Opinion

OPINION: A viable drought policy will require more honesty from all stakeholders

Mick Keogh, Australian Farm Institute, 09/12/2014

Australian farmers and policymakers are once again wrestling with drought policy – something that has proved to be one of the most intractable and persistent issues for both over the last one hundred years. But there is no real indication that the outcome of the current debate will be any better or more enduring that all the previous attempts. Perhaps part of the problem with drought policy is that all parties come to the debate dishonestly, and never seem prepared to work on evidence-based policy outcomes.

The current drought conditions in north-western NSW and western Queensland are devastating for those farm families experienceing an extended period of low rainfall, and having to cope with low or negative income – in some cases for the third year in a row. The issue has gained extensive media coverage, has been the focus of the inevitable politicians visits, and has sparked a new round of debate about drought policy. However, it is worth remembering that much of the area affected by the current drought is in a region that is particularly drought-prone, as is evidenced by the fact that some of the areas involved were drought declared for up to thirteen of the eighteen years between 1992 and 2010 (see following map), despite Exceptional Circumstances drought declarations supposedly signifying a one in 20-25 year event.

The frequency of the above drought declarations, and the fact that there are again calls for more drought support for farmers in these regions highlights two important facts. Firstly, for drought declarations to be made with such frequency provides evidence that these regions are inherently drought-prone, and farmers in the region need to take that into full consideration in making business and investment plans. Secondly, however, it also highlights that despite exceptional circumstances drought support being available to farmers in much of that region for more than half of the past twenty years, farmers are seemingly no better prepared for the current drought than they have been in the past. This, more than anything else, is surely a clear indication that the Exceptional Circumstances interest rate subsidies were not an effective drought policy measure.

In saying that, it is also important to remember that the vast majority of farm businesses did not, and have not in the past, received any form of government drought support. During the milennium drought from 2003 – 2010, despite much of Australia being declared to be in Exceptional Circumstances drought, over 70% of farm businesses did not access government drought support. Reinforcing this, during the current drought in NSW the NSW Government made available transport subsidies of up to $20,000 for the transport of stock, fodder and water, yet during the time that these were available, less than 10% of eligible ratepayers accessed this subsidy.

For all the noise and argument over these policies, there are only a small number of farmers that actually access drought support, and the sad fact is that often it is the same farmers who access support repeatedly over time. This is evidence that these policies are not making farm businesses more resilient, and also creates the impression that farmers rountinely line up for drought support, which is quite misleading and damaging for the industry.

The current claims about a debt crisis amongst farm businesses in the drought declared areas of northern NSW and Western Queensland also need to be treated with a degree of caution, based on data recently published by ABARES. The survey on farm debt in these regions arose out of the recent farm debt roundtable hosted by the Minister for Agriculture. That research, which obtained data from banks, cattle farmer groups and official government sources, found that

..data provided by the ABA indicate that the number of farm businesses with difficulty servicing bank debt remains low. There has been an increased in both the northern Queensland gulf region and north west New South Wales during 2012–13 and 2013–14. These data need to be viewed within the context of prolonged drought and other weather conditions that may have affected farm finances in some areas.

In the northern Queensland gulf region, the proportion of borrowers more than 90 days in arrears servicing bank loans increased from 1.9 per cent at 30 June 2012 (23 customers) to 3.4 per cent (43 customers) at 30 June 2014.

In the north west New South Wales region, the proportion of customers more than 90 days in arrears servicing bank loans increased from 2.2 per cent at 30 June 2012 (12 farms) to 4.0 per cent (25 farms) at 30 June 2014.

Nationwide, 3 per cent of the total value of agriculture, fisheries and forestry sector debt was more than 90 days in arrears at 30 June 2013. Approximately 2 per cent of the total value of all other business sector debt was more than 90 days in arrears nationwide at the same time.

While the position of those farm families who are in arrears in servicing their bank loans is undoubtedly extremely distressing, the numbers still appear to be relatively modest, and do not appear to support the notion of a widespread debt crisis that would necessitate wholesale debt reconstruction, as some propose. While it might be well-meaning, media exaggeration of the scale of the problem does little to help the confidence of the industry and its financiers.

On the government side, there are also a few issues that need to be clarified. First, all Australian governments signed off on reforms to national drought policy in April 2013, but then completely ignored the need to communicate this decision to stakeholders, or to take responsibility for the decision and initiate some of the actions identified in that agreement. In fact, the Australian Government of the time proceeded to announce a concessional loans scheme as part of a pre-election deal, without any evidence or consultation, and foisted the scheme on the  Department of Agriculture and the states with no warning. The inevitable result was mass confusion and extended delays, as eligibility rules had to be developed, responsibility for administrative costs argued out, and in most cases State Governments had to work out what they were going to do with the money – there being no drought in those states at that time. The actions of the Australian Government of that time – which were contrary to the national drought policy agreement – have subsequently emboldened state governments to also initiate actions contrary to the national agreement they signed on to.
One outcome from the national drought policy agreement that has been implemented is the Farm Household Alllowance scheme, which provides welfare support to farm families experiencing an extended period of no income. While this has been touted as a new drought support measure for farmers, it is in fact nothing more than making available equivalent welfare support to farm families that is available to everyone else in the community. It had long been an anomaly that someone with a $10 million house in Vaucluse or Toorak could access welfare support without needing to sell the family home, but farm families were treated differently because of the value of their farm assets. Unfortunately, there still seems to be a view amongst policymakers that this is a ‘special’ concession for farmers, evidenced by the fact that it is costed against the Department of Agriculture budget rather than the Department of Human Services.
Perhaps the biggest issue that governments of all persuasions need to recognise and be more honest about is the fact that the levels of risk and revenue volatility experienced by farm businesses are on average more than two and a half times greater than the average for businesses in the rest of the economy. Policy prescriptions that do not recognise this will inevitably fail, as is the case at the moment.
A consequence of this high level of risk is that farm businesses need to hold much higher levels of equity than is the case for other businesses, and managers are less willing to invest in capital improvements. As a consequence, sector productivity will decline – as is being observed at present. This provides justification for stronger government incentives to encourage farmers to better manage risk using a range of actions and instruments like multi-peril insurance, and also to reconsider arrangements around policies such as Farm Management Deposits. Providing a 150% tax deduction for the premium cost of approved multi-peril insurance policies would send a very strong signal to farmers, and also help to overcome the inevitably high premium cost of these policies during their development phase. Providing greater tax concessions for money allocated to Farm Management Deposits (as is the case for superannuation contributions) would also encourage farmers to better prepare for drought.
Perhaps most importantly for governments of all persuasions is the need to sit down with farmers and their representatives and negotiate a clear set of policies that all sign off on, and which are then subsequently communicated widely and adhered to be all parties, but especially by both farmers and politicians. As the current debate highlights, continuing policy uncertainty serves as an encouragement to farmers and politicians to ‘game’ the political system, and to constantly come up with ad hoc proposals and policies that solve nothing, and ultimately cost the entire farm sector including those who adequately prepare for the risks their businesses face.
This article was originally on the Australian Farm Institute. To view original article click here

HAVE YOUR SAY

Your email address will not be published.

Your comment will not appear until it has been moderated.
Contributions that contravene our Comments Policy will not be published.

Comments

  1. charles nason, 09/12/2014

    Mr Loughnan has got it spot on . There is widespread concern as to the sampling procedures wrt to the ABARES surveys . I have debt data from the 1970’s where the ABARES data is completely different to other 2 data sets . All sampled the same population with markedly different results

  2. Bill Loughnan, 09/12/2014

    The ABARE research from which it is inferred that there isn’t a debt crisis in the bush (for example only 43 grazing operations in the northern Queensland gulf region are in strife) is fundamentally flawed.

Get Beef Central's news headlines emailed to you -
FREE!