Shadow Agriculture Minister JOEL FITZGIBBON starts his new column today with a discussion on drought policy strategy and private sector investment opportunities. Follow Out of the shadow here every second Wednesday.
IT'S raining outside - the best time to be thinking about drought policy. A good place to start is to identify where we have certainty.
For starters, we know dry events will continue to haunt us more frequently. We also know there will always be farmers who won’t or can’t sufficiently prepare for extreme dry events.
On the back of those realities we know three things.
First, farmers need a family household safety net – a temporary welfare payment with a more generous means test for farmers with significant on-farm assets. Second, we need policy responses which encourage farmers to better prepare for drought – whether it be more money in the bank, more infrastructure, or new farming methods. Third, we need polices which don’t reward those not having a go at the expense of those having a go.
“Farmers who are most vulnerable to drought are less likely to borrow from a bank ...”
Some might argue that if we get all of that right we’ve done enough. I disagree.
Our farmers are the custodians of two-thirds of Australia’s land mass. They feed us, earn export income and importantly, are most vulnerable to the vagaries of Mother Nature. We can’t afford not to do more!
We’ve tried a few “mores” over the years – interest rate subsidies, exit payments and so on. But none has met the above tests or indeed, the Commonwealth Budget test. Maybe we’ve failed because we’ve been looking in the wrong place – in the government cupboard rather the private sector cookie jar?
The Australian farm sector has much to be proud of. It’s in good shape because of the hard work and innovation of our farmers. It also has an exciting future as it continues to gear up for the Asia-led 'dining boom'.
Consider this: the Australian Bureau of Agricultural Resource Economics and Sciences (ABARES) estimates that 91 per cent of broadacre farms and 72pc of dairy farms have equity exceeding 70pc of assets. More than 95pc of farms in these sectors are family owned and operated. Bank lending accounts for around 94pc of outstanding rural credit. This bank lending is traditional bank loans secured against farmers assets.
Over several decades there has been a constant reduction in the number of farms as a result of a move to larger farms to increase productivity. Consolidation will continue and the smaller farms which remain will be amongst those most vulnerable to drought. And because farmers tend to discount upside risk and overestimate downside risk they tend to borrow less than the finance sector is willing to provide. Understandably, those farmers who are most vulnerable to drought are less likely to borrow from a bank because they are afraid of miscalculating.
“Surely it’s time that we also consider more innovative forms of funding?”
When you think about it, it’s a little surprising the private sector has not seen opportunity in reoccurring drought challenges. As noted, all farmers have something of value – land, farm infrastructure and the expertise to make sure those assets are income-earning. And the assets they own and work are the means for meeting some of the growing food needs of Asia. Given this and with the right level of capital, it’s hard to see the value of what they own doing anything else but rising, possibly at well above the bond rate.
We need the sector to continue to consolidate and to invest in technology and infrastructure. Consistent with the way the farming sector is exploring new ideas, surely it’s time that we also consider more innovative forms of funding, particularly for those farmers reluctant to extend back credit?
Surely this is a dynamic the market should be interested in? We should be exploring financing arrangements used widely in other sectors such as equity funding, the development of secondary finance markets, and greater use of leasing.
One vehicle for a marriage between this farm value and the market may be some form of reverse-equity mortgage; a scenario in which the investor provides working capital for a stake in the farm’s future worth.
The farmer might enter into an arrangement which provides him with his working capital or debt relief (keeping the bank at bay) while providing the investor with say, 50pc or more of the asset value upside after a five year period. At the end of the period, the farmer would have the right to repay the capital plus the investor’s share of the increased value of the farm, or to rollover the agreement.
This form of financing would allow the most vulnerable to finance themselves in times of drought and perhaps also to invest in the technology and infrastructure needed to improve productivity and meet the expected increase in demand in export markets.
What if the value of the farm declines you may ask? Well, with every investment comes risk. But all global forecasts suggest a shortage of farming land and food supplies over the long-term. This can only mean one thing – rising prices. Hence new and innovative financing arrangements can present attractive opportunities for investors who want exposure to the Australian farm sector.
So this is a call to the market: "come and see whether you can do drought policy better". Government has been trying for more than one hundred years at great expense to the taxpayer and with mixed success. And unlike us, there may just be a quid in it for you!