Strawberry Fields - Submission on Non-Forestry Managed Investment ...

Jon Carmichael
Proprietor
Strawberry Fields
133 Laxton Rd
Palmview, Qld 4553
Mobile: 0418 877769
Fax: (07) 54945425
Email: jon@strawberryfields.com.au

26 August 2008

Review of Non-Forestry Managed Investment Schemes
Business Tax Division
the Treasury
Langton Crescent
PARKES ACT 2600

Dear Sirs,

In view of the government’s decision to seek input to “A Review of the Costs and Benefits of
Managed Investment Schemes (MIS)”, Strawberry Fields wishes to put forward the following
submission:


I have recently returned home to take on the family business after spending over a decade
managing national horticultural supply chains for corporate entities such as Chiquita Brands
South Pacific, Angas Park Fruit Company and most recently Golden Circle Limited.

During this time I have been in a unique position to compare the workings and efficiencies of
Corporate versus private horticultural farming entities given that supply was received from
both.

It is with this understanding that I wish to answer your questions and put forward my thoughts
regarding MIS schemes in Agriculture generally but more specifically in the Qld Strawberry
Industry.

Question 1 – Do MIS have a Tax Advantage?

Firstly I would like to say that this question is of much lower concern than the questions to
follow, as the government can make changes to the tax laws to suit the countries
requirements.
The real issue is the impact of MIS operations on the supply and demand equation of a
specific crop and the impact of this on the long term sustainability of that crop.

Given it’s the governments role to create the tax laws and manage them I would have thought
that your own team of accountants and lawyers could answer this for you based on current
law.
From my limited knowledge of tax law I would have thought that the inputs are of a capital
nature and should be accounted for on the same grounds as traditional farmers are.

Because they are not, means MIS operators have a considerable tax advantage.

The obvious question is; Why would the government let legitimate tax money that could be
used for much needed infrastructure be squirreled away?

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Question 2 - How well do MIS perform?

To answer this I shall draw on my experience with corporate farms and what we currently
observe of the MIS operating in Strawberries.

During my corporate career I was involved in the acquisition and management of several
crops including Bananas, Apricots, Oranges and Blueberries. The reasoning for a corporate to
get involved in the growing side was normally to increase market share and to gain a better
control on supply for the marketing side of their business.

Of those operations I am aware that the bananas have now halved in size, the oranges have
been sold off to an MIS, the apricots have been sold off to a private operator, only the blue
berries are still operating and this is mostly due the fact they hold approximately 70% of
domestic the market.

The reason for the demise of these entities is simple, they could not make money.

To say that large economies operations bring efficiency in horticultural production is a
statement I am yet to see proven from a financial perspective in Australia?

Horticulture is a high labour input industry which needs to be strictly managed. Management
decisions must be timely and made with a good understand of the farming process.
These are but two of the many things that are less effective in the corporate model, but have a
significant effect on performance.

Economies of scale are related to the capital applied and generally speaking there are several
levels in farming where economies of scale can be good.
In Australia the small low capital family model has stood the test of time and is still with us,
showing that this model can be very efficient and sustainable.

In horticulture, world wide efficiencies from large production models have generally only
been successful when the crop is either wholly mechanised i.e. Wine, Grapes and
Macadamias or crops that are located in areas with an abundance of cheap labour i.e. Bananas
and Oranges.

For Strawberries in Qld the performance of the MIS involved has been terrible; their farming,
financial and marketing results are considerably poorer than the average farmer. Growers next
door to the current MIS Strawberry operations have witnessed farming and management
practices that are the absolute opposite to best practice.

A significant issue is the poor marketing performance by the third party employed to market
the MIS Strawberries. They have constantly supplied fruit under current market value in an
attempt to buy future market share for expected future production, which then pulls the
market expectation lower and to date has resulted in a average market value well below 2006
pricing and yet we have had the same increases in costs as all other industries.

How well MIS schemes are performing in other crops is difficult to asses as they are mostly
tree crops and it will be many years before their real performance can be assessed. I do not
have any first hand knowledge of how these other ventures are performing other than
information supplied to me by those that are close.
Some of these accounts are not very flattering.

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Question 3 – What is the impact of MIS on inputs, the environment and regional areas?

To answer this question I will only consider the effects to strawberries in our Sunshine Coast
region.

Inputs
Our region, the Sunshine Coast, is the largest Strawberry growing region in Australia and we
account for over half of Australia’s production.
The key input effect by the MIS activities is availability and cost of labour.
Due to their inexperience and scale, labour availability has been tighter. To ensure they get
their numbers of staff, the MIS have increased their rates of pay to attract workers, much of
the industry have had to increase pay rates to compete.
Thankfully this issue has been recently alleviated by the Caboolture district being included for
extensions on working holiday visas.

Cost of land has also seen a substantial increase which has also been fuelled by the MIS
operators.
Another issue relates to availability of service providers; the added demand has made it more
difficult to obtain services as many are busy working for the MIS schemes.

Effect on the environment is difficult to answer, however there is an obvious increase in
water, fuel and electricity consumption. If this does not create a tangible benefit to the
community, then it is simply waste.

Regional Areas
Strawberries are a very large contributor to the Sunshine Coast economy; in general when the
growers are making money everyone connected to the Strawberry industry prosper.

The Strawberry industry has been operating and growing successfully now for over 50 years
and has continued to evolve into the effective industry it now is.

However the introduction of MIS into our industry has produced an over supply situation that
the Supermarket chains have used to push prices lower than required. This impact has had the
single biggest impact on the sustainability of our industry since its inception.

The future outlook is bleak at best and grower’s confidence is at an all time low. For the
regional community this means less investment, less employment and less general spend by
the very same people who have been investing sustainably in our region for so long.

The 2008 Strawberry production year will go down as the worst year on record with as many
as 90% of growers loosing money. This follows a poor year in 2007 which will mean the end
to many growers and a loss of generations of valuable farming experience.
Why would the government allow such a great regional industry to be disrupted in this
manner?


Question 4 – What is the impact on Commodity Markets?

This is by far the most important question and will have the biggest impact.

Of all the MIS schemes in horticultural, the only cash crop is Strawberries.

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As such the Strawberry industries will be the first to show the real impact of MIS schemes on
a commodity market.

MIS started in Queensland Strawberries in 2007 which was a poor year by most grower
expectations, showing the first signs of the issues to follow.

This year is not yet finished however our business is already running significantly behind last
year and by all reports most growers are in the same situation.

At this stage its not a just the over supply that is causing the issue, it is the expectation by the
supermarket chains and the general market of an oversupply that has already seen average
prices lowered by more than 15% of 2006 averages.

The crucial supply and demand equation that has managed the sustainable growth of this
industry over time has been severely disrupted. We now have a grower segment where
making a profit from lease and management fee’s comes before profitably growing and
selling strawberries.

How can the economic process of supply and demand work in this environment?

This is exactly the type of situations the chain stores like to see, and puts more power in the
hands of the buyer.

However the market can only absorb a certain amount of fruit given the margin expectations
of the Chains and so traditional grower’s fruit is simply being replaced by MIS fruit and the
consumer is no better off.

Strawberries have a low potential for export, as little as 5% are exported.
The reason for this is simple, with our cost of labour and location; we cannot compete in most
markets other than NZ.

This export cost issue is the same for most horticultural commodities.
However each horticultural commodity is linked, if there is an oversupply of a number of
Commodities at the one time all commodities marketed at that time will be impacted by lower
prices as consumers will only consume a certain amount of produce, what ever the mix.

One of the key marketing angles of the MIS schemes is their focus on export markets for
selling their product, however I believe this to be totally misleading and an insult to the
current long term produce marketers that handle these products.
Most horticultural crops in Australia are currently exported to some degree; the reason why
there is no volume is because our production cost limits the ability to move volume profitably.

To say that MIS expected economies of scale will cure this issue is a complete fallacy; the
minimum cost to export is the sum of pick and pack labour, packaging, freight and agency
fees.
When labour comprises upward of 50% of total operational cost for most Australian
horticultural crops, the small gains MIS may make in these areas will not create the difference
between our $16.28 minimum hourly rate and that of an overseas competitor that pays
approximately the same rate for a days work.

The real question is: What happens with all the produce that is now in development phase if
the produce is not exported?

If this produce is forced back on to the local Australian market, the oversupply will be
horrendous and the impact to long established farming businesses will be unrecoverable.

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What of the impact on the MIS? The managers of the scheme’s will not be impacted greatly
because they have already received there lease and management fees, the share holders will
make nothing but they have already gained their tax deduction and they weren’t expecting to
make money anyway.

Conclusion and Recommendations

If the MIS are allowed to continue not only will we loose the current sustainable supply
chain’s we have relied upon for many generations, but we loose a generation of knowledge
that cannot be replaced, and be left with corporate profiteers.

When food production is becoming an international issue with most countries starting to
better protect their producers, do we want to go down a path of destabilisation?
Is this what we want for the future of food production in Australia?????

I can understand why MIS could be advantages for the starting up or gearing up of some
industries.

However consideration of where MIS is appropriate should be an industry by industry
approach with lots of consultation with the industry involved prior to making any decisions.

In a mature industry like strawberries the evidence is all ready here to show the big mistake it
is, and needs to be stopped immediately before any further damage can be done.

The money that is being used is money that should be going into Government Revenue, if the
Government wants to inject more money into the regional areas why not start by offering it to
the businesses that have got us here to date.
This money could be used to better equip our current farmers for efficiency and I am sure you
will find the money will be much wiser spent and go a lot further.



Yours sincerely


Jon Carmichael
Proprietor
Strawberry Fields

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