Australian Financial Review news articles – July 2021

High-income tax cuts to stay

The federal Labor Party is set to go to the next election vowing to leave untouched the stage-three income tax cuts if it forms government, heading off a Coalition campaign to portray it as high taxing and anti-aspirational .

Following several days of conversations , Labor’s hierarchy has decided against trying to either unwind or amend the cuts if elected.

The decision is yet to be ratified by the caucus but sources said it was a safe bet it would remain unchanged.

The tax cuts have already been legislated to begin on July 1, 2024, and will cost an estimated $137 billion between then and the end of the decade. They will abolish the 37 per cent tax rate and apply a 30 per cent rate to all income between $45,000 and $200,000.

Labor supported the legislation for the tax cuts after the last election but, it argued, only because they were tied to the stage-two tax cuts for low- and middle-income earners which began on July 1 last year.

It always reserved the right to take a different position to the next election, depending on the state of the economy.

With debt headed towards $1 trillion and the budget deficit above $100 billion , Labor mulled revoking the cuts altogether but gave more serious consideration to capping them so the 30 per cent rate would apply to incomes up to $180,000, instead of $200,000.

It calculated the latter option would save $80 billion, which could be used variously to pay down debt and deficit and fund potential Labor election promises, such as a higher JobSeeker welfare payment.

Leader Anthony Albanese had always insisted Labor would not make a final decision on its position until closer to the election, but it was decided in May to make the decision during the parliamentary winter break and get it off the agenda.

Had Labor sought to amend the cuts, it would have faced a campaign by the Morrison government that it was for higher taxes and anti-aspirational , which were similar themes run against Labor at the 2019 election. Labor went to the last election with a number of policies aimed at curbing tax breaks, such as negative gearing and cash refunds for excess franking credits. It also went to the election opposing the stage-three tax cuts.

In May this year, after Labor refused to state its position, Prime Minister Scott Morrison gave notice of a similar campaign at the next election. ‘‘ If Labor wants to put taxes up, they need to tell you how many jobs it’s going to cost and how much it’s going to slow growth,’’ he said.

‘‘ They’re the ones who have to make the argument for change. We did at the last election, won an election and implemented it. It’s now law.

‘‘ If they want to put up taxes in the middle of a recovery from the worst recession since the Great Depression, they can make that case. This is the worst possible time.’’

There was strong support among Labor’s right faction to leave the tax cuts alone, more so given they were already legislated and factored into the budget bottom line. Unravelling them had the added potential of a messy Senate battle after the election.

The decision to leave the cuts unchanged will rob the government of a key attack line come the election, while emboldening the Greens, who oppose the cuts altogether.

The intergenerational report released in late June by Treasury found that even with the stage-three tax cuts factored in, personal income taxes would grow faster than other sources of revenue over the medium term, placing an increasingly larger burden on a smaller portion of workers.

Treasury projected the Coalition’s self-imposed tax-to-GDP ratio of 23.9 per cent would be reached in 2035-36 which, because of the impact of the pandemic, was four years later than forecast in the 2015 IGR.

This suggests that the stage-three income tax cuts could be the last for a long while.

AFR – Tuesday, 13 Jul 2021 – Page 1

Packhorse’s $1.5b fund secures first seed asset

Packhorse Pastoral Company, which is backed by Canberra Rich Lister Terry Snow, has closed its first capital raising and acquired its seed asset, a Queensland cattle station, as it embarks on a plan to muster a $1.5 billion cattle and carbon fund over the next five years.

The $62.5 million raising helped Packhorse lock in its first acquisition, the 8360-hectare Stuart’s Creek near Roma, in a $30 million deal, bought from private owners. The deal also puts it on the way to its initial target in its first year of operations of $300 million in agricultural assets, with about 30 per cent of that total comprising debt.

‘‘ It’s in an ideal area. It’s got the right rainfall, it’s got the right soils, it’s got good logistics, close to the Roma sale-yards and 450 kilometres from Brisbane ,’’ Packhorse chairman Tim Samway told The Australian Financial Review.

‘‘ It’s been conservatively grassed and well-managed for 75 years by one family . So it’s a turnkey. It’s got good infrastructure . The opportunity for us is the pasture improvement.

‘‘ That is how we think you get the returns. You buy privately, you aggregate for scale, you improve the pastures, you change the grazing methods, you increase the carrying capacity.’’

Packhorse brings together some big names. The cornerstone investment from Mr Snow, whose Capital Airport Group owns Canberra Airport, has galvanised the platform’s start up, sparking interest from other investors. About 40 high net worth and family office investors have come on board for the first raising. Packhorse aims to conduct raisings, asset-by-asset , with a $160 million pipeline of potential acquisitions stretching from Coonamble in NSW to Taroom in Queensland.

Mr Samway is well known in the funds management world as the chairman of Hyperion Asset Management, an Australian and global equities fund manager with more than $10 billion in funds under management. Also on board as Packhorse’s managing director is agribusiness veteran Geoff Murrell, who previously managed Macquarie’s beef and sheep giant Paraway Pastoral’s northern Australian properties.

Central to the Packhorse strategy is the principle of regenerative agriculture – increasing biodiversity, enriching soils, improving carbon capture. It is a thematic with growing adherence in the sector, espoused by major players such as Tiverton Agriculture.

Stuart’s Creek will allow Packhorse to put those principles into practice, transforming the property into a rotational grazing model and introducing further grass and legume species – Rhodes, digit, gatton panic, desmanthus and others – to improve biodiversity.

Those improvements enable the return of carbon to the soil, providing the potential for the property to one day generate carbon credits.

‘‘ By making these changes we think we can double the carrying capacity. You can understand what that does to the revenue and to the valuation of the property,’’ Mr Samway said.

‘‘ What it does is it improves the soils and increases the ability to sequester carbon. Carbon sequestration is about coverage. It is about getting green matter across very inch of the land.’’

The carbon play is in effect an add-on benefit , although potentially a very material one. Packhorse is not banking on carbon offsets to make its returns stack up from its portfolio. At current prices – Australian carbon offsets have reached $20 a tonne for the first time since the carbon price was revoked in mid-2014 – carbon credits would generate 0.5 per cent to 1 per cent on Stuart’s Creek’s internal rate of return.

But there are expectations that carbon prices will surge in the lead up to the 2030 emissions reduction target. Prices for offsets in Australia lag well behind those in the European Union, where they have surged by more than 75 per cent this year. On a rough estimate , a carbon price of about $100 a tonne could deliver a 4 per cent internal rate of return on its own for grazing properties, according to Mr Samway.

While not betting on those outcomes , Packhorse will be well-prepared , taking baseline measures for soil carbon, followed by regular assays as pastures are improved.

‘‘ The reality is this is about running properties better, increasing their carrying capacity, increasing the biodiversity of the plant matter so we get superior cattle and people pay more for those cattle and to have them raised,’’ Mr Samway said.

The other major component to the Packhorse strategy is its focus on the land, rather than holding cattle itself. It is primarily an agistment model, where Packhorse will limit its ownership of livestock.

‘‘ This is a very focused strategy,’’ Mr Samway said. ’’ No feedlots, no abattoirs, no branded beef. We are a cattle motel.

‘‘ We’ll own some stock along the way but in the long term, we are basically supplying grass in a high-quality cattle motel for other’s people’s cattle.

‘‘ A lot of businesses are exposed to the livestock. We think by taking that exposure out, you get to prioritise the land. What we want to do is prioritise the soil and the grass. When you don’t own the cattle, you don’t have that problem.’’

AFR – Monday, 12 Jul 2021 – Page 34

China rides on our sheep’s back as farmers anticipate bumper season

Despite trade embargoes and a diplomatic deep freeze, there is an Australian export which is being warmly welcomed in the Chinese market. And it is not iron ore, which is booming anyway.

It is the product which iron ore replaced as the source of much of Australia’s prosperity – wool.

China this year lifted its quota on duty-free Australian wool imports by 5 per cent from 36,000 tonnes to 38,000 tonnes and it accounts for close to 90 per cent of Australia wool exports, up from 70 per cent about a decade ago.

The next largest export market for Australian wool is Italy, which accounts for about 3 per cent of exports.

Wool and sheepskin exports lifted 8 per cent, or $47 million, over the March quarter, hitting $633 million, according to the Australian Bureau of Statistics.

Australia is also China’s largest source of imported wool, with a 74 per cent market share, ahead of South Africa (8 per cent), according to the Department of Foreign Affairs and Trade.

New Australian Wool Innovation chairman Jock Laurie sees similarities between the natural fibre and iron ore exports to China.

If China wants big volumes of wool, Australia is the logical, trusted and only real option. And like iron ore, Chinese mills and manufacturers add massive value to the raw commodity.

China is also by far the biggest buyer of both commodities. Those trading relationships survived COVID-19 , although wool suffered for a period, and is now going strong despite the frosty relationship between Beijing and Canberra.

Wool prices have started the new financial year slightly softer but are up about 65 per cent since bottoming out last September – and that is good news for Mr Laurie and his family, who will shear about 10,000 sheep this year.

The tough-talking former National Farmers’ Federation president has been farming for decades and has never seen it so good, barely 18 months on from one of the worst droughts in the country’s history. ‘‘ I’ve been involved in the game all my life and the run we are having at the moment is as good as I’ve seen,’’ he said.

‘‘ It is a combination of commodity prices – certainly at record levels from a meat industry point of view and from a wool industry point of view recovering after COVID – and interest rates being really low.’’

Mr Laurie said China had a big wool processing industry that made more than 50 per cent of its sales on the domestic market.

‘‘ The wool industry has very strong relationships there and has done for a long time,’’ he said. ‘‘ It is great to see that progressing well under current circumstances.’’

The Lauries spread the commodity risk on their farms at Walcha, Bendemeer and Gunnedah in NSW, raising sheep and cattle, and growing grain.

The cattle price continues to go from strength to strength, as meat processors and farmers looking to restock post drought compete for limited numbers.

The eastern young cattle indicator (EYCI) reached a record of 951.5¢ a kilogram this week, up from 752.25¢ a year ago and from 492¢ in July 2019.

Mr Laurie said red-hot cattle prices were starting to work in favour of sheep. ‘‘ The drought had a tremendous impact on sheep numbers, but we are starting to see a strong rebuild now,’’ he said.

‘‘ A lot of people are taking the opportunity to get into sheep, be it sheep meat or wool, sheep of any sort.

‘‘ The cattle market is red hot. You are talking large amounts of money, if you want to start buying cattle. People can see value in sheep.’’

Mr Laurie said all farmers had to make decisions on the best use of their acreage and this year Australia is on track to produce a massive winter grain crop with prices at solid levels.

Victorian farmer and Grain Growers Limited chairman Brett Hosking said crops across most of Australia were in good shape mid-way through winter.

‘‘ There is potential for a big crop, particularly if Victoria and parts of South Australia get a good finish ,’’ he said.

‘‘ Northern NSW is looking good, a fair bit of NSW where there is no mouse damage is looking good. Southern Queensland and Western Australia are looking good.’’

Mr Hosking said some mixed farmers had swung back towards livestock on the back of strong prices, but crops covered plenty of ground that was used for sheep and cattle before the drought.

He would normally grow out some steers for sale but stayed out of the cattle market this year and focused on his main game of grain and sheep.

‘‘ They say the best cure for good prices is good prices,’’ he said of the cattle market.

In WA, farmer-controlled CBH Group has started its annual harvest recruitment drive a month earlier than normal after a wet winter across the state’s vast wheat belt that promises to deliver a bumper harvest.

The giant grain handler and exporter is looking to hire 1800 seasonal workers but could struggle to hit that target in a state with a hardline border closure policy and already in the grip of a labour shortage affecting both mining and agriculture.

A shortage of truck, train and machinery drivers continues to hamper CBH’s ability to get grain to its port fast enough to keep up with demand from overseas customers.

Exports suffered another blow this week when WA authorities refused to let a bulk carrier berth at the Kwinana Grain Terminal after a crew member was transferred ashore with COVID-19 .

The MV Emerald Indah turned back to Indonesia without the 50,000 tonnes of wheat it was chartered to carry out of Kwinana.

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