Building a more competitive, profitable and sustainable Agricultural sector: Helping farmers help themselves through revenue insurance Submission to the Australian Government s Agricultural Competitiveness Issues Paper Prepared by Latevo International April 17, 2014
Submission to Australian Government s Agricultural Competitiveness Issues Paper Contents A response from Latevo International 1 How Revenue Insurance Works 2 The Current Landscape 4 Insights from the Farmers 5 A Revenue Insurance Case Study: Corrigin WA Grower 7 Tax incentive partnership 9 Revenue Insurance: An initiative that answers the sector s issues 10 Ensuring food security in Australia and globally 10 Farmer decisions for improving farm gate returns 10 Enhancing access to finance 11 Enhancing agriculture s contribution to regional communities 12 Reducing ineffective regulations 13 Enhancing agricultural exports 13 Assessing the effectiveness of incentives for investment Premium Payment Tax Incentive - An extract from Will the Introduction of Revenue Insurance Improve Productivity of Western Australian Wheat Farmers? Prepared by John Thomson, Director, RSM Bird Cameron 14 Conclusion: Creating Generational Legacy 18 Recommendation 20 Appendix Attachment A Detailed Extract from Will the Introduction of Revenue Insurance Improve Productivity of Western Australian Wheat Farmers? Prepared by John Thomson, Director, RSM Bird Cameron Attachment B Revenue Insurance Case Study Financial Spreadsheet: Corrigin WA Grower
Submission to Australian Government s Agricultural Competitiveness Issues Paper A response from Latevo International Latevo International is a new agricultural insurance company offering an innovative multi-peril crop insurance program to farmers, and is proudly Australian with 50% Canadian ownership. Developed by Australian Farmers and Underwritten by Allianz, Latevo has created the Certainty Insurance product for Australian farmers, a breakthrough crop income and revenue insurance-based program that provides a revolutionary new way for farming families to recover their business and production costs of their cropping enterprise when weather related disaster strikes. Created specifically for Australian growers, Certainty Insurance has been modelled from a comparable program that has been successfully operating in the Canadian marketplace over the past 4 years to support improved farm management and profitability in the country. Latevo is pleased to be a part of the Australian government s consultative process to strive to improve the agricultural sector s global competitiveness. Latevo s revenue protection-based insurance model, which will be detailed later in this narrative, underpins this comprehensive submission. Latevo strongly believes that revenue insurance has the capacity to create an economic stimulus that is non trade distorting and does not result in a cash cost to the taxpayer. As will be described throughout this missive, the program offers widespread benefits to the agriculture sector Providing a simple answer to the Government s most pressing questions. In this submission, Latevo International requests the Australian Government consider: 1. Providing the agricultural industry with a tax incentive to take out revenue insurance 2. Modelling this tax incentive on the current R&D Tax Incentive. Latevo International s extensive research, and our consulting work with the Big Four Banks, Farming Associations and Economists, indicates that the direct result of this tax incentive would be: Accelerated uptake of adoption of revenue insurance across the nation A way to remove financial volatility from the equation for farmers, creating the kind of stability and opportunities for increased innovation and productivity as yet unseen in the Australian agricultural industry Flow-on benefits for the Australian economy, regional communities and our global competitiveness. Building a more competitive, profitable and sustainable Agricultural sector 1
Submission to Australian Government s Agricultural Competitiveness Issues Paper How Revenue based Certainty Insurance works. Recovering business and production costs when disaster strikes Developed by Australian farmers and underwritten by Allianz, a leading global insurance specialist, Latevo International s Certainty Insurance product is based on a customised crop income protection model that offers a recovery of cropping costs in the event of a farmer being hit by the devastating effects of frost, flood, drought or other weather-related and revenueaffecting perils*. A new approach to crop insurance Unlike past multi-peril crop insurance programs that have failed to achieve critical mass in the Australian marketplace, Latevo offers for the first time in Australia a scheme that is viable without government subsidy. Past MPCI programs have traditionally been yield-based offerings and have assessed farmers on district averages. These past models have not provided farmers with the adequate financial security or individualised coverage solutions required in seasons with poor growing conditions. An affordable, customised program Latevo s revenue-based insurance model extends coverage on a highly customised, personalised basis and functions like most traditional insurance policies by first undertaking a risk assessment. In addition to working with each farmer s adviser(s) to obtain relevant operational information, Latevo utilizes a 5-year revenue and expense history calculation to conduct an assessment of the estimated costs that Latevo will replace in the event of a peril generally the full cash cost of production, including seed, chemical, fertiliser, interest and overheads will be made available in the form of coverage to growers. Certainty Insurance provides a secure insurance solution by transferring risk from the farm to the global insurance industry that financially supports the program, thus providing farming families with access to vast amounts of working capital when they need it most and offering a comforting level of security with growers banks and trading partners. Building a more competitive, profitable and sustainable Agricultural sector 2
Submission to Australian Government s Agricultural Competitiveness Issues Paper How Revenue based Certainty Insurance works. How it works Without Revenue based Certainty Insurance The main objective of any business is to make a profit; to do so, the first thing the operation must achieve is $1,400,000 Good Year Bad Year covering its costs of business. If a business does not cover its costs through revenue or earnings, it must then draw on external funds to meet the realised shortfall and obtain additional funds to support $1,200,000 $1,000,000 $800,000 business continuity going forward. $600,000 The concept of Certainty Insurance crop income protection is simple: to provide a farming enterprise with an operational safety net, such that in the event of a worst-case, catastrophic scenario, the grower has the protection in place to carry the operation through to the next production year. As an example, if it costs $1 million to cover a cropping enterprise, the operation would purchase approximately $1 million of crop income protection insurance to replace its expected costs in the event of a disastrous growing season. Building upon this example, in the case of a bad year (such as the grower experiencing a severe frost or drought event, resulting in the enterprise s income dropping to $400,000), the grower s claim would be to the value of $600,000. There are many advantages to having such a significant payout in years where a farming enterprise s income is low. Under the conditions provided through the Certainty product, the grower s operation can: Eliminate the need to borrow additional money from the bank to fund next year s crop $400,000 $200,000 $0 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 Crop Income Good Year Expenses Crop Income Bad Year Expenses With Revenue based Certainty Insurance Crop Income Expenses Crop Income Expenses Grain Revenue Expenses Latevo policy payout Latevo premium Elimitate the risk of breaching its bank covenant Reducing the paralysing effect of increase interest costs Possess the ability to hold grain in inventory wait for a higher achievable price Take advantage of land purchase opportunities Reduce financial stress Have comfort knowing the farm will not become insolvent in the event of a significant drought event Building a more competitive, profitable and sustainable Agricultural sector 3
Submission to Australian Government s Agricultural Competitiveness Issues Paper The Current Landscape The agricultural industry at a glance Droughts, floods, frost and other perils have historically generated conditions in which many farm businesses run at a loss Most enterprises have gone through expansion phases to gain greater economies of scale, which expose the business to further potential losses in the event of a peril striking the operation Australian farmers have also experienced declining terms of trade, with a significant increase in expenses to further reduce achievable margins Working capital requirements are now on average three times greater than they were just 10 years ago The conditions above translate to deteriorating financial conditions for farming families, regional communities, national food security administrations and the economy in its entirety. In its Issues Paper, the Australian government seeks advice from industry on how to encourage a competitive, profitable and sustainable agricultural sector, which has substantial multi-level effects for the health of the Australian economy. Latevo, with the support of key industry stakeholders, firmly believes that as a nation, we must first recognise and address the enemy to innovation, sustainability, competitiveness growth and productivity. This enemy is risk. A hand up, not a hand out beyond the bail-out mentality The traditional methods utilised for managing catastrophic events taxpayer-funded, ad-hoc aid and welfare programs - are not sustainable or economically viable, are less acceptable to the Australian public, and do not generate the necessary confidence in the industry to ensure its sustainability. In demonstrating their commitment to a sustainable, competitive and productive agricultural sector, Australian farmers have collaborated to create a game-changing crop income insurance program to transform the future of Australian agriculture and create economic stimuli without a cash cost to taxpayers. Latevo s Certainty Insurance product has the ability to protect farmers against financial loss and provide financiers the confidence to lend, unlocking additional working capital in the event of a catastrophic event that could drastically impact a farm s projected profits. Revenue insurance has enormous economic and social potential to address the needs of the farming community by enhancing the overall efficiencies and the competitiveness of the agriculture sector. For farmers to farm, which in turn enables the kind of innovation, productivity, competition, jobs growth, regional development and national security our country needs, the substantial risks faced by our farmers must be mitigated in a cost-effective, sustainable way. Building a more competitive, profitable and sustainable Agricultural sector 4
Submission to Australian Government s Agricultural Competitiveness Issues Paper The Current Landscape Farmers are in the business of being a business; we farm to make a living. When adversity strikes, we don t want welfare; we want to be self-sufficient, not relying on government assistance just to help us carry on. PHIL KOSCHITZKE Farmer in the Wimmera region Northern Victoria Any program that helps us achieve this aim is sensible; not just for everyone directly involved in our industry but also for those around us. Our business has become highly volatile; both in production and in the price we receive for our product. Rising expenses has seen our ability to manage seasons with minimal income become increasingly more difficult; the buffer between the good and the bad seasons has been eroded away. And when we have little income, our local communities suffer; retail, charities, sports clubs, all share the drought with us. Protection against the poorer seasons would help stabilise our business, and allow us to continue to be vital contributors within our communities. Revenue insurance would help us to reduce the impact of a poor season. Poor production or poor prices; both are protected against with a product that allows us to cover our expenses, regardless the reason for the income deficit. Any incentive that would encourage the farming community to adopt this form of insurance as the norm, would have long-lasting benefits for us, for our communities, and for the wider population. PHIL KOSCHITZKE 5 Building a more competitive, profitable and sustainable Agricultural sector 5
Submission to Australian Government s Agricultural Competitiveness Issues Paper The Current Landscape Farmers debt spokesman goes broke Extract from The Australian, 14 April 2014 ONE of Australia s largest grain-growers and influential farm leaders, Rowell Walton, has gone broke, with debts of more than $30 million on his five Queensland cropping properties. The ANZ Bank sent financial receivers KordaMentha to Mr Walton s home at Condamine in southwest Queensland on Friday, immediately taking over the management and ownership of his extensive graingrowing business. He and his wife Debbie have been told to leave their home, Yullabilla station, within 30 days. All four prime properties owned by Mr Walton 2400ha Yullabilla and adjoining Mt Pleasant, Wyola and Undulla stations near Tara are expected to be forcibly sold in the next six months on behalf of ANZ. Mr Walton has spent the past three years lobbying politicians to ease the farm sector s $66 billion debt burden, influencing both Labor and Coalition governments to provide debt relief and cheap loans for farmers. A fortnight ago he challenged the Australian Bankers Association to write-off a portion of the nation s bad rural debt believed to be about $10bn to boost farm productivity. Mr Walton said yesterday he did not blame the bank for making the decision and conceded his debts far exceeded the value of his farms. It s bloody awful circumstances for us, but I am not about to engage in bank bashing, he said. There is a pattern emerging and a much bigger picture. Mr Walton said he had probably borrowed too much for expansion in the three years between 2006 and 2009. But his farms were then worth $27m, land values were rising and the major banks, prior the global financial crisis, were lending freely. Floods hit Mr Walton s properties in 2010-11, wiping out crops worth more than $7.5m a year. His properties subsequently suffered two years of drought. I am afraid that we are going to see a lot more bank foreclosures and farms being put into receivership in the next six months, he said. Farmer evicted from 102-year-old property amid drought and rising costs Extract from ABC Landline, 6 April, 2014 Like many wheat-belt farmers Peter Repacholi succumbed to a spiral of debt after a run of drought and frost combined with rising costs. Last June after reassessing him as a higher credit risk, Bankwest raised his interest rate from 8.5 per cent to 13.62 per cent. Ironically Mr Repacholi had a bumper year in 2013, harvesting about $800,000 worth of grain. But he had arranged finance outside the bank to fund his cropping program and after harvest, Bankwest claimed it all. They confiscated everything. They took every grain I took off the farm, he said. These hard-working and dedicated farmers would still be farming if they had had the option of revenue insurance. With the Government s help we can close the book on stories like this. 6 Building a more competitive, profitable and sustainable Agricultural sector 6
Submission to Australian Government s Agricultural Competitiveness Issues Paper Case Study: Real life - Lost Opportunity Cost Corrigin WA Grower. Financial summary of farm position without Revenue insurance vs with Revenue insurance from 2008 The detailed nation-wide analysis that has been conducted by Latevo International over the past two seasons reveals frightening results across the country. The analysis of broad acre cropping represents a country-wide condition that is much more troublesome than Latevo s initial perception of the current state of Australian agriculture; that is, conditions are far worse than initially thought. Without the implementation of effective government policy, the next significant drought in Australia will see almost every region experience conditions like those currently in southern Queensland (i.e. mass farm foreclosures). A case study conducted by Latevo on a farmer in Corrigin, WA is presented below; this particular farmer attempted to expand his operation to accommodate additional cropping hectares, however his efforts were significantly curtailed by the catastrophic drought conditions of 2010 prevalent in his region of Western Australia. The financial results and corresponding analysis of this operation have been modelled to illustrate the historical conditions and strength of this grower s cropping business, which were then compared to the results achievable under the Latevo Certainty program had it been extending coverage to the operation since 2008. Australian farmers have never had access to an effective insurance program. Our new approach with Revenue Insurance is commonly seen as too good to be true. We urge farmers and the industry to accurately calculate the lost opportunity cost. Our real life examples demonstrate how Revenue Insurance is the only viable opton for farmers looking to expand farms safely. Andrew Trotter, CEO Latevo International Building a more competitive, profitable and sustainable Agricultural sector 7
Submission to Australian Government s Agricultural Competitiveness Issues Paper Case Study: Real life - Lost Opportunity Cost Corrigin WA Grower. Financial summary of farm position without Revenue insurance vs with Revenue insurance from 2008 Provided below is a summary of the insights that have been derived from the thorough analysis of the actual historical experience of this farming operation. When analyzing the effects of the application of Latevo insurance coverage on this farming enterprise, the results provided some incredible insights: Latevo s revenue insurance product allows for safe expansion of farming enterprises The drought experienced in 2010 has catastrophically paralyzed the farmer s business in this real-world example position facing enormous annual interest rates and a reduced land area If the grower had Latevo Certainty insurance in these past years, he would be in a debt-free position by Jan 2013, rather than carrying over $3M in debt on his books The farmer would be running a vibrant, sustainable business, rather than one on the doorstep of foreclosure. See Appendix: Attachment B for full summary details Please Note: The growers 2014 will be available May 2014 Financial The 2010 year Summary left the farmer in a massive debt Results as at January 1, 2013 Western Australia Grower: Corrigin, WA Farm Position: Without Insurance vs. With Insurance Financial Results: Actual Financial Results: With Latevo Insurance Area Farming (Total Ha) 1,595 5,029 Long-Term Debt Retained Earnings (Cash in Bank) Effective Debt Position Annual Interest Bill Payable Maximum Annual Revenue Capacity ($3,283,386) $0 ($3,283,386) ($229,837) $1,236,590 $0 $503,265 $0 $0 $3,462,653 Overall Latevo Advantage $3,786,650 Actual Experience: Financial Results 2008 2009 2010 2011 2012 2013 Cumulative Total Cropping Land Area (Hectares) 2,403 1,588 5,029 1,594 1,595 - N/A Long-Term Debt (833,400) (1,665,300) (1,210,671) (2,401,086) (3,283,386) (3,283,386) (3,283,386) Interest on Long Term Debt (58,338) (116,571) (84,747) (168,076) (229,837) (229,837) (887,406) Total Grain Revenue 830,509 779,303 1,100,860 1,097,528 762,037-4,570,237 Total Contract Revenue 72,631 41,715 132,055 139,062 114,797-500,260 Total Expenses (1,435,714) (884,993) (1,502,245) (1,144,392) (1,443,723) - (6,411,066) Net Income (532,574) (63,975) (269,330) 92,198 (566,889) - (1,340,569) Adjusted As-If Experience: Financial Results 2008 2009 2010 2011 2012 2013 Cumulative Total Cropping Land Area (Hectares) 2,403 1,588 5,029 5,029 5,029 - N/A Long-Term Debt (833,400) (1,665,300) (1,210,671) (2,201,086) (1,583,386) - - Interest on Long Term Debt (58,338) (116,571) (84,747) (154,076) (110,837) - (524,569) Total Grain Revenue 830,509 779,303 1,564,019 3,462,653 2,402,686-9,039,170 Total Contract Revenue 72,631 41,715 - - - - 114,346 Total Expenses (1,475,748) (911,449) (1,586,028) (1,560,062) (1,560,062) - (7,093,349) Net Income (572,608) (90,431) (22,009) 1,902,591 842,624-2,060,167 April 17, 2014 Latevo Insurance - WA Farmer Experience Analysis.xlsx Summary of Results Building a more competitive, profitable and sustainable Agricultural sector 8
Submission to Australian Government s Agricultural Competitiveness Issues Paper Latevo would like to propose a tax incentive partnership to facilitate national participation across regional Australia. Rewarding innovation and sustainability without a cash cost to the taxpayer While the Latevo revenue-based protection model does not rely on government subsidy, we believe there is an essential role for government to play in the introduction of the program, a structure comparable to previous government programs and the current R&D Tax Incentive scheme. There is precedent in the Australian Taxation System for policy initiatives to be made more attractive and to accelerate their update process by introducing a range of both refundable and non-refundable tax offsets. The R&D Tax Incentive provides eligible companies with a tax offset for expenditure on qualifying R&D activities. The two components of the program are: (1) a 45 per cent refundable tax offset (equivalent to a 150 per cent deduction) for eligible R&D entities with a turnover of less than $20 million AUD per annum; and (2) a nonrefundable 40 per cent tax offset (equivalent to a 133 per cent deduction) for all other eligible R&D entities. A similar tax incentive to increase national participation in revenue insurance will help direct positive growth within the agricultural industry, and serve to answer many of the questions asked in the submission to the Australian Government s Agricultural Competitiveness Issues Paper. See PAge 14 for a detailed analysis of the benefits of Premium Payment Tax Incentives. Building a more competitive, profitable and sustainable Agricultural sector 9
Submission to Australian Government s Agricultural Competitiveness Issues Paper Revenue Insurance: An initiative that answers the sector s issues Issue 1. Ensuring food security in Australia and globally Issue 2. Farmer decisions for improving farm gate returns Australian farmers are renowned for their innovation and adaptability to the challenges of the Australian climate. However, the combination of unpredictable conditions and the constraints in raising capital pushes farmers to continue to abandon their enterprises and sell to the highest bidder, often to foreign investors. The challenges faced by Australian farmers in turn create uncertainty over the future of our nation s domestic food security. Government support of the national adoption of revenue insurance via the proposed $1.50 tax incentive would provide an additional incentive for farmers to expand agricultural production into new regions, such as Northern Australia, increasing production nationwide and helping to manage the challenges of global food production. To allow farmers to cope with declining terms of trade, the opportunity to produce greater, more consistent outputs from available resources needs to be presented. The propensity for farmers to invest in technology, improve economies of scale or introduce additional intellectual capital is significantly reduced if the risk of a catastrophic event will result in immediate or short-term business failure. Revenue insurance will reduce this risk and enhance the possibilities for farmers to increase productivity to offset negative terms of trade trends. A national adoption of revenue insurance would create opportunities for our top-performing farms to continue to grow, offering a demonstrator effect to other farming communities and increasing the likelihood of success across the board. It would also allow farmers to confidently undertake succession planning, consider opportunities around scale and generate diversity of production. Building a more competitive, profitable and sustainable Agricultural sector 10
Submission to Australian Government s Agricultural Competitiveness Issues Paper Issue 3. Enhancing access to finance Insurance and finance are intrinsically linked. In the absence of insurance, banks, machinery dealers and Ag Chem retailers cannot effectively provide extended payment terms and options to the same degree as the terms that would be made available were an established insurance product in place. In the current landscape, it is difficult for companies or banks to provide extended payment terms to growers because if their crops fial there is no reveue to pay the extended terms. With the advent of Revenue Insurance credit providers can have comfort that their extended payment terms will always be met. From a banker s perspective, this type of risk mitigation has been a long time lacking and is great news for the industry. The absence of such support distorts natural growth and innovation, something I have seen first hand in the WA Grains industry, Chris Moore, Westpac Head of Grain, Commercial & Agribusiness Banking WA. By transferring risk from the farm to the insurance industry, revenue insurance can protect farmers against financial loss and provide financiers with a high level of confidence to lend. Several banks have already advised they are working on incorporating revenue insurance into their bank lending policy for the 2014 season. Revenue insurance will help farmers maximise profits by empowering them to expand with safety, to forward contract grain, and to use fertiliser appropriately, without fear of failure. Building a more competitive, profitable and sustainable Agricultural sector 11
Submission to Australian Government s Agricultural Competitiveness Issues Paper Issue 5. Enhancing agriculture s contribution to regional communities Governments can, at the margin, influence the demographic, economic and social patterns of activity and settlement across Australia. This, however, is not best achieved by way of temporary payments to farmers for drought relief. Ad hoc government payments and increased government distributions injected into a rural community are likely to have a limited impact due to the stressed state of the local economy under these conditions and the often delayed receipt of payments. Conversely, the payment of revenue insurance claims would flow immediately upon declaration of crop failure by the insured. The immediate cash inflows into the hands of farmers would allow those communities to effectively prepare their operations for another year without having to consider a disadvantageous reduction of farm inputs. Whilst catastrophes affecting operational production may appear random in nature, there have been longer sustained, measurable trends impacting rural Australia s ability to generate production such as population decline and an aging demographic. An immediate impact of a production catastrophe is a sharp reduction in employment levels and an increased exposure to a large group of younger generations who are not able to effectively relocate to urban areas given difficulties in assuming different work-related roles. Those who are unable or unwilling to adjust to changing environments are likely to face lowered income levels and therefore have the propensity to qualify for social security payments. A child born to a farming family should have the same opportunities as their city cousins in pursuing careers of their choice and not be penalised by living in regional and remote Australia. Funding boarding school fees in a drought, flood or frost can be extremely challenging. Latevo Revenue Protection Insurance assists in making sure the school fees are paid. Dale Park - President The West Australian Farmers Federation Building a more competitive, profitable and sustainable Agricultural sector 12
Submission to Australian Government s Agricultural Competitiveness Issues Paper Issue 7. Reducing ineffective regulations Issue 8. Enhancing agricultural exports Research suggests the Government Drought Policy may have impeded the development of a private market for insurance on the basis of farmers believing that the government will provide assistance during a drought or other natural catastrophe. However, the failure of fiscal and monetary stimulation to generate sustainable recoveries in agriculture demonstrates the notion that this policy does not work effectively or consistently. The introduction of Certainty Insurance as an Adaptive Governance strategy allows the industry to naturally determine which producers will stay solvent and which will either become insolvent or will be acquired by another operation. This is achieved primarily by providing access to cost-effective capital and allowing producers the capacity to be productive and innovative. Due to the challenge of continually declining terms of trade in agriculture, Australian farmers must consistently strive to improve efficiencies and achieve productivity growth if they are to remain internationally competitive. Should Latevo be given the opportunity to support a critical number of Australian farming clients in the program s first year, the global reinsurance capacity supporting the program will be further strengthened, and the product s eventual launch into the U.S. market will become a near-sought reality for Certainty Insurance. A program of this nature in the North American environment will provide the U.S. government with an opportunity to relieve a portion of its farm bill insurance subsidisation scheme achieving the long term objective of creating a level playing field between the U.S. and Australia wheat growers. Building a more competitive, profitable and sustainable Agricultural sector 13
Submission to Australian Government s Agricultural Competitiveness Issues Paper Issue 9: Assessing the effectiveness of incentives for investment and job creation Premium Payment Tax Incentives An extract from Will the Introduction of Revenue Insurance Improve Productivity of Western Australian Wheat Farmers? Prepared by John Thomson, Director, RSM Bird Cameron Tax policy settings are used to assist the allocation of resources in the economy by supporting entrepreneurial activity and sensible risk taking. The objective is to encourage businesses to pursue new investment opportunities, compete strongly in export markets and create employment. A central challenge in estimating the effectiveness of tax policy is finding a suitable quantitative measure of policy that is exogenous and that exhibits sufficient variation to identify the effect of policy. The rigorous production audit process required by reinsurers of Revenue Insurance will allow an unprecedented quantitative approach in evaluating the effect of fiscal incentives using the audited farm performance data. There is precedent in the Australian Taxation System for policy initiatives to be made more attractive and their uptake accelerated by introducing a range of both refundable and non-refundable tax offsets. An overview of several of these is set out below: Primary producers who purchase new conservation seeding equipment and receive a Research Participation Certificate can apply to the Australian Taxation Office (ATO) for a 15 per cent refundable tax offset. The R&D Tax Incentive provides eligible companies with a tax offset for expenditure on eligible R&D activities. The two components of the program are: a 45 per cent refundable tax offset (equivalent to a 150 per cent deduction) for eligible R&D entities with a turnover of less than A$20 million per annum; and a non-refundable 40 per cent tax offset (equivalent to a 133 per cent deduction) for all other eligible R&D entities. If you are a primary producer, tax averaging enables you to even out your income and tax payable over a maximum of five years, to allow for good and bad years. This ensures that you do not pay more tax over a number of years than taxpayers on comparable but steady incomes. When your average income is less than your basic taxable income you receive an averaging tax offset. When your average income is more than your basic taxable income you must pay extra income tax on the averaging component of your basic taxable income. Farmers, like other business people, are responsible for managing risks that will occur from year to year. When extreme events happen which are uninsurable simply because there is no insurance cover offered there may be both a moral and economic argument short-term tax payer funded assistance may be necessary to help viable farmers survive. Notwithstanding farmers who both expect and receive direct payments are less likely to master market conditions. Agricultural policy reformers should encourage farmers to engage strategies which allow long term structural reform. The adjustment by farmers to supporting their grain producing enterprises with production risk insurance has brought challenges to the promoters of Revenue Insurance in Australia due primarily to farmer s poor understanding of their financial position. The tax policy issue is whether by Government support for the accelerated introduction of multi-peril insurance will be rewarded by increased farmers autonomy and widened their options complimented by the value of underwriting more sustainable rural communities. Building a more competitive, profitable and sustainable Agricultural sector 14
Submission to Australian Government s Agricultural Competitiveness Issues Paper Based on ABS data in Western Australia the table below used area sown to produce grain or seed as a basis to estimate the cost to the Federal Government any RTO tax expenditure: The estimate cost of the proposed RTO can be directly Both the social and economic cost of Australia s offset by the following: regional population continuing to relocate to coastal city hubs. An increase in income tax payments from those farming businesses who adopt Revenue Insurance on The Conservation Tillage Refundable Tax Offset (RTO) the basis a claims payment will be assessable income initiative is part of the Carbon Farming Futures program and therefore likely to reduce any carried tax losses and was designed to encourage conservation tillage from a disastrous production year to nil; practices in Australian agriculture. Likewise the Revenue Insurance RTO could also be designed to the A reduction in Centrelink transfer payments on encourage the uptake of crop revenue protection the basis Revenue Insurance will increase taxable insurance on the basis influencers such as accountants incomes; will promote the tax effectiveness of the strategy and Exclusion of Revenue Insurance policy holders from farm consultants will reconsider the strategy given the prospective ad hoc disaster payments means their cost has effectively been reduced to circa 50% of the income will exceed the thresholds given, in the current offering. receipt of an insurance claim; and Building a more competitive, profitable and sustainable Agricultural sector 15
Submission to Australian Government s Agricultural Competitiveness Issues Paper The RTO could be administered by the ATO on the Certificate application form on or before 30 June of basis the ATO is responsible for all matters relating to the same income year the insurance contract was eligibility and the issuing of any offset through the entered into the premium paid; taxation system. If the Conservation Tillage Refundable Receive a Research Participation Certificate from the Tax Offset is to be used as the implementation model ATO; and then an overview of the process is as follows: Claim the offset in income tax return of the entity Enter into an eligible insurance contract with an who paid for the insurance contract and who eligible general insurance provider; conducts a primary production business ; Complete and submit a Research Participation The Table below sets out the reduction in costs for a Revenue Insurance premium following the introduction of a RTO: Building a more competitive, profitable and sustainable Agricultural sector 16
Submission to Australian Government s Agricultural Competitiveness Issues Paper Companies are currently allowed to carry back tax losses to get a refund of past tax paid claiming on the basis this policy setting will help companies innovate and adapt in an economy in transition. Conceptually a farming business is no different except that agriculture is challenged more by production catastrophes than other Australian enterprises attempting to reposition themselves in an increasing globalised economy. Whether a company claims back past tax paid or a current farm business passes less tax in the current year the impact on tax revenues is the same therefore it is equitable to provide both sectors with an opportunity to innovate and adapt in an economy in transition. A comprehensive assessment of any RTO introduced with respect to Revenue Insurance will be possible using the data collected as part of the production audit process and correlated with other data sets such as ABARE and private consultants. The data used for the statistical analysis would include a mix of farmers who registered to receive an RTO and other farmers with observably similar characteristics that are not registered to receive the RTO. The objective will be to ascertain whether there is a statistical relationship between the tax incentive and the adoption of Revenue insurance. The Federal Agriculture Minister Barnaby Joyce when announcing the terms of reference for Agricultural Competitiveness White Paper identified farmer education being central to the promotion and adoption of sustainable risk management strategies. Clearly the longer the adoption period for Revenue Insurance the greater the risk Government will be again asked to fund ad hoc production catastrophe payments. Tax incentives have been demonstrated to be an incentive for farmers to adopt new business models notwithstanding it is arguable farmers should adopt such strategies from a best business management perspective. The key to reducing the impact on public resources is to encourage mechanisms supporting sustainable risk management strategies. Tax expenditures which directly assist with the demand for counter cyclical assistance measures will allow expenditures in the areas of agriculture research and export development to be strengthened. In conjunction with Revenue Insurance this is more likely to establish pathways to reform by helping continuing farmers to adjust to changes in market forces enhance both structural change and improve capital liquidity in agriculture. The Australian Revenue insurance model is unique to Australian conditions and has been developed outside of Government demonstrating Australian agricultural entrepreneurs have the capacity to be world leaders. Unfortunately if the adoption of this financial risk management tool is not embraced promptly the ongoing risk to both agricultural efficiencies and Government s financial resources will continue. See appendix A for a detailed extract from - Will the Introduction of Revenue Insurance Improve Productivity of Western Australian Wheat Farmers? Prepared by John Thomson, Director, RSM Bird Cameron Building a more competitive, profitable and sustainable Agricultural sector 17
Submission to Australian Government s Agricultural Competitiveness Issues Paper Conclusion: Creating a generational legacy The impacts of farm production catastrophes are far-reaching, with profound impacts on training, health, family lives and community development and sustainability. The loss of farm workers and family members from farms means a loss of intellectual capital and potential family farm successors. will strengthen our balance of trade position as we increase productivity, investment, and export value, contributing to a stronger more robust future for the Australian farming sector and the country in its entirety. Revenue protection insurance is likely to strike a resounding note with young farmers tasked with taking over a family farm or those who are entering the agricultural industry by purchasing their first farm. With a stable agricultural sector, we will create more jobs and reduce urbanisation. A stable industry Building a more competitive, profitable and sustainable Agricultural sector 18
Submission to Australian Government s Agricultural Competitiveness Issues Paper Conclusion: Creating a generational legacy Farmers have to prepare themselves for drought, and insurance is the only effective way. Farmers cash reserves are no longer adequate enough to survive catastrophic weather conditions that risk striking their cropping land. Terms of trade that now exist in Australia have impacted aggregation of land; farmers have increased farm size to achieve economy of scales in an attempt to drive profit. However, if farmers across Australia were to experience the equivalent season to (or worse than) 1994 or 2002, over 85% will fall outside of bank covenants. This risk exposure creates dire consequences for the industry that cannot be underappreciated, and money debt for the agricultural sector is at its highest peak. The risk profile of a farmer has been significantly accelerated by these factors, but farmers overarching capacity to recover from these risk events outstrips the strength of their balance sheet. In most all other western countries of the world, agricultural insurance has been subsidised by government. Despite this being an approach traditionally enacted in farming industries, Latevo does not believe an Australian program needs to be subsided in the same way. In other countries, governments pay up to 50% of the insurance premium that would be charged to a farmer for multi-peril crop protection; however, under the Certainty Insurance program, Latevo has developed a method of establishing globally competitive premiums that provide a viable risk management solution for Australian farmers. the product as a highly utilized tool in Australian farming. Similar to the R&D tax incentive fund and Howard s health rebate, a $1.50 government tax incentive for Certainty Insurance will help to effectively guide the industry growth. If support is provided over a period of at least two consecutive terms, growers would be able to experience payouts in certain circumstances and gain comfortable in recognising a producer that has established itself in a market and conveys longevity to support grower needs. When the agricultural industry plays such an important role in the nation s economy and GDP, it is staggering to see the industry is so underprepared for its next catastrophe, whether that catastrophe is drought, flood, or another weather-related peril. The vast majority of Australian growers, should they experience a severe drought in 2014, would fall outside of bank covenants (i.e. would be virtually insolvent). It can also be said that agriculture in Australia cannot possibly take advantage of the Asian Century if catastrophic risk is not mitigated. The only effective way to solve this issue is through widespread adoption of multi-peril revenue insurance across the country for farmers, financiers, and investors in agriculture. If we have another 2002 drought the industry will implode. Farmers have to prepare themselves for drought, and insurance is the only effective way. Andrew Trotter CEO Latevo International However, Latevo does require governmental support to help increase nation-wide participation and to establish Building a more competitive, profitable and sustainable Agricultural sector 19
Submission to Australian Government s Agricultural Competitiveness Issues Paper this initiative reach far beyond the immediate benefits to agriculture; a stable industry will strengthen the country s balance of trade position as Australian productivity increases, and investment and export values contribute to a stronger, more robust future for the Australian farming sector and the country in its entirety. Crop revenue insurance will dramatically change the way that farmers plan and manage their cropping enterprises each season. With the comprehensive content of this submission, Latevo International respectfully recommends the Australian Government: Recommendation The Australian agricultural sector is in desperate need of a new approach that will enable farming enterprises to succeed and mitigate the impact of climate change. Stabilising farm businesses is absolutely critical to the growth and prosperity of this country. It is vitally important that we also consider the huge social cost to this country borne from the significant financial distress faced by farming families in the rural sector. The alarming increase in male depression in regional Australia and the loss of generational farming knowledge as young families sell their operations all stem from the economic hardships faced by those in rural communities across the country. With the collaboration of government, corporate finance and regional sector groups working together to develop effective solutions for agricultural industry sustainability, we can help farmers become economically prepared to survive the effects of mother nature and significantly reduce financial volatility in farming communities. Under the conditions of a stable agricultural sector, more jobs will be created and maintained and the growth of urbanization will be reduced. The effects of 1. Provides the agricultural industry with a tax incentive to purchase revenue insurance to effectively manage the risks exposing the industry; 2. Models this tax incentive on the current basis of an R&D Tax Incentive. As demonstrated throughout this submission, the results of such a tax incentive, which would create non trade distorting economic stimulus and achievable at no cash cost to the taxpayer, would be: 1. National adoption of revenue insurance 2. A way to remove financial volatility from the equation for farmers, creating a level of stability and opportunity for increased innovation and productivity that is yet to be seen in the Australian agricultural industry 3. Measurable benefits to the overall Australian economy, its regional communities and the country s global competitiveness. We thank you for your consideration of this submission and look forward to discussing how Latevo can work with the Australian Federal Government to help engage farming families and communities in the widespread adoption of this innovative, timely and effective program. Building a more competitive, profitable and sustainable Agricultural sector 20
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Abstract... 3 1. Introduction... 4 2. Review of Agricultural Insurance Literature... 8 3. Methodology... 23 4 Calculating Net Cost of Revenue Insurance... 31 5 Calculating the Loss in Productivity Due to Not Adopting Best Farming Practices... 39 5.1 Analysis of the After Shock Phenomena... 42 5.2 Analysis of Financially Stressed Farmers... 43 6 Estimate the Financial Impact in the Grain Production Supply Chain from Revenue Insurance.. 44 7 Increase Cost of Farm Equipment Due to Supply Chain Inefficiencies... 59 8 Premium Payment Tax Incentives... 64 9 Improving the Efficiency of Grain Marketing in Australia;... 69 10 Improvements in Land Care and the Environment;... 78 11 Self Insurance Using Farm Management Deposits... 81 12 Conclusions... 88 Crop Insurance Acronyms... 89 Glossary of Terms... 92 References... 96 List of Table and Figures... 98 Transferring Tax Expenditures Along the Supply Chain... 99 Structural Changes... 129 Latevo Policy Wording... 148 Latevo Policy Schedule... 162 2
Abstract! Australian society is portrayed by the media as being concerned for the welfare of rural communities.forthediminishingnumberofaustralianswhostillretainadirectlinktoagriculture either by profession or family connections their concern is real. However the balance of the population either having no exposure, or have drifted far from their agricultural ancestry, the challenges of their own lives dominate their thinking.nonetheless there is a growing sense of frustrationfrombothfarmersandgovernmentasmechanismstosupportagricultureintheabsence ofanyalternativerelyonaseeminglyneverendingcycleofadhocretrospectiveaidandwelfare programs.thecurrentliteraturefrequentlycriticisessituationbutprovidedfewpracticaloptionsfor tacklingthecomplexandinteractingissuesfacedbypolicymakers. Governments responding to both public concern and the flow on impact of catastrophic events decimatingagriculturalproductionfacesignificantmoralhazardinidentifyingwhichfarmersshould be provided with assistance. Primarily this is due to the lack of reliable, timely and accurate information on farm management and performance.to date Government has not been able to balancesupportandwelfareforfarmersimpactedbycatastrophiceventsthatareacceptabletothe balance of the Australian society while satisfying Governments sustainability and economic efficiencygoals. This paper will explore whether revenue crop insurance 1 has the capacity to replace ad hoc Governmentandwelfarepaymentswithasophisticatedfinancialproductfullyunderwrittenbythe internationalinsurancecommunity.whilstgovernmentsarefacedwithacomplexsetofobjectives andinteractingissuesonareactivebasisinsuranceproactivelyfactorstheriskofcatastrophicevents into long runs of prospective premium payments.the objective of this research is to explore whether the introduction of revenue insurance will increase the productivity of Australia grain production. 1 RevenueInsuranceinsuresonlyaproportionoftheinsurablerevenueofthefarm. 3