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Economics References Committee
29/10/2015
Cooperative, mutual and member owned firms

CALABRIA, Mr Peter John, Managing Director, Yenda Producers Co-operative

DALTON, Mr Nayce, Deputy Chairman, Yenda Producers Co-operative

McFARLANE, Mr Terry, Chairman, Yenda Producers Co-operative

[11:12]

ACTING CHAIR: I now call Yenda Producers Co-operative. Thank you very much for joining us, gentlemen. Do you have any comments on the capacity in which you appear?

Mr Dalton : I am also a grower member of the co-op.

Mr McFarlane : I am also a grower shareholder.

ACTING CHAIR: Do you have an opening statement?

Mr Calabria : Yes, we do. Firstly, on behalf of Yenda Producers, we would like to thank the Senate Economics References Committee for the opportunity to speak. Another point I would like to make to Senator McKenzie is to acknowledge the support that the National Party has put out with that $14 million kick-up for agricultural co-ops. It was much appreciated and well recognised.

ACTING CHAIR: Thank you very much.

Mr Calabria : What I would like to do is give you a brief overview of the co-op and then, from there, highlight some of the issues that we face. Yenda Producers co-op is based in the small town of Yenda in what used to be the Riverina—I think the electoral boundaries are about to change, but we are in the MIA. We originally started 90 years ago, in 1925, with 10 shareholders, and now we have just over 1,550. The co-op was originally set up by soldier-settlers who returned from World War I to take up farming allotments in the irrigation area of the MIA. As a co-op, we currently provide a range of services and farming inputs to those existing farmers and community members out there in the local area. In the local area, we employ 80-odd local people and their families who contribute to our local community. The wages bill is around $4½ million in the year just gone. As well as that, we support over 100 local charities and schools—you name it; if someone puts their hand up, generally we are there to support them in the local area. We are a distributing co-op, so we do pay rebates and dividends back to our shareholders. In the last five years, those dividends and rebates have amounted to over $7 million back into the local community.

I will highlight a couple of the challenges that we have faced. I have been at the co-op for 20 years, and, from my 20 years there, the biggest thing we face at the moment is the water issue—the transfer and ownership rules. I will not say it is a mess, but it is not really good at the moment, because we have different competing interests—the environment, the irrigators and the community—all clambering over themselves because we have gone to a model that is really based on capitalism and the highest bidder winning. That was, I suppose, spelt out just recently when the member for Murray, Sharman Stone, was having a go at the South Australian government and telling them, 'Lay your hands off our water,' and then they fired back and basically said, 'It's a free market; we'll do what we want to do.' So I definitely think that needs addressing, and for us as irrigators and irrigation farmers in our area and our community it is a big issue. As part of that, the follow-on is that, if it does not go back into government hands, maybe a cooperative model could be one solution for that.

The main thrust, I suppose, of our original submission was that, with the changes with the accounting standards we had to comply with in 2005-06, our net assets in one year went from $7½ million back to just over $1 million, and our business did not change. The same staff were there. It was from an hour to midnight to an hour past. I just have an example in the back of some documents I would like to pass to you, just to illustrate an example of how it changed our position.

ACTING CHAIR: Thank you.

Mr Calabria : On top of that, going through the 10-year drought from 2000 to 2010 was a major challenge for us, trying to keep all our staff employed, because you know that when you are in the country and you lose qualified staff you just do not find them.

The other main area is really this education thing, getting the broader community on board, because cooperatives and companies are similar in that they both need to make profits. The difference with a cooperative is that people on cooperatives think long term. Because those customers and shareholders are the same people, it is not about shareholder returns; it is about delivering services. You still have to make a profit, but at the end of the day the bigger community or the broader community benefits from those profits. I will leave it at that for now.

ACTING CHAIR: Thank you. I know Senator Xenophon is going to go down the same rabbit hole I want to go down.

Senator XENOPHON: Okay, I will go down the rabbit hole. Can you just break down for us the reference to the international accounting standards. You live and breathe this; we do not. I think the purpose of this inquiry is to assist cooperatives to have a bigger role in our community. Just explain it to me. The international accounting standards have generated a problem with raising capital, as your submission sets out.

Mr Calabria : Yes.

Senator XENOPHON: Just walk us through that step. I do not have an accounting background, so I just need you to explain that to me and explain what you think ought to be done and what the risks are. Has it made cooperatives 'safer', or has it just been an unnecessary impost?

Mr Calabria : I will probably step you back to 2005, when it happened, and just run you through what we went through. In 2005 our auditors came to us and said: 'Look, there's rules afoot. Australia's about to adopt international accounting standards, and as a result of that there's going to be a major change to how our balance sheet will look, so what's going to happen is that our share equity that we previously held as equity or as capital is now going to have to be recorded as a repayable loan to our shareholders.' As a result, from a minute to midnight to a minute past midnight on 1 July—

Senator XENOPHON: What does that mean? What they were saying is that the equity is a repayable liability in the balance sheet. What was it at a minute to midnight?

Mr Calabria : At a minute to midnight it was similar to a proprietary limited company, meaning that, when you took your assets and your liabilities and netted them off, the balance that was left was really your shareholders' equity business or your equity in your business—what your business was worth.

Senator XENOPHON: And what were they doing at a minute after midnight?

Mr Calabria : At a minute after midnight those shareholder funds, which for us were $7½ million, would then have to be added onto our existing liabilities and be shown as an additional liability in our business.

Senator XENOPHON: But wouldn't that be an asset?

Mr Calabria : No, because the way they viewed it was that it was a repayable loan to the shareholder for the money they had contributed.

ACTING CHAIR: Anybody could just rock up and say, 'I want my money back.'

Mr Calabria : They could demand their money back.

Senator XENOPHON: But a proprietary limited company does not do that.

Mr Calabria : No, a proprietary limited company basically records its assets and nets off its liabilities, and whatever is left over is viewed as the value of the business.

Senator XENOPHON: So you see the rationale under the new international accounting standard for that—do you see why they did it?

Mr Calabria : No, I always took the view that, at the end of the day, generally, you have bank covenants or commitments with banks. The bank usually has first call on everything, so, at the end of the day, if a bank came in and decided to rule a line and sell you up, they would sell all your assets and they would take their share of what was owed. Whatever was left would get divided amongst the other creditors that were owed money and if anything was left after that, then the shareholders would get so many cents in the dollar.

Senator XENOPHON: But this rule applies to all co-ops now, doesn't it? This new international accounting standard.

Mr Calabria : Yes, it does.

Senator XENOPHON: And the feedback you have got from other co-ops is that it has really hurt the balance sheets?

Mr Calabria : Yes, it has. I know, around that time, that we had other bigger cooperatives in our area—bigger than us—that actually went, had shareholder meetings and looked at restructuring their co-op into a semi-private concern and looked at actually privatising and turning it into a company.

Senator XENOPHON: Hang on, the paradox of this—the consequence, unintended or otherwise, of doing this—is to push some cooperatives down the path of becoming a private corporation.

Mr Dalton : SunRice was a classic example of that; they were a co-op in that area and, because they have a large need for capital to pay growers for crop payments, they had to go to the corporate model.

Senator XENOPHON: So SunRice is no longer cooperative?

Mr Dalton : No, it is corporate.

Senator XENOPHON: It seems a bit daft, doesn't it?

Mr Dalton : It is still a restricted corporate that behaves like a co-op, but they have been forced over that side of the fence.

Senator XENOPHON: The effect of this change happened back when—2005?

Mr Calabria : Yes, 2005.

Mr Dalton : Yes.

Senator XENOPHON: From 1 July or—

Mr Calabria : Yes, from 1 July. What we actually did at that time was we grabbed our auditors and we grabbed our banker at the time, who was from one of the big four banks in town, and we had a series of meetings to explain to them that we have not changed our business model. We had borrowings with them up to $9 million, so they had an interest, obviously, in what was going on. We educated them in making sure that they kept supporting us, because the fear for us was really that someone in the bank, and it may be someone at a higher level, would see the result and look at our net assets, obviously going from maybe $10 million back to $1 million, and say, 'Gee, why should we lend this mob $9 million?' and then we would have that funding pulled out.

Senator XENOPHON: As a result of these accounting rules in 2005, has that restricted the ability of your co-op to grow?

Mr Calabria : Yes, for sure. You have only got to say you moved that shareholder liability back into equity, and then all of a sudden we have added another $8 million to our bottom line. So, yes, I would say definitely.

ACTING CHAIR: You talk about engaging with the banks. How comprehensive would you say the big four's understanding of the cooperative model is?

Mr Calabria : In my personal opinion, very limited, because when we went back to our bank and had these series of meetings, they went looking internally for advice and our feedback was that it was very limited information they got back. As a result, in the back of this, I have included an example of the covenant that our bank put on us and basically we have got a ratio we have got to meet, obviously, so that the bank is happy with where we are at. If we kept it under the same regime, our covenant would go from meeting our commitments by 35 times—and our limit had to be at least 30—to minus 1.3.

ACTING CHAIR: Yes, I saw that.

Mr Calabria : So, in essence, we have had to convince our bank for them to look at that shareholder liability and take it out of the equation so that we can continue to meet our covenants, because otherwise we would not have.

Senator XENOPHON: So you have worked around it—is that right?

Mr Calabria : We worked around it in an individual sense, yes.

Senator XENOPHON: What have you heard about other cooperatives who were hit by these requirements 10 years ago?

Mr Calabria : Other than the rice growers—

Senator XENOPHON: Other than SunRice.

Mr Calabria : Yes, I have not followed through.

Senator XENOPHON: It is a pretty bad example though, isn't it?

Mr Calabria : Yes.

Mr McFarlane : Thankfully we had a really longstanding relationship with our bank—one bank—and they really understood how we operated as a co-op and the importance of keeping—

ACTING CHAIR: Which bank is it? Is it one of the big four?

Mr McFarlane : It is Westpac.

Mr Calabria : Our thought process as a board, and part of the strategy from that point on, was to say, 'Our bank manager may not be there in two or five years, so we as a business have to make a conscious effort to rebuild that capital.' What we have done over the last 10 years is retain, in essence, half of our profits to build up our equity. The downside of that, I suppose, is that we have returned less money to our shareholders than we would have liked to—and by retaining money, obviously, you do pay more income tax.

ACTING CHAIR: Out there in the community and in producer land, how do you maintain the commitment to the co-operative? I know there is a bit of shopping around that goes with milk prices in my home state of Victoria—people in and out. You want profitable businesses at the end of the day. You want to be bringing home the most you can through the farmgate. You have chosen this model as a way of doing that. Can you comment on how attractive this Yenda co-operative is to producers.

Mr McFarlane : It is very hard for a co-op to compete against the corporates. That has always been the case, and it will never change. But we have often relied on our dividends and rebates as a nice little incentive for people to stay with us. Certainly management, more than anyone, has met the high challenge of trying to convince people to buy produce through us. We have been there for such a long time, and it has made it easier for people. They realise what we do in the community and they see the benefits of still shopping with us. Certainly we lost people, particularly during the drought period. Some will shop on price only. They will bypass, for instance, the co-op model; it may be slightly more expensive. They realise what we do in the community, but at the end of the day their business has to survive, so they may have shopped on price. But we have built that equity up a bit now and we have been paying nice rebates and dividends in the last few years.

Mr Dalton : I support what Terry said. But if I could just go back to the balance sheet issue again: the accounting standards seem to have no respect for what is in our constitution. Under our constitution we only have to repay the shareholders' funds when the board sees fit, but we are lumped in with this on-demand group. It takes no account of what our constitution says. Whether that could be built into—

ACTING CHAIR: So you would like there to be discretion, depending on the organisation's constitutional arrangements?

Mr Dalton : Yes.

Mr Calabria : That may simply come down to a definition. It might be that simple. I am not 100 per cent sure what the perfect answer is and what is acceptable, but it may be that simple. Just to add to what Terry said: the other thing that we try to do as a co-op is do a little bit extra and do things a little bit differently to what the corporates do, whether they are an Elders, a Landmark or whatever, in our situation.

ACTING CHAIR: What does that look like in real terms?

Mr Calabria : That might be: the customer rings up and basically says, 'My truck's broken down. I need to get this to here'. As we have trucks in our fleet, we will have someone out there within an hour to go and do it. Or a farmer might ring up and say, 'I can't afford a spreader, but I know the co-op has one', so they will rely on the co-op to do that. We are providing services and assets to the community that maybe our competitors do not. That differentiation is a key driver in letting a co-op survive.

ACTING CHAIR: I imagine access to the big ticket items like spreaders et cetera would be an incentive to join?

Mr Calabria : Yes.

ACTING CHAIR: As long as you did not all want fertiliser on at the same time on the same day! The rain is coming!

Mr Calabria : That's right.

ACTING CHAIR: Mr Calabria, you are a managing director of a co-op. How did you get good at that? Why did you choose a co-op? What is your background? What sort of training did you have, if any?

Mr Calabria : I grew up on a horticultural farm just the other side of Griffith. I was on it for 19 years. I went to school locally. I went to Wagga and did accountancy over in Wagga.

ACTING CHAIR: Were you taught about co-operatives in your accountancy degree?

Mr Calabria : No. I was racking my brain, but, to be honest with you, I cannot honestly recall 100 per cent. But I would be pretty safe to say no. There was no mention of co-operatives. Then I came back to my home town and set up my own place. I got a job with the local council, initially. I was there for roughly nine years doing administrative accounting work, insurance and that sort of stuff. Then the job came up at Yenda Producers as company secretary. I moved into the company secretary role and did that for seven years, and then the manager's job came up. In that regard, it was about wanting to be there locally. A key driver in co-operatives is thinking about the community and thinking long term. It is something that does not happen in companies. I think that is probably the key.

ACTING CHAIR: But there was no professional development that you could do to be a managing director of a co-operative?

Mr Calabria : No.

ACTING CHAIR: Nothing. Learning on the job—

Mr Calabria : Yes.

ACTING CHAIR: and good boards.

Mr Dalton : With your indulgence—

ACTING CHAIR: Of course.

Mr Dalton : One of my pet subjects is governance training for potential directors of co-ops in regional areas. Access to it and the cost of it are both fairly prohibitive. The Australian Institute of Company Directors runs very good things, but—

ACTING CHAIR: How much is it?

Mr Dalton : especially for someone coming down from a rural area to stay in Sydney for the week, transport—it just makes it a prohibitive cost. I see that as probably where a lot of co-ops do fail—in their early governance training and education.

ACTING CHAIR: That is a good pet subject.

Senator XENOPHON: Have you sent this supplementary submission electronically as well?

Mr Calabria : No, but I can.

Senator XENOPHON: It might be more useful if we can disseminate it to other members of the committee. If you could send that electronically as well, that would be good.

Mr Calabria : Okay.

ACTING CHAIR: Do you have any further questions?

Senator XENOPHON: No. That was very useful.

ACTING CHAIR: Thank you very much Yenda. I will pass on your positive comments to the minister.

Senator XENOPHON: What do you grow, Mr McFarlane?

Mr McFarlane : Broadacre irrigation, a lot of seed crops for seed companies and clearing sheds, such as faba beans, wheat, sunflowers, onions, radishes, carrots—

Senator XENOPHON: Right.

ACTING CHAIR: A one-stop shop!

Senator XENOPHON: What do you grow, Mr Dalton?

Mr Dalton : I have a dry area side to my business—just the traditional wheat, barley oats. We also run beef cattle, and on the irrigation side we do corn, cotton and rice, basically.

Senator XENOPHON: What is the season going to be like?

Mr McFarlane : Very tight for water—27 per cent I think we are sitting on, or 29 per cent.

Senator XENOPHON: Is that all?

Mr McFarlane : It is quite limited in what we can do.

Senator XENOPHON: Is that getting towards the drought years?

Mr McFarlane : It is a little bit complex. We did have quite reasonable carry-over from the season before. I think during the drought years we got down as low as 11 per cent.

ACTING CHAIR: Just on water and transfer rules: can you talk us briefly through a very complex problem that has confounded us all since Federation—how to share water fairly.

Senator XENOPHON: We are not getting into that debate now.

ACTING CHAIR: No, we are not, South Australia, because you would lose. New South Wales and Victoria—

Senator XENOPHON: For the Hansard, I disagree.

ACTING CHAIR: As is your right. But as a co-operative, how would you like to see this issue dealt with?

Mr Calabria : I will make a quick comment and then I will throw over to Nayce. If you look back to how it did work 20 or 25 years ago: you could not own water in Australia unless you owned land.

ACTING CHAIR: That is right. Then we unbundled.

Mr Calabria : That was the biggest mistake. Everything was downhill from there. There are two principles behind that: the first is, if you do not have a vested interest in the land, then water should not be relevant to you. What we are finding now is that you have all these investors—

ACTING CHAIR: Super funds.

Mr Calabria : everywhere with no thought for the community and no thought for environment, as such; they are just looking for the highest bidder. That is No. 1. I think No. 2 is that water affects everyone. As I said before—whether it is the environment or the community or you are an irrigator—they are the people who should be involved in the discussion, and everyone else should be locked out. Maybe a cooperative model, if those people are shareholders, could be a platform to manage it and to manage it well.

Mr McFarlane : As a strategy from the board, when we have excess funds we are purchasing some permanent water; but the resale of that can only go to customers who are going to use it in our area. We do not want it leaving the area.

ACTING CHAIR: The cooperative itself is going to become a water trader, rather than individual members of the cooperative—is that what you are saying?

Mr McFarlane : They are too, as well, but with any small parcels of water we are buying we are just creating wealth that we want kept in the area. That is what the cooperative model does.

ACTING CHAIR: Have you put a submission in to the Murray-Darling Basin inquiry?

Mr Calabria : I have put a couple in.

ACTING CHAIR: For the Senate one that is running?

Mr Calabria : Not for the current Senate one, no. But I had put two previous ones in when the plan was going about.

ACTING CHAIR: With this current initiative of the board around water purchase and use, community focus and the cooperative model, I think that would be quite a useful submission for the current Senate inquiry to receive, if I may be so bold. What I am saying is: do not worry about the due date. Just put it in.

Senator XENOPHON: Before you finish deliberating, though.

ACTING CHAIR: Yes. We have hearings next week. Mr Dalton, did you have something to add?

Mr Dalton : On the irrigation companies, Coleambally Irrigation do run as a cooperative. I am involved with Murrumbidgee Irrigation, which does not. I was not involved when they were privatised. But even though we are a corporate, we behave like a co-op. I do not have the answer for you, but it would be interesting to know why they did not go with the cooperative model. It would have suited the common purpose of those people, being irrigators, which fits right into the cooperative model. I am not sure whether that was because of taxation or whatever. But our shares are of nominal value and we cannot trade them, so we are nearly a de facto co-operative—because it is. But I cannot tell you why we are not there.

ACTING CHAIR: Thank you, gentlemen, for your evidence today—it was really interesting. Thanks for coming down to Sydney.