Green paper signals bad farm policy

27 Oct, 2014 04:45 AM
Focus on the farmgate: but at what cost?
The Abbott government's green paper on ag competitiveness offers little in the way of leadership
Focus on the farmgate: but at what cost?

OPINION: YOU can see why Tony Abbott is straining to keep the channels for Chinese investment in agriculture open.

The Prime Minister is counting on foreign investors to achieve the structural change that he is not prepared to engineer himself.

And in the coming decade, the Chinese food industry will be among the foreign investors with strongest reason to spend money, raising the productivity of Australian agriculture.

The Abbott government's green paper on agricultural competitiveness offers little in the way of leadership in developing a serious reform strategy.

Yet serious reform is needed. Agriculture is an Australian success story but, as the Productivity Commission says, constant improvement is necessary to keep up with the competition.

"Agricultural competitiveness is about advantage in markets," the commission says in its submission to the green paper consultation process. "Australian producers and their supply chains need to continually innovate and improve their efficiency and be highly attuned to international market developments."

While productivity growth for the farm sector has easily outpaced the rest of the economy, there remains a large rump of small, undercapitalised family farms that are unproductive and unprofitable. This rump has survived with the help of, among other things, drought assistance that degenerated into a Nationals party rort. Agriculture should have been subjected to an independent and rigorous review by the Productivity Commission. Instead we have a green paper that, we are told, presents the ideas and options put up by "stakeholders" and which gives only a passing nod to the interests of the wider community.

This is an old trick. It creates the illusion of a serious review while the final policy package is negotiated between the politicians and the rent-seeking stakeholders and is then slipped into place with no independent analysis.

Yes, the green paper concedes, there is a structural problem in agriculture. The top 25 per cent of farms account for 54 per cent of the value of broadacre output and the bottom 25 per cent of farms account for only 8 per cent of the output.

Yet "family farms are a cornerstone of Australian agriculture and rural communities and policy must reflect this fact, and the aspirations of those Australians who would seek to participate".

Stewards of the land

Indeed, the green paper goes on to assert that family farms are "the best stewards of the land because they've been on it for generations and care about maintaining it for future generations".

That will come as a surprise to anyone who has seen the erosion caused by overgrazing on small, undercapitalised farms. Alert readers also might wonder why corporate owners would be less careful in preserving the value of their major asset.

"To be on the land," the green paper continues, "is similar to owning your own house for those who live in the cities. It is a core aspiration that should be reflected in policy settings".

True, the green paper concedes, drought is a recurring feature of Australian farming and "a strong and profitable farm business is the best way to prepare for and manage drought".

"However, there are community expectations of a role for government in providing appropriate support" and the "government is seeking stakeholder views on the most appropriate program mix (on farm, household, business, social or other support) to assist farmers to prepare for, manage through and recover from drought".

As has been widely reported, the green paper canvasses 27 new dams, as well as tax breaks and permanent cheap loans.

The dams are supposed to be subject to rigorous cost benefit analysis, but we can assume that assurance will be forgotten as quickly as the Prime Minister's pre-election promises about cost-benefit analyses of major infrastructure projects. What did Finance Minister Mathias Cormann call cost-benefit analysis? That's right: unnecessary red tape.

Similarly, it is a good bet that the drought package that finally emerges from this process will bear more than a passing resemblance to the package already introduced by the Abbott government.

Structural adjustment

Despite the rhetoric about farmers being expected to cope with all but the most extreme droughts, the government announced a $280 million concessional loans scheme for drought-affected farm businesses. This, the Productivity Commission warned, risked delaying adjustment in the sector. But that is exactly why Abbott did it.

He knows there must be structural adjustment. Australia's undersized farms cannot make enough money in the good years to get through a standard drought, and that makes them unviable.

If, as is claimed, droughts are becoming bigger and more frequent, these farms will be even less viable.

They should be absorbed into decent-sized agribusinesses that can benefit from economies of scale, invest in water and feed storage, and command financial support of the banks.

As in the rest of the economy, much of the increase in productivity and viability comes from the disappearance of unproductive businesses. "Creative destruction", the economists call it.

But Abbott and the Nationals have a low pain tolerance when it comes to losing rural votes. If there must be further accelerated rationalisation of the farm sector, they want it to be as painless as possible.

Governments can no longer afford to sugar coat reform with lavish compensation. The next best option from the government's point of view is to have foreign investors pay unviable farmers a premium for the privilege of consolidating their farms.

That won't be as good an outcome for Australia: there will be less rationalisation and more of the benefits will go to foreigners. But it will suit the political purposes of Abbott and the Nationals.

Alan Mitchell is economics editor for The Australian Financial Review

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27/10/2014 5:10:31 AM

Except the foreign investors will buy the big profitable farming enterprises won't they, help keep the dollar at inflated levels; and use transfer pricing to take as much out of Australia as they can!! Looks like an excellent future to me!!
27/10/2014 6:51:12 AM

No leadership by government, no results with effective policy, no success for those depending on the elected MPs to do their jobs...they may as well all be on the Centrelink line...they'd do less harm...
27/10/2014 7:37:43 AM

Well I'm no statesman and it's easy to be wise with 20/ 20 rear vision but it seems to me that the previous lot threw money at the wrong target. If we had invested in-updated infrastructure and better roads / ports we would have a much better situation. Yes, it's easy to lay blame but you can't do much while servicing a huge debt.
27/10/2014 8:11:28 AM

Mitchell is correct with his analysis. But why would we expect any thing different with the Nats holding the portfolio. Just true to form.
Bushie Bill
27/10/2014 8:16:06 AM

Alan Mitchell beautifully and cleverly skewers any pretence to intelligence, rationality and objectivity claimed by the "you owe me a living because I am a farmer" rorters. The sooner the agsoc leaners and loafers are removed from the industry, the better off Australia and its long-suffering taxpayers and consumers will be. Bring it on with all haste and stop pandering to the mindless self-serving rantings of Neanderthal economics. We can no longer afford to tolerate such nonsense.
27/10/2014 8:50:19 AM

Limited understanding of the northern cattle industry where many of the larger corporate 'farms' are the lower end of the spectrum in prodcutivity and management with workforce not comprising experienced families but backpackers and gap years looking for 'life experience'. There is reasonable data available to demonstrate that the 'get big or get out' mantra thrust upon us in the 90's following the inquiry into rural debt did not deliver the outcomes required. You will not be able entice the people we need to manage our farms without family ownership being appealing enough financially.
27/10/2014 10:31:27 AM

' Australia's undersized farms cannot make enough money in the good years to get through a standard drought, and that makes them unviable.' Compare this 'throw away' statement with the story on Kidman Co and the impact of drought. Perhaps the author might like to explain how big a non 'under sized farm is' Of cause, any one with real world experience know the opposite is true. It's the big operations that get hit the hardest, Small family units can 'hibernate' with one or more family members, taking off farm work to keep things going.
John from Tamworth
27/10/2014 10:56:18 AM

Let's move from the general to the specific.The Minister has received the recommendations of the Senate review on grass fed levies.The recommendations are crystal clear and have the widespread support of cattle producers.Yet the whole issue has gone dead.Reform of the beef industry is a no brainer yet the Minister seems incapable of action,incapable of publicly endorsing the Senate review and incapable of providing cattle producers with any hope of meaningful change.He initiated this enquiry but now seems paralysed to act.The engine is revving high but the machine won't go forward.
27/10/2014 12:10:30 PM

Incensed...totally agree. Large corporate farms aim for short term big profits....not only are they relying on backpackers and inexperienced staff, but the turnover rate of upper level management is huge...spend more time in the office and some of them wouldn't know a weed from a blade of grass....I could mention the company...but for self preservation I must keep my mouth closed!!!
27/10/2014 5:32:19 PM

Bushie continues with his double standards. Fact is the most rural commodities can be seen to be highly competitive when benchmarked at the farm gate, despite the huge imposts imposed by his "high wage Australia". It just means slender profits to reinvest, or smart farmers realising that it is pointless to keep investing, if any potential profits are ripped off farmers by inflated post farm costs. Buying bank shares is more profitable and offers better returns than more farm investments, where everyone but farmers benefits.
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