AGRICULTURE: by Patrick J. ByrneNews Weekly
Tax breaks for wealthy hurting agriculture
, July 22, 2006
Federal Government tax concessions for the wealthy are spawning huge corporate farms at the expense of family farms, writes Pat Byrne.Managed investment schemes (MIS) are distorting rural investment, agricultural markets and water allocations. MIS involve wealthy people seeking to minimise their tax by investing in managed rural investment schemes that are creating very large corporate farms.
About $3.6 billion has been invested in MIS since the 2001-02, almost $1.2 billion this year. They have an annual compound growth of around 36 per cent, according to the national rural paper, The Weekly Times.
This involves buying up about 105,000 hectares of land annually.
Of the 59 new projects this year, investments break down as follows: 44 per cent into tree plantations, 42 per cent into horticulture, 5 per cent into other agricultural investments and 9 per cent other. Recent projects include: forest-planting, "tax-effective tomatoes ripening in giant glasshouses in northern NSW, pearls in the Northern Territory, sandalwood, vineyards, olives, mangoes, almonds, truffles, even walnuts and cherries," according to The Weekend Australian
financial pages (July 1-2, 2006).High up-front fee
In part, these schemes operate by charging a high up-front fee, several times the cost of establishing the project. A tree-planting project might cost $9,000/ha, while the true establishment cost may be only $1,500/ha.
Without going into the tax-minimising details of these schemes, "most investors don't worry about a return at the end of 15 years. Their main concern is a tax deduction now. Given it is a 100 per cent deduction, the more they spend the better it is. And with any profit years away, it is unlikely the promoter will be held responsible for that performance until too late," said The Weekly Times.
Hence MIS investments are not based on market signals. They are solely driven by wealthy investors - many having made a lot of money out of the recent stock market bull-run - wanting to minimise their tax.
The problem for genuine farmers is that these MIS projects are so large that they frequently lead to overproduction and the collapse of rural commodity prices. This puts genuine family-farms out of business, but does not affect MIS operations as their primary purpose is to minimise investors' tax liabilities, not to actually make a profit.
This overproduction is rapidly turning some high-value farm products into low-value products. Owning 15 per cent of the wine-grape industry, MIS have contributed to the collapse in prices for wine grapes from around $600-$800/tonne a few years ago, to $150-$200/tonne this year.
Elsewhere, some MIS timber projects are turning once proven, highly profitable broad-acre cropping and grazing land into considerably lower-valued timber plantations.
MIS also affect the supply and price of irrigation water.First
, intensive planting of young trees, which absorb a lot of water in their growth stage over 10-15 years, dries up surface flows and reduces ground-water flows. The use of this water is at zero cost to the MIS, but it has a negative cost to other users downstream.Second
, flush with money, MIS are in a position to buy up large amounts of water entitlements at well above normal market prices, forcing up irrigation prices across a system.Third
, irrigators believe MIS, with their huge ability to buy into the water market, are the major source of water trade between catchments. This comes at a time when federal and state governments are wanting to deregulate the water industry, arguing that allowing water to trade between catchments will see market forces shift water from low-value to high-value agricultural production.
However, with the supply glut created by MIS, today's high-value products can quickly become tomorrow's low-value products. This makes economic modelling on water trade between catchments, from "low-value" to "high-value" agriculture, unreliable for policy decision-making. Arguably, all that the modelling measures is the up-side of a boom-and-bust cycle in an industry facing serious over-investment due to huge tax breaks granted by the government to wealthy city investors.Fourth
, at the end of these schemes, the manager-operators are left with huge water banks and huge land banks. Water banks can be used for a variety of purposes, including withholding supply and forcing up water prices in drought times.
Finally, there is great irony in that the Federal Government insists that it will not subsidise agriculture, as is done across most of the rest of the world, arguing, "Why should taxpayers subsidise farmers?"
Yet it is prepared to have taxpayers subsidise wealthy city investors in MIS schemes, which seriously distort agricultural markets and drive genuine farmers out of business.
The genesis of these MIS were the concessions the Federal Government allowed in order to boost investment in tree plantations, so as to cut Australia's $2 billion deficit on timber imports. In which case, the schemes should now be limited to the timber industry, and environmental planning limitations should limit the areas where the plantations can be established.