News

Russian sanctions are the least of our ag sector’s problems

Dr Mark McGovern, Queensland University of Technology, 14/08/2014

Farm Road Sunset, Queensland, AustraliaRussia’s targeting of $A400 million of Australian food exports and the government’s muddled response are just the latest setback for a sector struggling under failed policy approaches.

Agriculture is Australia’s only “strongly competitive industry”, according to recent reports from consulting firm McKinsey and the Business Council of Australia (BCA). Yet, the industry is today characterised by high levels of debt, low farm income, depleted reserves, increasing levels of insolvency and rising poverty. Why the mismatch?

Productivity is high in agriculture. Indeed productivity performance has been outstanding. Yet profits and incomes have been miserable for years. To top it off ABARE reports current Queensland farm incomes as the lowest for 37 years (which is when their figures began).

We’re measuring the wrong things

Measures of both competitiveness and productivity can increase when an industry is in decline. Today, agriculture is not where we hoped it would be. Existing policies and thinking have not delivered gains for agriculture in real terms (as evident in the graph) or Australia (as rising net overseas obligations demonstrate). Continuing them is folly.

A rocky path of questionable returns.
McGovern, M. (2013). Repositioning Rural Australia. Choices in Agricultural Policy: Rationalise or Reconstruct? Merredin WA, Muntadgin Profit Farmers.

 

Disappointingly, this failed stance sits behind the “new“ veneer in the BCA’s “Building Australia’s Comparative Advantage”. Under its dated take on comparative advantage, economies of scale still rule. The productivity mantra is repeated regularly but profit is never mentioned by the BCA, and incidentally mentioned only twice by McKinsey. Yet profit and sustainable incomes lie at the heart of sound business and investment servicing.

It’s 1997 thinking. Then, Minister for Primary Industries John Anderson convened a Rural Finance Summit in Canberra. The thrust was similar. Scale was the saviour and the message was that over a quarter of farmers must go. We overachieved – more than 40% or 103,000 farmers went during the Howard-Anderson era.

The reality is economies of scale require enterprises to increase operational size, utilise the latest technology (such as limited till farming and GPS navigation), employ advanced managerial systems and so on. Increased farm size requires larger machinery and equipment to replace labour intensive farming. All this takes money, yet financial considerations have been essentially absent.

Farm sector reforms have now created a sector with 20% of farmers producing around 80% of output from an increasingly untenable financial basis. Aggregation costs were neglected.

As asset inflation was thought never to end, debt-to-equity loans were not designed to be repaid from income. Capital gains would pick up any shortfall. But as stresses built and the GFC unfolded with pervasive capital losses, the economies of scale arguments and poor lending collapsed. Untenable loan-to-valuation ratios ushered in a financial crisis in national food production.

Large highly mechanised “efficient” enterprises were suddenly expected to repay multi-million dollar debts from insufficient income. Foreign buyers acquired most significant Australian food manufacturers and many farms.

What next?

Untenable financial arrangements need restructuring. The sector needs recapitalisation, new institutional arrangements and, for a time, a hands-on approach from government.

Today, the numbers of bank foreclosures and bankruptcy proceedings challenge the mantra makers. Financial numbers that don’t add up, and often never did, trash empty pseudo-economic rhetoric. Incomes going nowhere will not service the recent debt run up, as is evident in the graph below. Systemic failures allowed this development.

Debt has outpaced the ability to service it.
Ben Rees (2013) Reconstruct or Rationalise Agriculture? Compiled from: NVFP, ABARE, Commodity Statistics, Rural Debt , RBA online, Table D9

 

Yet, despite Foreign Minister Julie Bishop stating “the Australian government will do everything in its power to minimise the impact on Australian farmers“ of the $400 million disruption from Russia, Agriculture Minister Barnaby Joyce “would hope that we’re able to manage it without direct assistance”. Ongoing “do nothing (but hope)” emptiness is destructive. Why is abject market appeasement still the first preference in Canberra – but not elsewhere?

The real structural reform needed is in industry, governmental and BCA thinking. Scale and competitiveness policies that have failed to deliver need to be discarded, not re-veneered.

Real solutions require substantial considerations of income, investment and profitability under uncertainty. Finance matters as do market and supply chain realities. Policy makers have avoided these things for too long, to the great cost to agriculture, other infected industries and Australia.

Ironically today, the despised low-productivity small farmer with household off-farm employment may be more solvent than the aggregator or the competitive.

The Conversation

Mark McGovern is an active member of the Rural Finance Roundtable Working Group.

This article was originally published on The ConversationRead the original article.

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Comments

  1. Philip Downie, 19/08/2014

    Bart your third last para says it all we have been hoodwinked by Canberra and professional Ag experts into their constant moving of the goal posts in an attempt (quite successful at times) to divert attention from their past stuff ups. Real farmers (not wannabe Nats pollies) don’t have the time for these BS meetings their to busy trying to stay alive. What Aust has now, in beef for instance, is where there used to be 10 buyers there is now 1 buying for 10 people how is that competition?

  2. Bart Brighenti, 18/08/2014

    Dont think for a minute that the debt and lack of farm profits is isolated to cattle in the northern states. All farmers are one hiccup from collapse..
    Take some notes Mr Keogh. People like Mark, Ben and Rowell have been taking up the fight for all farmers without pay and more importantly without the support of so called “farm Groups”, and its about time organisations like yours realised what is happening in reality and start supporting these guys or get out.
    For too long groups that claim to represent Australia farmers have only helped continue the very issues/policy which is destroying our lively hoods and generations of work, and are little more than nursery’s for want to be nation party politicians.
    Horticulture of all types and sizes, is and has been for too long on the low profit/increasing debt spiral.
    Good hard working farming families who invested in their industry to gain the promised economies of scale have found it to be no more than a pot of gold at the end of a rainbow, next to the leprechaun and free trade.
    Only last week a neighbour told me that the best thing he had ever done in farming was be an underachiever, he can survive on off farm income, has little debt and can sleep at night.
    Agriculture does not have time to continue hanging it future on the BS of level playing fields, Asian food bowls, Niche markets, economies of scale and the opening of magical markets.
    Many farmers are already too old and too tired to fight and this will only get worse each year.
    We dont want handouts, we just want fair competition, not a cent or regulation more or less than our competition.
    Get behind these guys Mick Keogh or get out of the way.

  3. Rodney Hamilton, 18/08/2014

    I attended a presentation by Mark McGovern a couple of years ago and I thought a time he is telling my story. So I have followed the work of Dr. McGovern and Ben Rees, Mick Keogh it is time to take notice look at the graphs they are the truth!

  4. Ben Rees, 16/08/2014

    Mick,
    The debt curve is compiled from RBA Statistical Tables, online, Table D9 Rural Debt by Lender. data goes back to 1965.
    Please accept my apology for omitting the debt source previuosly

  5. Rob Atkinson, 16/08/2014

    Here is another shout from the rooftop highlighting the plight of our Agriculture Industries. Many producers in the droughted areas of the beef industry in Queensland are in desperate situations. Still there is no Debt Survey from Australian Bankers Assoc. Why? Because they know how bad the situation is, but they won’t act. So it is left to a pro active producer group like the Gulf Cattleman’s Assoc to hightlight this cancer. When these results are published at least the industry will have some idea of the plight some producers are in. It has been reported that the Federal Industry Minister, Ian McFarlane was in Longreach this week. Reportedly he was surprised at the severity of the drought and he said he had been bracing himself for a week before his visit. If a plan to keep many of our producer families on the land is not developed immediately, there is going to be a huge depopulation of northern and western Queensland. The situation is dire. Rome is burning.

  6. Rowell Walton, 15/08/2014

    Thanx Mark McGovern and Ben Rees for pushing on, your work has for decades pointed us to the place we are, if we were unable to move the political thought process of Canberra, its good to see Mick Keo taking an interest, its disappointing that he has taken so long, to with his mates at the NFF, notice what the empirical data tells us, that the trouble in the bush is as bad as ever and getting worse by the day.
    Sadly Ben and Mark are not paid to do this work and we can all name the blokes, including you Mick who are, to do this important work.
    Talking now is no less than fiddling while rome burns, history will wonder how so many failed to pull their weight while the show simply collapsed

  7. Ben Rees, 15/08/2014

    Mick,

    The graph is authentic and in nominal values. It appears you are unaware of the data base from which these curves were derived. The reference is ABARES, Agricultural commodty statistics, Table 13, Australian farm returns, costs and prices, 2013. p. 13.

    The original paper Rual Australia v orthodox Economics presented at the Treasursers Rual Finance Conference, Septemebr 2012 with 2011 data is on my web site . If you need any further assistance, then feel free to contact me on through that site

  8. Pete Mailler, 15/08/2014

    It is great to see qualified economic analysis of our situation that actually describes accurately what is happening on the farm.
    It is a far cry from the usual rubbish that suggests we are travelling very well and it will all work out if we just talk it up, have faith and somehow run a little faster on the hamster wheel.
    With great respect to Mick, I am afraid that the AFI is out of touch with practical agriculture. I would love to attend one of your roundtables, but they are timed to coincide with essential activities of busy farmers and so I am precluded. It seems to me the only people who come these days are not actually engaged in physically running a farm. Hardly a farm institute if most farmers can’t attend or participate I am afraid. It is sad that an organisation with such promise so often delivers messages that are compromised so as not to offend its benefactors too much. No offence, it is just a commercial reality, but the sanitised AFI reporting on agriculture often does more harm than good. Please accept the validity of the article and act on it.
    Thanks Mark for your article it is heartening to see that we are not alone in academic circles after all.

  9. Mark McGovern, 15/08/2014

    Hi also Philip and agree that supply chain and market power issues are a key consideration dodged for too long by government, industry and their agencies. You are also right about the need to turn most currently popular ideas on their head, but that’s another piece. It is worth noting that modern economics has moved well past the current obsessions of Australian policy circles. Take trade, and our comparative advantage mantra as an example. That’s week one lectures for my students in International Economics, and by week 6 many just can’t believe Australia’s policies. Critical exposure to more robust trade theories and analysis is needed across policy circles. Seriously flawed thinking rules on shore and off, but nothing will change until Australian producers make determined efforts to challenge it. More on that another time.

  10. Mark McGovern, 15/08/2014

    Hi Mick
    Ben’s graph correctly uses nominal values for both gross debt and net farm income as you would expect (and as you seem to have realised in your second comment). The “ability to service” debt is well captured in net income but would be better captured if we could reduce net farm income further to net factor income, and wondering if you or anyone you know has such data? There is a further consideration if we accept that around half of farms appear to debt free. This means the $60b+ bank debt is being serviced by perhaps $5b, which would make things markedly worse. Since 2012 the rural finance roundtable working group has sought an indication of the break up from the banks but they have not yet provided this or other information needed to get to the bottom of things. It’s time they did. One final point in checking the original ABARES ACS source there is an in interesting published error which heightens my concern about the unprecedented stability of nominal net farm incomes for the last three years. Thanks for helping get clarity – and be reassured that Ben’s graph is spot on, unfortunately for the industry.

  11. Mick Keogh, 14/08/2014

    Could the author please clarify if the net value of farm production included above in graph 2 is real or nominal? The above comment may be incorrect if the net value of production is actually a nominal value?

  12. Mick Keogh, 14/08/2014

    There are some important issues raised here, but they are not helped by a graph that compares nominal debt levels (not adjusted for inflation) over time with inflation adjusted or real net value of farm production (graph 2). This graph is an example of very flawed and highly biased analysis, and helps no-one. It detracts from the credibility of the entire article.

  13. Philip Downie, 14/08/2014

    What has happened is that farmers are the looser and the rest of the supply chain are the winners. In some form or fashion this has to be changed and I suspect it will challenge the ideas of Govt and economists because it will mean turning most of those ideas on their heads. Concentration of off farm power is the biggest problem that I can see to the point that there are almost monopolies that are public/private companies whose sole aim is their own bottom line. At least disband some of this if you can’t stomach the original AWB style of farmer co op. Then farmers may start to get back to profitability by competition. “Workable” competition is code for we are too scared or lazy to do anything to fix the problem and anyway I don’t think Govt see farmers as their problem, not enough of them.

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