value you estimated, when you made this
decision in 09, that the shares were going to arrive at? To be able to make the judgment you have
made, you must have had a financial plotting, an analysis, of the prospects of Great Southern.
Given that the 94, 95 and 96 rotations of their plantations ran at a serious loss and had to be
propped up and that 97 and 98 were looking in the same direction, did you do an analysis of the
shares? If you did, could we have that tabled?
Mr Wingrove—Again, for clarification, our work was to value the interest that an investor in
the MIS might have had in that MIS prior to the transaction, and then looking at the value of the
shares they would receive under the transaction would have been after the transaction—
CHAIR—Surely it is part of the prospective judgment. You go to the doctor and he tells you,
‘That’s a melanoma, son. Get it off,’ and you believe him. KPMG are a great firm. You are
telling investors, ‘Don’t worry, Bill. Get rid of your lease. Buy the shares and, in the long term,
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ARI 64 Senate Wednesday, 7 October 2009
you will be just as well off.’ That is the summary of what you would have had to say. In making
that judgment, surely you had to make a judgment on the financial strength of the company. Did
you?
Mr Wingrove—There is a judgment made clearly on the value of the share, which would
obviously entail—
CHAIR—Which would be based on the financial prospects of the company.
Mr Wingrove—Correct, and the underlying—
CHAIR—Could we see the paperwork where you assessed the financial prospects of the
company?
Mr Wingrove—The basis on which we formed an assessment of value of the share is set out
in the expert report, which is on the public record.
CHAIR—You are the managing partner, for God’s sake. Your reputation is on the line. We do
not want to trash it. As a responsible decision making senior partner in the firm, signing off on
this stuff, surely you would really want to know. There are thousands—we had one here earlier
in the day, a financial analyst who could tell you what the prospects were, which were terrible.
Yet you were able to step up to the plate and say, ‘Sell these cattle, because these blokes are
desperate for cash flow. They can’t even pay for the leasing of the country that the cattle are on.
They are exchanging cattle, a lot of which are cleanskins, and God knows where they finished
up, in return for shares.’ You make that judgment for someone who is running their own do-it-
yourself super fund or a little old retired lady who has bought them for her grandchildren. They
put a lot of trust in you. Surely you would have to convince yourself from your own work, not
from the work of someone who is paid to give an opinion. We have had evidence, from Mr
Marshall back in 2003 to this day, of where, if you do not agree with an opinion, you just buy
someone else’s opinion. Surely you would have to have your own KPMG opinion on the
financial prospects of Great Southern, because when you made this decision they were in free
fall. How could you make that decision?
Mr Wingrove—The opinion is based on a relative evaluation, or relative assessment, as I said
before, of the value of the interest in the MIS and the value of the share.
CHAIR—Could we see the paperwork that drew you to that conclusion?
Mr Wingrove—Again, it is set out in our report. It is a fairly lengthy report. The calculations
are in there. The fact that particular people might have a view that the cattle schemes were not
worth anything because of the way they were set up, of itself, does not mean that a particular
transaction was not fair and reasonable. It is a relative assessment of the value of something you
hold before and the value you hold after.
CHAIR—As a reputable accountancy firm, surely you would want to know if there is a
drought at Wrotham Park or that the cattle that were west of St George were not starving, which
in fact they were. Surely you would need to know that to be able to make a judgment. Surely you
would take enough interest to know that this is a shoddy scheme, which it is. Surely you would
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have sent someone out to the paddock. I rang a bloke from Elders. He is not actually an
employee of Elders; he is a commission agent operating out of Elders. I got his name—he
wondered how I got it—from an Elders bloke at Katherine. I rang him on Friday night—that is a
good night to ring someone out in the back country—and said, ‘About this exchanging cattle for
lease money: who is counting the cattle and who is valuing the cattle?’ He said it was all ticked
off by KPMG, but it was not. In the transform arrangement, saying this is all good, surely you
would have known that at that point they did not even have enough money to pay for the lease of
the country that the alleged cattle were on. Surely someone in KPMG would have at least said,
‘Duh, this is pretty fundamental.’ This crystal-clear accountancy of yours has to have some
practical, dirt-under-the-fingernails input to make a decision, which in fact has destroyed
hundreds of people’s financial well-being, and you are the blokes who made the decision.
Mr Wingrove—I do not think that is right, in terms of us making that decision. What we did
was—
CHAIR—You recommended, and that is what they relied on—and they paid you handsomely
to do it, I presume, as they pay the guy who is running around looking after the wellbeing of the
cattle. He said he is well paid to do it, and fair enough. Mr Buntine is well paid too—fair
enough. But surely they paid you well to give them advice that said, ‘When you go the
transformer meeting, you can quote us, KPMG, as saying this is a fair deal for the investors, to
transfer the least value of the cattle and the process of the progeny for seven years into shares.’
Surely you would have to have known what the likely outcome of the seven-year leasing of the
cattle would be, given that there had already been a near failure in the first year of 50-odd per
cent calving. Piddling amounts of money went back as dividends. Surely you would also have to
have known that they were in financial stress in even meeting the lease payments and there were
some funny land deals—buying back land on King Island—which we will come to at a later
hearing. There were all sorts of strange bloody internals going on. Surely you would have picked
up an inkling that there was something going wrong with Great Southern’s capital.
Mr Wingrove—Again, there are two issues here. There is the value of the interest in the MIS.
KPMG undertook an assessment of the units MIS members held in that scheme and, in doing so,
appointed the expert we referred to earlier to assist in looking at the cash flows from the
perspective of a specialist with cattle expertise. That expert is well versed in this area, and that is
the basis on which they were appointed. That allowed us to form a view on a reasonable basis, as
we were required to under the securities commission guidelines, as to the value of that interest.
The next step is to have a look at the value of Great Southern. In doing that, we had a look at the
balance sheet of Great Southern—the asset backing, the cash flows, the audited financial
statements and so on—and formed a view as to the likely value of those shares.
CHAIR—Could we see that analysis?
Mr Wingrove—As I said earlier, that is set out in our report.
CHAIR—Could you point to it in the report?
Mr Wingrove—I have not got a copy of the full report here, but it will be in the detailed
report.
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ARI 66 Senate Wednesday, 7 October 2009
CHAIR—Could you give us a page reference on notice?
Mr Wingrove—I could.
CHAIR—We may have to question you further, and you may choose to bring along someone
that is a bit more familiar with the scheme. I would like to take you to figure 1 on page 5—
Mr Wingrove—I do not have the report with me.
CHAIR—We can make it available to you. Could you explain this KPMG analysis. What
does this mean?
Mr Wingrove—You have not got a copy in front of you now, but, if you work across from the
left of the diagram, there are four columns there. The first one reflects the share price of a Great
Southern share when the original expert report was prepared.
CHAIR—What was that?
Mr Wingrove—Forty-three point five cents.
CHAIR—When was that?
Mr Wingrove—That was at the date of the original expert report, which would have been
back in October or November 2008. The second column is the final VWAP, or volume-weighted
average price, of a Great Southern share. That would have been shortly before the transaction
date, and that is 28.45c.
CHAIR—So the price was in freefall.
Mr Wingrove—It had gone down.
CHAIR—Forty per cent. Continue along the line.
Mr Wingrove—The third column is the closing share price on 9 January 2009—
CHAIR—Which was what?
Mr Wingrove—Seventeen and a half cents. The fourth column is the proforma net asset
backing post the implementation of this transaction, which is 85c.
CHAIR—So in January, when you made the report, it was 28c?
Mr Wingrove—Correct.
CHAIR—Subsequently it fell to 17c, but when you prepared that report it would have been
higher than 28c, wouldn’t it?
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Wednesday, 7 October 2009 Senate ARI 67
Mr Wingrove—When the original one was prepared, yes.
CHAIR—Because you did not prepare it on the day; you would have prepared that report in
the preceding weeks and months.
Mr Wingrove—Correct.
CHAIR—So it would be fair to say that during the period in which you prepare the report the
price of the shares fell by half.
Mr Wingrove—That is correct factually, yes.
CHAIR—So then how did you make an assessment for the shareholders who have got these
cattle that allegedly are real—they at least have a calf to sell—that it was in their best interest to
get rid of all of that? We are not too sure that in getting the 2007-08 drop of calves the transform
arrangement was exactly legal, in that some of the calves which got traded back in the lease
arrangement actually belonged to the investors and should not have been traded. But that is not a
concern of yours; that is a matter for the police whom I have been talking to. How did you make
a judgment that it was in the best interest of investors given that the price subsequently fell
another 50 per cent—that it was a good deal? How the hell could you arrive at that decision?
Mr Wingrove—As I said earlier, that assessment is a relative assessment of relative value, not
necessarily absolute.
CHAIR—It is there in black and white. From when you started, the assessment the price fell
by half, and subsequent to giving the recommendation the price fell by half again. Surely a smart
young fellow like yourself—this was not your doing, by the way; you have just been sent here to
put up with this—any responsible financial planner or a person working for KPMG who has a
CA would understand that it is very tricky business to try to understand not only why it fell by
half while you were assessing it but also what it means, even though you have an expert opinion
from someone who tells me that he would have seen only 10 per cent of the cattle. How the hell
can you arrive at the decision that it is okay to recommend that Great Southern’s shareholders
quit their trees and whack the money into shares? How can you arrive at that morally or
financially? The figures are right there in your own report. The thing fell 100 per cent while you
were writing it.
Mr Wingrove—The fact that the share price falls on any company doing these sorts of
assessments does not of itself mean anything. It is a relative assessment of the value of the
interest you hold before the transaction compared to the value you hold after the transaction. It is
a question of the value of the interest in the MIS scheme compared to the value of the share
afterwards, and the last column on the table that you referred me to shows a net tangible asset
backing proforma, which was effectively the balance sheet post the implementation of this
transaction of 85c.
CHAIR—But of course that is meaningless.
Senator O’BRIEN—So the value that would have been ascribed was the asset backing of the
share, not the market value of the share, for the purpose of the exercise?
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ARI 68 Senate Wednesday, 7 October 2009
Mr Wingrove—The asset backing would have been a consideration. You would look at the
asset backing in conjunction with the market price of the share and form a view as to where you
thought that share would trade. That is not specific to this particular transaction; you would
apply that logic to any of these sorts of transactions.
Senator O’BRIEN—So you relied upon the balance sheet, together with any assessment of
the value of the entity which was being transferred to the company’s book from the investor’s
book, to tell you what the asset backing was.
Mr Wingrove—That would be part of the assessment.
Senator O’BRIEN—So there would have been some assessment of the value of the cattle
scheme. Someone would have given it a value.
Mr Wingrove—Yes. The interest in the MIS cattle scheme would have been assessed as a
first piece of work. As I said earlier, you would need to assess the value of that and it was for
that piece of work that the technical cattle experts were appointed to assist with looking at the
cash flows and at when those cash flows would be derived timing-wise and what their quantum
would have been.
Senator O’BRIEN—Should those people have been at arm’s length from the company?
Mr Wingrove—An independent expert appointed under the regulatory guide needs to be
independent of the company. Parties appointed as subcontractors of the main expert—that is, the
cattle experts—would also be expected to be independent of the company and of the
counterparty. Independence is covered under one of the regulatory guides issued by the securities
commission.
Senator O’BRIEN—So, if they were contracting to the company to provide a service, would
that be independent?
Mr Wingrove—Yes, they could be. There are certain areas where, if you undertake certain
work, you would definitively not be independent. The main area of that is that, if you provide
strategic or structuring advice in relation to a transaction, you cannot then also express an
independent opinion in an expert report on that transaction.
Senator O’BRIEN—That means that if you are about how the business works you cannot
provide advice, but if you are just managing the animal welfare standards of the company, you
can?
Mr Wingrove—Yes, you could.
Senator O’BRIEN—So reliance on a financial connection with a company would not
disqualify you from providing this critical advice?
Mr Wingrove—It could do. You have to look at the specifics of that involvement.
CHAIR—Can I just take you to the role of Mr Ainsworth—it was Ainsworth, wasn’t it?
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Wednesday, 7 October 2009 Senate ARI 69
Mr Wingrove—Ross Ainsworth and Jeffrey Meeth.
CHAIR—When I rang Mr Ainsworth—I do not want to disclose the private nature of these
phone calls—he was actually on the wharf in Darwin loading cattle. I said, ‘How’s it going?’ and
he said, ‘Good.’ I asked, ‘Many cleanskins?’ and he said, ‘Oh yes, there are a few.’ I said, ‘How
come there are no tags?’ because it was all new to me. He said, ‘Senator, if they are from the
property of origin, you don’t have to put an identification tag on because it is a waste of a tag;
they are getting on a boat to go.’ In other words, any cattle could be getting loaded, including
cleanskins. He told me that his job was to go around the various properties to inspect the cattle
and see that they were in reasonable shape, which was a nice job because it included a bit of
travel—a trip down to King Island and a glass of wine, I suppose. This became a nightmare
because drought set in in places and they had to move and they got poor and all the rest of it. I
was curious how you would prove, with the information that was available, that all the cattle that
were being leased actually existed, because you do not get 100 per cent muster in that country up
there. Usually you muster and mark in the one muster and send them off somewhere to grow
them. Have you ever been up there?
Mr Wingrove—No, I have not.
CHAIR—I do not think that too many people in KPMG have either, I have to say, or in Great
Southern—they have got no idea what was going on. Between Mr Buntine and Mr Ainsworth,
and approved by Mr McCloud, the brother-in-law, they had the job of management of the
flock—Mr Ainsworth looked after the wellbeing, Mr Buntine the commercial side of it, assisted
by some stock-and-station type blokes. They destocked a lot of the permanent staff on properties
and put on contractors et cetera. He had his own contract band and, to his credit, he would go out
and sleep under the wheel of the wagons. He was well paid to oversee everything from whether
they were being fed and watered, which was a difficulty in places, to being loaded on the boats.
Following on from Senator O’Brien’s comments on independence, do you really think he was
the person who could give an independent opinion? He was on their payroll being seriously well
paid. How could he give an independent view? He was on their payroll, for God’s sake.
Mr Wingrove—That of itself does not mean that he was not independent. We would have
looked at the roles he had played before. We would have looked at his professional capability.
Senator STERLE—You cannot be for real making that statement, surely.
CHAIR—We are talking about independence. You are as independent as the person who pays
you. We have got endless records of opinions going back to Mr Marshall in 2003, where he
predicted all this was going to happen. They got an opinion then of these schemes which did not
suit Great Southern, so they went and bought someone else’s opinion. That is the way it works.
You are as independent as the person who pays you. This guy was seriously on the payroll to
confirm the wellbeing of the cattle. He travelled around—that is what he did. You will not see all
the cattle, obviously. You go to a bore and have a look at the cattle there and think, ‘They’re all
right, yeah,’ but you do not see what is up over the range. These are big properties of a million or
two million acres. He is paid to do that. How can he possibly give an independent view to you
which you then give to Great Southern to say this is an okay deal? How the hell could he do
that?
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ARI 70 Senate Wednesday, 7 October 2009
Mr Wingrove—Independence is covered, as I said earlier, in one of the regulatory guides
issued by the securities commission. We would have, in undertaking this work—
CHAIR—I appreciate there will be book work to back it, but I also appreciate that the likes of
ASIC just gave this a rubber stamp because they did not understand it. I asked Mr Read from
McGrathNichol, ‘Why have you got Mr Buntine on your payroll, for God’s sake?’ He was the
guy who got the $10 million spotter’s fee to buy the first properties, and then it got bigger and
they had to lease properties and get cattle quickly. There were all sorts of arrangements made
and he was involved in it. He was buying property himself to put Great Southern’s cattle on—to
lease the cattle out on the property. And he was working with Mr Ainsworth. They go into
custard formation. McGrathNichol agree to pay him in cattle instead of cash for some of the
country that he is leasing back to Great Southern, and he is on McGrathNichol’s payroll to
supervise the operation. This is bizarre. I will not disclose the conversation, but he was well
rewarded for his work, I can tell you. I would not have minded the job. How can he then provide
an independent opinion to satisfy both you and all the mums and dads and grandmas out there
who put their life’s earnings for their children’s wellbeing, as we heard in evidence this morning,
into Great Southern? Cold-blooded, bureaucratic legal speak says that is okay? It fails the pub
test. Are there any further questions?
Senator O’BRIEN—No, we have gone over time, well and truly.
CHAIR—We are very grateful for your appearance here today. There are a lot of people who
will not front up; I think it is to KPMG’s credit that you have fronted up, and you might convey
those sentiments back to your bosses. We are grateful, but obviously I am pretty distressed, as is
this committee, with what has gone on, but we are looking for solutions rather than wanting to
cut anyone’s head off. Thank you very much.
Mr Wingrove—Thank you.
CHAIR—If you could provide the details of Mr Ainsworth’s assessment to the committee, we
would be very grateful.
Mr Wingrove—Yes, we will do that.
CHAIR—I would be very interested to see how Ross summarised things.
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Wednesday, 7 October 2009 Senate ARI 71
[2.14 pm]
THOMAS, Mr Kerry James, Private capacity
CHAIR—Welcome, Mr Thomas. Do you have any comments on the capacity in which you
appear and would you like to make an opening statement?
Mr Thomas—Thank you. I am a finance and property consultant. Not being familiar with the
process, would you like me to go through my qualifications and experience in the matters being
discussed?
CHAIR—You are a qualified valuer et cetera; we believe you. You can tailor your stuff if you
like. We are easy to get on with.
Mr Thomas—I did not know if you knew what my background was.
CHAIR—You are a registered valuer.
Mr Thomas—And I have got tertiary qualifications in agriculture and so forth to lead me to
the conclusions that I have—
CHAIR—You’ve got more than me, mate!
Mr Thomas—You have a copy of the statement I made earlier.
CHAIR—Yes.
Senator STERLE—I have a copy of an email you sent to Senator Heffernan.
Mr Thomas—That is right. Whilst I do not have anything against managed investment
schemes, my major concern has always been the independence of the people who are appointed
as valuers or experts in these matters—
CHAIR—We have just had an episode of that.
Mr Thomas—and the qualifications of the funds managers in relation to rural management. I
support the existence of the MISs in principle, subject to a large number of provisos, one of them
being that the market for the volume produced can be defined. More important than that is the
suitability of the funding arrangements based on appropriate valuations. I emphasise the words
‘appropriate valuations’. If you look at any of these prospectuses—and I have not looked at any
recently, but my experience goes back in the valuation, project management, development and
on-sale into these schemes, not as a promoter but as a person representing an angel company to
start them going—the valuations invariably state, as is the default instruction for a valuer, the
market value as defined, which clearly states it is an unencumbered freehold value. The fact of
the matter is that in a lot of these things where there are forests, tea-trees or grapes the
landowner is one entity, the investor or the grower is another entity, and the management
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ARI 72 Senate Wednesday, 7 October 2009
company is another entity. At the end of the day the property is heavily encumbered. So any
valuer that is looking to do a valuation should take that encumbrance into consideration because
it is so esoteric that, should that ever be placed on the market, any experienced rural person—
and I emphasise ‘rural’—would not get his mind around what he was buying and simply walk
away.
My first experience in the valuation of these assets was probably over 20 years ago, when a
bank had made a substantial advance on a plantation and there was no possible way it could ever
be sold, because it would take over 75 per cent of the investors to unwind the complications of
its arrangement. Usually by this stage they have not got any dividends, they are very angry and
they do not want to cooperate with anybody. So you have an asset which is heavily encumbered,
for which the prospectus and the bank have been given valuations which are totally hypothetical,
in my view. The recipient of the valuation is usually the bank or the promoter, which is hardly
independent, as you would probably appreciate. That some of these valuers are from interstate
with little or no knowledge of the local conditions or industry, to my mind, opens questions as to
whether or not those valuations are really worth what they are intended to convey.
Senator O’BRIEN—It strikes me that almost inevitably where a company becomes insolvent
its assets are sold at much less than their book value. The question arises: does that mean the
book value is always grossly inflated or does that mean that in the context of a sale which has a
definite time line and in circumstances where the buyers know it must be sold the price
inevitably falls significantly?
Mr Thomas—Yes, that would be a forced sale. But a mortgagee would normally take that into
account when they are limiting—
Senator O’BRIEN—A prudent mortgagee or a mortgagee who had a big financial interest in
getting something near the value of the property. But a mortgagee whose interest was much less
than the value of the property maybe would not care less.
Mr Thomas—In normal circumstances where there are none of these esoteric encumbrances,
is that what you mean?
Senator O’BRIEN—Yes.
Mr Thomas—If it were just a normal freehold property?
Senator O’BRIEN—We have had an example today: the almond assets of Timbercorp or
Great Southern—I cannot remember which—
Senator STERLE—I think it was Timbercorp.
Senator O’BRIEN—being sold for $128 million that had a $300-odd million book value. It
was not just the almond interests; the water resources went with them. It seemed to me that it
was almost inevitable when they went on the market that someone would say, ‘I have the money
to buy them now.’ If you can wait, who knows what price you will get?
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Wednesday, 7 October 2009 Senate ARI 73
Mr Thomas—The book value versus the purchase price probably reflects the discount that
should have been applied to the valuation in the first place. How to quantify the impact of the
encumbrance is a technical matter which we probably do not need to go into here. But an income
based stream, or whatever it may be that the valuer was asked to provide an unencumbered
freehold valuation on, is subsequently produced in the prospectus and provided to the bank—and
it is in fact not the case. That discount you speak of may be due to the fact that the valuation of
$300-odd million was unencumbered and the actual purchase price reflects the encumbered
value of it.
Senator O’BRIEN—In other words, they are buying it with debt.
Mr Thomas—No, buying it with complicated structures that are difficult to unwind. The debt
situation on some of these that I have read about probably would not have occurred had the
valuer pointed out the impact on saleability of the property subject to these encumbrances. In the
commercial world the fact of the matter is that the person looking at the valuation for lending
purposes is looking for the highest valuation they can get—
Senator O’BRIEN—Sometimes the lending authority staff are looking for that too to justify
the lending.
Mr Thomas—Since they started getting paid commissions to lend money that has probably
occurred—not when I joined the bank 40-odd years ago. However, that is the case. The bottom
line is that, if the valuer were to ask for the instructing party to provide the details of those
encumbrances, he may well find that he does not get rung back, that they keep ringing around
until they get someone who does not ask those questions or in fact that they instruct someone to
do an unencumbered valuation. The amount of debt that accumulates as a result of these what I
would call inappropriate valuations is based on a totally hypothetical figure, and that probably
explains the difference between the book value and the sale value.
Senator O’BRIEN—Particularly a property which is in the process of being developed to
ultimately produce at a certain rate when you know what its earning capacity is given the
vagaries of agriculture. You can ascribe some sort of value on its earning capacity, but in the
absence of that it is always likely, isn’t it, to come in at under what its book value is?
Mr Thomas—If it is a forced sale, the bank would take that into account when they decide on
their lending margin. The lending margin on these should be much lower than a conventional
freehold property, let us face it.
Senator O’BRIEN—Or should be.
Mr Thomas—Yes. People who have the agricultural qualifications, valuation experience and
rural experience to make an appraisal on these properties are few and far between. It is not a big
market. Most of them are getting on a bit. You have to be on a bit in rural to really understand
what it is all about. You might find that they get overlooked, because they are too well informed,
perhaps in favour of someone in other states who is probably less informed.
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ARI 74 Senate Wednesday, 7 October 2009
Senator O’BRIEN—Is it is fair to say that in terms of all rural property, and given what we
are being told about the increasing valuations, that their best case scenario sales are not sales
where the bank is saying that they want their money and they want it as quickly as possible?
Mr Thomas—It is up to the bank to determine their lending margin based on how difficult it
is or what equity you think they can get out of it. It might be a six-month selling period or it
might be a 12-month selling period. But my point is that it is the valuer’s duty to inform the
mortgagee, or the person that is asking for the valuation to be published in the prospectus, of the
impact of these very esoteric structures on the value of the property, and whether he tries to
quantify it or whatever—which is a technical issue—is irrelevant. If you pick up any of these
prospectuses you will find that there is no mention made of the impact on the saleability of these
properties because of the various structures. You cannot assume the existence of a special
purpose purchaser, for example, a forest person, coming in and buying a forest. You are selling
to a rural market. Most experienced rural producers who have got the sort of money to buy these
sorts of places, which are pretty highly capitalised, are fairly experienced people. They are not
going to accept a valuer’s valuation as the market value of that property. They will do the
appraisal themselves and when they have a look at it and see how difficult it is and what they are
actually buying, they will just simply walk away. They will not go to the auction.
CHAIR—So in return for, say, a place that has been acquired by Great Southern, or leased by
Timbercorp where there is half-grown blue gum plantation where it has all turned to custard, and
it gets put on the market and the rehabilitation cost is more than the actual capital cost, in theory
the property is worth nothing.
Mr Thomas—Yes.
CHAIR—If you are going to rehabilitate it.
Mr Thomas—Yes.
CHAIR—Have you had experience in looking at any of the MIS valuations?
Mr Thomas—Yes, but not recently.
CHAIR—Do you know much about King Island?
Mr Thomas—No, I do not.
CHAIR—There have been some funny deals down there.
Senator STERLE—Funny peculiar not funny ha ha!
CHAIR—Yes, funny peculiar.
Mr Thomas—I do not, but we were involved in the acquisition and onsale and I am familiar
with the structures of these things. But in recent times I have not looked at many prospectuses.
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Wednesday, 7 October 2009 Senate ARI 75
CHAIR—So from a commercial point of view you will have read, if you read the Financial
Review, about the arrangements that were made surrounding the purchase of Wrotham Park and
those three properties.
Mr Thomas—Yes.
CHAIR—What would you say if it turns out to be true, as alleged, that Mr Buntine got $10
million as a spotter’s fee for the three properties? That would be fairly extraordinary, wouldn’t
it?
Mr Thomas—Yes, it would be most unusual. I do that sort of work myself and it would be—
CHAIR—As for valuations, it was not an extraordinary amount of money—it was $50-odd
million for one. What would have been reasonable?
Mr Thomas—Assuming you are doing the due diligence and evaluation, which of course has
got to be supported by another independent valuation, and the negotiations, and footing all the
expenses of the research into the economics of the operation—in other words, providing your
agribusiness budgets, your evaluations—and all the other expert advice that you need to include
in that, and assuming on a success-fee basis only—in other words, you are putting all your
expenses in and it may not come off—
CHAIR—You take the risk.
Mr Thomas—you would expect a one per cent fee of the total acquisition cost.
CHAIR—So $10 million by—
Senator STERLE—How much would that be?
Mr Thomas—A $50 million property?
CHAIR—One per cent.
Mr Thomas—Yes.
Senator STERLE—Quick, what is the figure? You have probably got a calculator and we
have not.
CHAIR—Obviously, it is a billion-dollar deal for $10 million, and that is garbage. Bear in
mind that it was not described as a due diligence report; it was described as a spotter’s fee, which
would indicate the generosity and the mindset of the greed-driven management of Great
Southern at the time.
Mr Thomas—The terminology is a bit of a worry. ‘Spotter’s fee’, I thought, would have gone
out when it was declared illegal for real estate agents to appoint spotters.
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ARI 76 Senate Wednesday, 7 October 2009
CHAIR—I think it was described in the Financial Review as that. However, whatever it was,
it was very generous.
Mr Thomas—There are not a lot of people that would have the experience to be able to do
the evaluation, projected budgets, negotiations and call in other experts involved.
CHAIR—I understand the complexity.
Mr Thomas—And you would know who they are. Some of these people I have never heard
of. When I ask people that are experienced rural valuers and agribusiness analysts in their 40s,
50s and possibly even 60s, who they are, they have never heard of them.
CHAIR—Do you know Mr Ainsworth?
Mr Thomas—No.
CHAIR—I do. So the long and short of your evidence is that a lot of valuations are driven by
the person who pays for the valuation.
Mr Thomas—Well, I do not know whether I would put it in those words. I would say that the
valuations that are submitted are submitted as unencumbered freehold market value as defined
by the courts, which is not in fact what is being offered as security.
CHAIR—The best example of that is a place that has got half-grown or finishes up with
paddocks of stumps or something that you have got to rehabilitate. How do you value that?
Mr Thomas—I have yet to see any reference. I know valuers who have been asked to provide
valuations, or I have spoken to them socially, and they do not get called back. They do not get
the instructions, in other words. So whether it is by design or whatever, the people that are
issuing the instructions—and it is not illegal to ask for an unencumbered market value if you
going to use it for whatever purpose, except if you are going to use that for mortgage purposes
and prospectus purposes it is heavily encumbered; it is totally inappropriate. You can draw your
own conclusions as to how these things arrive, but if you were to ask a valuer that is what you
will get, a market value definition. I am sure you have seen that.
CHAIR—Just to take the example, we were given evidence by the former chairman of Great
Southern and the non-executive director, Mr Mews, in Perth of $9,000 a hectare and there was
enough money in that upfront fee to buy the land. So if you have got this free capital to acquire
the land and put the trees on, to justify that to your shareholders I suppose you would look for a
generous valuation to get rid of the money.
Mr Thomas—Yes.
CHAIR—And you then have a non-arm’s-length intercompany relationship.
Mr Thomas—And an unencumbered value to boot. That is my point. They are not
unencumbered. The property is heavily encumbered with all sorts of complex structures which
would confuse any possible rural purchaser.
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Wednesday, 7 October 2009 Senate ARI 77
CHAIR—Not this particular one. Is anything further you have like to add?
Mr Thomas—I do not think so.
CHAIR—Thank you very much. We will now take a short break.
Proceedings suspended from 2.33 pm to 2.40 pm
AGRICULTURAL AND RELATED INDUSTRIES
ARI 78 Senate Wednesday, 7 October 2009
[2.40 pm]
BAKE, Mr Glenn Keith, Farm Services Manager—South, National Foods Ltd
O’MALLEY, Mr Conor Stephen Francis, Group Executive, Corporate Services and
Logistics, National Foods Ltd
WAUGH, Mr Ashley James, CEO and Managing Director, National Foods Ltd
CHAIR—I welcome the representatives of National Foods Ltd. I invite you to make an
opening statement if you wish to do so and then we will ask you some questions.
Mr Waugh—Good afternoon, Chair and committee senators. I would like to thank you for the
opportunity to be here today to respond to the inquiry into food production and, specifically, the
prices paid to dairy farmers in Tasmania. We understand that this is a highly emotive issue and
we hope to use our session today to clarify some of the headlines with clear facts about the
Australian dairy market and, more specifically, the situation in Tasmania.
I will address the key issues. Farm gate milk prices are set by market forces. Both the ACCC
and Dairy Australia have published reports that clearly identify that the international value of
dairy commodities determines the farm gate value of milk in Australia. Over 60 per cent of the
milk produced in Australia is exported to the global market. The key value drivers of that milk
that is exported are the value of the dairy product itself that is traded as a commodity and the
Australian dollar-US dollar exchange rate. In South-Eastern Australia approximately 70 per cent
of the milk that is produced is exported. For Tasmania approximately 90 per cent of the milk
produced is sent out of the state. The global financial crisis has had the effect of reducing the
commodity value of milk from the extreme highs of 2007 and 2008. Within that global
environment National Foods, which employs 4,000 people across Australia, buys nearly 2 billion
litres of milk nationally and we compete for that milk against all other milk processors. To
remain competitive with the other milk processors and to secure supply, National Foods has to
pay its farmers a market competitive price, a price that is ultimately influenced by the
international price. We do this by basing our price on the largest competitor for milk by region.
National Foods commits, by way of contracts to its farmers, to pay a premium over that
competitor to ensure security of supply for 12 months of the year. In Tasmania our largest
competitor, Fonterra, which buys about 65 per cent of Tasmanian milk, has reflected in its
pricing the global value of farm gate milk. National Foods has committed, by its contract offers,
to pay at least a 3c per litre premium over Fonterra’s price for milk in Tasmania. National Foods
buys approximately 145 million litres of milk annually in Tasmania and that represents about 23
per cent of the total production in Tasmania. Thirty per cent of that milk goes to the domestic
drinking milk market. Fifty per cent of that milk goes into the domestic and international cheese
market. Twenty per cent of that milk we actually do not need. National Foods is committed to
buying this excess milk to assist our suppliers in managing excess supply and has done so at a
significant financial risk to our company.
In concluding my short opening remarks, let me finish by stating very clearly some key facts.
National Foods does not have a monopoly over milk buying or selling in Tasmania. The current
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Wednesday, 7 October 2009 Senate ARI 79
contract offer to our farmers is guaranteed to be at least three cents per litre on an annualised
basis more than our major competitor. Our forecast milk price within our current contract offer
over the next 12 months is 32½ cents per litre. Our actual milk price average across all of our
suppliers in Tasmania is currently 35.6 cents per litre. We understand that dairy farmers across
Australia face difficult times driven by climatic conditions and the current world value of dairy
products. Having worked with our farmers over the last 10 years of extreme drought, we know
only too well the hardships created at farm level and the stresses that our producers face. We are
committed to working with our farmers to ensure their long-term sustainability and we are
continually reviewing our contracts against our competitors and the world price.
CHAIR—Thank you for that and, on behalf of the committee, congratulations and thank you
for coming today. Could you explain to the committee, if it is not commercial-in-confidence,
what are the arrangements you have the Lion Nathan?
Mr Waugh—That is no problem. Lion Nathan is currently and has been for about nine years a
46 per cent owned subsidiary of Kirin in Japan, Kirin being a major brewer in the Japanese
market. Kirin acquired National foods in December 2007 and they own 100 per cent of National
Foods. Kirin have offered to acquire the remaining 54 per cent of Lion Nathan shares which they
do not own currently and that proposal was voted on by the shareholders of Lion Nathan on 17
September, from memory, and it was agreed that the remaining 54 per cent of shares would be
sold to Kirin in Japan.
As a result of the acquisition of the full ownership of a Lion Nathan, Kirin are moving to align
the ownership of their Australian assets through a single subsidiary holding company in
Australia called Lion Nathan National Foods. So National Foods will become a trading
subsidiary of Lion Nathan National Foods as will the current Lion Nathan companies. That
change of ownership is due to occur somewhere around 23 October 2009. At this time, National
Foods is still a 100 per cent owned subsidiary of Kirin in Japan.
CHAIR—You would be aware of the extremely emotional response to what the people see as
a cold-blooded multinational approach to producers and the lack of capacity of the ACCC to deal
with the producer end rather than the retail end of mergers. The response we have had from
farmers is that they have been treated unconscionably. Given that Woolies and Coles hold 80 per
cent of the packaged market and about 55 per cent of the unpackaged market, you say you
compete with Fonterra, but it is like you want to buy cows and they want to buy calves, that sort
of thing, in the break-up of your milk. It would not be so bad for consumers if, when the price of
milk halves because we no longer dis-aggregate market milk from manufactured milk, the price
went down in Woolies and Coles. Part of the trick with consolidated retailing is about what
defines milk and the use of permeate in milk. Made-up milk products like Black & Gold milk
sometimes do not taste like milk, but they are milk. If you are on a fixed budget it is there for
$1.79, so why would you not buy it and spend $2.29 on the whole milk product? Is part of the
distress of farmers that reconstituted milk has taken the premium off sound milk?
Mr Waugh—I will address the issue of permeate and milk first. I would like to talk a little bit
about the process that National Foods and other dairy processors go through when they buy
milk. We buy farm gate milk from a farmer. We do not just take that milk and put it in a box or a
bottle and sell it to the consumer. In the modern dairy industry we take that farm gate milk and
break it into its component parts. We strip that milk right back to its component parts and build
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ARI 80 Senate Wednesday, 7 October 2009
products that meet the Food Standards requirements at consumer level. The NIP on a carton says
how much fat and how much protein have to be in whole milk, modified milk or any other dairy
product. Permeate comes to us off the farm. It is a part of the milk that we buy from the farmer.
We can actually put more permeate in some products to improve the mouth feel and to reduce
the cost of production for National Foods. If we do not put the permeate in the product we throw
it away. Just as we recover dairy solids from the whey streams in our factories, so permeate is
recovered in exactly the same process from liquid milk. It is in the milk we buy from the farmer;
it is just put back into the product in different ratios.
CHAIR—We were told yesterday the profit was 20.8c for some people in Tassie. It has not
moved in the supermarket, so who picks up the advantage? You, or Coles and Woolies? Where
does the profit go?
Mr Waugh—That 20.8c is not—
CHAIR—Say 26c for easy working, instead of 46c or 52c.
Senator STERLE—Currently some are getting 49c, the cost of production is 39.8c and the
new contracts deliver about 29c.
Mr Waugh—The prices I gave you are the prices we will be paying to our farmers across this
year.
CHAIR—I am dealing with some of your farmers in New South Wales, not in Tasmania, who
are on 26c and 28c, but we are on 52c. It has recently gone to 31c or 32c. As you say, there is a
global price and the bulk of the milk is exported not as milk but as product, because milk is
fairly perishable. It is a bit hard to explain to the consumer who would like to protect the
institution of family farming why, if he is not getting a reduction in the supermarket, the price
should be halved at the farm gate, given it has not moved at the supermarket.
Mr Waugh—Somewhere here I have the price of milk in a supermarket versus farm gate milk
price.
CHAIR—If you are going to tell me that when the price rose globally it did not rise in the
supermarkets, I know that.
Mr Waugh—Correct. The price in the supermarket today is very much in line with the farm
gate milk price that existed in 2005-06. When the price of milk for us climbed to in excess of
50c per litre, the price of milk in the supermarket did not double.
CHAIR—Part of the trick for the supermarket is retail brand milk, which comes back to the
question: what is milk? A bloke rang me from Western Sydney last week and said: ‘I’ve just
bought a carton of Black & Gold milk. It doesn’t taste like milk to me.’
Senator O’BRIEN—Mr Waugh also did not factor in the 11c that should have come off.
Mr Waugh—The 11c most certainly did come off. It was $2.19 and is now $2.09, from
memory.
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Wednesday, 7 October 2009 Senate ARI 81
Senator O’BRIEN—You have cribbed a cent then.
Mr Waugh—I do not think we did, to be honest.
Senator COLBECK—I am with Senator O’Brien. The price that I checked at the
supermarket the other week was $2.08. We are within a margin of error, so we are happy with
that.
Mr Waugh—That is correct.
Senator COLBECK—On your point that when the farm gate price of milk doubled globally,
to suggest that the supermarket price of milk would double does not stand. Because the price of
milk at the farm gate doubles does not mean that the manufacturing cost doubles. Some of your
costs might go up with inflation, but obviously the price being paid at the moment, as I
understand from farmers, is 20.8c. The current price being paid this month in Tasmania is 20.8c.
I know that you are talking about an average across the year when you talk about 32.5—I
understand that—but to suggest that the price at the supermarket would double because the farm
gate price doubles does not hold.
Mr Waugh—No, but that is not what we are suggesting. What we are saying is—
Senator COLBECK—That was the comment that you made, that it did not double when the
farm gate price doubled.
Mr Waugh—No, it did not.
Senator COLBECK—Well, it should not.
Mr Waugh—No, and I am only reflecting on the fact that, now that the price has come off the
2006-07 high at the farm gate, it follows that the price at the supermarket is not going to halve.
Senator COLBECK—You are saying that the price now is about where it was in 2005-06,
which is prior to the increase?
Mr Waugh—Correct.
Senator COLBECK—That is understood.
CHAIR—I will just give you an example of something you can touch and feel. Touch your
suit. Is that a woollen suit?
Mr Waugh—I do not know.
Senator O’BRIEN—I bet you it is.
CHAIR—If it is a woollen suit, there is actually $12 worth of wool in it at the farm gate and
the suit was probably $1,500 or whatever. That makes the point.
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ARI 82 Senate Wednesday, 7 October 2009
Senator COLBECK—You did say that the price went up, and your submission says that in
2007 and 2008, when the global price was high, you did pay above the contract price in order to
secure a supply of milk. I can understand that that would be the case. But did you pay above
your competitors’ prices or did you just pay above the contract price? The evidence we heard
yesterday was that you did pay above your contract price but you did not pay above competitors’
prices.
Mr Waugh—That varies by state. I would say to you that yes, we paid above competitors, on
average, across Australia. Glenn, I think you might have—
Senator STERLE—Let’s talk about Tassie, because that is where we were.
Senator COLBECK—The evidence we heard from Tasmania yesterday was that you did not,
and it is all very well to talk about averages. You mentioned the actual average, 35.6, across all
farmers in Tasmania this year. That is because you are stuck with some contracts that were
signed two years ago for two years and are currently receiving a higher price.
Mr Waugh—That is correct.
Senator COLBECK—So I think we need to be really careful of the averages because they
can distort the numbers. We received evidence yesterday that, if you take a 600 cow farm
producing three million litres of milk, calving in late summer—so it is a farm designed to
operate on market milk or a whole milk type basis—a comparison between the two companies
on their stated bill prices indicates that a National Foods supplier would be $7½ thousand worse
off. The farmers took us through a process yesterday of how your model farm design scheme
works, where you divide the year into two halves and you operate on separate parts of the year. I
would be interested in hearing you explain to the committee how the submission we received
yesterday is incorrect and you do actually pay more, because obviously a comparison has been
done and the comparison says that a farmer supplying National Foods would be $7½ thousand
worse off.
Mr Bake—It would be great to see those numbers.
Senator COLBECK—What I am asking you is to demonstrate your claim to me. You have
made the claim that you pay three per cent above. I am asking you to demonstrate to us how that
works. We were taken through the system yesterday. As the farmers understand it, they explained
to us how the model farm scheme works. I understand what they were telling me, and the issues
particularly of concern to me are where the step-ups come in during the second half of the year.
You pay double the step-up that Fonterra will pay—and I understand that—but the likelihood is
that farmers will be producing more milk in the first half of the year, so paying double the step-
up in the second half of the year does not have the same effect across the whole year.
Senator Sterle interjecting—
Senator COLBECK—You are following me too, Senator Sterle?
Senator STERLE—Absolutely.
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Wednesday, 7 October 2009 Senate ARI 83
Senator COLBECK—That is fantastic.
Senator STERLE—It was pretty clear yesterday. Actually, you should have been in Tassie
yesterday, Mr Bake. Mind you, they might have hung you from the nearest tree at the rally, but
you still should have been there.
Senator COLBECK—I do not think they would have done, Senator Sterle, but it would have
been nice to see them there.
Mr Bake—We work on a model farm system. We need year-round milk supply, so we have
devised a model or a contract offer that rewards farmers that produce milk in the second half of
the year—the January to June period. The basis of our offer to farms is to pay a matching price
in the first half of the year—the July through to December period—and in the second half of the
year to pay a premium above our competitor of 4c to 6c per litre, depending on where the market
ends. That is the system.
CHAIR—But your model farm does not make allowances for droughts and doubling of the
price of grain and all those things. You do not build that into it, do you?
Senator COLBECK—And the model farm price also includes any other elements that might
be made up. If there are any deviations outside of the specific ranges of deviance that you have,
there are penalties that come off that. Effectively that guaranteed price is ensuring that the
farmer sticks within some fairly tight supply constraints. Any seasonal circumstances such as
have been occurring in Tasmania over the last few months or so, where there is obviously some
distress with the animals and the farms and it is just generally a mess—
Mr Waugh—You are exactly right. We can select a range of different farms and put them
through our farm price model or the competitors’ farm price model. We build our model based
on rewarding farmers for providing milk to us at the period we need that milk, across 12 months
of the year. If you supply National Foods with milk when it is very efficiently produced and
cheap, in the spring, you are penalised to a certain extent. But, in the autumn and winter and, in
some parts of the country, late summer, where the cost of production is high because of the
farming systems that have been adopted to produce that milk, there is a reward to the farmer who
meets that supply pattern. It is a never-ending debate. It is a debate we have ad nauseam within
the company, because everyone can always find one example where it does not result in the ideal
pattern. We are very happy to look at any information you want provide to us and take it into
consideration. That is not an issue.
CHAIR—You will read the transcript from yesterday about the unfortunate treatment that was
meted out to that woman on King Island. Are you aware of that?
Mr Waugh—I would need to understand who we are talking about.
Senator COLBECK—We will come to that. Your submission tells us that you have got some
contracts that are still in force that have higher prices. Have you renewed any contracts this year
at higher prices?
Mr Bake—No.
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ARI 84 Senate Wednesday, 7 October 2009
Senator COLBECK—As you said in your submission, some contracts still include prices
prevailing at periods when the world market was very high and, as a result of the global financial
crisis, which we all understand, the contracts have been progressively reset. So the farmers in
Tassie, who are getting 45c, the guys in Northern New South Wales, who are getting 48c, and the
ones in Queensland, who are getting higher prices, are all, when their contracts expire, going to
progressively see a reduction in the prices that you are paying to them?
Mr Waugh—That is correct. I think we have said that in our submission.
Senator COLBECK—I just wanted to confirm that.
CHAIR—That is not based on the price of milk here. That is based on the global price—
Mr Waugh—Correct.
CHAIR—and what it costs to milk a cow in the back of China somewhere.
Mr Waugh—No—
CHAIR—You are not very interested in that, though.
Senator COLBECK—We are talking about local regions in Australia. What would the range
of prices be that you are paying to newly contracted farmers across various states at the moment?
Mr Waugh—I can give you the equivalent number in our model. I gave you 32c and 32½c
per litre. We have all of our farmers contracted at 34c a litre in terms of the new milk price in
Victoria and 34c a litre in South Australia. That is based on the largest cooperative companies’
position in those markets.
CHAIR—How is New South Wales?
Mr Bake—In New South Wales, new contracts have been signed at around 50c per litre.
Senator COLBECK—New contracts?
Mr Bake—Yes.
Senator COLBECK—What is the change in price on those contracts?
Mr Bake—They have come back from, I believe, about 54.
Senator COLBECK—So, at 50c, there has not been much of a reduction in price in New
South Wales?
Mr Bake—That is right.
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Wednesday, 7 October 2009 Senate ARI 85
Senator COLBECK—And that is based on the fact that you have got competitors in the
market that are paying a higher price so you have to pay a higher price to get milk?
Mr Bake—Regional market forces do play a part, yes.
CHAIR—So what has happened in the Wagga that they have gone from 52 to 26?
Senator STERLE—Chair, we do not have a lot of time. Can we concentrate on the evidence
we have taken so far and try to get some answers.
Senator COLBECK—Effectively, you have had or are looking to have reductions in prices in
all of your markets.
Mr Bake—Depending on the regional forces at that time, when contracts come off.
Senator COLBECK—So when on 18 June a Mr Chris Wallace wrote to customers saying
that prices would increase for National Foods products because of increasing milk products, how
does that relate to the fact that you are paying your farmers progressively less across the
markets? He said:
Whilst there has been some easing in world dairy commodity prices in very recent times—
and I think that is a bit of an understatement because they crashed in January—
much of these have not affected farmgate milk pricing in NSW due to our longer term fixed contracts …
So you are putting your prices up. You are screwing prices down to farmers at one end and yet in
the market where you are selling you are putting prices up—how does that relate?
Mr Waugh—Senator, I would need to get a copy of that letter and to take it on—
Senator COLBECK—I am happy to table it.
Mr Waugh—Thank you. What I would say to you now is that the prices prevailing in New
South Wales and Queensland are still substantially higher than any movement in price to our
customers in those marketplaces or nationally, so National Foods is still playing catch-up against
substantial price increases that occurred through 2006 and 2007.
Senator COLBECK—It does not seen much of a message to the farmers, though. You are
telling them that because global prices are falling you are going to have to pay them less, well
under the cost of production, and yet when you go into the market you are telling your customers
that you have to put prices up. It is not much of a message, is it?
Mr Waugh—But it is a relative movement. The milk price in New South Wales and
Queensland escalated substantially. I would also like to add that the northern states of Australia
are not dairy friendly manufacturing environments. The per cow productivity, the grass species,
the higher demand for supplementary feed and the cost of water, if it is available in some areas,
means that the cost of production in those states is higher than in the south-eastern states, which
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ARI 86 Senate Wednesday, 7 October 2009
I would describe as more natural dairying areas. So we compete with different companies in the
different states of Australia. In New South Wales and Queensland we are very much competing
with other milk processors—
CHAIR—You’re not trying to tell me it is okay down the South Coast here are the moment,
are you? It is bloody tough this season for dairying down the South Coast.
Mr Waugh—In the Bega area?
CHAIR—Yes.
Mr Waugh—I am not sure I would describe it the way you described it, Senator. What I am
saying is that it is tougher to produce milk in some parts of the country.
Senator COLBECK—By the same token, I just do not think it rings true that you are telling
your farmers you cannot pay them more, in fact you have to pay them less, and yet at the other
end of the market you are saying you are going to whack the price up. It really just does not gel
with me. I just find it completely incongruous that the prices to farmers are going down at the
rate that they are and yet it is no big deal that the prices are getting whacked up, particularly
when you are projecting to double your profits. That is the thing that sticks in my craw as much
as anything else: you are projecting to double your profits and yet the price that you are offering
farmers will guarantee they will make a loss.
Mr Waugh—Would you like me to comment on that as a question?
Senator COLBECK—Yes.
CHAIR—Before you do, Richard, have you read the second paragraph into the Hansard? If
you have not, I will. This is you writing to ‘Dear Valued Customer’—
Senator O’BRIEN—No, it is Chris Wallace.
CHAIR—It is Mr Chris Wallace writing:
We are writing in relation to the price increase—
surprise, surprise—
… effective 6 July 2009.
Hello to Frank Vincent at Wagga’s dairy, on this one.
These increases are necessary in part due to the unprecedented increases in the farmgate milk price in NSW. Over the past
2 years National Foods has experienced an average of 72% increase in farmgate milk costs in NSW.
It was July this year when you did that to the milk farmers. It continues:
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Wednesday, 7 October 2009 Senate ARI 87
The drivers of these increases have been strong world demand combined with declining supply due to drought and
structural change with the Australian dairy industry.
While you were writing that out, you were saying to the farmers, ‘We’re gonna skin you.’
Mr Waugh—As I said, it is the relative change—
CHAIR—It is not a relative change. For some guys you halved the price of milk, and here
you are saying: ‘Holy cow! We’ve got to put it up at the farm gate.’ It has just all gone the other
way, mate.
Senator COLBECK—And your evidence is that your prices to all your dairy farmers are
going to go down.
Mr Waugh—Yes, but going down from a much higher base.
CHAIR—Haven’t you told these people a lie?
Mr Waugh—I will give you a written response to this letter which will explain—
CHAIR—It is your letter. This letter seems to me to be telling a lie. It says here—and this was
written on 18 June:
... to unprecedented increases in the farmgate milk price in NSW.
For God’s sake! At the same time in a lot of places you have halved the price. ‘Unprecedented
increases in farm gate milk price’: it is a lie.
Mr Waugh—I am suggesting that it is actually not a lie. That was at a point in time. When did
the milk price start to—
CHAIR—This was written on the—
Senator COLBECK—The milk price has been going down. It fell drastically in January. We
all know that. Fonterra for the first time in many years decreased their price halfway through the
season. I know you guys did not do that, so I am not arguing with you about that.
Mr Waugh—Thank you for acknowledging that.
Senator COLBECK—But you are saying that this is due to unprecedented increases in the
farm gate price for milk in New South Wales. Those contracts that you told about were long-
term contracts. As soon as they expire they are going to go down. You have already told us that
the price you are offering is 4c lower in New South Wales. So your prices are not in fact going
up; they are going down. How can you argue in this document that you have increased milk
prices?
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ARI 88 Senate Wednesday, 7 October 2009
Mr Waugh—Even after we take 4c off our New South Wales milk price, it is still a milk price
that is substantially higher than the milk price in any period in the previous two years.
Senator COLBECK—But it is not an increased milk price, which is what this says.
Mr Waugh—It is an increase in milk price. If you go back to 2006-07, the New South Wales
milk price has increased dramatically, even after we take 4c off it. I am sorry. That is why I
wanted to come back to you with the time frames.
Senator COLBECK—That is not what dairy farmers are saying. The letter is from June this
year. The milk price had been going down for six months since then. Everybody knows that.
Mr Waugh—I am sorry. We are a little bit at cross-purposes. I am talking about the price we
pay our farmers, not the global price for milk. Yes, the global price for milk had come off in
January. There is no question about that. We honoured and continue to honour—
Senator COLBECK—You were not suffering increased milk prices in June. You had the
same contract prices that you would have had for a period of time—probably 18 months—
because your contracts were that old.
Mr Waugh—Senator Heffernan, I would like to ask for permission to come back in writing
on this letter, please.
CHAIR—No trouble at all. I will share a pie with you, as well, if you like.
Senator COLBECK—I would like to go to the issue of a payment that was agreed for one of
your suppliers—or a contract, I suppose—for Mr Oliver in Burlington in Tasmania. There was
an outstanding amount of a quarter of a million dollars. Mr Oliver’s clear understanding, on the
basis of the evidence and the submission he gave to us yesterday, was that the payment would be
made. This was for the season. Can you enlighten us as to where that is? He understands,
according to the submission that he gave us yesterday, that he is still owed $255,666.11, and you
have offered him $62,745.82.
Mr Waugh—I would like to make a couple of introductory comments, and Glenn may elect
to cover some of the specifics. This is an inquiry into food prices in Australia. It is not an inquiry
into a commercial dispute between us and one of our milk suppliers. The issues with Mr Oliver
have got nothing to do with our milk supply offers.
CHAIR—With great respect, could I bring you to the point of this hearing. This committee is
inquiring into how we will produce food in the future that is affordable to the consumer,
sustainable to the environment and viable to the farmer. What happens to the farmers is very
much pertinent to this committee, including the arrangement that farmers have with consolidated
retailing. Manufacturers are right on our bailiwick, with great respect.
Mr Waugh—Thank you, Senator. I understand that. The issues between National Foods and
Mr Oliver have nothing to do with the contract issues on price between National Foods and its
farmers. It is a commercial dispute between a farmer and a company. We have willingly gone
forward and suggested open mediation to Mr Oliver, because the interpretation of an existing
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Wednesday, 7 October 2009 Senate ARI 89
contract—not a new contract—is in dispute. We believe that should just follow its natural
course. We have offered to fund binding mediation and we will abide by any binding mediation
that comes out of it. We do not want to have an argument with Mr Oliver. That is not our
intention at all. But if we have a disagreement on the interpretation of a contract, we have the
legal right to have it reviewed.
Senator COLBECK—Okay—I understand where you are coming from.
Senator O’BRIEN—I will make a comment and invite you to respond to it. The
understanding we have is that the interpretation of the contract that National Foods now relies
upon has not been the way the contract was interpreted by the entity that National Foods
purchased. For the life of the contract until National Foods took over that entity, the contract has
been interpreted in the way that Mr Oliver claims it should be interpreted. Do you disagree with
that?
Mr Bake—There is a difference in the interpretation of the contract. We have administered
the contract under our interpretation.
Senator O’BRIEN—Do you agree with the proposition I just put to you?
Mr Bake—Could you repeat it again—sorry?
Senator O’BRIEN—The proposition I just put to you is that the disagreement about the
interpretation of this contract only arose after it had operated for some time and at a point a short
time after National Foods took over the entity with which the contract was originally entered
into.
Mr Bake—We obviously could not administer the contract until we had taken it over.
Senator O’BRIEN—Do you agree with me that that is a matter of fact?
Mr Bake—I would have to review it a little a bit further.
Senator O’BRIEN—You do yourself no credit, Mr Bake.
Mr Waugh—The problem is we do not know the answer to that question. That is something
that we want to get an answer to. We are working on finding out what the interpretation of the
previous owner was. When we understand what that is, we will be in a position to address the
issue.
CHAIR—Could it be that when Lion Nathan take over in a month’s time, or whenever, they
may wish to repair what has been apparent public damage to the brand of National Foods in your
treatment of farmers in this throwaway way. We will give you the opportunity in the future to
come back and give further evidence and respond to some of the mournful stories that you have
not had the opportunity to hear. They occurred in Tasmania yesterday. In fairness to you, we
think that there are always two sides to a story—which is what you are demonstrating here now.
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ARI 90 Senate Wednesday, 7 October 2009
Senator O’BRIEN—Mr Waugh, would you accept that in a contractual relationship between
a milk processing entity such as National Foods and an individual farmer that National Foods
holds a particularly strong position in those negotiations?
Mr Waugh—If you are saying that we are a big company and we deal with individual farmers
who are small, independent businessmen, that is a natural comparison that you could make.
Senator O’BRIEN—But a dairy farm is different, isn’t it, because they have an ongoing
production capacity, which they can only sell to a processor? There is a limited number of
processors. You are one of that limited number. If you do not take their milk, unless another
processor will buy it, they cannot sell it. Doesn’t that mean that you hold a very strong position
in any negotiations with an individual farmer, as a company?
Mr Waugh—I would have to agree. If they cannot sell the milk to somebody else, we
absolutely have a position that says that we have a responsibility and an obligation to those
farmers to assist them by taking their milk. That is why National Foods is acquiring from
farmers in Tasmania this year 30 million litres of milk that we actually do not have a viable
market for. We stepped forward as a buyer of milk in Tasmania and said to our farmers, ‘There is
too much milk here, but we will buy this milk.’ We will take that milk and we will process it
through our Burnie cheese facility. We do not make globally competitive cheddar cheese in that
facility. We have to make it into Edam and Gouda, and we will be forced to trade that into an
unfriendly, low-value international market. So I have would have thought that was reasonable
evidence that we do not take our responsibility to farmers lightly at all. We do not.
Senator COLBECK—Farmers are not necessarily for all of that surplus, are they? You as a
company have contributed to a large proportion of that, almost 50 per cent, by the fact that your
relationship with BettaMilk broke down and you have lost 12 or 13 million litres in milk supply.
Mr Waugh—That is true but, at the same time, we already had too much milk. But we do
have that responsibility. I would like to think that our farmers know that we will be there to pick
up their milk. We might have an argument about the value, we might have an argument about the
monthly price, but at the end of the day National Foods have never not picked up the farmers’
milk. We understand that the farmer cannot turn the cows off and he has to do something with
his milk. In actual fact, recently, when we had the power shortages on the north coast, we
understood that farmers had some difficulties then. We moved very quickly to assure those
farmers that, if they had to tip out their milk because it was not refrigerated, we would actually
give them some compensation for that.
Senator O’BRIEN—So in a period when world prices are very low and in a market where
you are seeking to recontract farmers that have been on two-year contracts, why are farmers
being pressed to sign five-year contracts in circumstances where their bargaining representatives
suggest that that contract in many respects is so bad that they are recommending that the farmers
not sign?
Mr Bake—They are not being pressed to sign a five-year contract. They actually have the
option to sign a one-year, two-year, three-year or five-year contract. It is completely up to them
which contract they choose.
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CHAIR—Is it a contract or an agreement to supply, because there does not appear to be a
price?
Mr Bake—There is a price. There is a minimum price guarantee based on the commodity
market.
Senator O’BRIEN—It is not a reference price in the contract; it is reference to the
commodity market price?
Mr Bake—Correct, yes.
Mr Waugh—That is correct. Some farmers want the longer term security of knowing they
have somewhere to sell their milk. They are prepared to sign a longer term contract. Some
farmers are benefiting from that decision now; some farmers are not. It is an independent
decision each individual farmer makes.
Mr Bake—Almost 90 per cent of our Victorian farmers signed a five-year deal this year. They
had the option to sign for shorter amounts of time.
CHAIR—At what price?
Mr Bake—It is the same mechanism as what the guys in Tasmania are being offered.
Senator O’BRIEN—Do you accept the evidence that we have received from representatives
of Tasmanian dairy farmers and some other farmers that the average cost of production is closer
to 40c than 30c in Tasmania or is that of no concern to National Foods?
Mr Waugh—We get information from a number of different sources that estimate what the
cost of production is in different parts of Australia. We use it as a guide in understanding where
the farming communities are at, because it is of no value and it is not in the interests of National
Foods to have farmers producing milk year in and year out at under the cost of production. We
have every interest in making sure we have a viable dairy industry, because a milk company with
no milk is not much of a company.
We would not agree that the current milk production price in Tasmania is around 40c. We
actually do not know specifically what the number is. But the indicators we look at from
ABARE, from Dairy Australia and from some recently submitted information—from Minister
Llewellyn in Tasmania—do not support a 40c number.
Senator O’BRIEN—What do they support?
Mr Waugh—34c to 35c.
Senator O’BRIEN—For what sort of milk?
Mr Waugh—Twelve months of the year supply of milk.
Senator O’BRIEN—That is for someone whose farm is not seasonally calving?
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ARI 92 Senate Wednesday, 7 October 2009
Mr Waugh—That is for someone whose farm is not seasonally calving. We take an
intersection of information from different sectors. But our interest is making sure we can cover
our costs of production. We will always have an eye on the viability of the farmer. That is
absolutely clear.
Senator O’BRIEN—When you are having an eye on your costs of production, clearly they
are going to go down quite a lot. What about the commodity you sell in Australia? By my
reckoning and from what I have seen, there has not been a dramatic reduction in dairy product
prices across Australia in supermarkets, corner stores, service stations and the like.
Mr Waugh—You are quite right. It goes back to exactly the discussion that Senator Colbeck
and I were having about this letter, and that is that the farm gate price of milk is still driving the
need for our wholesale prices to be increased. Since 2006 and 2007 we have not recovered all of
the impost of increasing milk prices.
Senator O’BRIEN—So at the moment we are recovering that?
Mr Waugh—There is a massive time lag on how fast you can recover from the market base.
Senator O’BRIEN—On the New South Wales price, isn’t it fair to say that part of the impact
on the overall New South Wales price is the move into New South Wales of Queensland
processors, to make sure they have got enough milk for their market? That has had a big impact
on the price in New South Wales.
Mr Waugh—New South Wales is a competitive market for milk. When we acquired Dairy
Farmers we had an undertaking with the ACCC to sell a large-scale milk business in New South
Wales. That transaction occurred. We have met our commitments to the ACCC undertaking that
we made. Parmalat are now a major player in the New South Wales market—and they were not
there before.
Senator O’BRIEN—They were not there before as a processor.
Mr Waugh—Correct.
Senator O’BRIEN—But they were there before as a buyer.
Mr Waugh—In the northern part of New South Wales and on the fringes.
Senator O’BRIEN—The northern part is a big part, I think, for dairying.
Mr Waugh—It is, but South-Eastern Queensland is also a very fast growing part of the
country.
Senator O’BRIEN—For historical purposes the argument of the Victorians when
deregulation came about was that producers in New South Wales and Queensland were getting
50-something cents for their market milk and they could take a lower price for their other milk
and they were being disadvantaged, hence we ended up with pressure on deregulation. Now you
have got different factors driving a higher price in the northern states, not just the costs of
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Wednesday, 7 October 2009 Senate ARI 93
production but the fact that if you want them there you have got to pay them more to keep them
there. That is a fair comment, isn’t it?
Mr Waugh—I would not like to comment on that because I am not sure where those New
South Wales and Queensland prices are going to go in the next 18 months to two years. One of
the significant factors is going to be this: where does the international price of dairy
commodities go?
CHAIR—Which begs this question: what is the viability of transporting a perishable
commodity a long distance? Is it all right to bring it from Western Australia or from Beijing to be
the morning’s milk supply in Brisbane? What is the limit on transporting milk as a perishable
product?
Mr Waugh—That is a good question. The reality is we have a high-velocity, short-shelf-life,
13-day product. The ability to move milk from farms over large and larger distances is very
expensive.
CHAIR—So the argument that there is a global price is really just a marketing tool, isn’t it?
Mr Waugh—No, because of the amount of Australia’s milk whose value is driven by what
can be returned out of the global market. That is how it is valued.
CHAIR—But the global price is determined by countries that have got subsidies and
countries that pay their farmers threepence a week at the back of China or Thailand or India or
somewhere.
Mr Waugh—I understand the point you are making but it is really not something that I can
comment on.
Senator O’BRIEN—In terms of the issue of how you get equitable negotiations between
entities such as National Foods and individual farmers, you made a case saying that your bona
fide is that you buy more milk than you need and that it has nowhere else to go other than into a
low-profit or no-profit product—I am not sure whether you make money on the product, I do not
know. Does that not emphasise the point that those farmers, in those negotiations, have very little
power, they have nowhere else to go, that there is nowhere else for you to get rid of the milk and
certainly nowhere else for them to get rid of the milk?
Mr Waugh—That is a pretty good point. At the end of the day it really is incumbent upon us
to work closely with our farmers to send them long-term signals on what our volume
requirements will be for milk, especially in Tasmania where milk has grown 18.6 per cent in the
last five years.
Senator O’BRIEN—And it is the only state which has shown any growth, probably for very
good reason, given there has been a decline nationally. But you make a good point about signals
to your growers because we had evidence that a number of growers were encouraged to increase
their productive capacity, only to now be told that the capacity is not required and that you
would not guarantee to take the milk at the same prices that were negotiated for other milk, let
alone at the price that was being received when the encouragement was given. What
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ARI 94 Senate Wednesday, 7 October 2009
responsibility does National Foods have when its representatives have given such
encouragement?
Mr Bake—At times a lot of farmers come to us to talk about their growth aspirations and that
is usually initiated by the grower, not by National Foods. I think you highlighted in your
comments that we look at that growth aspiration and potentially look to see whether we can
provide a home for it and accept the milk—that is the guarantee we give. We do not give a
guarantee on what the price might be. That is still subject to the contractual arrangements in
place at the time and our need for milk at different times of the year.
Senator O’BRIEN—That is partially an answer and that may be the message you are giving
now. We have evidence that your predecessor was giving a signal to farmers that they could
make investments, could deliberately invest in more capacity, buy other properties, increase their
herd and that they could do that secure in the knowledge that National Foods would take that
product on the same basis as the other product they produced. If it is established that that took
place, what is National Foods responsibility to those growers?
Mr Waugh—If it is established that that took place, I feel we would have an obligation to buy
that milk, but from where I sit in National Foods, there has been no corporate directive to grow
milk supply in Tasmania.
CHAIR—To the best of your knowledge but not to the limit of the knowledge because some
of these field officers played their own game.
Mr Waugh—I would be disappointed if our field officers were carrying a strategic message
which was not core to what we are trying to achieve as a business.
CHAIR—But if they did, you would not know it.
Senator O’BRIEN—You would not be the first CEO to be disappointed.
Mr Waugh—I understand that. We have been very conscious about milk growth in Tasmania
for the last two or three years. We watch milk growth very closely.
CHAIR—We refer you then, for a later date, to Mr Oliver and Mr Wilson, who gave that
evidence yesterday.
Senator O’BRIEN—Particularly Mr Wilson.
Senator COLBECK—Did you participate or have any awareness at all of the dairy
development plan in Tasmania which was quite publicly announced.
Mr Waugh—The government program, Senator?
Senator COLBECK—No, it is not a government program; it is an industry program which
was developed by the industry as major players in the market. Surely you would be aware of the
fact that there was a growth plan for dairy in Tasmania.
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Wednesday, 7 October 2009 Senate ARI 95
Mr Waugh—Senator Colbeck, I was surprised to hear the other day of how substantial that
growth plan is in Tasmania. My feedback to the minister I was talking to at the time was: who is
going to process it and where is it going to be sold? I am the CEO of National Foods and I was
unaware of it.
Senator COLBECK—You are kidding me.
Mr Waugh—I am not kidding you.
Senator COLBECK—I went to a public launch with most dairy farmers in Tasmania three or
four years ago. You must have your hands over your ears or something. I cannot understand that
you do not have any understanding of the growth plans of the industry in Tasmania. It was a
significant launch. It got huge publicity within Tasmania. I recall when it was first announced
thinking that it was quite modest, the projections for growth. I thought they were relatively
conservative, and I think they were somewhere of the order of five per cent. It was not a huge
growth. It was quite publicly launched in Tasmania. You are a major player in the milk market in
Tasmania and you have no idea?
Mr Bake—I think most states in the southern area had ambitions of growing milk supply and
Tasmania was one of those. It still comes back to the point that that growth, because we have a
limited market, the need for milk would have to be done at a commodity price. That is for that
additional growth—
Senator COLBECK—I am just surprised that you did not know.
Mr Waugh—I am well aware of the growth aspirations of Western Australia and well aware
of the growth aspirations in South Australia. I have spoken to politicians in both of those states
and I have cautioned them on exactly the same basis and I have spoken to Minister Llewelyn—
Senator COLBECK—But there is a published plan the industry put together and you are not
aware of it. It has been in the market for at least three years.
CHAIR—I would not caution the politicians, I would caution the farmers. Senator Sterle.
Senator STERLE—Mr Waugh, firstly I will clear the air that I have had no problems in
dealings in my previous life with National Foods. It has been a very reputable company, in fact
to the point where there would be the highest paid truck drivers in Western Australia employed
by National Foods. But I want to ask you how your farm price model works. I know you have
touched on figures from ABARE but I will help you out here. It was said yesterday, and I only
want to talk about Tasmania, it was said by one lady representing a group of growers that she
believed that National Foods had no idea how to run a dairy farm. I dispute that. I reckon you
have got more idea than anyone else, because I do not think for one minute you would enter into
contracts with farmers not knowing very closely what their inputs would be over the coming
year. So can you tell me about your farm price model. How does it work and what does it consist
of? I have dealt with formulas for 25 years in my small capacity of negotiating rates for
contractors—I will call them contractors, the poor fool who took the truck home on the weekend
and had to wash it. There are three components: variable, fixed and labour. What makes up the
components of the farm price model?
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ARI 96 Senate Wednesday, 7 October 2009
Mr Waugh—Can I clarify. You are asking us how we set our farmgate milk price?
Senator STERLE—Yes, that is what I want to get to.
Senator COLBECK—Can I just ask a supplementary?
Senator STERLE—No, you can’t, you have had plenty of questions, plenty of time. I am
only joking.
Senator COLBECK—The question does not need an answer now. Could you provide us with
some models of how the model price works, some examples.
Mr Waugh—Sure.
Mr Bake—The question is how we set pricing in different regions of Australia. Is that your
question?
Senator STERLE—Yes.
Mr Bake—Basically if you look at a state like Tasmania or the southern milk pool, we look at
the regional forces affecting that. That is the commodity driven price in Victoria, Tasmania and
South Australia.
Senator STERLE—Put that in layman’s terms for me, Mr Bake. Put it as simply and clearly
as possible.
Mr Bake—We pay a premium above the commodity price.
Senator STERLE—And what is the commodity price?
Mr Bake—The commodity price is basically the price set by the major commodity processors
in this country, the Murray Goulburns and Fonterras.
Senator STERLE—How do they come to their commodity price?
Mr Bake—I believe it is a price they are able to sell skimmed milk powder and butter on the
global market.
Senator STERLE—How do they get to that?
Mr Bake—You need to ask them.
Senator STERLE—You see, this is where I do not believe it. Sorry, with the greatest of
respect, you are not fools, you are not a two-bob shelf company that has popped up in the last
couple of months. You have been around a long time, you know your business. Now, surely you
cannot expect me to accept that these figures just fall out of someone else’s workings. Obviously
you would work out and would know—and please on the record tell me if you do not—you
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Wednesday, 7 October 2009 Senate ARI 97
would roughly know what it costs a farmer in a certain region, with all things being equal, the
fuel is the same and there is no drought and fertiliser prices are the same, you would know how
much per litre that would cost, roughly.
Mr Waugh—We do have a rough idea and, as I said before, we have a number of different
sources for that information which comes to us ranging from information picked up by our field
officers, studies done by ABARE, studies done by Dairy Australia, studies done by individual
farmers who want to have that discussion with us, but that is not anything to do with how we
value milk at farm gate. Your question is: how does our major competitor value milk?
Senator STERLE—No, you led it down that path. I asked you how you did it.
Mr Waugh—Okay, that is fine. In Victoria, Tasmania and South Australia there are major
volume milk buyers, much bigger than National Foods. They set the benchmark value of milk.
By and large they are cooperative companies. As cooperative companies, they have an obligation
to maximise the value of milk to their shareholder suppliers. So they buy that milk from their
farmers for 12 months of the year. They sell it to a range of international markets. They work out
what it is worth and they divide it by the amount of milk they got from their farmers and they
say, ‘ That’s the price we’re going to pay you because we’ve maximised the value of that milk
for you.’ They have a sophisticated system where they have an opening price and a step up the
price-based system. That sets the international value of milk by region. That is how that works.
So it is determined by the major players, the price setters in the industry. National Foods is not a
price setter in the industry.
Senator STERLE—Okay, but if it cost the Tasmanian growers X cents to produce a litre of
milk, please tell me how that can be fair if they are disadvantaged, if the price they are
receiving—and I am not blaming National Foods—is less than what it costs them to produce the
milk.
Mr Waugh—That is a fair question and it is a discussion which we need to have ongoing with
our farmer suppliers. There is no question about that, but that is not a question which gets asked
every two months; that is a question which should be answered on a three- to five-year time
horizon because farmers cannot make decisions to change what they are doing in a manner of
five minutes and have it effective on their farm three minutes later. In that particular instance, we
would be very concerned if, long-term, farmers were asked to supply milk at a price below their
cost of production. I think the question should be asked: how much did they make in the peak
period of supply in 2007, 2008 and going into 2009 and was the cost of production at farm level
a significant issue for them at that time? I would suggest to you that the answer is no. Therefore,
I would also suggest to you that, if you extend the period of review, we should not be talking
about two months of one year; we need to be looking at an annualised and longer term time
frames. Yes, National Foods is very concerned to make sure we have sustainable farming group
out there because that is what our business is.
Senator STERLE—On that—you see, this is where it has knobs on it. This is fair dinkum
corrupt. I am not insinuating that your company is corrupt. This formula, the way it is set, is
wrong, it is flawed, it is corrupt. I do not think one grower would argue against rises and falls.
They would accept those. Any business person knows there are rises and falls, but if you have a
fair dinkum formula which reflects the costs going in on a monthly basis, a three-monthly basis
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ARI 98 Senate Wednesday, 7 October 2009
or a six-monthly basis, that is fair. So the four letter word beginning with ‘f’ here is ‘fair’ and
this is not fair. It has not been fair to your company, you are saying to me, because the price was
up here and the farmers were making squillions; now it is going southwards at 100 miles an hour
and they do not know how long you expect it will be under their price. This is not right. I would
encourage National Foods and you, Mr Waugh, as a responsible corporate citizen, and your
chiefs beside you, to see that it would be decent and fair to sit with the growers and work
through the figures with them.
Mr Waugh—As far as I am concerned, we do.
Senator STERLE—From what we heard yesterday, you do not.
Mr Waugh—I know you heard a lot of individual, one-off stories. There are always many
examples.
Senator STERLE—No, sorry, Mr Waugh. I am not picking up on issues Senator Colbeck
raised; I am speaking because the collective who were present yesterday represent some 80
growers. I do not think the collective is a bunch of radicals who want to lay down in front of
your factory to stop all production; I think they are concerned farmers who have a charter to
represent their members’ best interests and this is what I am trying to encourage. Mr Waugh, I
have dealt with the most decent people in transport in this country; I have dealt with the biggest
pack of crooks in this country as well. You people are not crooks. You are so right: you need a
viable dairy industry, but what came to us yesterday—and please correct this if I am wrong—is
that you are not having bipartisan conversations about the inputs and the costs of producing milk
in Tasmania.
Mr Waugh—With all due respect, we do not run the dairy farms in Tasmania.
Senator STERLE—I know you do not run the dairy farms.
Mr Waugh—We buy milk and we run a processing company.
Senator STERLE—Okay, but you are giving them contracts now. We love to use this
terminology, which I picked up—it was a favourite of the previous government, and I am not
being political here—‘the independent businessperson’. They are about as independent as my
little finger. They are not independent and they all get paid with, ‘That’s the price whether you
want it or not.’ They do not have the ability to say, ‘Hang on, I have these different costs.’ They
do not have that luxury with your company, do they?
Mr Waugh—I would like to think we could have that conversation with our suppliers. That
does not automatically mean that every month of every year the price we pay for milk will be
above the cost of production. As long as we believe the industry is sustainable long term and that
on the way up there are winners and on the way down there are winners, we are quite happy with
that.
Senator STERLE—Rise and fall.
Mr Waugh—Correct.
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Wednesday, 7 October 2009 Senate ARI 99
Senator STERLE—I have never argued against rise and fall. On that, could this committee
take away from this that from now on National Foods would be prepared to sit with the
representative collective to go through negotiations for the price of delivery of milk in Tasmania
rather than just, ‘Here’s the price; take it or leave it’?
Mr Waugh—What you can take away from this is that we will pay a competitive price which
is aligned to the marketplace.
Senator STERLE—That does not answer it. It is important. I understand all the words we
can use. We are in politics up the front here. We know you can either answer yes or no you can
talk out here but still not answer the dam question.
CHAIR—Can I confine this a little. We have received evidence, which can be backed up by
statutory declaration, of a National Foods executive advising a meeting in Melbourne that it has
no obligation to maintain farms as sustainable businesses. That is fair enough—you do not. This
is what your executive said, ‘ Appallingly, if the farmers make losses, so what?’ We can back
that up with that stat decs.
Mr Waugh—I would like to see that because that is certainly not the attitude of National
Foods.
CHAIR—Well that is the attitude of one of your executives.
Senator COLBECK—That is the problem we have right now. That is the public perception
of the company at the moment.
CHAIR—So that does not reflect your corporate policy? We will provide you with the backup
on that.
Senator COLBECK—As Senator Sterle said quite fairly, we are not here to be adversarial.
We have had some stuff put in front of us which we want to discuss and investigate, but that is
the problem you guys have at the moment. It appears to me, as a senator from Tassie, that you
have a terrible relationship with your farmers at the moment and you really need to look at it in
the long term and to do something to repair it. That is as it appears to me.
Mr Waugh—I do not disagree with that and I am quite saddened by some of the highly
inflammatory misinformation about National Foods which has been propagated through a
hungry press to politicise where we are at as a company in Tasmania without having any
balanced view or any balanced perspective. I would ask you: where is Fonterra? Why are the
Fonterra suppliers not sitting behind us complaining about their milk price? They will get less
this year than what we pay.
CHAIR—They are coming. They are sitting behind you, thank you for coming though.
Senator COLBECK—They are coming, but, Mr Waugh, I would also have to say that they
operate very differently from your company in relation to their dairy farmers.
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ARI 100 Senate Wednesday, 7 October 2009
Mr Waugh—Would you do me a favour and asked that dairy farmers in Wagga if agree with
that?
Senator COLBECK—I have spoken to the dairy farmers in Tasmania and they—
Mr Waugh—Try the farmers in Wagga Wagga.
CHAIR—They are neighbours of mine. So what is the question I have to ask them?
Mr Waugh—There are a few disgruntled Fonterra suppliers in that area—
CHAIR—They are coming. Don’t worry; we are not going to miss them.
Senator COLBECK—I am not saying that they are happy, but they are less unhappy than
your suppliers. That is the problem.
Mr Waugh—I want to go back to it, Senator Colbeck. We do not want to have a debate in the
press about the pricing. We can have a debate—and a constructive debate, Senator Sterle—in
terms of our price, how it is structured and what we are offering, and we want to have that
constructive dialogue and debate with our farmer-suppliers, not with anybody else. It saddens me
greatly to see inflammatory and incorrect statements in the press that really upset individual
farmers and create angst unnecessarily. I hope you notice that we have not participated in the
public debate, for one reason: we do not want—
CHAIR—We are running out of time. Senator Sterle would like to have a crack.
Senator STERLE—And, Mr Waugh, that is only what I am asking. I would love nothing
better than for the Tasmanian dairy farmers never had to talk to us again. With the greatest
respect, I think that would be fantastic. I am sorry—the Tasmanian senators can speak to the
Tasmanian dairy industry; I meant that there are no problems down there. But I would love
nothing better than if you were able to sit behind closed doors and have grown-up conversations.
I heard the rise and fall, and I do not have an argument with that. But what we picked out
yesterday is that there is not a conversation; the contracts are foisted upon them: ‘Here it is. That
is all we are paying. Sayonara.’
Mr Waugh—The contracts reflect nothing other than the rise and fall in value of the market.
That is what it represents.
Senator STERLE—Yes, but that does not mean it is fair. There is that f-word popping up
again. You have just spent a bit of time telling me how much of a kick in the pants National got
over the last X amount of time because the price was up here. I am not arguing. I am not arguing
one bit. But the other side of the equation does not have the opportunity to sit around the table
with you and say what their costs are. There would be nothing better than everyone saying,
‘Here are our costs.’ You see, I do not give a fat rat’s backside, Mr Waugh, if National are
earning squillions. That is none of my business. I think there is a place in the sun for everyone. I
would love to see everyone earning squillions. But when one side does not have the opportunity
to sit down and put down their costs, their inputs—to put a sustainable argument to you with rise
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Wednesday, 7 October 2009 Senate ARI 101
and fall clauses—it cannot help us, sitting up the front, thinking, ‘There’s something that’s not
right here.’ Because I know National Foods—you have done it.
CHAIR—Have you got a question?
Senator STERLE—Yes, I have got a question.
Mr Waugh—Please do not feel you have to ram that message home. We are very happy to sit
and discuss, with our farmers, milk pricing. I would just like to add that we have actually already
said that there is some movement in the international value of some of the commodities, that one
of our competitors has responded in that marketplace, and that our contract offers will require
review because of those movements. But our pricing offers to the farmers in Tasmania will be
based on market value. We are very happy. We are looking at it. And Mr O’Malley and Mr Bake
have the responsibility to make sure that we work our way through that.
Senator STERLE—My last question is: Fonterra normally set the price first in Tasmania and
then you follow?
Mr Waugh—We like to see where the market opens.
Senator STERLE—Why don’t you lead?
Mr Waugh—Because we are not the price setter in the marketplace; we are a price taker.
CHAIR—You are the market milk people though, aren’t you? They are the manufactured
milk people.
Mr Waugh—We buy 23 per cent of the milk in Tasmania. Thirty per cent of that goes to
market milk; 50 per cent goes to the cheese market, internationally and domestically; and 20 per
cent is milk we actually do not want.
CHAIR—Yes, but the 30 per cent you buy for market: does that subsidise the other operation,
as you see it?
Mr Waugh—Farm-gate milk is farm-gate milk to us. We take milk off all of our farms in
Tasmania.
CHAIR—Yes, but you are avoiding it. Obviously you have a capacity to offset some of it in
the market.
Mr Waugh—Can I answer that one for you?
CHAIR—Yes, but I want to ask a bigger question. So, in terms of getting around this path of
20.8c or 20.9c that some people in Tasmania have been offered, and 30 per cent of that milk
going to turn up as $2.29 in the supermarket: do you actually plot what happens to the 20.8c and
how it arrives at $2.29 in the supermarket? Is that information available—all the costs that come
out along the way? Could I also ask you, if it is not commercial-in-confidence, what percentage
of National Foods’ gross product is fixed administrative costs—in other words, bonuses to
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ARI 102 Senate Wednesday, 7 October 2009
yourself and others, and holidays and glasses of wine that the farmers do not get? What is the
percentage of fixed administrative overheads in a company such as yours? It might be sushi back
in Tokyo but, whatever it is, what is it?
Mr Waugh—Let me answer both of those questions. We would not be a very good company
if we did not understand what milk costs us and how we derive value out of that milk in
processing it. I make the point to you: milk may go into one factory but all of the components
may not necessarily be used in that factory, because we will move cream to other factories where
we make cheese, for example, and we will move skim milk from our cheese factories back to our
milk processing operations. So farm gate milk is farm gate milk. It is a raw material for us and
we dissect it, as I said before.
I would have to come back to you with a very accurate answer on percentage of fixed costs,
but it will be less than 10 per cent.
CHAIR—Thank you very much.
Mr Waugh—We operate in the dairy industry, Senator Heffernan, and it is a pretty mean
market. We have to be low cost. We are not an extravagant organisation.
CHAIR—As of today, there are no managed investment scheme dairies around? Thank you
very much for your evidence. And do not worry, Fonterra will be here in due course.
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Wednesday, 7 October 2009 Senate ARI 103
[3.57 pm]
DAVENPORT, Mr Alan John, Chairman of Dairy Council, Tasmanian Farmers and
Graziers Association
OLDFIELD, Mr Chris, Chief Executive Officer, Tasmanian Farmers and Graziers
Association
WILLIAMS, Ms Penelope Jane, Private consultant
CHAIR—Welcome. Do you have any comments to make on the capacity in which you
appear? Mr Oldfield, you do not have to talk about your prior employment history. You have a
bigger challenge now.
Mr Oldfield—Thank you, Senator, although I am going to refer to it, you will be pleased to
know.
Mr Davenport—I am also a dairy farmer.
Ms Williams—I am also a calfer and farmer. I am not a dairy farmer, though. I do not milk
cows, but I have an extreme passion for the Tasmanian dairy industry and what is happening
down there at the moment.
Mr Oldfield—The reason we have brought Penny with us is that she consults with over 100
dairy farmers in the region and I think provides almost a unique insight into a range of farms in
terms of performance, profitability and size. Senator, as you mentioned before, of the groups that
the committee predominantly spoke to yesterday, National Foods represents 80 farmers, and they
represent those farmers brilliantly. We cover roughly 450 dairy farmers in the state. As you are
aware, there are two other major companies in the state—Cadbury and Fonterra. Mr Davenport
is a Fonterra farmer.
Senator Heffernan, as you touched on, I have come from a different background. I am not a
farmer. I understand corporate life probably a lot more than I understand dairying life. If it is at
all possible, I actually worked for a company in Tasmania that was probably even more disliked
than National Foods, and at the moment that takes an effort. I know how these big companies
operate, having done that myself for 20 years. As I heard this afternoon, what is currently
happening in the dairy industry in Tasmania is simply not fair.
Farmers can deal with ups and downs. At the moment, our vegetable farmers in the state have
to deal with these ups and downs. We are seeing prices for peas, beans and potatoes all under
pressure, but they are within a range that is, whilst undesirable, understandable. In recent
months, the things that we have seen in the dairying industry have been totally off the scale—
unprecedented stuff. What I heard this afternoon from National Foods, as I sat here during their
submission, could be summarised as they think there is nothing wrong. Well, there is something
wrong. They do need to engage with their farmers and they need to do it very quickly.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 104 Senate Wednesday, 7 October 2009
To be quite clear, Tasmania need National Foods. We need them to be profitable. We need
them to be successful. Equally, they need their farmers to be profitable and successful. We need
to share value with them and I just do not think they get it. Like I said, I worked in a company 20
years ago that probably did not get it, but the point is that was 20 years ago. The behaviour we
are seeing exhibited now by National Foods and by other companies is simply not acceptable.
You made a very valid point earlier on: why is it that National Foods is drawing the heat when
we have got other farmers from other companies who are also suffering and suffering badly? I
have spent a lot of time in the last few weeks sitting at kitchen tables with farmers and hearing
terrible tales of woe. But it is the behaviour of National Foods that seems to be a standout.
People are clearly unhappy with Fonterra and Cadbury, but as an organisation we get nothing
like the level of complaints about them that we do about National Foods. As I said, we need
National Foods to be successful and we want to help them to do that.
When I hear of companies blaming the media for their predicament, I always start to worry.
We have a free media. They have every opportunity to put their case. Usually, when companies
do not have a strong case to put, they say, ‘We would prefer not to enrage public debate by
continuing.’ Again, I have had 20 years experience in the media; I understand that is what people
do when they do not want to engage, and we do want to engage with National Foods.
I have prepared a submission. We will pass that over later. I do not think you want to hear
much more from me; you want to hear from some experts. One thing we will touch on—and I
will address this when Alan and Penny are finished—is that, in addition to the behaviour of the
companies, we think there are some other structural things that it would be meaningful to
discuss. It is about the upskilling of our farmers; it is about offering career paths; it is about
encouraging people into the industry; and it is about better business skills. Whilst it is easier just
to attack the companies, these are some of the things we want to work with the farmers to
improve. As I said, I think the most meaningful way we can spend the next few minutes is to
hear from Alan as a Fonterra farmer and Penny, who is an expert in the industry.
Ms Williams—I will let you know the costs of production. In the 2007-08 financial year, if
you were calving in spring, you needed to receive 41.7c. If you were a split, an autumn or an all-
year-round calver, you needed to receive 44.5c for your milk. In the year of 2006-07, if you were
a spring calving farm, you needed 34.6c, and if you were a split, an autumn, or an all-year-round
calving farm you needed 38.5c. This year, the rates in my area have gone up 10 per cent, and
electricity in Tasmania has gone up 15 per cent. So everyone that irrigates this year is going to be
paying 15 per cent more for their power. So what I am really saying there is: costs rise every
year.
Mr Davenport—Interestingly, when you look at the cost of production and the effects of the
prices that we are seeing at the moment, farmers have already adapted their farm systems to
cover off some of those effects because, while we talk about those prices that have increased, a
couple of prices have decreased. Fertiliser prices are about two-thirds of what they were this
time last year and grain prices have dropped off. But what people did when those prices where
really high is cut back their use and actually used that as a farm cash management strategy.
CHAIR—We are very familiar with that.
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Wednesday, 7 October 2009 Senate ARI 105
Mr Davenport—When we look at this 40 per cent impact on people’s incomes, we have got
to consider the fact that farmers are pretty used to dealing with a fair bit of volatility, but this is
the most volatility that we have seen since—and Senators O’Brien and Colbeck would
remember this well—the deregulation inquiry, which I spoke at some eons ago.
Senator O’BRIEN—Yes, last decade.
Senator STERLE—Did they both have black hair?
Senator O’BRIEN—There is a fair chance.
Mr Davenport—No comment! I am sure that at the inquiry Senator O’Brien saw that was the
position we would be in, with corporates having control of the market and not considering how
the dairy industry was going to be sustainable into the long term. At the moment National Foods
are doing what they probably have a legal right to do and using their market power to push back
the milk oversupply that they have. Some comments were made about the 30 million litres of
milk that National Foods do not need in a year, and Senator Colbeck spoke about the 13 million
litres of that that was the result of a market loss. Market milk businesses have that risk and have
dealt with it forever. Cadbury used to do it and Classic Foods do it with MG. They buy and sell
milk with the commodity processor in the state, and what has happened recently is that the
commodity processor has said, ‘I’m full,’ and it has affected the ability to move milk about.
Fonterra are probably pushing National pretty hard, and they might be able to tell you some
more about what they are actually paying for that milk. But National are being a little bit flippant
about that oversupply. It is something that they have always had to deal with. It is a risk of being
in the market milk business.
The risks that the National Foods suppliers have at the moment are not just this 10 per cent
increase in cost to flatten their supply curve but also the contractual agreement. If something
happens which adds a heap to their costs such that they cannot afford to make them, National
Foods will be in breach of their contract, which will upset it for the rest of its period, so they
need more than that 10 per cent allowance. This 3c a litre or whatever margin above, say, me as a
Fonterra supplier—not that I am excited about the price that I am getting—is why the National
Foods suppliers are making more noise than the Fonterra suppliers. The Fonterra suppliers are
probably a little bit more accepting of the fact that Fonterra has a high level of export market
exposure. The reality is their export market exposure is nothing like MG’s. Murray Goulburn are
selling a lot more of their product on the export market than Fonterra because Fonterra have
bought brands very well. Fonterra are probably selling something like 65 per cent of their
product on the domestic market, some of it into the ingredients but quite a bit of it branded. Just
like National Foods have passed a profit on to Kirin, Fonterra in New Zealand have just
managed to pay their suppliers a 13½ per cent price increase because of the returns that they
were making largely out of the Australian market.
Senator STERLE—Does that mean the Kiwi farmers were getting screwed right down
before?
Mr Davenport—The Kiwi farmers were getting screwed, but remember that they have a
strength in having ownership of the business, so they get a value for their shareholding in the
AGRICULTURAL AND RELATED INDUSTRIES
ARI 106 Senate Wednesday, 7 October 2009
company. I grow poppies, potatoes, parsley and beef cattle, and combined they are not as hard to
understand as how the milk industry operates. It is quite complex.
Senator COLBECK—You mentioned that the Fonterra dividend to farmers in New Zealand
was by virtue of a price increase. What capacity do Fonterra have to bring a dividend back into
the Australian market? A lot of the Fonterra farmers are actually shareholders in the company.
Mr Davenport—They are not shareholders.
Senator COLBECK—Is it a different form of shareholding?
Mr Davenport—They are not shareholders in Fonterra and will not be for the foreseeable
future.
Senator COLBECK—The farmers yesterday were talking about the shareholding that they
had.
Mr Davenport—Their shareholding is in Bonlac Supply Co., which is the shelf company that
is there to manage the milk supply that Fonterra then buys. Fonterra also have suppliers outside
that. It definitely is not a shareholding in Fonterra.
Senator COLBECK—I want to go to the development plan. Could you give us a quick run-
down on the dairy plan? That was about three years ago, wasn’t it?
Mr Davenport—Yes, something like that. The Dairy 500 project was a result of looking at
increasing production, which I think was five per cent a year, and we have been achieving that.
As the dairy industry, we think that is conservative. The opportunities for growth in Tasmania
are huge, but one of the things that you need to encourage growth is some confidence in the
industry, and we are certainly doing a fair bit to destroy that confidence at the moment. When
that project went ahead, it was clear, to defend National Foods to a degree, that Fonterra was
going to be the major player that was looking for growth, because they had access to the export
market. We understand that the domestic market is quite restricted. Fonterra has always said that
it has a market for all the milk that can be produced in Tasmania. It might not be at a satisfactory
price. They also said at that time that they would develop processing capacity to handle that
milk.
Two years ago, they trimmed that back and said that they were going to spend $10 million that
we needed to upgrade it so they could handle the organic growth that we were getting. They
postponed that for a year, then put it off, so now we have hit this spot where we do not have any
spare processing capacity in the state. We have the last-litre situation. There is no home for it at
the moment, even though the industry has been told, particularly by Fonterra, that we should
grow. Fonterra are still paying a growth incentive to their suppliers. They have said that they will
take all the growth from their existing suppliers but they will not take on any new suppliers at
this stage. I think they might be reviewing that position from January of this year and consider
taking on new suppliers. You might say that as a national food supplier we might just jump ship
at that point and go to Fonterra, but some of the National Foods suppliers have entrenched a lot
of costs in their system to meet the flat production curve that National Foods have sought, and
Fonterra are not going to pay enough of an incentive to produce out of season to supply that.
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 107
When we talk about the costs of production, there is a lot of variability in that in our business.
We are looking at a cost of production of about 28c a litre. We run our business on a fairly
conservative basis, but that does not allow for a return on investment. They are fixed costs in our
business. Just like National Foods, I like to make a return on my business. This is the first year I
have ever done a cash-flow budget for farming—and I have been doing them for 20 years—and
had a break-even budget.
Ms Williams—On that, Alan and I were talking on the way up here today about how that
break-even budget does not include: the fertiliser that should be going on as maintenance that is
not going on, because there are not the funds to pay for it; the labour unit that perhaps was there
last year that is not going to be here this year, so the dairy farmer does an extra three hours a
day; or those items in the cash flow that should be there to improve the farm and get it going
even better for next season. Those costs are not in that break-even budget this year. I have not
done a cash flow for any supplier or milk company in Tasmania where there has been a dollar
left over at the end of the year.
Senator COLBECK—I have had some conversations with farmers, particularly Circular
Head way, of late. They are, effectively, cutting back on farm inputs, which is then affecting their
productivity and their profitability even further because of the circumstances that they are facing
at the moment.
Ms Williams—That is right.
Senator COLBECK—So things like nutrients, feeding in the bale, trying to maintain their
fibre-versus-grain feed balance—all those things are adding up, and they would have to have a
long-term effect, would they not?
Ms Williams—Most definitely from a cow point of view, animal health point of view, the
point of view of extra costs that are related to the vet this year and the point of view of lost
production. There is more than one farm in Tasmania, especially on the north-west coast, that is
doing 50 per cent less daily production but at twice the cost of last year due to having to bring in
bought feed. We are getting half of our milk cheque already compared to last year, we are doing
half of the daily milk production we did last year and we are feeding twice as much brought-in
feed per cow on a daily basis compared to last year as well.
Senator COLBECK—So you are effectively talking about people whose income is a quarter
of what it was but whose costs, including fixed costs, are higher.
Ms Williams—The income is actually just about 50 per cent less. So, if you earned $1 million
last year in milk, you will get a little bit over $500,000 at the most.
Senator COLBECK—But, if your production has dropped by 50 per cent as well, you are
down to 25 per cent.
Ms Williams—Yes, that is right. That is exactly right.
Senator COLBECK—That is hardly sustainable, and that is going to drain things like equity
out of properties, enormously, and then there is the issue of returns, as Mr Davenport talked
AGRICULTURAL AND RELATED INDUSTRIES
ARI 108 Senate Wednesday, 7 October 2009
about. You are talking about another fixed cost being added to the business, which is the cost of
repaying the debt that you are incurring.
Ms Williams—That is right, and I have some people whose milk cheques hopefully will be
little bit more than the bank payments in the coming months, but for the last three months their
bank payments have equalled the milk cheque. That is before any other cost is paid.
Senator STERLE—If I can come in here, Senator Colbeck—
Senator COLBECK—Go for your life.
Senator STERLE—We took evidence earlier from National Foods, and I understand you are
with Fonterra, Mr Davenport. Ms Williams, are you—
Ms Williams—I know milk.
Senator STERLE—Just an expert! What about the comment earlier, then, by National Foods,
about taking the good with the bad, so to speak—that things were all good before? National
Foods are paying more than Fonterra according to their presentation, even though we heard
different. Mr Davenport, you are a farmer; what do you say to that?
Mr Davenport—It is interesting that Mr Waugh made a couple of contradictory statements, I
think, in his presentation. He was talking about the need to pay farmers in the northern states a
satisfactory price to meet their costs of production—the need to pay the 50c plus a litre in some
states to meet the costs of production because there is an entrenched cost there. Well, there is an
embedded cost in the production in Tasmania at the moment, and there is not a satisfactory price
being paid to me.
Ms Williams—In fact, it has got so serious in Tasmania, and perhaps even worse on the north-
west coast, that the aged payables, the creditors from last season, cannot be paid. To give you a
real farm case, I was at a farm on Monday whose income is only going to be $313,000 dollars
for the year but the farmer has $307,000 in aged payables out to 120 days. That is the
seriousness of the situation for the majority of the dairy farmers in Tasmania. It is fact.
Senator STERLE—So it blows a hole in the statement, ‘The last couple of years have been
all right so there is some fat there; put up with it’?
Ms Williams—Yes, but the way my dairy farming friends see it, as I do, is that where the
price was is where it needs to be for us to have a reasonable return on the dollars we have got
tied up in the farm and for the hours of work we do.
Senator STERLE—Talking about the averages of north-western Tasmanian dairy farmers,
how long can these businesses sustain these losses that they are experiencing?
Mr Davenport—Some have already gone beyond the tipping point. With the weather, we
have got this double whammy—and National Foods cannot be blamed for the weather, as much
as a lot of people would like to blame them!
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 109
Senator STERLE—It is all right. The chair will blame the MISs for that! Yes, we will let
them off the hook for that.
Mr Davenport—So we do have this calamity. Farmers have looked at these prices come in—
and I am particularly speaking for the Fonterra suppliers at the moment, because there has been
some concern that the Fonterra suppliers have not been jumping up and down about the prices.
Most of the Fonterra suppliers have accepted a higher level of exposure to the domestic market
and the fact that Fonterra are competing fairly directly with Murray Goulburn, which is a farmer
owned cooperative for milk. So the price will be—I have absolutely lost track of where I was
going, sorry.
Senator STERLE—I will help, while you gather your thoughts. We can tug on the
heartstrings and say farmers are going to go broke. If that is the case, we need to know if that is
seriously what is going to happen. I made a statement yesterday that is a standby: the saddest
part, I believe, is that farmers, God bless them, are brilliant at coping with all forms of adversity,
to their own detriment at times. They will end up delivering, at great expense to themselves. Will
the dairy farmers in Tasmania be put in that same basket or will we see them go broke?
Mr Davenport—That is exactly where I was heading. Most farmers decided, when they saw
these prices coming, that it would be really tough, but, given a fair season, we will be able to
cope. We are confident in the long-term future of the industry and that prices will start to trend
up and we will survive, as much as it will hurt. A lot of them made new arrangements with their
bank managers, including me for our family business, and a lot of others have reviewed their
operating strategies for managing their farm—their input costs—but they are still going to lose
money. In a lot of cases it is a significant amount of money. They have had the weather thrown
on top. Calling it a catastrophe is not too much of an exaggeration for a lot of farmers.
Mr Oldfield—The point I was going to make is that there is a significant social cost outside
the farm gate. Farmers in the north-west and Circular Head believe that there will be a reduction
between $80 million and $100 million a season in that region. A whole lot of businesses rely on
this industry. The point that Alan made is valid. This is not a matter of losing money. Farmers
will survive, and sometimes for a while, losing money. What they will not survive is when the
bank says, ‘We want our cash.’ We had all the major lending institutions at the TFGA last Friday.
We met with them as a group. The thing in our favour is that most of these bankers and
financiers live in our community and have an understanding, but their understanding is only to a
point. They also have their own goals to achieve. What we asked for was an understanding to
deal with farmers individually, not collectively across the industry, because circumstances can
change, and we got a fair hearing. We also asked for debt relief, moratoriums on payments and
items like that, to which the response was, ‘We would do that if we had some predictability in
the industry, and we haven’t got that. So if we give somebody a three-month holiday now from
repaying debt, that is great, but how can you tell us that in three months time the situation is not
worse and the poor fellow is in worse debt? And when it comes to us selling him up he has less.’
Where we are lacking as an industry is with predictability. Farmers can deal with ups and downs;
they cannot deal with things off the scale. At the moment, we believe that off-the-scale part is
being dealt to them unfairly due to lack of competition and market manipulation. It is as simple
as that. There will be farmers who will go out of business. There are banks that are starting to
lean on people. They will have to reach a point where it is in their best interests to exit, and those
are very hard conversations to have with farmers.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 110 Senate Wednesday, 7 October 2009
Senator STERLE—I could not imagine.
CHAIR—I will get into trouble for asking this. I really do not want a comprehensive answer,
but for your farmers in Tassie has there been any discussion about the impact of a carbon tax,
following all the rest of the gloom and doom? It is $17 a tonne. The impact on an irrigated dairy
farm is near the point of insolvency. Have your blokes had a discussion about that?
Mr Oldfield—If you want to put a dairy farmer over the edge who is struggling, talk to him
about a carbon tax. As was mentioned before, they have had to deal with a 30 per cent increase
in power charges in the last two years and significant council rate increases. The thought of a
carbon tax would just put some people over the edge.
CHAIR—It is all part of our agenda. I do not want to deal with it today, but I think is
something that you ought to go back to your people and talk about.
Mr Oldfield—And we would do. To the credit of the state government, we have somebody
funded on our staff who looks after drought and now dairy farming, because the issues in
drought and dairy farming are similar, and that includes climate change. He is looking after that.
One of the submissions we put to the state government recently was about, as a result of a TFGA
initiative last year, the establishment a drought task force. That was made up of departmental
heads, Commonwealth representatives and a whole lot of service providers. We have argued that
the task force should now be rebadged as a rural task force because the lessons they have learned
in dealing with drought are similar to the crisis in the dairy industry. Again, we have had a fair
hearing from the state government on that. Yesterday they announced a short-term rescue
package which will provide some relief to those in the worst conditions, including a 50 per cent
subsidy on veterinary bills for eight weeks, some cash handouts for dairy farmers receiving
Centrelink payments, and increased counselling, which we think is important—social, mental
and financial. These all things that will help in the short term, but they are only short-term fixes.
Ms Williams—There is one thing the Tasmanian dairy industry needs to know. We need to
know the final price that we are going to receive for the year. When we go out and milk our cows
every day, at the moment we do not know whether Fonterra is going to give us six more step-
ups, 10 more step-ups or one more step-up. So the dairy farmers—and National Foods suppliers,
once they come off contract—down in Tasmania do not know what their final price for their milk
is going to be this financial season.
Senator STERLE—I find that amazing—gobsmacking, actually.
Ms Williams—Yes.
Mr Davenport—It is. One thing—
Senator STERLE—It is somewhat gobsmacking that businesses nowadays enter into
arrangements where you do not get told what you are going to get paid until after the event.
Mr Oldfield—Correct.
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 111
Mr Davenport—We have actually started producing in some previous seasons without having
an opening price, but we must remember—
Senator O’BRIEN—You do not have a choice, do you?
Mr Davenport—Inertia is a word that was used yesterday between Chris and me, and it is
one of the problems with the dairy industry.
Ms Williams—That is fair dinkum, Senator Sterle—fair dinkum.
Senator STERLE—I do not want to sound condescending. As an ex small business person, I
just do not get that. I wish I could have entered in my fuel bills the same way, telling Chevron
that I will pay them what I decide the diesel is worth!
Mr Davenport—Until last year, though, we thought that we would still at least be getting the
price that we got at the start of the season at the end. It is the first time in history that that has
happened—so farmers did have that level of security, at least. But the problem is with the
volatility in the industry. If Simplot decide to drop my price for spuds and I think it is not
sustainable, I just say, ‘Well, I’m not growing spuds this year,’ but the momentum that we have
in the industry is one of the millstones around our necks that allow companies to use market
power against us.
CHAIR—I refer to the letter that announced:
Dear Valued Customer,
We are writing … in relation to the price increase National Foods has recently announced effective 6th July 2009.
These increases are … in part due to unprecedented increases in the farmgate milk price in NSW.
A woman has just emailed me about this. I have not spoken to her yet, but she has plenty to say.
Did you find that letter offensive?
Mr Oldfield—It is offensive. I opened up today by saying that I understand how big
companies work, and that is clearly offensive. They are clearly embarrassed, and I will be
intrigued to see the response that they give you. What National Foods need to understand is that,
in a place like Tasmania, the bigger the company, the bigger the level of responsibility. I just do
not think they quite understand that yet. As you said, I think, Senator Sterle, they are probably
decent people, but I just do not believe they understand the impact they are having on the
average farmer, the average family. When you get a letter like that, all that does is exacerbate the
situation. Why not say, ‘We got it wrong’?
Mr Davenport—I would be very interested, Senator, to have you ask a question of National
Foods. We are talking about the costs of flattening the supply curve and what processors need to
pay to get that done. National Foods recently lost a contract that they had with BettaMilk. I
would be interested to know how much National Foods were asking BettaMilk to pay for that
flat supply curve. I think it would be significantly above 39c a litre.
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ARI 112 Senate Wednesday, 7 October 2009
Senator COLBECK—I think evidence we got yesterday was that they were asking 72c.
Mr Davenport—That is what I thought, but I have not seen that in writing.
Senator COLBECK—My interpretation is that National Foods saw an opportunity to belt a
competitor. They jacked their price up significantly and their competitor quite rightly went
somewhere else and got a much, much better deal. In fact, they ended up paying less than they
were paying National Foods in the first place. So stupid behaviour has brought about a result.
Mr Davenport—We might see some more of that once we get some processing capacity in
the state to increase some competition, we would hope.
Senator STERLE—I am waiting for the good news.
CHAIR—We will obviously be asking Fonterra to appear and one or two others as well. We
thank you for taking the time to come up here. The evidence we heard from the lady from King
Island yesterday was so offensive, if it is true—and we will ask National Foods to respond to
that after they have read the evidence. That is classic market power at work in a confined area,
where they have no choice. It is almost emotional blackmail.
Mr Davenport—I will make one other comment about the other major processor in the
state—Cadbury. They do a similar thing to National Foods in price setting, but their contracts are
nowhere near as restrictive. They pay a margin above what Fonterra pay. Their suppliers
normally accept that. If there was a difference to National Foods as opposed to Fonterra and
Cadbury, it would appear to be about communication.
CHAIR—Given that say it is a confined market and you cannot transport milk very far and
National Foods say 30 per cent of their production is market milk, does it ever vary in the
supermarket?
Mr Davenport—Very little.
CHAIR—The great preponderance for somebody standing at the back of the court room, as it
were, or on the tram to wherever as an independent person is: what happens to the money? How
the hell does it get from 20.8c or 20.9c for people who are not signed up on a contract, as we
heard about yesterday, to $2.29 when it is within 50 miles of the farm?
Mr Davenport—It is difficult because the milk business is complex and there are a lot of—
CHAIR—I understand all that. To go to a difficult question which some want to ponder and
some do not want to ponder, should we have tougher branding for milk—that is, milk, that is not
actually milk but is more permeate influenced than cream influenced? We do get people now say
they would go to Black and Gold in Liverpool or somewhere in the western suburbs of Sydney.
They say, ‘God, that did not taste like milk!’ But they bought it because it was cheap.
Mr Davenport—The market will decide that.
Mr Oldfield—If you are asking whether we support truth in labelling, we absolutely do.
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Wednesday, 7 October 2009 Senate ARI 113
CHAIR—So how do we jump the hurdle where people are prepared to pay on a Virgin
flight—good luck to Virgin, by the way—$2.50 for 350 millilitres of allegedly Australian water,
which works out, if you took the bottle home, at about $7 a litre. Milk at the tap is somewhere
between $1.50 and $3, depending on where you are. That would work out, to take an average,
that you could take the bottle home and fill it 3,400 times out of the tap. People are prepared to
pay that for water in a bottle but not for milk. Is there a marketing skill are that you are missing?
Mr Oldfield—You would have to say there is something structurally not working in our
economy, if that is the case.
CHAIR—That is the case.
Mr Oldfield—We hear the water example all the time. You are absolutely correct. Clearly
there is a structural problem when water that is effectively out of a tap or a stream is more
expensive than milk.
Senator STERLE—Mr Davenport, are all Fonterra’s farmers paid the same per litre for their
milk?
Mr Davenport—No. They are paid on a base price but there are productivity incentives. So,
if you are a larger scale farm, there are differences in the price. Also, payments are set, similarly
to what they are for National Foods and Murray Goulburn, on a fat and protein basis.
Senator STERLE—Of course. Do you have the opportunity to sit down with the company
and negotiate your—
Mr Davenport—We do not negotiate milk price.
Senator STERLE—Is it ‘take it or leave it’?
Mr Davenport—It is to a degree, although Bonlac Supply Company theoretically do have
some power to discuss that. But we really are pleased to see that Murray Goulburn is still there
as a competitor. It will be a sad day if we ever end up in a situation where we do not have a
cooperative in the industry, I believe.
Senator STERLE—So you cannot put your costs on the table and say, ‘This year it has cost
me more than what you reckoned, and we reckon we need more per litre than what you want to
pay’?
Mr Davenport—We do but it is up to Bonlac Supply Company to go through that negotiation
on our behalf.
Senator STERLE—Do they have the ability to do that?
Mr Davenport—They have not done it too well this year!
Senator STERLE—So when you hear the term ‘independent business person’ you have to
raise your eyebrows, don’t you? You are not independent; you are at the end of the food chain.
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ARI 114 Senate Wednesday, 7 October 2009
Mr Davenport—Yes.
Senator STERLE—You are a taker of prices; you are not a giver of prices.
Mr Davenport—That is right.
CHAIR—So were you a bit surprised to see that a National Foods executive said, ‘If farmers
make losses, so what?’
Mr Davenport—I would be horrified. What we are talking about here as a way forward,
hopefully, is to have people understand that, for us to have a sustainable dairy industry, all
components of it need to be sustainable. Nobody minds the dairy companies making a profit;
nobody minds sharing the pain when there is pain.
CHAIR—Hopefully Lion Nathan will try to repair the damage.
Mr Oldfield—But you are literally talking about people’s lives. You cannot be that flippant.
CHAIR—Yes, absolutely. Do not worry. We had people yesterday who were cracking up on
us. I understand that. I can take you to a house in the Riverina where a bloke will not get out of
his pyjamas.
Mr Oldfield—We deal with that almost on a weekly basis now. That is why we have been
very strong in pushing for adequate counselling in the region. I think we have done a reasonable
job with the state government. It is a major issue.
Just as the final point, we want to work with National Foods, with the negotiating committee
and with the industry. We are not trying to drive them out of the state; we are just trying to
understand how we can get them to accept the concept of partnership, because both parties need
each other. That is something we just do not seem to have done at this stage.
Senator STERLE—You were here in the room, Mr Oldfield. Are you going to walk out of
here feeling comfortable in the fact that those wishes may be met?
Mr Oldfield—I will feel comfortable when I stop having dairy farmers’ wives ringing me up
crying.
Senator STERLE—But you were in here listening to the evidence from National Foods. Do
you think the door might be open little bit for you?
Mr Oldfield—I think so. I think they are decent people. Corporate life does funny things to
people, but my starting point would always be that inherently they are decent people. But they
need to understand the consequences of their actions, and I do not think they get it.
Senator STERLE—Let us hope for all of us that we do not have to have this conversation
again.
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Wednesday, 7 October 2009 Senate ARI 115
CHAIR—It would be an interesting exercise when the Lion Nathan brand comes along to
repaint the badge.
Mr Oldfield—It is a great opportunity.
CHAIR—That is what Incitec Pivot did with their CEO when they got rid of Mr Segal. The
Incitec Pivot incident was pure greed and market control. So this committee has dealt with that.
Pleasantly, the price of DAP has gone from $1,400 to $550. It was a culmination of a lot of good
work by a lot of people. Hopefully this committee can help the dairy industry. We thank you for
your evidence today.
Mr Oldfield—Thank you.
Mr Davenport—Thanks.
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ARI 116 Senate Wednesday, 7 October 2009
[4.38 pm]
ADAMS, Mr Jim, Chief Executive Officer, Timber Communities Australia
HANSARD, Mr Allan, Chief Executive Officer, National Association of Forest Industries
STEPHENS, Mr Michael, Deputy Chief Executive Officer, National Association of Forest
Industries
CHAIR—Welcome. You can make an opening statement, probably most which we have heard
before, but we can go through it again.
Mr Hansard—I will be giving an opening statement, and I think Mr Adams will as well.
Mr Adams—I was invited here today by Mr Hansard to talk specifically in relation to term of
reference no. 4 on the social impacts of the MIS issue.
Mr Hansard—We have provided a copy of our opening statement to the committee. Given
the time issues today and that fact that I would also like Mr Adams to make an opening
statement, I have abridged my opening statement. I have provided a copy for the committee that
perhaps I could table.
Senator O’BRIEN—Do you want that incorporated in Hansard?
Mr Hansard—Yes.
Senator O’BRIEN—That means we have it and it goes in Hansard, whereas tabling it would
not mean having it on the public record, effectively.
Mr Hansard—Yes. One reason I want it incorporated is that it contains additional
information that our submission did not provide, and this is information that we worked up over
the coming days. That is the reason why we would like that provided in its entirety.
CHAIR—Is it the wish of the committee that the document be incorporated in the transcript
of evidence? There being no objection, it is so ordered.
The document read as follows—
The National Association of Forest Industries opening statement to the Senate Select Committee on
Agricultural and Related Industries for a hearing into food production in Australia—Impact of Managed
Investment Schemes
Wednesday 1st October
The National Association of Forest Industries welcomes the opportunity to address the Senate Select Committee on
Agricultural and Related Industries Inquiry into food production in Australia. NAFI notes that the Committee proposes to
examine the impact of MIS, and the recent collapse of some MIS companies on various aspects of food production in
Australia.
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Wednesday, 7 October 2009 Senate ARI 117
This short opening statement provides additional evidence to that provided to the Committee through our Submission.
As detailed in our Submission, the plantation forest sector has had a negligible effect on land prices and food production
in Australia, and does not compete directly with prime agricultural land.
NAFI notes the recommendations of the Parliamentary Joint Committee on Corporations and Financial Services—
Inquiry into aspects of agribusiness managed investment schemes. The industry is working constructively with the
Government to ensure the regulatory arrangements for MIS provide security to investors and restore confidence in the
plantation industry as a sound investment.
NAFI is pleased that we are now seeing the issue being commercially resolved, for the sake of the investors, the
industry and for the communities that rely on the plantation sector.
However, there is a fundamental issue that has arisen through the course of the Government review of MIS
arrangements that relates to the role of Government in facilitating investment in forestry.
Forestry plantation investment is a long term investment that can provide long term regional economic and
environmental benefits. The time periods for investment in plantations are much longer than many other investments.
Investors have to wait long periods for returns and the investment scale and economies of scale required inhibit small,
medium and large investors from entering the market—unless the inherent characteristics of the investment are addressed.
Australia has followed the course of almost all countries that have plantation resources by facilitating investment in
plantations through direct and indirect government measures. These measures recognised the inherent characteristics and
broader public benefits of plantations. Up until the late 1980s the Federal and State Governments directly invested in
forestry plantations. With the withdrawal of direct government investment the establishment rate of plantations
plummeted.
The evolution of MIS arrangements came at a critical time for the industry. Not only had Government investment in
plantations been withdrawn but through the Regional Forest Agreement (RFA) process over n million hectares—over half
of the production native forest area—was put into conservation reserve. This had significant impacts on the industry and
communities reliant on the industry. The development of a plantation resource through the MIS mechanism assisted in
offsetting some of the economic, social and environmental costs associated with reserving these areas.
The forestry MIS mechanism has been effective in facilitating private sector investment because it addresses the
characteristics that limit individual investors from investing in plantations.
• It provides investment scale through the pooling of investment funds;
• It provides economies of scale through year on year investment in the resource; and
• It addresses information deficiencies and lowers transaction costs.
The Government process in reviewing MIS arrangements has revealed a lot of misinformation about the cost to taxpayers.
This reflects a misunderstanding in relation to what the MIS arrangements for forestry actually do. In essence, the
arrangements allow investors to obtain a tax deduction for investing in plantations in the year the investment occurs.
However, what is not well understood is that the MIS management company pays tax on the gross receipts from the
investment in the year they are received. In contrast, other companies pay tax on their net receipts and in the period to
which the receipts relate.
This over achieves the Government objective for symmetry of taxation between the same year deductibility for the
investor and the same year tax paid by the company. The cost to the taxpayer of the measure is largely the difference
between the individual investor’s tax rate and the tax rate of the company.
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ARI 118 Senate Wednesday, 7 October 2009
Forestry is not heavily assisted in relation to tax concessions provided by Government compared to other agricultural
based industries (See Figure 1). Based on Treasury data, the Productivity Commission reports the summed expenditure of
the tax arrangement for forestry at $44.1 million between 2002-03 and 2007-08. This compares to $98 million for dairy
cattle farming and $527 million for grain, sheep and beef cattle farming. In total, tax concessions for primary production
totalled over $1 billion between 2002-03 and 2007-08 (See Table 1). It should be noted that the expenditure associated
with taxation arrangements for forestry—specifically plantations, does not include positive revenue the Government will
receive when the plantations are harvested.
Between 2002-03 and 2007-08, it has been estimated that around 390,000 hectares have been established through the
forestry MIS measure (See Figure 2). On average the initial cost to the taxpayer of the forestry taxation arrangements is
$113 per hectare ($44.1m/399,000ha)—remembering that this does not include the positive tax revenue from harvest
proceeds (Tax revenue will depend on growth rate and rotation length but indicatively can range from $1200 to over
$3000 per hectare).
This means the tax payer provides an initial investment of around 12 cents per seedling planted
($44.1m/399,000ha/1000). When the tree is harvested, this initial investment is repaid, through tax revenue from harvest
by 10 to over 25 fold.
The forestry MIS measure has delivered the following:
Assisting in meeting our Kyoto Target
The post 1990 Kyoto plantation estate holds around 400 million tonnes of carbon (industry estimate). The majority of
these forests were established through the MIS mechanism. These plantations contribute around 20 million tonnes of
carbon toward Australia meeting its Kyoto target between 2008 and 2012. This offsets around 4 percent of our national
greenhouse gas emissions. At a price of $20 per tonne this carbon is valued at $400 million a year. These plantations are
unlikely to be recognised by the CPRS and the carbon from them will contribute free of charge toward our national Kyoto
account. NAFI estimates that contributions from Australia’s plantations could increase to 50 million tonnes by 2020 if
stable taxation arrangements remained (NAFI Industry Strategy 2008).
Helping meet our renewable energy target
It is estimated that the utilisation of woody biomass from plantation operations will generate sufficient renewable energy
to offset in excess of 1.5 million tones of CO2, or over 3 percent of Australia’s renewable energy target. This is estimated
to generate around 400 new jobs in rural and regional Australia (See note 1).
Improving environmental quality in our rural landscape
Plantations provide a range of environmental benefits that improve the environmental quality of our rural landscape.
These benefits include improving soil and water quality, improved biodiversity and improved environmental protection
through sun and wind shelter. These benefits enhance agricultural productivity and environmental quality, are often not
recognized and are provided free to society.
Around $4 billion of investment into rural and regional Australia
The measure is highly efficient in attracting private sector investment. It has been estimated that private sector investors
have invested around $4 billion through retail forestry schemes between 2002-03 and 2007-08—this is a public to private
investment leverage ratio of around 90 to one—for each public dollar expensed there are $90 dollars leveraged from the
private sector (See Table 2).
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Wednesday, 7 October 2009 Senate ARI 119
In terms of overall cost to the taxpayer the mechanism compares favourably with other Government mechanisms to
facilitate plantation investment. For example, the Commonwealth grant per hectare of plantations for the Tasmania
Community Forest Agreement (TCFA) was $6,000 a hectare.
Significant employment growth in rural and regional Australia
Around 120,000 people are employed in the forest industry. The majority of these jobs are in rural and regional Australia.
The plantations established have contributed substantially to the employment in the forest industry. The Bureau of Rural
Sciences estimates that 17 new direct jobs and 0.7 indirect jobs are created for every %million invested in plantation
establishment (Bureau of Rural Sciences State of the Forest Report 2008).
Underpinning investment in processing
Plantations established through the forestry MIS mechanism are now providing the essential resource underpinning for
value added processing and for the expansion of export markets. The industry estimates that there is $7 billion worth of
processing upgrades and new facilities that are in various stages of development (See table 3). These investments will
create an estimated 5,400 new jobs in rural and regional Australia. The recently commissioned Myamyn processing
facility and proposed Gunns pulpmill are examples of investments that will use resource established by the forestry MIS
measure.
Addressing our $2 billion trade deficit
Conservatively, by 2020 the harvest revenue from plantations established through the forestry MIS mechanism could
offset our $2.0 billion trade deficit in forest products by $1.3 billion (See note 2).
Mr Hansard—What I will do is give quite a brief run through as to what the opening
statement says. I do not have to run you through the history of forestry and MIS. I am sure you
are all aware of that and, if you are not, we can certainly explore that in questions. I do not have
to provide to you any background as to how important the MIS mechanism has been for our
industry, in developing our industry and also assisting in meeting forest policy objectives.
However, I think the process that we have seen since the collapse of the two MIS companies has
raised some questions in relation to MIS as a mechanism and the way it operates.
What I would like to do today is have a look at some of those questions that are appearing and
some of the misinformation that I think is about, particularly in relation to the cost of MIS to
taxpayers. As I said, this really reflects a misunderstanding in relation to what the MIS
arrangement for forestry actually does. In essence, the arrangements allow investors to obtain a
tax deduction for investing in plantations in the year the investment occurs. However, what is not
well understood is that the MIS management company pays tax on the gross receipts from the
investment in the year they are received. In contrast, other companies pay tax on their net
receipts and in the period to which the receipts relate. So I think there is something missing in
the general interpretation as to how MIS works. The way that MIS actually works is that it
provides symmetry of taxation between the deductibility for investors and the tax paid by
companies.
I would also like to comment on the sense that forestry provides heavy rates of tax concession.
Forestry is not heavily assisted in relation to tax concessions provided by government compared
to other agricultural based industries. I refer you to figure 1 and table 1 in the opening statement.
In having a look at that cost and at how much plantation has been put in the ground over a set
period of time, we have worked out roughly what it costs the taxpayer per hectare for MIS,
remembering that the cost that we work out here does not take into account the positive tax
AGRICULTURAL AND RELATED INDUSTRIES
ARI 120 Senate Wednesday, 7 October 2009
return from harvesting proceeds. So it is purely in relation to that arrangement around the
deductibility for the investor and the tax paid by the company. We worked that out to be $113 per
hectare.
CHAIR—What is that? What is the $113 per hectare?
Senator O’BRIEN—The initial cost?
Mr Hansard—That is the initial cost to the taxpayer in relation to the area of plantation that
has been put in the ground under the MIS arrangements.
CHAIR—But the $9,000 a hectare that went into the promoting company is a tax deduction to
the investor upfront. You do not include that.
Mr Hansard—It is included in that. These are figures provided through Treasury to the
Productivity Commission.
CHAIR—With great respect, if $600 million has been invested by investors in whatever year
in upfront, tax-deductible MIS investments and it is a 100 per cent tax deduction, why isn’t that
calculated?
Mr Hansard—Because this works out the tax concession. All MIS is is a timing arrangement.
CHAIR—Just bear with my thick head! I go to my accountant and say, ‘God help us; I have a
tax problem’—or, as someone colourfully put it, ‘I have to minimise my income because the
missus has left’—‘and I want a $50,000 tax deduction,’ and I can borrow the money and get the
tax deduction. Surely that is a real cost to the taxpayer.
Mr Hansard—But, if you are going into that activity anyway, you would get those deductions
anyway.
CHAIR—Hang on. You say here that for forestry and logging the sum of tax concessions
from 2002 to 2007-08 is $50 million. What was the sum invested by investors in that period?
Mr Hansard—We put that in there too. Over that period that is about $3.9 billion.
Senator O’BRIEN—So $3.9 billion was invested in other managed investment schemes and,
in the same time, the cost to the taxpayer according to the Productivity Commission was $50.4
million.
Mr Hansard—This is cost to the taxpayer in relation to a tax concession.
CHAIR—No, we are talking about the tax deduction as a cost to the taxpayer, not as a tax
concession. The $3.9 billion in those years was deductible to the investor—right or wrong?
Mr Hansard—It was deductible to the investor, yes.
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Wednesday, 7 October 2009 Senate ARI 121
CHAIR—Surely that is a contribution by the taxpayers of $3.9 billion.
Mr Hansard—The taxpayer makes that contribution to anyone that invests in anything and
obtains a tax deduction. That happens right through—agriculture—
CHAIR—No, in the case of an agricultural thing there is a 50 per cent deduction, for instance,
on plant right at this minute, until Christmas. It does not have to be for a farmer; it can be for
you, for a business car. But this is quaint bookkeeping here, in that you say that in a time when
there was $3.9 billion of tax deductions allowed to investors there was only $50 million for the
tax concessions.
Mr Hansard—That is right.
CHAIR—That is just fancy talk. This is the real cost to the taxpayer, up-front, with nothing to
do with what happened to the money after the investor got the tax concession. It draws into
question part IVA. The $3.9 billion worth of tax deductions to investors over the period of time
was a real tax deduction.
Mr Hansard—Yes, and—
Senator O’BRIEN—This is about, on the one hand, a tax concession and, on the other, the
timing of a tax deduction—
Mr Hansard—Exactly.
Senator O’BRIEN—which is the differentiation you are making, Mr Hansard, which Senator
Heffernan is not. You are saying that inevitably the same tax deduction would be available
whether it was for an MIS or for some other investor but that, because of the legislation, under
an MIS the tax deduction is available up-front rather than in the subsequent year.
Mr Hansard—Yes.
CHAIR—The tax deduction up front—if you could explain it to my thick head—is $3.9
billion.
Mr Hansard—Yes.
CHAIR—Where does that disappear to if the tax concession is $50 million.
Mr Hansard—That still goes into being a tax deduction, as it would if they invested in
anything else.
CHAIR—No, that does not quite—
Senator O’BRIEN—Hang on. You are putting words in the witness’s mouth. I am not going
to have it.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 122 Senate Wednesday, 7 October 2009
CHAIR—That is all right.
Senator O’BRIEN—The point—and we have established this—is that the difference between
what Mr Hansard is saying and what you are saying is that someone who was not in an MIS and
who invested the money in 2001 would not be able to claim it for their tax income period in
2000-01, whereas under an MIS they can claim that for the year they put the money in but before
it is spent. The difference is that, if it is not an MIS, you cannot claim it until the year it is spent.
Mr Hansard—Senator, what you are also not taking into account is that—
CHAIR—I understand that, but the cost to the taxpayer is up front regardless of how it is
spent. The investor that gets the tax deduction, given the tax ruling, gets $3.9 billion worth of tax
deduction, which is a real cost to the budget—
Mr Hansard—Yes.
CHAIR—regardless of what happens to the money after it leaves his hands.
Mr Hansard—And the company that—
CHAIR—You say that that is somehow different to someone else. What is different about it is
that it is up front and does not require a trace of how it is spent. We have taken evidence that a
lot of it was spent for a capital acquisition. That is of no interest to the investor up front, but it is
of interest to the taxpayer.
Mr Hansard—I am sorry, Senator, but you have missed the point that I started with.
CHAIR—I have not missed the point. I understand it.
Mr Hansard—I also said that the companies that manage the plantations pay tax on the gross
amount—that $3.9 billion—in the year they receive it. So, largely, you have got a tax deduction
coming out at the investor’s marginal tax rate and revenue coming back in at the company tax
rate.
CHAIR—I understand that—they get a tax deduction on the $3.9 billion they pay the tax on
for what they legitimately spend, up to 70 per cent of the forestry. But as for the real income
derived from that, given that they spend some of that money appropriately, as they see it, on
capital acquisition, why wouldn’t they pay tax on it? You are converting a tax deduction to an
investor into a capital acquisition program for a promoted MIS company. Why wouldn’t you pay
tax on it if you are using the money for capital acquisitions? Duh!
Mr Hansard—The taxation arrangements in division 394 do not allow a deduction for capital
items.
CHAIR—That is exactly right; that is why they pay the tax on it. Then, through the year, they
get the money. They have got enough money—as we have seen in evidence taken from the
chairman of Great Southern—to go and buy the land to put the trees on. You pay the tax on that,
sure, but when you spend the money on the land to put the trees in you get the tax deduction.
AGRICULTURAL AND RELATED INDUSTRIES
Wednesday, 7 October 2009 Senate ARI 123
That is all right, but it is a base of free capital for the MIS company, which gives it a serious
advantage in the market. What we want to talk about is the distortion of the price of land and the
distortion of supply and demand.
Senator O’BRIEN—With respect, Chair, Mr Hansard was making a truncated opening
statement, which you interrupted. Can we have that completed?
Mr Hansard—Yes. I think you understand the basis of what we mean by what the taxpayer
pays in relation to this mechanism. It is largely the difference between the deduction the investor
gets versus what the companies pay in relation to taxation on the investment they receive. If you
do run that through in relation to the area that is planted, it works out to be around $113 a
hectare. But that does not take into account the revenue the government receives when those
plantations are harvested.
CHAIR—So you are saying that, for $9,000 invested per hectare, there is a $113 tax
deduction?
Senator O’BRIEN—Can we have the statement and then come to questions?
Mr Hansard—What I would like to do is read the statement—
Senator STERLE—What he would like to do is throw the jug at him so he can finish the
statement!
Mr Hansard—I am happy to come back and talk to the committee, or to members of the
committee individually, about how this is determined. It is not sleight-of-hand accounting or
anything like that. It is using government figures in relation to the cost of the mechanism. It
represents the true cost of the mechanism as reported by the government. The point that I would
like to make is that this mechanism has been quite effective. If you have a look at the cost to the
taxpayer and then have a look at what it has actually generated in relation to investment in
forestry, which is what we need to be able to develop our industry, it has been quite effective.
CHAIR—But not for the investors.
Senator O’BRIEN—It depends on the investor.
CHAIR—They have done their dough.
Mr Hansard—If you are talking about the two MIS companies that have collapsed, that is
still being worked out. I do not think you can make that statement across all of the industry.
CHAIR—No, and we are not. Obviously Willmott and Visy are on the game.
Mr Hansard—Yes.
CHAIR—I understand that, but you have got a lot of sharks in the market.
Mr Hansard—I do not think you can make that statement across the whole industry either.
AGRICULTURAL AND RELATED INDUSTRIES
ARI 124 Senate Wednesday, 7 October 2009
CHAIR—I do not say it across the industry, but there are sharks in the market.
Mr Hansard—I think it is important to recognise what MISs have actually delivered for our
industry and also for rural and regional communities.
Senator STERLE—That would be very helpful, Mr Hansard.
Mr Hansard—There is a lot of emphasis put on what the mechanism does or does not do. I
think I have basically outlined what I see as the true cost of the mechanism to taxpayers and to
the government and that it is effective in leveraging private sector investment into our industry,
which is important. If we then have a look at what this has achieved we find that we have around
20 million tonnes of carbon towards our national accounts. That is what it has basically
achieved. That is largely through MIS plantations. We are still working out the CPRS rules but
the benefit of those plantations—that 20 million tonnes, which in relation to a carbon price is
probably worth about $400 million a year—is that they will help our economy move to a lower
emissions target. That is likely to happen at no cost to the Australian economy because at this
stage we cannot see those plantations coming into the CPRS.
We can also help meet the renewable energy target. About three per cent of Australia’s
renewable energy target can be achieved through use of plantation wood waste. That will also
create about 400 new jobs in rural and regional Australia. We also have considerable investment
in further processing. This is the benefit that MISs create in relation to allowing the industry to
establish a resource that is useable, that we can market and that we can add value to. We are
starting to see that now in the pipeline or at various stages of development. We have about $7
billion worth of processing investment. That will create about 5,400 jobs in rural and regional
Australia as it moves forward.
Senator STERLE—Are these full-time jobs?
Mr Hansard—Yes, they are full-time jobs. The other thing is that forestry has had a systemic
trade deficit. This has largely been driven by a number of factors, including the fact that through
the regional forest agreement process we had about 11 million hectares of native forest removed
from production and put into reserve. This plantation resource can assist in starting to address
that trade imbalance. We estimate that the plantations from MIS could contribute about $1.3
billion to our $2 billion trade deficit—hence substantially addressing that. I will leave my
statement there. As I said, I encourage you to read it. If you have further questions or issues
please contact me. I am happy to fill you in on that.
Mr Adams—In my opening statement I am really interested in just one additional factor in
this discussion of the importance of private sector investment in the forest and plantation
industry. Whether it is through MIS or whatever mechanism, I just want to draw attention to its
importance. The forestry and timber industry sectors in Australia, including the pulp and paper
sector, depending on whose figures you look at, employ between 80,000 and 120,000 people
across Australia, mostly in rural and regional areas. The figure of 120,000 comes from a survey
done by the Industry Skills Council funded through the government ForestWorks. The other
figures are probably older figures that come from DAFF and ABS that do not pick up transport
workers and the like because they tend to fall into another category. It is estimates that 72,000 or
60 per cent of those jobs are generated through the plantation industry—that is, the softwood
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plantation industry, the hardwood plantation industry and the processing industries that hang on
the back of those, such as the pulp and paper and sawmilling industries.
In the late 1980s to 1990s Australian governments stopped investing in new plantations. Prior
to that time nearly all plantations in Australia were grown on public land and were owned by
governments. Nearly all were also pine plantations. By 2008, nearly 61 per cent of plantations in
Australia were privately owned. So it has gone from being almost zero public ownership to 61
per cent public ownership. A further 14 per cent are in some kind of joint venture between
government and companies.
Over the same period, while Australia’s softwood plantation resource base has remained
almost stagnant—it has grown only marginally, and I can look up the exact figures, if you like,
but it has not grown significantly—the hardwood plantation resource has moved off a very low
base to now constitute nearly 48 per cent of the total area. That figure was 25 per cent in 1998.
That gives you an idea of the rate at which that resource has grown.
As with all commodity based industry sectors, employers in the forestry, timber and pulp and
papers sectors have businesses that rely on scale to achieve domestic and international
competitiveness and therefore ongoing viability in terms of their unit costs of production.
Sawmills are determined by their unit costs of production and our sawmills in Australia now are
competing in international markets, so they have to be internationally competitive. If they do not
have scale, they cannot achieve the required unit costs of production, and they become unviable.
The only way the viability of these businesses generating those 72,000 jobs around Australia
will be maintained is if there is a continued mechanism to generate private-sector investment in
the growth of the resource bases that support these sectors. Importantly, this resource base
includes both first rotation, or new, plantations and second rotation, or replanted, plantations.
Already in the softwoods sector, with the withdrawal of government funding of new plantations,
we have seen the rate of expansion of the resource slow to a dangerously low level which will
not keep pace with the rate of growth that the employers or the processors in that sector require
to maintain competitive levels of scale. As well, and critically in New South Wales and Victoria,
we have also seen both government growers and private owners of government plantations—I
am referring there to people like Hancock—resort to MIS as a means of generating the funds to
re-establish some of their second rotation plantations. This appears to be a growing trend.
A mechanism to maintain and indeed increase the levels of private sector investment,
particularly into long-rotation softwood plantations, is required if the significant number of jobs
in this sector are not to be put at risk, with associated disastrous impacts across Australia’s larger
rural and regional communities. I am talking about communities like Tumut, Oberon, Albury,
Traralgon and Mt Gambier—significant rural communities that currently rely on the pine
plantation sector. If we do not maintain the scale of that resource, those employers are going to
gradually lose competitiveness, initially cannibalising each other and eventually becoming
unviable.
On the hardwood plantation side, in many of the regions where the recent significant MIS-
driven growth of the hardwood plantations sector has occurred in the past decade, the scales of
the resources now achieved are only approaching or just sufficient to permit the investment in
secondary and tertiary processing that will deliver substantial community benefits. I refer you to
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ARI 126 Senate Wednesday, 7 October 2009
the work of Dr Jacki Schirmer, who has made a submission that outlines and details those kinds
of benefits.
For these investments to occur there needs to be ongoing certainty about the ability to
continue to expand these resources in order to both, where necessary, achieve and also maintain
the required scale for there to be sufficient certainty for investors to make the required
investments, like the potential $1 billion investment that is being contemplated in Tasmania at
the moment. Again, while governments are not prepared to make these investments, a
mechanism needs to be maintained to generate this investment from the private sector to
maintain the growth of these resource bases. That is the gist of the evidence I would like to give
to the committee.
ACTING CHAIR—I wonder if Mr Hansard or any of you could give us some sort of idea of
how we might break down the investment in plantations in the last two decades in Australia into
MIS, direct private investment, farm forestry type investment, government investment and any
other categories. Do you have any figures or access to figures?
Mr Hansard—The Bureau of Rural Sciences does do a breakdown in their Plantation
Inventory information that they provide on an annual basis. That will give you a rough
breakdown in relation to public, private and joint venture. We can also assist you in assessing
under those categories how much we think was MIS versus non-MIS and how much was joint.
The issue with MIS now is that it is also being used by governments to establish second rotation,
so we do have some joint investments happening as well.
ACTING CHAIR—Where is that happening?
Mr Adams—There are two examples of that. There is a company in southern New South
Wales contracting effectively to Forests NSW to establish their second rotation. Forests NSW
also have a joint venture with an MIS company that is buying new land for a plantation
establishment around the Oberon area. I can mention the names of the companies if you would
like me to.
ACTING CHAIR—I would be happy if you would supply more information about that.
There has been a focus in this inquiry on the companies that have failed. For completeness we
need information about the companies that have not failed and material about rates of return
where companies are ongoing and continuing to operate in the market. Can you assist us with
that?
Mr Hansard—We can. We are putting together some information now in relation to
performance of projects as well.
Mr Stephens—The long-term outlook for the forest products industry is good, with global
demand for wood products as a renewable resource. The plantation sector has been growing and
an increasingly significant proportion of total log supply comes from the plantation sector. MIS
mechanisms are crucial to underpin the industry.
ACTING CHAIR—In terms of the mechanism itself, there has been significant evidence
about the plantations of the former Timbercorp and Great Southern being simply a raw resource
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Wednesday, 7 October 2009 Senate ARI 127
managed for woodchip, with little or no resource being managed for anything else. Are there
examples where other managed investments scheme plantations are being managed for more
than woodchip?
Mr Hansard—There are a range of different examples. Jim Adams can probably provide
more information than me, but obviously there is the Gunns pulp mill. A large percentage of the
resource that pulp mill will use will be from their plantation base, and a large percentage of that
plantation base was developed through MIS arrangements. That is one example. Another
example is FEA. It has a sawmill that saws quite young plantation species in Tasmania. Another
example is Willmott Forests, who have long-rotation plantations and market long-rotation
products from that.
Mr Adams—Basically FEA have developed a technology to saw the biggest trees which
come out of a plantation, which they see as a sawlog resource rather than a chip resource. They
are doing that in Tasmania of course, as well as on the North Coast of New South Wales. On the
North Coast of New South Wales, Willmott Forests have also invested in a she-oak resource that
they are planting expressly for biofuel generation. So there are a range of other examples around.
The short-rotation ones are generally focused on chip or pulp and paper production. There has
been a significantly lesser amount, as I outlined in our discussion, of long-rotation sawlog
plantations.
Mr Hansard—It is very much like we have seen in the native forestry industry as well. What
often happens is you have stages of development. To develop the resource you need to have a
market somewhere. While you are developing the resource up, what you can do is access
woodchip markets, because the scale required is not as great as, say, providing to a pulp mill or a
large facility. When you get to the scale where you can provide the resource to a large value-
added facility, that provides the opportunity to divert those exports into domestic processing. The
Gunns pulp mill, if it goes ahead, will use a large proportion of plantation wood.
There are a number of other resource areas around Australia which are on the cusp of being
able to do that as well. One is the Green Triangle where there is a proposal for the Penola pulp
mill. Also the Western Australian resource is getting to the size where you could consider a
significant value-add processing plant. Although initially some of the MIS companies focus
towards export markets, as you develop your resource up, you can consider your domestic
processing opportunities, once you get that size.
Mr Adams—There is a tendency to look at the Great Southern and Timbercorp examples as
disasters and they certainly have been very unwelcome. One lesson we have taken out of those
examples is the strength of the assets and the manner in which they were able to be sold on.
There is a high level of international interest and domestic interest in those assets. Great
Southern is yet to be processed but Timbercorp was sold recently to Global Forest Partners
demonstrates that although the management of the company may have failed, the asset was
strong, well managed and valuable.
ACTING CHAIR—It has been suggested to us that, unless a company has other strong
financial support and interests, it is inevitable that a managed investment promoting company
will fail. Can you give us examples where that is not the case?
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ARI 128 Senate Wednesday, 7 October 2009
Mr Adams—Yes. Wilmot forest is a classic example of that. It started off as a managed
investment company, a promoter, and it has now invested and diversified into processing and
seems to have a very strong future. It has diversified into a number of contractual arrangements
with governments to apply MIS generated funds into second rotation and so forth as well as joint
venturing, to establish their own—
ACTING CHAIR—It has not remained as just an MIS company.
Mr Adams—No.
ACTING CHAIR—That it is perhaps a point to which those who make the original point
would respond that Wilmot forest is no longer just an MIS company.
Mr Adams—It certainly started off there and you have to start somewhere. Some of those
companies will get to critical mass where they can start building on—
Mr Hansard—The way the industry looks at MIS is that MIS set up an arrangement which
allowed for evolution. It could be picked up by some already existing companies and it was, but
also allow some companies to establish and move in. They would evolve over time. Obviously,
some are more successful than others and there are takeovers, as in other sectors, but it allowed
that evolution to occur. To take you back to the Timbercorp example, they did have arrangements
with the Penola pulp mill for supply, so they were definitely thinking about where they were
going to put their chips in the future. Their thinking was obviously evolving in relation to what
sort of company they were.
ACTING CHAIR—Obviously, the certainty of a buyer for the product who effectively is
dependent on the product is a much preferable arrangement when you are marketing an
international commodity like woodchips. I can understand why any company involved in the
production of plantation hardwoods would be keen to do that. However in terms of the
development, there has been criticism of managed investment forests being planted in areas
where, for example, a 600 millimetre rainfall is not likely to give rates of economic return to
justify the investment of the investors. Is the National Association of Forest Industries satisfied
with the way the scheme has been managed, where plantations have been placed and the
productivity of plantations? Do you have any information which might dispute the sort of
evidence we have had about the less than satisfactory performance?
Mr Hansard—There are cases where the performance of plantations has not been good and,
given experience, sure, you would not go back there. Forest plantations are largely a 10-year
crop. We have been through a fairly significant drought. In a lot of respects we are no different to
agriculture. We are developing how we work our business in hardwood plantations. We will have
some successes and we will have some failures. What we are seeing is people focusing on the
failures and not necessarily recognising the successes.
ACTING CHAIR—I am giving you the opportunity to put some successes before this
committee.
Mr Hansard—We can certainly do that.
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Wednesday, 7 October 2009 Senate ARI 129
ACTING CHAIR—All we have had is failures put before us.
Mr Hansard—If you looked at any agricultural activity over the same period, I am sure you
would see some underperformers and some overperformers as well.
ACTING CHAIR—And climatic conditions in a lot of areas have not been optimal.
Mr Hansard—That is exactly right over the last 10 years. As I said, we have probably had the
worst drought we have had in a good 100 years.
Senator STERLE—Where would Australia’s forest industry be without the managed
investment schemes?
Mr Hansard—From now on?
Senator STERLE—Now and then from now on.
Mr Hansard—If we did not have it to begin with?
Senator STERLE—Yes.
Mr Hansard—We would have a significant reliance on imported products. I could not give
you the figures. I think we would have a higher level of unemployment in rural and regional
Australia as a result. The adjustment of our industry because of the 11 million hectares that were
taken out during the RFA process would have been much harder. A lot of the regions that
benefited from the development of plantations and picked up the impact from the RFAs would
not have been able to occur. I think largely you would have had a far more significant impact of
the RFA process on not only our industry but rural economies and the broader economy.
Senator STERLE—Mr Adams, you talk about Tumut, Oberon, Albury, Traralgon and Mount
Gambier. I could not imagine what would have happened to Manjimup, Bridgetown, Nannup
since old-growth logging ceased in 2002. Those towns can only grow so many apples and
oranges.
Mr Adams—I can give you a little anecdote. I used to be the mayor of Bombala where
Willmott Forest operates. At the time when the south-east national parks were declared I spoke
to Premier Carr and said that, ‘If you are going to take away the native forest then we need a
substitute.’ I do not know whether it was in response to that or not, but certainly the $11-odd
million that Willmott Forest invests in that community has made the difference between that
community surviving, and even growing in some areas, and being a complete ghost town.
Senator STERLE—You could appreciate that we have had quite a number of witnesses come
in here saying it is all doom and gloom—whether it is horticulture, agriculture, forestry or
whatever. There have been a lot of misrepresentations too. We are trying to weed out what is true
and what is not so much true. I want to talk a little about land use. I notice that your submission
and Mr Hansard talk about land-use changes. Would you like to tell the committee a bit more
about that?
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ARI 130 Senate Wednesday, 7 October 2009
Mr Hansard—Land-use changes?
Senator STERLE—Yes, land-use changes in Australia because what has been said to us a lot
is that it is all in MIS plantations and everything is going down the tube. I think it is important
that you put your case forward.
Mr Hansard—There is a perception out there that we are going to wallpaper the landscape
with trees. I think that is far from the truth. The area of agricultural land that is actually under
plantations is 0.05 per cent, and that is a figure that BRS produce. I would like to table for the
committee a vegetation map of Australia. It shows plantations in red. Basically it gives you a
perspective of what we are talking about in relation to agricultural.
ACTING CHAIR—Do you have that electronically?
Mr Hansard—Yes, we can provide that to you. In most plantation catchments, the area of the
catchments that is taken up by plantations very rarely exceeds six per cent. There is a lot of
misinformation and misperception about where plantations are going and to what extent they are
growing. We provide information on MIS. Since the MIS mechanisms started, we would have
put in the ground approximately 600,000 hectares of plantation to add to an existing plantation
area of around one million hectares. We are up to about 1.8 million hectares in total. It is not a
larger area compared to the total area of agriculture.
Senator STERLE—Two per cent.
Mr Hansard—Yes.
Senator STERLE—Of course, your industry—those who use MISs for plantation—has also
been blamed for forcing up rural land values. Would you like to comment on that?
Mr Hansard—Yes, we provide some information in our submission on that. If you look at the
amount of agricultural transactions that take place and the role of forestry in those, it is quite
small. Michael might have the figures.
Mr Stephens—Yes, it is detailed in the original submission. We are talking about three per
cent of total sales. There would have to be very significant prices paid for land to drive the kinds
of trends that we are seeing in agricultural land prices in some areas of 34 per cent. What we are
saying is that forestry is really a small proportion of the land use change. There are a whole lot
of other things happening in the rural areas. Based on the evidence presented, it is hard to pin a
case on forestry as a prime impetus for those changes.
Senator STERLE—Dr Schirmer’s evidence was probably the most balanced that I think this
committee has heard.
Mr Stephens—That is right.
Senator STERLE—She has gone out there, done it and balanced it up a bit, recognising that,
yes, in some areas where there is forestry, when the plantations require more land, it has
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Wednesday, 7 October 2009 Senate ARI 131
increased, but it has certainly increased in other parts of agriculture where there is no forestry—
maybe not as much as the increase but there has still been an increase.
Mr Hansard—Economics tells you that, if you increase demand for something, the price
normally goes up. Even though we have talked, in a lot of senses, about a small increase in
plantation area, that still means that we are in the market and we are transacting. There has to be
some market effect. What we are saying is that it is not significant and definitely would not
preclude large areas of agriculture staying in agriculture, for example.
Senator STERLE—One of the submissions put some key points to us. I would be interested
in your comments. It said that plantation managed investment schemes have quadrupled the cost
of growing wood in Australia and are an unnecessary drain on the public purse. There are two
questions in that, but has it quadrupled the cost of growing wood?
Mr Hansard—Quadrupled the cost in what sense?
Senator STERLE—That was one of the statements put to us earlier. I think you should
answer that. Has MIS quadrupled the cost of growing wood in Australia?
Mr Hansard—I do not think it has. What the MIS arrangement does—and we put this in our
opening statement—is allow individual investors to invest in forestry. An individual investor will
have a higher transaction cost than, say, a company or a farmer, because of the costs associated
with the investor having to go out and put everything together. What we would say is that MIS
actually lowers transaction costs. The test for that is this: if you take MIS away, see how many
investors in Sydney or Melbourne would invest in forestry. You would probably see not many.
Why? Because the transaction cost for them to go through the process of investing is too much.
CHAIR—Can I take you up on that point. Obviously 2020 Vision started off the MIS
proposition and it quickly became an opportunity for a tax deduction—and there are successful
wood driven, market based MIS, Visy or Willmott type operations which are to be commended.
But it quickly became such a river of gold for the promoters that they quickly switched to other
industries, which is what has done a lot of the damage to the reputation of MIS. For instance,
with olives and some of those more interesting activities people put 50 grand in and owe
$225,000. I would like to ask you from a forest perspective: what would you do if you were a
person who leased your farm to Timbercorp and it is now full of trees and you are not being paid
the lease money? Would you use the inventive that possession is 90 per cent of the law and just
take possession of the trees? What is a fair thing for the farmer who thought this was a great
investment given the spiel that was given by a financial planner who was on up to 10 per cent
plus 10 per cent—and we heard the case of some of the expenses on the administrative side of
MIS money being 30-odd per cent? What is your advice to someone who has got a farm that is
full of trees and is not being paid the lease on behalf of the forest industries? What should they
do?
Mr Hansard—I cannot comment on that.
CHAIR—What percentage of the forest market was represented by the failed MISs? Would it
be 40 per cent or 50 per cent?
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ARI 132 Senate Wednesday, 7 October 2009
Mr Hansard—I would have to go back and check.
CHAIR—It is about that though, isn’t it?
Mr Hansard—I would have to check for you to see what the percentage was. In relation to
that what I will say is this: we welcome the expedient resolution of the Timbercorp and Great
Southern issues—
CHAIR—Do you think the government should have a role in that given the $3.9 billion of tax
deductions? Do you think we should hand that tax deduction business in a forced sale situation
to someone overseas and let them take the benefit of what was a generosity? You have got to
admit that these things would not have happened without the generosity of the taxpayer in the
first place to trigger it. It actually did supply interest free capital for a good purpose under the
2020 Vision into a long-term investment in forestry. If it had not happened that way, it would not
have happened.
Mr Hansard—I think that you are seeing commercial interest in sorting out the arrangements
of the two asset bases. I cannot comment on the government and whether they want to go on.
Commercially, it looks like it is going to be resolved.
CHAIR—On the tree side, but on the debt side? I have got one person who will not get out of
their pyjamas because of this. They have lost all their money. Then you see the CEO of Great
Southern get out before he informed the market that there was a collapse on the way, then go
back into the market—and we are wondering whether there was due diligence with the bank—
and buy back the debt, and he is now prosecuting the debt on the people who originally invested
in his company. Do you think that is a fair thing?
Mr Hansard—Senator, I cannot comment on that. That is an individual case.
CHAIR—But you would say that it has done a lot of damage to the reputation of MIS—
Mr Hansard—I will say that one of the jobs that we have to do now is build confidence back
in the plantation industry for individual investors, and also the industry and, I think, the
community. That is one of the jobs that we are now facing.
CHAIR—How do you think we should do that given that the evidence we took from Mr
Patrikeos and Mr Mews that in the case of Great Southern it was in fine shape until they really
got greedy and greed overtook reality?
Senator STERLE—In all fairness to Mr Hansard, that is not an industry problem; that is a
couple of crooks who, unfortunately, have conned a lot of decent honest people out of their hard-
earned money. It is not the industry that is doing it.
Mr Hansard—What I will say, Senator Sterle, though, is that industry is taking this very
seriously, and we are working with the government now to address those issues. One thing the
industry does not want is to see that happen again. So we are working with government now to
ensure that appropriate steps are taken to try and limit the probability of what we have seen
happen with Timbercorp and Great Southern happening again.
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Wednesday, 7 October 2009 Senate ARI 133
CHAIR—With the exemption from environmental planning under the RFA, do you think that
in future we ought to at least have the capacity to have an environment plan? Because there is no
capacity to do that at present. There are no interception equations. Do you think we can tidy that
up as well as the financial side?
Mr Hansard—Could you explain that a bit more?
CHAIR—If I want to put a plantation on the Bombala-Delegate road to Craigie, I do not have
to go and get an environmental plan; all I have got to do is buy the farm, and the first thing the
person next door knows about it is when the rip marks appear across the paddock. Do you think
that is fair? If I am the person putting the trees in, I do not have to work out the interception
impact on the stream there, where you used to be able to catch fish but it has now dried up. Do
you think that is fair?
Mr Adams—I am familiar with that road, because I live in Bombala.
CHAIR—I have had cattle on agistment there; I am very familiar with that road.
Mr Adams—Probably on the Hoods’ place. For a start, you are going to need to do a DA, so
the neighbour is going to know about it before it occurs. That DA is going to have a look at some
of the issues that you have outlined—
CHAIR—But you do not have to do have an environmental impact assessment done.
Mr Adams—You do not have to have a full-blown environmental impact plan, but you do
have to have a development application and you do have to have your development application
referred to the various referral authorities, including the council, the bushfire group and all of
those people.
CHAIR—I agree entirely with all of that. But you do not have to calculate the impact on both
the landscape and the run-off. Can I just take you to another example, with the indulgence of the
committee. In three weeks time they are going to put a block in the Lachlan River—this is
‘should we fix this stuff up and forget the politics’—and the river is going to be drained
along1,000 kilometres. The government has decided to do that without any environmental
impact study, without even working out how many farmers are affected—
Senator COLBECK—That is the state government, Chair.
CHAIR—Yes, the state government. Shouldn’t we—
Mr Adams—Senator, if I can turn the question around, shouldn’t we also be doing social
impact statements on some of the things as well? For instance, the New South Wales government
introduced private native forestry legislation without looking at the social impact on the
communities involved—
CHAIR—All of that. We received invaluable evidence today from a lady about social impact.
If there is goodwill—and I do not doubt the goodwill, Mr Hansard, at all, of your institution—
surely we can sort out the most basic things.
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ARI 134 Senate Wednesday, 7 October 2009
Mr Hansard—Certainly, Senator. All we ask for in relation to any of these issues is: abide by
some principles here. You mentioned water, and that is about equity and sustainability. We are a
dryland crop, just like all other dryland crops, a bit bigger, but we are not as extensive. Although
we have trees and they use water, so do other dryland crops—
CHAIR—Yes, I understand that, but—
Mr Hansard—And by scale they can use more than us—
CHAIR—But if you meet the target and you put the trees on what is now cleared—the likes
of the Craigie land—that is 30-odd inches of rainfall. Once you get to 35 inches, it is 2½
megalitres per hectare, and that has a high impact on the local run-off. If the 2020 vision is met,
1,000 gigs gross and 700 gigs net, according to the science, are going to disappear from the
catchment.
Mr Hansard—Senator, I will give you another example, and this is down in South Australia.
We have got 140,000 hectares of plantation down there, as you are aware—
CHAIR—You are defending the aquifer; I realise that. You do not have to give me an
example. I know about it.
Mr Hansard—Okay. They are asking us to be put into a licensing scheme down there. There
are 1.2 million hectares of improved pasture—basically, deep-rooted lucerne—down there. As
you would know, Senator, that does not use much less water per hectare than trees. They want us
in there, but they do not want to bring in that.
CHAIR—I can actually give you the paper on that, because I do know a lot about that. That is
depending on the rainfall. There is absolutely no comparison between a perennial grass, whether
it is lucerne or a fescue, and a forest if you are looking at like on like. If you go up to the back of
Batlow, the trees up there are taking three megalitres a hectare. It is like what the CSIRO said the
other day: ‘You can’t develop the north because of all the evaporation.’ The evaporation in
Northern Australia is 2½ metres per year. It is exactly the same as it is on the dams at Cubbie.
Mr Hansard—My point is that there is a big difference between 140,000 hectares and 1.2
million hectares. That is the point. In scale terms, these dryland crops are large in area and still
use a significant amount of water on that scale. This is the thing that we have to realise. It is not
only local; it is also large scale.
CHAIR—I could talk till you went stone dead. I know it all. Up the top here, where 38 per
cent of the run-off comes from two per cent of the landscape down the road where this man
lives, it is very sensitive to interception. Why the New South Wales government did not, when it
did the river management plans for the Murray, the Murrumbidgee and the Lachlan, include
forestry in the plans is beyond me. There was not a mention.
Senator STERLE—Chair, if we are not talking about MISs, you and Mr Hansard might want
to have a cold beer in your office after this and—
CHAIR—Yeah, I reckon.
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Wednesday, 7 October 2009 Senate ARI 135
Mr Hansard—I think we could do that!
CHAIR—Are you telling us it is time to go home, Senator Sterle? We were just getting into it.
Senator STERLE—I am not stopping you. Get into it in another forum.
CHAIR—Thanks very much, boys.
Mr Hansard—Thank you.
CHAIR—And thanks very much to the linesmen and ball boys up the back there.
Committee adjourned at 5.36 pm
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