Drought and productivity in primary production discussion paper – February 2014

 

Introduction:

Australia is the most arid country on the planet however it is globally recognised as an efficient producer of safe, clean high quality produce. Geographically Australia is isolated, which is a double edged sword, providing strong biosecurity benefits to the consumer however logistical costs play a major factor in the purchasing decision.

More importantly is the harsh and variable climate all Australian primary producers have to contend with. This is a difficult business prospect that is further exacerbated by the fact Australian exports have to compete against highly subsidised produce in all global markets.

Previous drought and other forms of natural disaster assistance programs have proved ineffective from a sustainability perspective. In the most part this is due to the focus on financial assistance in the form of interest subsidies and low interest loans. These are highly ineffective as they do not promote saving in high profit years and actually reward producers that have dubious business acumen.

This is not to say that assistance to primary producers is not warranted in times of extended drought or severe climatic events (cyclones, floods, frosts or fire) because in reality all producers do require assistance when subject to these adversities.

This paper will pose a very different perspective and will focus on long term structural changes as well as short term assistance measures.

 

Drivers of emotional capacity reduction within the primary production sector:

Each individual primary production unit has very different business drivers therefore it is not in the scope of this paper to explore these rather it will focus on the emotional capacity perspective that underpins reactions in the face of adversity. A critical point to acknowledge is that primary production in Australia is undertaken predominantly by family businesses. This imposed a dynamic that must be taken into consideration as it separates the human impact from the business outcomes.

A family business views the business, family and community through three important lenses

  1. Legacy – What does the family, family generation and family business want to be known for internally, in business and within the community
  2. Custodianship – No one individual truly owns the family business rather they are the custodian of the business on behalf of the past, present and future generations
  3. Stewardship – The family name and its legacy is the responsibility of the current leaders who are the stewards of this for the past, present and future generations

This is a fundamental difference within the family business framework that does not apply to non-family businesses therefore is not recognised by financiers, policy makers or the general public. However when applied to primary production you gain an insight into the emotional drivers that perpetuate all decision making processes regardless of the economic circumstances.

In times of high profit the family business invests time and resources back into the rural production unit, family and the community however when the climatic conditions turn against them there is a sense of loss and failure because the ability to be a good steward and custodian is diminished (or lost) and the family legacy is threatened. This leads to a sense of failure that is exacerbated by the day to day interaction with the environment and livestock that are deteriorating before their eyes.

Finally, primary producers are highly individualistic people with a propensity to avoid seeking assistance until desperation raises its ugly head.

 

Proposal for assistance:

This paper proposes a complete overhaul of the primary production assistance platform to assist the sector to become more resilient and build capacity at the business and community level. You will note that the majority of the proposition is moved from an expenditure / debt perspective into a savings / debt reduction perspective. In addition, the administration of the proposed assistance measures will be far lower than the historic and current mechanisms.

 

Short term support in times of adversity:

The sense of failure in times of adversity comes from two main areas (1) inability to maintain productive capacity and (2) the inability to fund operating costs. Based on this assertion it is proposed that short term assistance be directed towards building the individuals emotional stocks through the provision of financial support.

The major failure of interest subsidies and other financial support is the lack of focus on building emotional capacity. This is because the funds either go to the financial institution (interest subsidies) or are additional debt. This domiciles the control within the financial institution, which in fact increases the primary producer’s sense of losing control over their legacy.

It is acknowledged that a specific adverse event may necessitate an adjustment of the quantum of assistance provided therefore it is not the aim of this paper to explore all variables. What is explored is the provision of targeted financial support that is allocated to specific areas that will engender a sense of self-worth, family and community.

The base assertion in this proposal is that an individual primary producer will spend money on their productive capacity first therefore this proposed targeted assistance is specifically designed to take some pressure off certain operational areas of the business to enable the individual to reallocate their own funds to the areas that drive production. The targeted areas in priority order are

  1. Food and personal sustenance $5,000 / person / annum (max $20k)
  2. Insurances including private health cover $10,000 (max assistance)
  3. School fees $5,000 / student (max $15k)
  4. Professional services (Accountant only) $5,000 (max assistance)
  5. Regional Council rates $35,000 (max assistance)
  6. State Government rent $15,000 (max assistance)

There will have to certain conditions applied in the form of eligibility criteria and some recommendations include

  1. Means tests should be the capacity to fund production and finance costs with or without the above assistance
  2. Private health insurance has to be a historic expense item
  3. Motor vehicles must be inside the insurance package with on-road vehicles having comprehensive insurance
  4. School fees must include text books
  5. Regional Council rates are for current only – Any arrears are to remain until the individual producer has recovered from the adverse event
  6. State Government rent – Same as above
  7. Regional Councils and State Government must give an undertaking they will freeze interest charges and not pursue recovery action until the individual producer has recovered from the adverse event
  8. Normal recovery statutes remain if the primary producer sells of goes into receivership

Maximum level of assistance to be capped at $100,000 per annum and to be made available for two years after the event is declared as being over.

Additional forms of assistance can include Health Care Card.

 

Assistance in times of normal and high profit:

This area needs to be viewed through various lenses however they are to target capacity building, resilience and agriculture systems sustainability. Of critical importance is the promotion of a savings culture and facilitation of debt reduction in times of profit. In addition, the focus must be on sustainability of production, business performance and the family unit therefore a long term conservative approach is required.

This paper proposes targeting three areas within the business that are critical drivers to sustainability and successful performance – Financing, taxation and succession. However before proceeding to these categories it is important to set the scene for the assistance package.

Supporting non-viable and unproductive businesses is counterproductive therefore the package is to target the 60% of production families that are viable and productive. Viability and productivity are mutually inclusive because the eco-system and the business system are intrinsically interconnected. This raises the issue of an individual producer being of a mindset aligned to long term thinking based on improving their landed asset base rather than extracting a lifestyle or an income to support tax minimisation. Essentially the 60% of viable and productive growers are of this mindset as they look five (5) to ten (10) in advance and are not afraid of changing their operational systems to suit the forward projections. Furthermore these more progressive producers think through three lenses that are mutually inclusive being;

  1. Production systems including environmental and climatic systems
  2. Business systems including marketing and risk management
  3. Asset management including family succession and business continuity

Based on this, the more progressive thinkers also subscribe to the premise that our current agriculture / primary production system is not sustainable because the true asset (the soil and people) are being depleted at an alarming rate. The soil structure is being artificially supported through injection of fertilisers and chemicals however the base elements or organic matter, carbon and trace elements are not being naturally replenished. People are emotionally drained because their efforts are not being rewarded financially socially or emotionally. When you combine all of these factors the intellectual and emotional quotients of the community deplete resulting in a diminished social fabric within regional communities.

 

Finance:

The banking industry to be encouraged to extend the terms of rural loan facilities to 30 or 35 years on a principle and interest basis. These can have a maximum of five years interest only up front plus the ability to revert to interest only in times of adverse declaration i.e. natural disaster declaration.

Loan purpose needs to be clearly identified based on a strategic plan from the producer. This plan must clearly outline how the capital expenditure will benefit the family business in the areas of commercial profitability and personal capacity. The true meaning of sustainability and how this is being achieved must be clearly articulated throughout the strategic plan;

  • Financial resilience – How the capital injection improved the businesses ability to generate profit under normal business and climatic conditions
  • Economic value adding – How the capital injection adds value to the business structure and family system to enable the medium and longer term goals to be achieved
  • Social impact – How the capital injection supports the family’s social fabric and how this will have a flow on benefit into the regional community
  • Environmental improvement – How the capital injection will support the operational system to add back to the environment to improve the soil, water, flora and fauna ensuring it is more productive and of higher intrinsic value for the next generation

These four points are completely aligned with the above mentioned three lenses that progressive producers use to make decisions within their business.

 

Taxation:

This is the big ticket item within this paper and explores a range of items that will have to be assessed within the broader framework of the taxation system currently afforded to the primary production sector. Notwithstanding all current rebates and tax concessions one thing that needs to be addressed is the application of the GST on all products to reduce confusion and administration at the tax payer end plus the ATO end of the process. More specific to primary production this paper proposes the following changes to advance the savings and debt reduction process;

  1. 100% tax deductibility of principle repayments from term loans (capped at $150k per annum and allowable only in years of profit) relating to
    1. Capital purchases for expansion purposes as per producer’s strategic plan
    2. Productivity improvement programs as per producers strategic plan
    3. Environmental projects as per producers strategic plan
    4. Machinery purchases are exempt from this program as they can be leased or are subject to accelerated depreciation
  2. 150% tax deductibility for in-kind activities undertaken as part of a funded RD&E project
    1. Must be part of an official scientific project that is accompanied with robust governance, financial reporting and project management
    2. Project must have passed through a robust project management framework that includes producer input right from the project concept stage
  3. 100% tax deductibility for minor capital items up to and including $10,000 per annum capped at a maximum of five (5) items per annum
    1. The same criteria as point one applies
  4. Increase the threshold for superannuation deposits for all family members actively involved in the business i.e. owners of the business and working in the business
    1. Annual contribution maximum of $50k for direct family members – Bloodline
    2. Annual contribution maximum of $30k for spouses
    3. Annual contribution maximum of $25k for children over 18 years of age and under 25 years of age is they are studying full time or working on the production unit
  5. Increase threshold for distribution of profits into “farm management bonds” to $500k per annum
    1. These attract a tax of 15% on the way into the fund and 5% tax upon extraction from the fund
    2. Funds can only be used in times of disaster declaration to fund specific items such as
      1. Fodder for livestock
      2. Sinking new water supplies
  • Payment of debt including interest on term facilities
  1. Direct operational expenses within the production system
  1. Total cap inside the fund to be $3m excluding tax paid and interest received i.e. six (6) years of maximum deposit
  1. Streamline and fast track the ability of the primary production business or a group of primary production businesses to be registered under the R&D taxation incentive
    1. This will promote the drive of RD&E from the production end of the supply chain to ensure RD&E projects have primary producer input and have a clearly demonstrated value proposition for the production system
    2. Primary producers pay the levies therefore they need to have more say in how these levies are allocated and distributed
    3. Primary producers also need to get the maximum benefit from RD&E

 

Succession:

Family succession is a major issue in the primary production sector throughout Australia. To pass the “family farm” onto the next generation is part of the DNA of the sector however there is a number of emotional issues entangled within this process and many families experience;

  1. High expectation on the “first born son”
  2. High expectation of “birth right”
  3. Weight of expectation / obligation regardless of “freedom of choice”
  4. Weight of “passing on a poison chalice” to the next generation resulting in a guilt complex
  5. Development of a guilt complex due to not being able to pass on the “family farm” because of viability issues or other circumstances

There needs to be a very robust discussion about family succession that is based on competency factors, what does the next generation bring into the business and can multiple families (related or unrelated by bloodline) combine their aggregations to achieve viability, profitability, productivity, sustainability and longevity of the private family business.

Currently family succession planning has been the domain of professional service stakeholders such as the Accountant, Solicitor or Financier however these are the completely wrong people to initiate the process because they

  1. Target the business and asset NOT the family legacy and values
  2. Have vested interests i.e. protecting their debt exposure or business relationships
  3. Are limited in their experience relating to the understanding of
    1. Family values and legacy
    2. Behavioural change
    3. Emotional connection
    4. The supply chain and the associated relationships

Every business in Australia and globally can be broken down into seven distinct yet interconnected functions being;

  1. Legal and Compliance
  2. Administration and Finance
  3. Products and Services
  4. Business Development and Marketing
  5. Sales and Customer Service
  6. Production and Operations
  7. Human Resources

The primary production business is no different however due to the critical nature of specific functions and the large number of externalities that cannot be controlled this segmentation of the primary production business functions can be simplified into four categories being;

  1. Administration – Finance, Compliance, Governance
  2. Production – All in-field activity including upstream supply chain interactions
  3. Marketing – All post production activity including downstream supply chain interactions
  4. Strategy and capital procurement

Given the above, succession planning within the primary production sector needs to evolve into a competency based paradigm that may include the development of large “cousin consortiums” along bloodline or the amalgamation of non-bloodline families into a strategically focused and values based business accompanied by the appropriate corporate and governance structures.

It is acknowledged that in some States of Australia the land tenure / titles may have to be altered to facilitate ownership within a company structure.

 

Conclusion:

This discussion paper has been prepared by a single individual whom has no direct connection to the primary production sector as a producer or owner of rural assets. However the writer is a fourth generation rural family member and has numerous indirect links to the primary production sector throughout eastern Australia.

The paper has been developed based on personal knowledge and experience accompanied with a diverse suite of qualifications in business. It provides an unbiased perspective on how to improve the structural fabric of the primary production sector while facilitating the shift away from unsustainable debt levels driving unsustainable production practices and resulting in the disintegration of the social fabric of rural and regional communities.

It has to be remembered that;

  1. People make communities
  2. People drive economic activity
  3. People own and manage eco-systems and business systems
  4. People pay taxes

Therefore we have to support the people and they will in-turn support society and the environment for current and future generations.

 

Lloyd Russell is a 4th generation family business member and an accredited family business advisor who is based in Brisbane while servicing clients throughout Australia and internationally. Lloyd is a specialist in family business strategy and governance with a particular focus on inter-generational transfer. He has more than 30 years’ experience in senior management and is an accredited neuroscience practitioner.

Contact Lloyd on 0413 549 748 or lloyd@tcbsolutions.com.au

Website – www.tcbsolutions.com.au

 

#4_LEGAL!