Russian sanctions are the least of our agriculture sector's problems

By Mark McGovern, Queensland University of Technology

First published at The Conversation 

Australia’s dairy sector will lose out due to Russian sanctions,
but there are bigger issues in play. Anatoly Maltsev/AAP

Russia’s targeting of $A400 million of Australian food exports and the government’s muddled response are just the latest setback for a sector struggling under failed policy approaches.

Agriculture is Australia’s only “strongly competitive industry”, according to recent reports from consulting firm McKinsey and the Business Council of Australia (BCA). Yet, the industry is today characterised by high levels of debt, low farm income, depleted reserves, increasing levels of insolvency and rising poverty. Why the mismatch?


Productivity is high in agriculture. Indeed productivity performance has been outstanding. Yet profits and incomes have been miserable for years. To top it off ABARE reports current Queensland farm incomes as the lowest for 37 years (which is when their figures began).

We’re measuring the wrong things

Measures of both competitiveness and productivity can increase when an industry is in decline. Today, agriculture is not where we hoped it would be. Existing policies and thinking have not delivered gains for agriculture in real terms (as evident in the graph) or Australia (as rising net overseas obligations demonstrate). Continuing them is folly.

A rocky path of questionable returns.
McGovern, M. (2013). Repositioning Rural Australia. Choices in Agricultural Policy: Rationalise or Reconstruct? Merredin WA, Muntadgin Profit Farmers.

Disappointingly, this failed stance sits behind the “new“ veneer in the BCA’s “Building Australia’s Comparative Advantage”. Under its dated take on comparative advantage, economies of scale still rule. The productivity mantra is repeated regularly but profit is never mentioned by the BCA, and incidentally mentioned only twice by McKinsey. Yet profit and sustainable incomes lie at the heart of sound business and investment servicing.

It’s 1997 thinking. Then, Minister for Primary Industries John Anderson convened a Rural Finance Summit in Canberra. The thrust was similar. Scale was the saviour and the message was that over a quarter of farmers must go. We overachieved - more than 40% or 103,000 farmers went during the Howard-Anderson era.

The reality is economies of scale require enterprises to increase operational size, utilise the latest technology (such as limited till farming and GPS navigation), employ advanced managerial systems and so on. Increased farm size requires larger machinery and equipment to replace labour intensive farming. All this takes money, yet financial considerations have been essentially absent.

Farm sector reforms have now created a sector with 20% of farmers producing around 80% of output from an increasingly untenable financial basis. Aggregation costs were neglected.

As asset inflation was thought never to end, debt-to-equity loans were not designed to be repaid from income. Capital gains would pick up any shortfall. But as stresses built and the GFC unfolded with pervasive capital losses, the economies of scale arguments and poor lending collapsed. Untenable loan-to-valuation ratios ushered in a financial crisis in national food production.

Large highly mechanised “efficient” enterprises were suddenly expected to repay multi-million dollar debts from insufficient income. Foreign buyers acquired most significant Australian food manufacturers and many farms.

What next?

Untenable financial arrangements need restructuring. The sector needs recapitalisation, new institutional arrangements and, for a time, a hands-on approach from government.

Today, the numbers of bank foreclosures and bankruptcy proceedings challenge the mantra makers. Financial numbers that don’t add up, and often never did, trash empty pseudo-economic rhetoric. Incomes going nowhere will not service the recent debt run up, as is evident in the graph below. Systemic failures allowed this development.

Debt has outpaced the ability to service it.
Ben Rees (2013) Reconstruct or Rationalise Agriculture? Compiled from: NVFP, ABARE, Commodity Statistics, Rural Debt , RBA online, Table D9

Yet, despite Foreign Minister Julie Bishop stating “the Australian government will do everything in its power to minimise the impact on Australian farmers“ of the $400 million disruption from Russia, Agriculture Minister Barnaby Joyce “would hope that we’re able to manage it without direct assistance”. Ongoing "do nothing (but hope)” emptiness is destructive. Why is abject market appeasement still the first preference in Canberra - but not elsewhere?

The real structural reform needed is in industry, governmental and BCA thinking. Scale and competitiveness policies that have failed to deliver need to be discarded, not re-veneered.

Real solutions require substantial considerations of income, investment and profitability under uncertainty. Finance matters as do market and supply chain realities. Policy makers have avoided these things for too long, to the great cost to agriculture, other infected industries and Australia.

Ironically today, the despised low-productivity small farmer with household off-farm employment may be more solvent than the aggregator or the competitive.


Mark McGovern is an active member of the Rural Finance Roundtable Working Group.
This article was originally published on The Conversation.
Read the original article.

Northern Australia should have a say in its own future

By Allan Dale, James Cook University
Cross post under The Conversation republishing guidelines 




Northern futures, northern voices: It seems everyone has ideas about how Australia’s north could be better, but most of those ideas come from the south. In this six-part weekly series, developed by the Northern Research Futures Collaborative Research Network and The Conversation, northern researchers lay out their own plans for a feasible, sustainable future.


Recently, Australia’s north has featured front-and-centre in national debates about the country’s future; the election campaign will likely see more claims about what the north can do for the country.
 
Some cast it as the frontier saviour, a source of bold new resource and agricultural developments both real and imagined. Others dream of securing the north’s expansive landscapes as iconic wilderness.
 
Northern policy has long been a source of conflict. Debates have raged about the success or otherwise of government interventions in indigenous communities. Quick-draw policy responses on complex issues like the live cattle trade have devastated many communities. Additionally, media images of coast-bound refugees keep the north’s strategic importance centre-stage, raising unresolved tensions about our Asian-Pacific relationships.
 
Those debates are often crafted by, and for, a southern audience. In my view, we will continue to repeat the mistakes of the past until we rethink governance of northern Australia. Governance is not sexy, but it’s fundamental to making things happen. As a regional water official at a Mekong Basin workshop in northern Thailand recently stated, governance is “how society shares power, benefit and risk”.

The north needs a say too

In the 1930s, Australian treasurer Ted Theodore was calling for northern separatism; few suggest that now. But many in the north would argue there are major flaws in the south’s contribution to our governance and that major policy decisions are often made in the interest of a southern electorate.
 
The north is different to the south in many ways. It has a low population and institutional capacity. Land tenure is largely public rather than private. It is primarily an indigenous domain. It has enormous mineral and soil wealth, but resource limitations and a vastly different climate. Much of it is closer to populous Asia-Pacific capitals than to Perth, Brisbane or Canberra.
 
Northerners don’t want separatism, but they do want a genuine dialogue between northern and southern Australia; one focused on how the nation as a whole might secure better northern governance. Australian and state and territory governments should negotiate big policy decisions in the north and  manage government policy and programs in radically different ways.
This could emerge through a stronger northern Australian policy and delivery architecture integrated into COAG.
 
But to work, this kind of architecture must be powerfully engaged with a cohesive and strong pan-tropical alliance of northern Australia’s sectoral interests. It would have to include traditional owners, local government, industry, human service and conservation. Such an approach must also be independently informed by the north’s research institutions.

Problems that need attention

There are land use and tenure conflicts across the north (the dispute over what to do with Cape York is just one example), and we need innovation to solve them. This requires a long-term, cohesive and regionally driven approach to land use and infrastructure planning.
 
We also need a more consistent approach to negotiating major project development, to build the long-term foundations for regional community development.
 
Alongside this, we have an opportunity to create a northern-specific ecosystems services economy
– an economy that benefits from conservation. We could deliver land owners real economic benefit for managing extensive landscapes better.
 
Despite the Intervention, the fundamental (top down) model of both local government and indigenous community development has not changed much in 30 years. These approaches disempower and deliver stop-start progress. Fragmented, welfare-oriented, inflexible and annualised government programs simply do not build lasting human capacity.
 
Finally, to shift the whole economy from an historically boom-bust cycle, the nation must build a tropical knowledge economy. This could underpin productivity in existing industries (minerals, energy, agriculture, fishing, tourism) and help us think about export opportunities right across the globe’s tropical latitudes. This will rely on Australia investing in tropical knowledge development (such as tropical health, agriculture, environmental and disaster management, design and energy) within the north, brokered into the wider tropical region through long term partnerships, trade and innovation clusters and foreign investment.

A smart north is good for all Australians

A progressive and productive northern Australia, with a strong identity and great lifestyle, tightly integrated with its Asia-Pacific neighbours, should attract a diversity of people (with a wide skills base) interested in playing a strategic role in the Asian Century.
 
We can transform our reputation from the wild frontier on the northern margin of a vast empty continent, to a naturally blessed region providing high-value knowledge-based services in the south of a dynamic, rapidly growing region of 500 million people.
 
This is indeed about how society shares power, benefit and risk.
 
If we don’t get the governance right, we run big risks: we’ll entrench a boom/bust economy, whole regions of multi-generational disadvantage and degradation of the nation’s cultural and environmental jewels.
 
If we can more equitably share power and benefit across the north, we can capture opportunities that may hold the keys to the whole nation’s future.
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Allan Dale receives funding for a day a week under the Northern Futures Collaborative Research Network. He is Chair of Regional Development Australia Far North Queensland and Torres Strait.


This article was originally published at The Conversation
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