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Rural and Regional Affairs and Transport References Committee
Foreign Investment Review Board national interest test

FARLEY, Mr David Dickson, Chief Executive Officer and Managing Director, Australian Agricultural Company


CHAIR: Welcome, Mr Farley.

Mr Farley : Thank you. I am the CEO and Managing Director of the Australian Agricultural Company and I appear here with concern.

CHAIR: Thank you. You have lodged submission No. 8 with the committee. Would you like to make any alterations or additions to that?

Mr Farley : No.

CHAIR: Would you like to make an opening statement?

Mr Farley : Yes. We have got 38 years before we see peak food demand. When we see peak demand globally, under current resources we will arrive at a catastrophic position with supply and demand. The reality is Australia only gets one opening night when it comes to our future in agriculture. At the moment we seem to be more focused on, 'Where does the capital come from?', as opposed to the pathways of being successful in developing our land. The first issue, before we address what country, what faith, or what location the capital comes from, is that we need to ensure that we have got an attractive enough investment for these people to invest in. We have large, long-term challenges around land tenure. The majority of the land in the north is under various forms of lease. It has various forms of Indigenous engagement over the top of it through Indigenous title or the Indigenous land use agreements that have been put together. There is a powerful amount of social interests in our land in the north, both from an environmental and a heritage perspective and from the green urban democracy perspective. So before we get anywhere near even contemplating bringing capital in, we need to understand that we need to make the assets available. If we are successful it will take a number of years—if you start working down from 38 years, you could burn comfortably 10 of those, or a third of it. But then if we get there, with all those assets, for Australia to maintain its position as a global exporter—and when you look at Australia's position as a surplus exporter, in other words compared to any other surplus exporter in the world, we are No. 2 in wheat, No. 2 in beef, No. 3 in cotton and No. 3 in sugar—then agriculture has got a big, big job in front of it.

If we finally get over the land issues then we need to address the infrastructure issues of roads, power, ports, infrastructure, R&D et cetera, just to even get there. Then, more importantly, if we look at the debate about where the money comes from, one thing that is very clear in Australian agriculture is that we are not attractive markets to invest in our own land. We have heard this morning about the opportunities—we can read about it in the paper this morning as well—and why we are attractive to foreign capital, because of the taxation advantages both on capital and working capital conditions. They can bring capital into the country. Yet we export our capital because the taxation is more attractive offshore than onshore. If we could finally get to this point then of working out where taxation is, and then ultimately to the point of where do the ASIC rules, especially whether it is under trust arrangements or under public listed or private listed, play themselves in here, then we need to make sure we can conduct ourselves as a country properly on top of it.

We have seen the interruption of trade and the powerful erosion of equity value and lives with the interruption of the live cattle trade last year. We are getting challenged at the moment, and we are bringing the world's largest fishing vessel in to fish the waters under a smart move under the quota act. If you look at our history, of establishing the country, we need to make sure that anyone who invests in our country takes full respect of all the biosecurity measures that need to be there to be a successful operator of our land. Our history started with a pretty big blemish with smallpox, which took out the Indigenous population. Austin wanted to be entertained by rabbits and sparrows, and others enjoyed having prickly pear in their gardens and, of course, they have moved on from there. If we look at our own management of land there are numerous problems—we could look at the problems that our national parks are now giving to productive agriculture with wild animals et cetera, the problems that we are having with the lack of R&D bringing productivity back on to our land and then, more importantly, the inability to address different forms of equity or capital financing, whether it is through an Islamic souq bond or whether it is through private loans. Gentlemen, ladies, we have a big job before we even get to opening night. My concern is that in the next period of time, the next 38 years when we hit peak, if not catastrophic, agricultural supply and demand globally, or the next 10 years or 20 years, can Australia actually get itself ready to plays its part as a responsible supplier of food to the world? The way we are conducting ourselves at the moment, I doubt it.

CHAIR: Thank you very much, Mr Farley. I have to say that we on this committee are very conscious of what you were talking about there: the global food task and the contest with the global energy task. The government changed a pretty important committee—that is, the select committee looking at how we produce food in the future that is affordable to consumers, sustainable for the environment and viable for the farmer. It was actually shut down when the government changed and, as you know, the can-do part of the Northern Territory Development Taskforce was removed and is now cannot-do. It is a great challenge and is something that we on this committee are very conscious of. Hopefully we may be able to contribute to a sensible debate to get around some of the issues that you talk about.

Your company, for instance, was interested in developing Ord stage 2, as I understand it. I have seen too many deals done that have avoided the responsible use of taxpayers' money. In the Twynham water sale for $300-odd million, over a cup of tea after they removed the tender process, a lot of the water that was acquired by the Commonwealth the Commonwealth did not want, but to get the water they wanted they had to take it. So it is with this deal where you are competing against—and you do not have to comment on this—a company that says, 'We will take Ord stage 3 out from the Northern Territory'. Claire Martin of the Northern Territory told me, when I was chairing the Northern Territory Development Taskforce, 'We are not interested in development. We do not have the resources; we are not interested'. That company has said, 'We will take that as long as we can have Ord stage 2 as well'. That is the sort of game-playing that goes on behind the scenes which disadvantages companies like your and other companies. They may be American super funds or whatever, but they participate in our tax system and they participate in the commodity market, as your company so loudly does.

So you have my congratulations for turning up here today, but we are very concerned about where we are going to be. As I have said many times—and this committee is sick of hearing it—by 2050, 50 per cent of the world's population will be poor for water, there will a billion people unable to feed themselves, barring a catastrophe there will be nine billion on the planet, 30 per cent of the productive land of Asia will be out of production with two-thirds of the world's population living there, the food task will have doubled and there will be 1.6 billion people possible displaced. Over two hours, I could explain all that to you.

Senator GALLACHER: I want to go to the attractiveness of Australian capital to your type of enterprise. Just to give you a little bit of background, I used to be a trustee of a super fund and chaired an investment committee which had an investment in Colonial agricultural trusts. Every time we met and got a report on that it was deemed to be illiquid, akin to private equity and was set at a rate of return which was never going to be achieved. It was always an underperforming part of our portfolio. Indeed, it was so illiquid that we were advised repeatedly to just get out of it. In that sort of environment where people have got a horizon and an asset allocation, which means people have to retire and get paid, and they have a significant chunk of money in what might be deemed as illiquid and not generating much cash, how are you ever going to get over this hurdle to attract the very large superannuation industry to put its money into significant operations like yours?

Mr Farley : I am obviously not as intimately aware as you are on the performance of your past experience with the Colonial investment, but I do have some knowledge of it. An investment of that nature has a big time horizon to it. If you, quote, take the doyen of investors, Warren Buffett, no matter how many smart men you have in the room, it still takes nine months to make a baby. I sense that the length of time and tenure that you were in there for was not long enough.

If you reflect back on the Prudential group in the United States, now the largest landholder of agricultural land across America and a big anchor of their agricultural portfolio, and then if you go into the teachers and professors pension fund known as TIAA-CREF who have now expanded not only outside the United States but into Brazil and are currently the largest arable land buyer in Australia, if you speak to Terra Firma, the large British-based fund manager and their appetite for Australian land and more of it and many of the other funds, you would hear about this. If you have a chance to engage with Lawrie Willett from the Superannuation Fund Investment Trust that ultimately became CFM and their experiences in converting greenfield pasture into intensive irrigated land, I am sure he will enjoy great successes with you.

If you come to where we are today, and again today's press is quite comfortable reading, why do take our funds offshore? Because we put them into attractive tax havens. More importantly, why do people come to Australia to invest? Because the taxation haven they allow themselves to be in in Australia in agricultural land has an appeal to it. I am fortunate that I am probably representing the original foreign investor in Australian agriculture. We started in 1824 and at the time we arrived with £1 million and a number of sheep and were given a million acres of land in what was called the wastelands of New South Wales. Today we would describe that wasteland as the Hunter Valley. We were successful in developing towns, Maitland, Tamworth and others, which were all part of the station complexes. Agriculture takes time but the more interesting thing about agriculture today with our demographers and financial analysts is that we have much more ability with the technical tools we have got and the intellect we have got to predict the future. It is happening now at a lot faster rate and with a lot smarter capital than I sense, Senator, your experience allowed you to enjoy.

Senator GALLACHER: So what you are saying is that the people with the deeper pockets and the longer vision are not the Australian investors.

Mr Farley : Correct. I am also saying that the Australian investor has not got the opportunity to enjoy the taxation breaks that the foreign investor has.

Senator GALLACHER: Is there any sense in all of that, apart from the deep pockets and long-sightedness, that they are actually investing for food security of their own nations?

Mr Farley : The horizon of investors I just gave you, many of them are investing for long-term pension-fund outcomes. Some of my investors, the offshore investors in my corporation who hold big stakes, have no desire to even engage in conversation with me only on five- and 10-year periods because they know we are managing an unrepeatable asset that historically goes up in value. On the other side of it, my attempts currently to build an abattoir in the north I am having enterprises come to me which want to just process animals through the abattoir and take the whole animal offshore, everything from the hide to the tallow—the whole lot. They want to take it straight out of the country at literally station values. My concern is that as those enterprises accumulate more land I do not want to be a laundry market for dirty capital under Australia's taxation structure. I come here today with an urgent request to you, if you are the committee to take it all the way through, that we have to get this right. I repeat: we are only going to get one opening night on this and at the moment our rehearsals are pretty appalling to the international market. More importantly for me as an operator in it, I am concerned that I am being asked to facilitate something that does not fit our tax act.

Senator GALLACHER: But overall investment is going to have a rate of return and there is a bit of an argument that Australian superannuation funds particularly do not see that rate of return and therefore do not invest in agricultural sectors.

Mr Farley : Northern agricultural land up until the GFC was appreciating at 10.5 per cent historically, but up and down depending on the seasons. At the moment we have got over the GFC and our performance in the north of Australia is the uncertainty of the intervention that we had with the live trade and therefore the collapse of the small producer that the banks are now liquidating those producers out of it. Government actions, besides seasonal actions, have an impact on agricultural performance across the north.

CHAIR: I am not going to forget that I have got Senator Xenophon and Senator Edwards on teleconference. Mr Farley, we have got advice from the tax office that says there are all sorts of concessions to the new player on the block, which are sovereign investors, and if they in fact produce here and do not participate in the market and deal direct for humanitarian purpose there is no tax for them on the way out. They get a tax concession on the way in and if they finance an arm here it is passive investment and that is not taxable as well. How in God's name does anyone that is in the market to get a return on investment, wanting to participate in the commodity market and not distort the land market, compete?

Mr Farley : They don't, that is the reality of it. That is why the Australian investor, if our investment funds, the multi-trillions of dollars we capture and put together to work globally, if we could offer our funds those attractive breaks I am sure they would supply the capital to develop the north of Australia. We have got plenty of capital; it is an issue of the pathway to it. At the moment we are making it attractive for foreign capital to participate and harvest good reward from and take out of the country without it being to the benefit of the country. Surely to goodness we should be addressing how we prepare our capital to invest in these opportunities as well.

CHAIR: It is interesting that we want to have a free trade arrangement with someone who will not allow us freehold title in their country but they want it here. It befuddles me. Senator Xenophon.

Senator XENOPHON: Thanks very much for your evidence, Mr Farley. I am referring to an article that you wrote that was published in the Financial Review on 7 June that was headed 'We can feed the world ourselves. You made mention back then and asked the question why isn't a pathway being engineered for local investment ahead of international. In relation to that in terms of specific tax changes that you would recommend, what are they? You have referred to it in general terms, but do you see that there is an unlevel playing field at the moment in terms of that long-term substantial investment that is required to develop the north, for instance?

Mr Farley : If you want to make the playing field level, you will level it out to what the foreign investment capital can have now. I sense that that is probably inappropriate and it is just an accident of time that those pathways are there. I do think the most attractive point will be to ensure that the investment exit when it happens at a point in time is treated away from the current capital gains tax that the investment would have to pay. If it was made more attractive that the funds as they were being realised over the life of the horizon once the investment was complete with a little bit more appealing on exit, I am sure it would be a lot more appealing on the entry. That is one. Second, the other ones take a powerful amount of working capital into it and it is whether we can be balancing out the taxation of the overall fund if a percentage of its funds over a 20- or 30-year period were designed at developing Australia's capacity and competency and technology within agriculture that if a fund was demonstrating to Australia that it was putting money, that that demonstration could give them tax credits on the performance of all their funds. I am sure there are smarter, wiser men than me who could address the issue, but the reality is that we have one of the world's best harvesting nets of superannuation dollars for long-term horizons, in other words the horizons of the working life of men and women, and we should be able to make Australian agriculture and the demand for Australian agriculture attractive four Australians to invest in.

Senator XENOPHON: Further to that, you said that Financial Review piece that our super funds have made it known that they were keen to be involved and at the moment they are forced to invest offshore because of a shortage here of large-scale agricultural infrastructure projects. But it is a bit more than that, isn't it? It is because the tax rules are unattractive and uncertain for those large-scale projects.

Mr Farley : That is correct. We do have the potential for large-scale projects, don't get me wrong there, but first of all I do think the financial and economic playing field or pathway needs to be equalled and levelled for Australians to participate. Secondly, the projects are definitely there. We have the soil types and especially the soil types that have the ability to have good water holding characteristics. We operate uniquely in the north in what is called a dry topic as opposed to a wet tropic, so we have a defined period of production. We are unique in the extent that we are a young country but we can travel the world, whether in the Mato Grosso or the plains of Bahia in Brazil or alternatively in the floodplains of Louisiana and Alabama, there are plenty of examples around the world in the northern hemisphere geographically soil type wise of how quickly we could put production together. Whether it is the Kimberley region of Western Australia or whether it is the Katherine region on the Uluru aquifer around Katherine itself in the Northern Territory or cross into the Gulf or down onto the rolling plains in central Queensland, we have the opportunity for large projects again. If you go back and look at the history of the AMP Society in particular with its development of the Little Desert and its development of the Stanbroke pastoral company and others, they have been able to demonstrate in the 1950s and 1960s good investment return and exit from agriculture.

CHAIR: Bring back the northern development task force, I say.

Senator XENOPHON: I have a couple more questions further to that. Mr Farley, you have outlined some of the issues in broad terms that need to be addressed. Can I invite you, if you think it is appropriate, to get appropriate advice at your end if you wish to provide a supplementary submission or some supplementary suggestions in terms of specific amendments or specific issues that need to be addressed with the tax act. I know you have addressed it broadly, but if you wanted to do that in terms of any other specific matters I would find it quite useful.

Mr Farley : I will accept that offer and revert back to you.

Senator XENOPHON: The other thing is that I know you were quoted in the Australian a few days ago, on 4 August, saying that you raised concerns that the coalition was pandering to xenophobic interests—a word I am very familiar with—in advocating restrictions on foreign farm purchases. I want to clarify what your views are. If there was greater transparency and a register of who has got what and the threshold was lower than the $244 million threshold, you do not see that in itself as being something that would itself restrict reasonable foreign investment into Australia agriculture?

Mr Farley : First of all, may I comment that I have learnt a lot about how you get represented in the press over the last 14 days.

CHAIR: We will not go there.

Mr Farley : The xenophobic quote was not one of mine, it was used by the paper. It was in conversation. I do not think it is an issue at all where the capital comes from, it is the terms and conditions under which we allow that capital into our country and what job it has got to do. So whether it is Chinese capital, Middle East Islamic capital, UK capital or Malaysian capital is irrelevant. It is the terms and conditions under which we allow it to be employed.

Senator XENOPHON: In the final paragraph of your submission you made reference to sovereign companies in terms of state-owned enterprises controlling funds. There is a concern I have raised about what appears to be a privately owned company which actually has close links to a sovereign wealth fund through a system of guarantees or trusts or convoluted arrangements. Is that the sort of thing we should be looking behind to ensure that if it is a private company it is that, it is not actually a front for a sovereign investment fund?

Mr Farley : I think so, but I do think there is a greater understanding of the different financial tools that are available to us globally now. Islamic finance, the Shariah Sukuk bonds, does not allow the charging of capital.

Senator XENOPHON: Charging of interest, you mean?

Mr Farley : It does not charge interest of any form but it is a participation in the realisation of the value of the asset on the exit. Therefore if we are going to use that form of capital and allow that to be applied in Australia, we need to recognise and determine how it fits with our taxation base and then, more importantly, how it fits with our ASIC rules because we are operating under principles of offshore companies and offshore financing mechanisms underneath our trading rules. So there is a powerful amount of research to avoid the conflict that needs to be achieved. I reiterate that we only get one opening night on this. We have defined that we have only got 38 years, and more importantly we are defining we have got challenges in front of us that will take five to 10 years to resolve. I think that needs to be on the list as well.

Senator EDWARDS: Thank you, Mr Farley. I only want to take you to one point. I am in furious agreement was a lot of your sentiment there. I want to take you back to the regime in which we operate, which you will obviously outline with Senator Xenophon's invitation to resubmit, which I would be very interested in also. During your opening statement you effectively referred to being fearful that you might be asked to become a laundering facility, given our current taxation regime and the expectations of other foreign companies. Can I explore that a little bit more with you? It seems to me that that is the core of the issue: the expectations of foreign investments—the patient capital—and the Australian markets—the impatient capital—and the conflicts which exists with you trying to raise capital, and what is holding us back. And then, indeed, any conflicts that exist with the current law.

CHAIR: Can I assist Mr Farley before he answers? Senator Edwards, you would have the letter from the Australian Taxation Office—paragraph 3, dot point 2: 'Income tax will generally not be taxable if the income was passive income. For example, interest earned by a sovereign state from investments in Australia would be exempt from tax under the doctrine of sovereign immunity and similarly for income from dividends etc.' I think it is fair to say that the average Australian does not understand the concessions that are available under the present regime.

Senator EDWARDS: Correct.

Mr Farley : That is correct. All agricultural produce in Australia has to pass through a gateway. If it is cotton it passes through a cotton gin, a warehouse and a port. If it is sugar it passes through a sugar mill to refine it, a warehouse and then a port. If it is wheat it is passed through a silo complex and across to a port. In the case of meats, whether it is chicken, pork, cattle or lamb, it passes through an abattoir where it is broken down to its various cuts, a distribution chain and to the market. All of those add value to it because generally in agriculture the parts are worth more than the whole. If Australia is only realising its income tax potential on the whole, in other words the live cattle weight or the hot standing carcass weight in cattle, or in cotton the module weight or module advance, we will be passing offshore a powerful amount of revenue that has the ability to generate a tax base to further develop and underwrite all of our society. I am sure that if we look at it now, considering that our agricultural gateways in particular have been sold off to foreign investment—our meat industry is run by a duopoly, as well as our grain and sugar industries—and determine who is the pure price maker to Australian producers, it is the gateway assets themselves. They are the ones who are reporting price, making price and taking positions. Then ultimately, when those products go out of the country and are traded two or three times, are we realising the full opportunity to grow our nation off the toils of our resources? We need to be aware and have a greater intimate knowledge of how the pricing structures work and how our current taxation systems work over the ownership of the asset, the commodity and the commodity flow.

Senator EDWARDS: I agree. It is a serious area which Senator Heffernan is starting to flesh out with the ATO but it is obviously something that this committee must look at if we are going to get an outcome.

CHAIR: Just to reinforce that for Mr Farley—he would be aware of this—without being specific, there is a major purchase, which is at the Foreign Investment Review Board now, with an Australian equity partner and which I understand is a cotton enterprise. I understand there is a view amongst some of the participants that the cotton not be ginned in Australia and that it be dealt back to home base. It is like the beast—they are proposing you take it on board and it will not have to be broken up. I understand further that the equity partner in Australia will be 100 per cent financed by the minority shareholder, which is the foreign vehicle. As the letter from the tax office says, there are situations where dividends through investment are also exempt for a sovereign entity, so I guess it is an income tax nightmare.

Senator FAWCETT: Does AAco invest in leasehold land as well as freehold land in Australia?

Mr Farley : In the majority, 98 per cent of Australian Agricultural's land is pastoral lease or lease-in-perpetuity across North Australia. So, yes.

Senator FAWCETT: From a foreign investment perspective, I look at your submission and on the second page it talks about: 'The restriction of foreign investment in the Australian agricultural industry has the potential to lower land values and equity in Australian farms.' If we put a time limit, whether it is 50 years, 99 years or whatever, on that lease, which is not uncommon even for domestic purchasers of a lease, but said that all foreign investment was on the basis of leasehold with a time limit, do you feel that that would be a disincentive for foreign investors to look at a business case for investing in Australia, or is that just one of the terms and conditions that we could legitimately put on a foreign investment such that it allays the concerns of those who 'fear' selling the farm in perpetuity?

Mr Farley : I am sure there are many methods. Hong Kong was originally a lease with an extension of a lease, and it played out well for the British. The current proposal to develop the Ord stage 2 is a lease with a host of terms and conditions to do with the environment, Indigenous Australia and the extension of stage 3. The terms and conditions to the Australian capital markets, which is being offered on Ord stage 2 is unattractive, principally because the capital asset appreciation is not going to be there, yet for an offshore investor for the immediate period of time it could be attractive to address immediate food concerns. To answer your question then, as we progress Australia, we are freeholding more land. The new Queensland government has a proposal to start freeholding the pastoral leases, which I sense is going to happen relatively quickly, therefore that will just leave the Western Australian and the Northern Territory leases. The rest have all been extinguished anyway. I would imagine that over time they will happen quicker than our pathway to foreign investment will allow. Definitely, defining time and tenure on the assets could be one way to address the fears of investment in Australian agricultural land, but I do not think it will be the optimum one.

Senator FAWCETT: I hear very loudly your call that we make pathways for Australian capital to be very attractive to invest here. Could this be one of those differentiators whereby Australian capital can buy freehold but foreign capital has to look at a business case that it is only a lease with a set period? Could that play a part in setting terms and conditions that make it attractive for Australian capital to be the lead competitor?

Mr Farley : It could. It could be one of the terms and conditions that makes it attractive, especially if the underwriter of the land happened to be an Australian fund that used foreign capital to develop it and it reverted to the pension fund. We often see that in CBD properties. The original Australian Club in Sydney sold its land to a developer. It had a time horizon; they had the right to occupy a number of floors and, after a 75-year period, I think it will convert to the club members again. There are different machinations that are there but I do think there is a lot of pathway building to be done before we actually get to those models.

CHAIR: Can I assist the committee and Senator Fawcett? I declare an interest. Obviously in the western division of New South Wales there were expiring leases out there years ago which have been converted to leases-in-perpetuity and are now being converted to freehold. One of the difficulties for the leaseholder if there is a foreign investor would be that the Commonwealth or someone would have to pick up the difference in the value of the land between the lease and freehold title and that would be a bit of a complexity, I would have thought. But you have given us something to think about.

Senator FAWCETT: Again, coming back to the point here, we are trying to make it attractive for Australian capital to invest, versus overseas capital, to then provide an incentive for the seller to recognise that they will get more value by selling to an Australian fund. Then it is in the seller's interest and the national interest to have that construct.

CHAIR: And you would get the capital appreciation going to the Australian buyer. I guess that would work well with a greenfield site which was Crown land.

Senator FAWCETT: The reality is that it is a construct that is Australian. Everyone in the ACT operates on the basis of leasehold. Most pastoral leases in South Australia are leasehold, so it is not a foreign concept. It is already in play and it could work towards some of those objectives that you are discussing. Secondly, Senator Xenophon has discussed the concept of coming back with a supplementary submission. Whilst it does not directly go to the further aspects of this in terms of making those pathways that are attractive to Australian capital, you have mentioned several times specifically, and at other times in passing, things like environmental considerations and infrastructure, and you have hinted that perhaps in preparing for the 38-year timeline we need to ramp up our productivity that perhaps goes to research and development. There is a range of areas there. If in that supplementary submission you wish to detail any of those that you think are key things that would make it more attractive for Australian capital to come into these kinds of development then that would be very welcome.

Mr Farley : Thank you. As a comment, 38 years' time is when the curtain comes down—it is over. Globally, we reach catastrophic supply and demand criteria. It is happening now. It is what we can do in the next five years and the next decade that is going to be important.

Senator FAWCETT: That is exactly why I am asking you to provide the input. We can cogitate on it; we can ask universities to research it but you and your investors are the ones making the decisions right now, which means that you and your investors are probably best placed to identify the things that need to change in the next five years so that we can be positioned.

Mr Farley : Yes, I will work on an appendage for Senator Xenophon and Senator Xenophon can put it together.

CHAIR: I might put on the record what we are competing against in other areas like the continent of Africa and some of the better agricultural land in the more corrupt regimes. I have had a visit from several investors asking, 'What's wrong with you mob here in Australia because we can do business much more easily in Africa, even though in some acquisitions we spend more on facilitating than on acquiring the asset?' if you know what I mean. I hope we do not go down that path.

Senator NASH: Thank you very much Mr Farley for your evidence. It is extremely useful. I can certainly say we were glad to hear that the xenophobic comment was taken out of context. I am sure I can speak for all of us on this committee that we are anything but xenophobic and doing nothing more than trying to find some very clear answers to what is a very complex situation. I take you firstly to this issue of the taxation regimes. If the committee can bear with me for just a moment, I asked a question on notice to the ATO in May about the mechanisms for foreign entities lowering Australian taxation. They have come back, to their credit with a very comprehensive answer, stating: It would be impractical to attempt to list all such tax-planning mechanisms at a detailed level—there are many nuances. At a high level, tax planning mechanisms seek to arbitrage between differences in tax that may be available in relation to: who is taxed; where something is taxed; what is taxed; when and how. They go on to state:

With their easier access to low tax jurisdictions, foreign owned entities are more able to take advantage of who, where, what, when and how something is taxed by structuring transactions or the location of their functions, assets and risks so as to 'earn' more in lower more in lower tax jurisdictions.

They go on then to explain some applications of how that might be the case. Thank you again for your comments about this issue this morning. Why is it that this is an issue that has not been discussed before? Why is it that it is not top-of-mind for people that there is this difference, as you have so clearly outlined this morning, between the incentives that are there for foreign investment rather than domestic capital? I ask that in the context that we are told we need foreign investment, and we certainly do not have any intent here to say that there should not be foreign investment, but why is it that there has not been just as equally a strong case for changing arrangements within Australia so that there is far more incentive for Australian investors to invest in agriculture? You have given us some very compelling evidence this morning. Why do you think that has not been a topic of discussion, really, until now?

Mr Farley : That is an interesting question to ask me. I am sure more intellectuals around Canberra would be able to answer it. I will answer it from the perspective of an agribusinessman and from the perspective of someone who has had the opportunity to work around the globe. The reality is I think Australia has been asleep at the wheel. We have not prepared ourselves not only for the hard commodity boom which has taken place but we are definitely not preparing ourselves for the soft commodity boom which is taking place and it is about to explode. When I say 'soft commodities', I am referring to food products. We have not been aligned with the global macro trends, nor have we been aligned with the production trends sitting directly above us. This is the first time in Australia's history that we have been aligned to a demand profile and a production profile. From Indonesia, north into South-East Asia and China is where our current supplies go to. I comfortably feel that when you have foreign ministers understanding our research and development programs in agriculture and our withdrawal of funds from them, and they can quote them to me more quickly than our current agricultural representatives, that makes me feel Australia has been asleep at the wheel and has been caught wanting in our sovereign role of being responsible producers to keep stability especially within our region.

Senator NASH: Hear, hear!

Mr Farley : I will elaborate further. The problems in Egypt came about due to a massive spike in wheat prices when they got caught short. They did not have their book covered; traditional markets had sold out; they went to the Black Sea ports to get wheat; the Russians stopped; and, they put food instability into their country. Something like 24 per cent of the weekly spend of weekly pay rose to 42 per cent. They took away discretionary spending. When discretionary spending went, there was disruption in society because people had idle time.

The next disruption in food is going to happen directly above us. We facilitated a small disruption of the society when we took protein out of the supply chain in Indonesia. If we do that again, we will put our country at risk; we will put the 80,000 tourists to Bali at risk; we will put our energy supply at risk because of the refined products we bring out of those countries, now that we are closing down more refining assets; and, we will put at risk our biosecurity. We need to be awake at the wheel and, more importantly, we need to be responsible with our sovereign assets, to ensure that we employ them properly, not only for Australia but for the region we live in.

Senator NASH: Very well said. I completely agree with you about the R&D. It is ridiculous that funding for research and development is being cut, but that is for another day. What you have said leads me to my next question. You mentioned the instability that was created. I want to give you the opportunity to say whether or not this article from the Australian in June is correct:

Mr Farley, who runs the country's oldest continuously operating company, said regulators needed to ensure that enough foreign capital flowed in to fund the growing demand for Australian produce, but not at the expense of control.

I hope it is correct because I completely agree with you.

Mr Farley : Correct.

Senator NASH: Would you mind expanding for the committee what you mean by that? Obviously you are talking about foreign capital coming in. Can you give us some detail of exactly what you mean by 'but not at the expense of control'?

Mr Farley : The reality is that demographers have been able to tell us what the job is. We know the population will grow. We know there is going to be a powerful amount of intimacy in the next 10 years to put the population where it is expected to go. We can determine, with GDP growth and food consumption, what the job is. Australia is in no doubt what its job is in protein and carbohydrate production to the world. We need capital to meet that growth curve. We need development capital for infrastructure, agriculture and agricultural R&D. More important is who owns those assets and this is what I mean by control. If our water assets end up being owned by foreign investors who will only lease, rent or make available water to a producer, dictating that that must be used for rice and rice only—not oilseed, not cereal crops or not permanent crops—we will have a problem. If I go to a car rental place today to rent a car, the terms and conditions say I must drive the car only on bitumen roads, that I must not take it off the road. Therefore, we want to ensure not only that these assets are being employed for the best commercial use but also that they are not being employed for the sovereign benefit of another country. We need to ensure that we have commerce within our agriculture—if the land which is held can be used only for a single purpose or defined purposes within one season or a number of seasons, and the same applies to water, or alternatively throughput through ports or handling facilities. We need to make sure we have control over the assets or at least the terms of trade and commerce that those assets can be employed into.

Senator NASH: Would you agree that will there is a real difference between foreign capital investing in businesses operating in Australia compared to an entity that is purchasing land for purposes of future security of supply in another nation creating a food pipeline?

Mr Farley : Correct. Foreign capital defines itself by what it is investing for. If it is to underwrite the supply of food and security of food to their nation, that is one issue; if it is to ensure there is enough capital in the globe to underwrite agricultural production collectively, that is a different use. We need to be extremely careful that we do not price ourselves out of our own supermarkets with our own product.

Senator NASH: Yes, very much so.

CHAIR: There are two things that I have difficulty with. Some of the capital coming in is coming from a country that has what we call a nonmarket currency. And investment for humanitarian purposes, as described by the tax act, completely disadvantages Australians. They do not participate in the tax system. So if you have a nonmarket currency acquiring your sovereign asset, and the purchaser is a sovereignty, for the humanitarian purposes, that is to feed someone ahead of all other considerations, I cannot see how we can compete.

Mr Farley : We have the right to control the terms and conditions under which we bring capital into our country to develop our agricultural land. We also have the right to change old, antique rules that happen to be governing us. Australia has been great at distributing dollars to humanitarian crises around the world. Yet the smarter developed countries meet those crises with generally finished food products. They will add value to rice, to wheat, to meat and to peaches, plums et cetera and ensure that there are warehouses of revolving stock. So Australia could capture the value add. More importantly, it is very difficult to corrupt food, as opposed to dollars, once it hits. Also, food being delivered in containers is more effective than a pipeline of cash, which can take a month to get there. We are fortunate to know how long we can live without water and food, and most of the time we are fortunate enough to live under the pretext that even though the operation has been successful the patient died. Australia should be addressing Australia's humanitarian crisis response, and it is not dollars that answer that question; it is adding value to revolving stocks of agricultural product within the country.

Senator BACK: That goes to the point we have been discussing around this table—the sovereign fund grows a product, puts it on its own vessel, presumably at a low value or at no value, takes it offshore, adds value to it, mills it, gives it away to its consumers and says, 'Actually, there's no tax'—or 'minimal tax'—'payable in Australia because we actually gave it to the poor of our country.' From an Australian point of view, what is your solution for ensuring an adequate return to the Australian taxpayer for product that was actually produced in Australia?

Mr Farley : First of all, this is our country and it can be our terms and conditions under which we bring this capital in. The reality of why we are meeting here today is that we understand that the old terms and conditions under which we have been operating are not appropriate for the new world we live in today. So, to answer your question, I think the first thing is to speed this committee's resolve and outcome as much as you can. We need to change the terms and conditions under which we operate in the new millennium.

CHAIR: The ABS gave evidence to this committee agreeing with you, as did the Foreign Investment Review Board. They said that the foreign takeovers act is completely out of its time.

Senator BACK: In Beijing recently our agricultural attache in China said that one of the reasons the Chinese are reluctant to purchase our wheat and beef is that they are concerned that we are such a huge producer of wheat and beef that in some way we will control the global market. I suppose the Chinese see us controlling iron ore and coal, so they are concerned that if they get too close to us in terms of beef and wheat imports in some way we will control that market.

CHAIR: He needs re-educating because he is wrong.

Senator BACK: This is not what the attache said is happening; it is what he reported the Chinese saying.

CHAIR: They are wrong.

Senator BACK: How would you advise our agricultural attache in that context to change the view of the Chinese?

Mr Farley : It is obviously an issue of education, because they are openly wrong. Even though Australian agriculture might seem big to Australians, we are actually minnows within world.

Senator BACK: We are.

Mr Farley : I have great dinner conversations on a Friday night about having a herd of 680,000 head, but I read the kill report in America on Saturday morning and find out that they kill 640,000 head per week.

Senator BACK: That is right.

Mr Farley : We produce 26 million to 28 million tonnes of winter grains a year; the Americans produce hundreds of millions of tonnes.

Senator BACK: They do.

Mr Farley : So do China, France and countries all over the world.

Senator BACK: Britain also does.

Mr Farley : So, to answer your question, I think we need to educate the Chinese and create the right perceptions about the reality of where Australia sits. Yes, we are big surplus providers to the world—principally because we are a population of 26-odd million people.

Senator BACK: We cannot eat all the product, yes. Thank you very much. Others have asked the other questions, but Mr McGauchie said in his submission:

AAco shareholders—Australian and foreign—are an essential part of this company's success.

Can you give us a very quick profile—are your foreign investors or shareholders, in the main, institutional?

Mr Farley : It is for the public record so I will share it with you. It is there every day. It is like our land titles, which should be there every day for everybody to look at.

Senator BACK: Absolutely.

Mr Farley : My largest shareholder is a company called IFFCO Poultry, which is shared between the interest of a Dubai investment and a Malaysian investment—which is a large agricultural organisation, now state owned, called Felda that has just gone public. My next largest investor is an enormously successful entrepreneur based in the Cayman Islands. Then there is a list of shareholders who are principally US and UK investors who are there for the long-term thematic that agriculture is going through at the moment. But I do not have anyone on the register who wants my cows.

Senator BACK: We look forward to the supplementary submission you will make, which you agreed with Senator Xenophon. I think at the same time this committee needs to get out there and get much more active in following up, and we will provide some advice on that. It almost is the case that Australian shareholders would be wise to invest their funds offshore through one of your foreign investors and invest back in AAco through that foreign instrumentality to enjoy the taxation benefits—perversely, that is the case.

Mr Farley : Unfortunately, you are correct, and it does seem perverse in the world we live in today. The unfortunate part for agribusiness enlisted investors in Australia is that, if we could share with our institutional funds and our self-regulated funds for our retirees the same taxation benefits that are available to our offshore shareholders, I am sure my share price and that of the other listed agricultural entities would not be trading at a 50 per cent discount to NTA today.

Senator BACK: Thank you very much. I appreciate that evidence.

CHAIR: The CSIRO informed this committee through another avenue that the global protein task by 2050 will have a much greater contribution from fish protein, and I note that the volume of the sea is between 14 and 16 times the mass of the land above sea level. Perhaps the AA Company could give a bit of thought to what we do with the sea.

Mr Farley : Thank you.

CHAIR: Thank you very much for your evidence today.

Proceedings suspended from 11:14 to 11:26