What price drought support?

21 Feb, 2014 01:00 AM
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Professor John Freebairn, who holds the Ritchie Chair of Economics at the University of Melbourne.
Assistance allows poorer managers to hang on and ask higher prices ...
Professor John Freebairn, who holds the Ritchie Chair of Economics at the University of Melbourne.

ECONOMICS professor John Freebairn argues assistance for drought-hit farm businesses "socialises losses and privatises profits" and will prolong poor agricultural management practices, while Professors Linda Botterill and Bruce Chapman say making income-contingent loans to struggling farmers along the lines of the student High Education Contributions Scheme (HECS) would be better for both farmers and taxpayers.

Support will prolong the pain: Freebairn

THE financial stress felt by farming families in drought is palpably real, but economics feels no pain.

Next week, the federal cabinet will thrash out whether its response to the current drought will lean toward either economic rationalism or the subsidising of what Agriculture Minister Barnaby Joyce has praised as a "moral industry".

The "dry" economic case is sharply made by John Freebairn, who holds the Ritchie Chair of Economics at the University of Melbourne. Professor Freebairn's primary concern about farm assistance is that it "socialises the losses and privatises the profits". Government assistance helps to increase the average return on agriculture, "which encourages more resources to move from the non-subsidised economy to the subsidised economy".

"And there's no rationale for that as a smart way to use our limited capital."

Assistance also tends to reach only about 30 per cent of farmers, Dr Freebairn said.

"About 70pc of farmers do the right thing, and are decent managers, and what assistance does is to allow poorer managers to hang on and ask higher prices, holding up the inevitable long-term restructuring of agriculture."

His third strike against support is that farm assistance has often missed its mark.

"If you get an interest rate subsidy, it's because you have a high debt. You may be a multi-millionaire with lots of debt and be able to get the subsidy, but if you have no debt, you don't get a subsidy."

Dr Freebairn thinks direct income support to struggling farm households is a more equitable approach than what amount to agricultural subsidies.

"Most of the natural disaster relief for cyclone, floods, is direct household income support - and it's not very much," he pointed out.

"People in Victoria are being paid $3000 if their house burns down."

Arguments that agriculture is a special case don't cut much ice with Dr Freebairn.

"Despite agricultural fundamentalism, and stories that if agriculture died, we wouldn't get fed, I don't find agriculture any more or less special than the people that supply us with our water, electricity, education."

"People think if they go broke and they have to sell the farm, the farm will disappear. The reality is that while they will have a serious capital loss because of a distressed sale, there will be people who want to pick up their farm."

Concessional loans 'uncertain': Botterill

MAKING income-contingent loans to struggling farmers along the lines of the student High Education Contributions Scheme (HECS) would be better for farmers and better for the taxpayer, two policy researchers say.

Professors Linda Botterill and Bruce Chapman have spent about a decade developing and promoting the concept of income-contingent loans to replace Exceptional Circumstance payments, concessional loans and other forms of farm assistance intended to get farmers through crises. So far they have had little success in getting their idea adopted, Dr Botterill said.

"In the view of policymakers, income-contingent loans are a second-best measure," she said. "From the economist's perspective, the first-best measure is not to offer any support to farmers at all."

Income-contingent loans would be granted to struggling farmers by the Commonwealth, and only paid back in the years that farmers have an income. Repayments would be made as part of a farmer's BAS reporting for GST. The authors of the scheme suggest that repayments be set at two per cent of gross revenue, as reported on the BAS.

Dr Botterill argues that default protection is inbuilt in an income-contingent loan.

"The farmer who has taken on a long-term concessional loan, even at interest-only, still has to find the interest. When they come to pay it back, and they can't, their properties are on the line."

"An income-contingent loan is paid out of your future income stream. It's much better for the farmer: they only repay it when they can afford to."

It is better for the taxpayer too, she claims.

"We've modelled this on ABARES data across a range of industries, and we've worked out that within seven years, the government would get back 87pc of the money that it outlaid."

The money being outlaid on five-year concessional loans has an uncertain future, Dr Botteril believes.

If after five years a farmer has gone into another drought, with a hefty loan debt still owed to the Commonwealth - what, Dr Botterill asks, does the government do with that debt?

"Does the farmer go to the commercial banks who lost the business in the interim to loan money to pay the Commonwealth back?"

"An income-contingent loan is automatically repaid on future revenue, so you don't have to be quite so careful about the moral hazard of who you are lending to."

If a farmer decides to sell up while still paying back an income-contingent loan, the loan must be repaid in full on the sale.

Because the loan is made against an ABN, a search would turn up encumbered businesses. Knowing the loan was still outstanding, a purchaser could ask that the loan be paid out or agree to take it on for an associated reduction in the purchase price of the property.

The authors of the idea tested its robustness by asking a rural financial counsellor to look at the system, and devise ways of wriggling out of loan repayments. They reworked the idea to proof it against those strategies.

Linda Botterill is a professor of Public Policy at the University of Canberra. Bruce Chapman is Director, Policy Impact, Crawford School of Economics and Government at Australian National University.

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Matthew Cawood

Matthew Cawood

is the national science and environment writer for Fairfax Agricultural Media
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READER COMMENTS

wtf
21/02/2014 2:32:40 AM

Shows how out of touch this guy is with the real world when he says that someone else will buy them. The ones who did the buying are the 30% asking for the assistance, can't U see that? And if they go who will be the next 30% to hold up property values. This is no different to the direct propping up of residential mortgages by the rba when they created their commited liquid facility (clf), it was set up to make the banks immune from their toxic mortgages so they did not bring down the value of residential real estate. Its ok to subsidise residential loans but its not ok to back farmers
Eddie Randle
21/02/2014 4:26:54 AM

The people that get the drought relief still need it so they can buy the top of the range four wheel drive every year.
Barcoo
21/02/2014 4:31:55 AM

In a "dry" economic model, it makes no sense to pay drought relief to farmers. The professor is correct in that if one person has to leave a farm then the land will be taken up by another hopeful. But if we are going to apply dry economic theories to farmers then we cannot claim to be a fair society unless we apply the same dry principles to all of the national economy. That would mean no more setting of award wages, no more unemployment benefits, maybe even no more pensions. No more restrictions on the establishment of private universities selling degrees, no more restrictions on farming.
wyangaboy
21/02/2014 5:35:22 AM

I can’t believe economists like Freebairn have somehow missed the point that if you support a PRIMARY industry like farming, that industry will in turn support a plethora of secondary industries down the line creating a snow ball effect for the economy at large. It's easy to see if done wisely any tax breaks, rebates or incentives would be returned to government via extra tax earned by secondary service industries & their employees. At the same time regional economies are boosted with flow on effects filtering throughout the wider economy. So let’s get cracking, & actually achieve something
Bushfire Blonde
21/02/2014 7:09:04 AM

Eddie Randle, if that is what you think, you aren't mixing with the average Primary Producer. You would be advised to get out into the real Primary Production world if you are going to make statements like that.
R
21/02/2014 7:16:36 AM

Aust farmers are price takers and have increased efficiency yearly otherwise there wouldn't be any still around. Like most Aust workers, this professor survives because he receives an automatic pay rise regularly, whether he produces anything or not. Something that any Aust farmer would only dream of. Every farmer knows that he has to contend with the vagaries of weather and markets, but almost every decision made by federal and state Govts usually affects farmers adversely, such as the live export fiasco, which put beef producers on the back foot before the drought took hold...(cont)
Jacky
21/02/2014 7:27:12 AM

Does no one know any bad managers? Lets face it, there are plenty that the tax payer should not prop up.
R
21/02/2014 7:29:00 AM

Aust producers have to compete on the world market, but have the weight of Aust costs dragging them down, something this professor would know. If Aust producers could enjoy Asian wage rates, fuel prices, power prices and interest rates then we would have something resembling a level playing field. Instead of putting the boot in while enjoying his nice big salary, he and others like him should be helping people to survive this Canberra caused mess.
Dianelc
21/02/2014 7:32:36 AM

"...what assistance does is to allow poorer managers to hang on and ask higher prices, holding up the inevitable long-term restructuring of agriculture." Since when do farmers have the ability to ask higher prices? Freebairn, like so many economists, clearly has no idea about the actual economics of agricultural industries. I have a lot of cattle ready to sell and would LOVE to be able to just ask for higher prices.
farmerandeconomist
21/02/2014 7:57:00 AM

Prof Freebairn’s arguments are sound economics – if stated a bit bluntly. One related point is that drought assistance is a form of free insurance – it encourages some farmers to push their farms (e.g., overstock) harder than they would without the free insurance – this leads to environmental degradation and exacerbates the effects of droughts. The removal of drought assistance is a policy that could find support among both conservative and green voters.
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