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Standing Committee on Agriculture and Water Resources
05/03/2020

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BLACKBURN, Ms Tracy, Member, Latevo» Farmers Mutual Limited

HERDEGEN, Mr Jeffory, Director (Chairman), «Latevo» Farmers Mutual Limited

TROTTER, Mr Andrew, Founding Director, «Latevo» Farmers Mutual Limited

Committee met at 10:19

CHAIR ( Mr Rick Wilson ): I declare open this public hearing of the House Standing Committee on Agriculture and Water Resources inquiry into growing Australian agriculture to $100 billion by 2030. Audio from today's hearing will be broadcast on the parliament's website, and transcripts will also be made available on the committee's website. Before we begin, I ask a member to move that the media be allowed to film the proceedings today in accordance with the rules set down for committees, which include not interfering with committee proceedings and not taking footage or stills of members', committee staff's or witnesses'' papers or laptop screens.

Mr THOMPSON: It is so moved.

CHAIR: I welcome representatives of «Latevo» Farmers Mutual to give evidence today. This hearing is a legal proceeding of the parliament. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. I now invite you to make an opening statement before we proceed to discussion.

Mr Herdegen : First of all I'd like to thank your committee for allowing us the opportunity to present. I have an agriculture/science background, and research and advisory. I went into the national management role of handling ag chemicals and I've been farming—dry land and irrigation—with my own family operated properties, and I am currently, for the past 20 years, involved in the finance industry. I hold a financial services licence and I sit on the board of one of those companies. Andrew comes also with agriculture/science degrees. He is a recognised agronomist in his field, and he operates a family farm that he was brought up on as well as running «Latevo» . But he's a qualified agronomist and he's well-recognised, and I think it was that quality that took him to Canada to learn about what was happening with income protection over there many years ago when he was addressing a conference. He is the architect of «Latevo» in Australia and of the concept of income protection for farmers. Is there anything you'd like to add to that, Andrew?

Mr Trotter : I'd only like to mention that what this committee's about obviously is reaching a $100 billion target. It's been widely recognised at the ABARES conference this week that if we stay on trend in agriculture we're only going to reach approximately $78 billion or $80 billion. So, unless we do something different to what we've done in the past, we will not reach the $100 billion target, and that's what we're here to talk about today: what tools do we have available to us, as a government and an industry, to actually reach that target? To reach that target is very significant, because if we do there's an extra $22 billion a year that the federal government will receive in tax receipts because of the knock-on community effects. That's something really worth targeting. There are a lot of people in the industry who are a bit dismissive about this $100 billion target—that it's aspirational and we're not going to get there. We don't subscribe to that fact. We believe that it can be achieved and should be achieved, because there's very low productivity in parts of Australian agriculture, and I'll get to that in a minute. And we also have Tracy with us today.

Mr Herdegen : Tracy comes here with tremendous experience—lifelong experience—in large-scale agriculture. She comes with a qualification of a bachelor's business degree. She spent 11 years working with a rural agribusiness, and she now works with her husband, Terry, on the family farm, and they try to farm about 20,000 hectares in the central west.

To cut to the chase, Andrew and I have been up to the ABARES conference this week, and a couple of messages came from the minister: that he wants to put the tools in the tool kit and that he's there for the here and now. We believe this is something for all of that, and it's very much in demand. The other thing is that we've identified that there's a strong liquidity crisis. At this point in time there's a lot of disbelief in hitting the target of $100 billion, including from the National Farmers' Federation and also the ABARES people that we discussed it with. With that, I'll hand over to Andrew to explain to you what Mutual is all about and how it differentiates itself from anything else in the marketplace. It's clear from what they were saying at the conference that we need to have new things happening. And in the tool kit we need either new water from the north or a better risk-management tool.

Andrew, can you just talk about how this product actually differentiates itself, how we need the help and how it's going to get us to $100 billion by 2030.

Mr Trotter : If we're going to look at getting to $100 billion, the first thing we need is capital. If we don't have additional capital going into agriculture, it won't get to $100 billion. There's a bit of a breakdown in the financial model at the moment. To lend money to any farmer you need land security, including RIC. If you look at most large farming enterprises now, they are expanding their enterprises to get their efficiency scale via leasing a larger percentage of their operation—between 30 and 50 per cent is what's going on. Those farmers struggle to get access to capital because they obviously don't have security to offer. One of the beauties of farm income protection is that it's effectively a comprehensive insurance contract like you would put on your car. Once you put a comprehensive insurance contract on what's known as a mobile security it can then be used as collateral for a finance product. So to get to $100 billion dollars we need to be able to give the finance industry access to more security so it can lend with confidence.

What we've got now is the farm income protection multi-peril crop insurance we started way back in 2014. We've worked with the global guys, the global underwriters, so that the model is sustainable and covers all perils that a farmer is looking at, getting that comprehensive offer. In January last year, we entered complete market failure when Lloyd's of London pulled out of Australia, not allowing the syndicate that we were using to transact risk in Australia in agriculture. So when we had that market failure that occurred on 29 January our foundation members moved to form what's known as «Latevo Farmers Mutual, which is a discretionary mutual. A discretionary mutual, to be brutally honest, is a much nicer work environment than the insurance industry. There are lots of challenges when you're dealing with people in London and Zurich when you're talking about drought risk in Australia. It's pretty challenging.

So we put together a board that's very strategic in terms of the skillset it brings so that we could then build the mutual. The challenge with the mutual is that we don't have the capital backing the mutual for when we run into shortfall years. So the base principle is that the mutual runs a profit 85 per cent of the time, and 15 per cent of the time it runs a deficit. We run it that way because if you try to run a profit more than 85 per cent of the year the premiums will be too high and farmers won't purchase it. So what we are doing currently in the mutual is if we're in a shortfall we run a similar operation to wheat pools where we then make up those shortfall payments out of future surpluses of the fund. What we're asking for—and we believe this will be a better structure—is the federal government to stand behind the concept of a grower owned mutual to give confidence and the backing of the mutual only on a loans basis. The mutual's future surpluses would pay back anything. What that will do is give this new class a security that farmers can use not only to get access to more funds but to give them the confidence to put the correct inputs into their crops.

One of the things I'd like to point everybody to in the handout is the current productivity in agriculture. It's on the second page from the back where it says 'CSIRO'. You can have a look for yourself, but what it basically tells you is that water use efficiency in Australia is somewhere between 45 and 55 per cent. So if we're going to get to the 2030 target we need to lift water use efficiency from an average of 58 per cent to nearly 80 per cent. That's how we will reach our target. As we said—and as I think the chair would know himself—a lot of farmers don't necessarily put all the inputs that they could into their crops. They might use different seeding treatments and fertiliser strategies because they're fearful of what the spring is going to bring. There's a massive amount of uncertainty in farming and when you're looking to target your yield right now you actually have to make financial decisions in May when you won't know the outcome of the season until September. So it's a natural business management practice to be cautious because you don't want to overspend. If you've got a contract in place it gives you the confidence to put that bit extra fertiliser in or do that extra fungicide spray, which leads to increasing this water-use efficiency. The 2030 target of $100 billion is all about productivity.

The other big advantage of having income protection is it enables farmers to have the capital in their business so they can hold their grain if they choose or forward sell with confidence so they can get higher prices. We see that the farmers in our program, on average, get $30-odd a tonne more for their grain because they can sell their grain over a greater window. So it's our view that we've designed a model that enables us to manage the moral hazards. It's individually assessed so that we don't have basis risk in it. It's a comprehensive contract so that it can be used as collateral for either bank loans, finance companies, trade creditors or even RIC if it wanted to. We believe it's a transformable technology, but we can't do it alone. If we want this to go ahead, we really need the assistance of the federal government.

CHAIR: Thank you very much. When you came to see me previously we talked about trying to attract the likes of Co-operative Bulk Handling in Western Australia, who have dabbled in this space a little bit and backed out when they got their fingers burnt. How are you progressing? I think the Commonwealth government would be much more comfortable if there were some private investment as well.

Mr Trotter : I'll give you an update on that. The two main players we've been talking to in the industry that are in a position to assist are CBH and GrainGrowers Australia. We currently have proposals with both of those. CBH—there has been a bit of fun and games over there in the board structure recently. Once that settles down we've got a board member that's going to be tabling the proposal for them to consider, which is going to happen over the next couple of weeks. GrainGrowers are organising a meeting with us now. They're having a look at the proposal. It's a little bit of chicken and egg. I know for a fact that GrainGrowers are meeting Mr Littleproud on Tuesday, and this will be a discussion point in that meeting. There is no question at all that GrainGrowers Australia would move if the government did. So would CBH. It's one of those things. We can't do it alone at the moment, because there's just so much uncertainty when you deal with a founding discretionary mutual. All we're asking for is basically a government guarantee.

Probably one of the big things about it is the proposal that I've included on page 31. You can read that at your leisure. Greensill has pledged an $2 billion of working capital for the 2020 season if the government backs the mutual. You can see the chart they're talking about on page 32, which is this one here. Basically, Greensill is saying that they will put up $2 billion worth of working capital funding that can be lent to farmers. If we issued a $500,000 mutual contract, they would then lend $450,000 against that contract, because they know that it's going to be paid. The mutual doesn't have any credit rating at this point in time because it's uncapitalised. If the government stood behind the mutual, it then picks up a AAA credit rating, because we have a guarantee that if we run into a deficit there will be money there to make sure that the claims are paid in full. It's a total game changer for us if the government stands behind the grower owned mutual.

CHAIR: In your graph you have the NAB et cetera. Have you had discussions with the NAB?

Mr Trotter : Yes. I caught up with an officer yesterday at ABARES. Everybody's at the point that, if the government stands behind the mutual, all the banks—everybody, CBA, Westpac, NAB—will then use this security for lending.

CHAIR: The government takes all the risk and the banks can come in; they are the commercial beneficiaries of this.

Mr Trotter : It wouldn't be the government taking all the risk. The mutual is taking the risk, and it's only in the advent that the mutual is short—

CHAIR: That's what underwriting is.

Mr Trotter : Of course it is. Someone's got to. When we were in the insurance world, the insurance world stood behind it. The minister himself is very against insurance, and I can understand and appreciate why—there are challenges—but there is a positive in the insurance world. It's got deep pockets and it pays claims. Not last year but the year before, because it was a bad year in 2018, $13½ million in claims was paid out to the farmers. The farmers use that money to pay their bills and it gets into regional Australia. Think about what happens when you get widespread uptake. If a community goes out with a drought or a frost and suddenly $20 million or $30 million rocks up into the hands of those farmers, they can use that money to pay their bills.

This is the problem in New South Wales at the moment. Western New South Wales is stone motherless broke. There's just no other way of saying it. The problem is so bad that it's pushing to the trade creditors—that is, the agchem merchants—so, instead of having inventory in their shops, they have debtors on their books. If you throw in canola buyers, there are no forward orders in the system. It's turning into an absolute disaster because of a lack of working capital.

What we're asking for is the government to stand behind the mutuals. RIC has $1.2 billion of interest-free loans. Quite honestly, it's a disgrace. The money is not getting out there, and people are furious. I can tell you right now. You're going to hear a lot more about it in the coming weeks. All they want is a first mortgage or a second mortgage, and you're talking six months in some cases for people to get answers. It's just not acceptable. In this scenario if you use an insurance contract, a mutual backed contract by the government, you can lend money to a farmer and settle within a week. It's just like when you get a car loan. It happens within a week because you have that security. It's a game changer for getting money into rural Australia. If we don't get cash out in the next 90-odd days, you're going to see crops planted with straight wheat—no fertiliser and no inputs.

Ms Blackburn : If they're planted at all.

CHAIR: Andrew, what I'm getting at is the consideration that the government will go through. If we stump up a $500 million guarantee and the banks come in and lend risk-free money, they're getting the benefit. Sure farmers are getting a benefit, and that's what we want to see, but there is a commercial benefit going to other parties that maybe should be making a contribution.

Mr Trotter : I understand your point. If you want to keep it all in government, put more money in RIC and let RIC be the provider of working capital loans. The banks really only want first mortgages. That's the truth. If you get behind the closed doors, you find out what the truth is. They don't want to deal with working capital. They give that to the trade creditors and everybody else. The spot in the market for RIC is using these government secured mutual contracts to lend money—these working capital loans—to farmers. That's where it should be. It shouldn't be in the back room trying to do deals with the banks on first mortgages. The other point I will make is that I don't think that the Commonwealth has a very good appetite to sell up a farmer because it has his first mortgage security. That's the other advantage. If we're going to get capital into regional Australia, someone is going to make some money out of the transfer of that capital. It may be the private sector. If you don't want the private sector to make any money in terms of interest then the government is going to have to do it. It's just a natural trade-off of the cost of capital.

CHAIR: Yes, I understand that. It's just when the government does it and other people piggyback off the government's contribution. If that's the chemical reseller then that's probably not a problem. If it's one of the four big banks or all of the four big banks then that becomes a political issue for governments of either persuasion.

Mr Trotter : At the moment the only person who has put their line in the sand, as to money to commit, is Greensill. At this point in time Greensill have said that, 'If the government backs a mutual, we'll raise $2 billion and get it into the Australian farmers' hands.' They said it would take eight weeks to do the legals and all that sort of stuff. To be honest, Rick, the finance companies are going to be the first movers in this. The banks are always the slowest to change their policy. Working with banks is like turning the Titanic. They're very slow to change their policy. The nimble trade creditors are the ones who are really going to move first. At the moment, trade credit in the market for farmers is 12 per cent, if you can get it. You can put these secured loans out there at 4½ to 7½ per cent, so this significantly reduces the cost of funds to farming in the commercial world.

CHAIR: Andrew, I want to open it up to the committee to ask questions. We're running out of time, because we've only got till 11 o'clock. Can you very quickly explain how a farmer's production is guaranteed or insured?

Mr Trotter : Go to page 34, please. As you'd appreciate and as the chair really understands, every farm is uniquely different, and we needed to build a product that had no basis risk. There's no point your premium being calculated on something else that happens 50 kilometres away; it needs to reference your farm. The way we do that is we look at a minimum of five years financial records. Then we convert those from financial year to production year, so we really know what's going on, to take out the financial year smoothing. We also get a copy of their production plan, so we know whether they're putting on fertilisers et cetera and we get their grain marketing plan. So we've done that really traditional due diligence. We can get this process done. It gets done independently by Agri-Analytics; they're CPA accountants. We can get that done in two weeks.

Once you know what that is, please go to the brochure page, which is right at the end, where it's got the chart. On the left-hand side, this is revenue. For this example, let's assume that you've been adjudged to have a $500 a hectare average and you've got 2,000 hectares, which gives you a million dollars. You're a million-dollar business. What that means is that we start you off at this time of the year with a category 1, which is in the bottom left corner, which gives you a guarantee of $400,000. That gives you enough money to put the seed chemical and fertiliser in with confidence because, if it comes up and dies, that's what you're guaranteed. Then, like you've seen, we've had the rain. Parts of northern New South Wales are already there. They're tracking on to a very good season. All they've got to do is get the crop up and going and they'll qualify for category 2, which lifts you to $700,000 in this case. So that's now covered your input costs and your business costs—overheads, labour et cetera. Then, if we're lucky and it continues to rain like it did in Victoria this year, you end up with category 3, which is 90 per cent of your average. That gives you the confidence to put on that extra nitrogen and fungicides and go after it.

As an example, I've put in the financials from my farm because it's one of the best examples. We were in a claim in 2008 and we got $508,000 in it. If you go to page 39, these are the management accounts of my family farm. We've standardised it into the crop year, so you'll see right at the top here, in 2008, there's $508,000 of insurance recoveries. We were in a claim. If we didn't have that, we would not have been able to achieve what we got in 2019. As you'll see if you go to the next page, we took a business that actually made no money from no income to $1.5 million because of the confidence—

CHAIR: That's a quorum. I might stay here, Gavin, and keep things going.

Mr Trotter : That's just an example. The power of this program is that it gives you the cash at the start of the year if you've had a failed season so that you can rapidly recover—no different to an insurance contract on your house if your house burned down. It's the same principle. That's how we've built the product and we've built the product with those multiple levels to make sure we leave enough risk with the farmer that we don't have to charge too much in premiums. Our average price across Australia is $15 to $30-odd a hectare. And that means it's affordable for farmers.

CHAIR: So what is $15 insuring? What level—

Mr Trotter : So $15 insurance will get your 40 per cent coverage. Say, in the lower-risk areas of South Australia, they get 70 per cent for $17. If you go to the really risky parts of north-west New South Wales, they have to pay $24 for 40 per cent because they've got so much risk at the start of the crop. Effectively, it's relative to the land price—

CHAIR: So you can insure stage 1? You don't have to insure the whole lot? You can just insure stage 1 where you get the crop out of the ground?

Mr Trotter : Yes. One other point that I didn't make is that we have a low-doc entry process as well, which is common in the financial industry. So you can get category 1 on a district average, but you can't get upgraded if we haven't done that complete due diligence, if that makes sense. So, like you said, Rick, it's your choice as a producer whether you want to go up in coverage or spend more money, but you can cover your base costs—worst-case scenario. And, everywhere in Australia, the most expensive for that is $24 in north-west New South Wales where it's just blown up big-time over the last few years. Everybody else is getting that for $15-odd a hectare as the entry point, which is quite cost effective.

CHAIR: Have you modelled what the impact on the pool would have been if you had 10 per cent uptake over the last couple of years?

Mr Trotter : So I'll give a couple of stats on that. We had 115 clients in the program in 2018. If we use that as the model—because it was not perfect geographically—if we do what's known as an 'as if' and we roll back the program to 2014, we would have only just dropped into a bit of a shortfall in this current season, because it was so bad. This was a really, really bad drought in Australia, because Western Australia got hit as well. So, to answer what we've got: in the grains industry, the bookies rated it at 250 per cent probable maximum loss. What that means is that, in a worst-case scenario, it's going to cost us 250 per cent of the base premium. If we spread the risk beyond the grains industry, we can get the PML down to 150 per cent, and that's the long-term target. When you're running a semicapped program, that's where your PML needs to be.

CHAIR: What do you need to do to get it beyond that? Obviously you've come out of the grain industry and these costs are obviously cropping costs. I would've thought it would be simpler to operate in the livestock industry.

Mr Trotter : Rick, there's no question that we are very keen to get into the other sectors, but it comes down to, when you've just formed a mutual, you've got to do something first. So this model can be translated into everything from livestock to pork to chickens. All these people are talking to us at the moment, and we've got to work out which industries we go to first because it's really important for the mutual to get out of east coast drought correlating risks, if that make sense, because that's how you get the PML down. We want to put some risk into the book that doesn't pay out claims in an east coast drought.

CHAIR: Yes.

Mr Trotter : And that's what gets the PML down. I should say, which I haven't mentioned: that's the PML rating in the mutual but we've also rated the mutual so that it's running at 25 per cent. So, over a 10-year period, it will run a 25 per cent surplus, so it capitalises itself in future. So we're only looking for assistance in the formative years, not in the long term, which is what was recommended by the IPART report in New South Wales, for those who are familiar with it.

CHAIR: That's a division. My apologies. We may not be back.

Mr Trotter : We'll stick around and see how it goes.

CHAIR: Thank you very much for coming today. If you have been asked to provide any additional information, please forward it to the secretariat by Thursday 19 March 2020. You will be sent a copy of the transcript of your evidence and will have the opportunity to request corrections to transcription errors. Thank you very much.

Committee adjourned at 10:48