IT IS evident that farmgate returns have not increased in line with costs and farm debt is increasing, regardless of where you may sit on the distribution curve of profitability or productivity in the sector.
There is a real decline in profitability of the sector and in turn, viability is increasingly difficult. The trend data is irrefutable and demands acknowledgement.
The government solution to declining terms of trade has been to encourage improvement in productivity, through increased intensity and or through increased scale. This strategy has been successful to some degree in delaying the impact of declining terms of trade.
However, as the cash cost of inputs rise, coupled with the realisation that the efficiency gains have not accounted appropriately for non-cash costs, particularly in the context of the long-term productive capacity of the soil, this strategy is doomed to fail.
It is intriguing that this phenomenon of ignoring non-cash costs exists also in non-food sectors. For example, people talk about supply of oil as if it were renewable. Technically fossil fuels are renewable, but the real rate of production of fossil fuels is measured in hundreds of millions of years, so our collective extraction is not sustainable.
The price people pay and are prepared to pay for oil products does not factor in the fact that it took about 250 million years to make it.
We pay for what it costs to extract, refine and distribute oil with a relatively small margin. Because there a relatively few “producers”, they can control supply within reason and manage to extract a healthy margin, but this belies the real natural resource cost of the production of the oil in the first place.
Agriculture is remarkably similar in terms of the pricing framework based on consumer expectation and its implication for sustainability and utilisation of natural resources, albeit with relatively shorter time frames. However, the market is only as strong as the weakest seller and there are currently too many producers of food to control supply and so there is little opportunity to increase price from the supply side.
Moreover, governments foster oversupply of food to ensure excess production. Food is essential and therefore more important than other industry sectors, as reflected on Maslow’s hierarchy of needs.
As a result food is subject to more willing market manipulation to oversupply on a wide range of justifications as opposed to a more sustainable economic rationale of restriction of supply to drive up price. The result is that producers have little to no influence over price, as opposed to oil “producers”.
Interestingly, the Australian government professes a commitment to market-based agricultural policy and yet in spite of global oversupply, also prioritises heavy investment in research to lift productivity ahead of profitability.
It is a complete contradiction to implement policies to combat unsustainable declining terms of trade in an oversupplied market by increasing production, particularly in a volatile production environment like Australia.
There is only one way to improve farmgate returns. The unit value of the product must increase more than the unit cost of the product.
To do this sustainably, the real cost of production must be understood and met in full.
Globally, consumers are reluctant to pay more for food. The result of an agricultural pricing structure that is ultimately determined by consumer expectation is that sustainable agricultural pricing is unachievable through normal market forces.
Ultimately, people will have to pay and the longer the market is allowed to neglect the real cost of food production the bigger the ultimate cost will be.
Farm leaders and politicians who promote a business as usual position on agricultural policy are contributing directly to the magnitude of the problem that we will have to face.
Currently, farmers are carrying the cost of Australian agricultural policy in the context of current terms of trade, but ultimately our children will bear the real cost.