Wednesday, March 3, 2010

Drought is not exceptional

The front page of yesterday's Australian newspaper reports Agricultural Minister Tony Burke's recent speech outlining his intention to reform Australian drought policy. The specific part of the Exceptional Circumstances subsidies targeted by the Minister's speech was the interest rate subsidy. Under this scheme farmers in drought declared areas can have 80% of the interest on their farm debts paid for by Australian taxpayers.  Farmers were provided $61 million per month in drought assistance at the end December 2009 - or about $730 million per year.

As a side note, it makes me wonder how substantial agricultural subsidies must be in Europe. Australian direct agricultural subsidies amount to approximately 8% of farm income, while in most European nations subsidies account for greater than 60% of farm income.

What I find particularly interesting about drought policy is the logical dilemma encountered when determining what are in fact 'exceptional circumstances'.

Applications for areas to be declared under Exceptional Circumstances must demonstrate that the event:

1. was rare (a one in 20-25 year event) and severe
2. resulted in a severe downturn in farm income over a prolonged period (eg. more than 12 months) for a significant number of farmers in a region or industry, and
3. was not predictable or part of a process of structural adjustment (the policy does not cover downturns in commodity prices).

Yet criteria 1 and 3 logically conflict. If we know the probability of a drought event occurring it must be predictable, or at least foreseeable.  Most parts of the country have at least a century of reliable rainfall data to determine the long term rainfall variability. Under the assumption that this climate pattern is representative of long term patterns, we have a solid probabilistic framework to determine likely future rainfall, and solid base to determine future farm investment risks.

These illogical policies have far reaching impacts.  For example, prices achieved for agricultural properties appear to factor in this expected government assistance as a future income. There are very few farms in the country that can be bought at market prices and make a return greater than the cost of debt funding without any government assistance. Farm land prices already incorporate the capitalised value of future subsidies. The need for this type of government assistance is self-reinforcing as it develops a future dependence on yet more assistance from those who have bought into farming.

Additionaly, such assistance rewards famers who make poor investment decision, while providing nothing for those who were prepared to support themselves during inevitable drought periods.

Drought policy may also be driven by the prevailing myth that if we don't support farmers we won't benefit from their food production.  That is patently wrong.  If a single farmer's business fails they can sell up and move on.  They may cover their debts and move on with cash in hand, or they may incur a loss on their investment (such as Cubbie Station).  But whoever buys the farm will, in all probability, continue to farm and produce food.  Agricultural will not cease if some farm businesses fail.  It may even increase as more efficient operators come into business.

I'm not saying we should scrap all subsidies or government assistance to the agricultural industry. But we need to let farmers take their own risks and use their own innovation to overcome these foreseeable climate variations.

Instead, it may be more appropriate to secure the future of Australian agriculture by the use of land use/planning controls. For example, we could make the decision as a country (or state) to preserve some areas for agriculture by removing the State's rights to minerals on productive agricultural areas (as some farmers have proposed). Alternatively, we could make planning decisions to preserve 'green belts' of agriculture on city outskirts to eliminate sprawl and maintain agricultural communities.

There are many more ways in which we can support the agricultural industry as a whole (if we choose to) without having governments take on the risk from private investment decisions. Drought is not exceptional, and anyone entering the agricultural industry should be aware of that.

1 comment:

  1. some marginal farming areas may in fact be permanent (low rainfall) drought areas and the exceptional circumstance is 1 or 2 years of good rain - so should taxpayers continue to support these unviable farms -keith