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.

Rural debt crisis: What crisis say the banks

Rural policy failure has lead to a recognised rural debt crisis especially amongst northern cattle producers and the wheat belt of Western Australia. .
But how do you fix a problem if you don't know how big it is?

There was no QRAA rural debt survey in 2013 because the banks just refused to participate.

This youtube is a speech by Queensland Senator Barry O'Sullivan in the Senate chamber on the 27th March 2014.




With the banks refusing to participate and thereby no 2013 rural debt survey represents a significant information gap for policy development – therefore it is hard to accurately gauge the extent of the issue of debt, particularly across Northern Australia, where drought and the 2011 live export suspension have crippled communities.

The Australian Bankers Association believe there is not a rural debt issue in Queensland.

However, the latest available survey (from the Queensland Rural Adjustment Authority rural debt survey in 2011) found the beef industry total debt of $9.17 billion in 2011 was up 17.2 per cent from 2009. The beef sector represented more than half of the total rural debt in Queensland (where 66pc of the national herd can be found). The number of borrowers only increased to about 6,500, up from 5,660 in 2009.

Beef industry borrowers considered non-viable increased from less than 1 per cent to 6.9 per cent of the total pool (loan classes below A and B+) in the period.

 Given the impacts of the live export suspension decision, the ongoing drought and an extended recovery period likely, this debt position is expected to have deteriorated and the potential for significant industry debt reduction in the short-term is likely to be limited.

The banks need change their minds and participate or at least explain their decision.

Swan grabbing unattented nest eggs

It shows the desperation of the Federal government led by Prime minister Julia Gillard and treasurer Wayne Swan that they are grabbing funds out of people's private bank accounts if they have not been used for three years. These accounts include money placed in children's accounts and pensioners who have set aside funds in case of a medical emergency.

Image sourced from barnabyisright.com


Regular contributor to this site, Peter Neilsen in the Open Thread page brought our attention to a newspaper article which tells of a pensioner coming home from hospital from heart surgery to find that a heartless federal government had emptied his account.
Peter writes

The robbery has begun early.
Although the legislation to steal all money held in bank accounts that have been inactive for 3 years does not come into effect until after May 31st, the Government have jumped the gun and have already taken money from bank accounts which would be illegal prior to legislation coming into effect.

http://www.couriermail.com.au/money/money-matters/queensland-pensioner-emerged-from-heart-surgery-to-find-bank-had-emptied-account-and-given-it-to-federal-government/story-fn3hskur-1226647919220

This is the link to just one typical story about the theft of money from peoples accounts prior to the commencement date of the legalisation of theft in Australia.

There are numerous reports coming forward now about this theft, including a report of $6 dollars being stolen from an account held by a child. Bloody hell they must be really getting desperate to rob little kids.

Also In the Courier Mail the article, Government grab nets boys' savings, tells of two little boys piggy bank saving have been taken by the federal government.

Ms Hadfield's sons' accounts were set up by the boys' grandparents when they were born. Grandmother Sandra Hodgson said the grab was disgusting.
"We should be able to leave the money in the accounts for the boys until they want it," she said.
The Coburg family did not realise the accounts had been closed until they got a letter. "I think there are lots of people like us who will get caught out," Ms Hadfield said.
Queensland pensioner Adrian Duffy was another victim.
He emerged from a quintuple heart bypass to find $22,000 had been emptied from his Suncorp bank account.
The 77-year-old had spent 14 years saving the cash with his wife, to help pay for major health-related costs.



Seamus and Eamon Hadfield, whose savings were seized. Picture: Ian Currie Source: Sunday Herald Sun

In this media release, Gillard government seizure of inactive bank accounts is an attack on property rights, back in February Simon Breheny of the IPA warned of the consequences of the federal governments then proposed actions. Although now some months old this media release is still very relevant.

"The Gillard government's plan to take money from dormant bank accounts is a shameful grab for cash and a significant attack on property rights," said Simon Breheny, director of the Legal Rights Project at free market think tank the Institute of Public Affairs.
The Treasury Legislation Amendment (Unclaimed Money and Other Measures) Act 2012 amends the Banking Act 1959 to lower the threshold for "unclaimed moneys", which are transferred from banks that hold the accounts to the Australian Securities and Investments Commission. Previously this was defined as any money in bank accounts that had been inactive for a period of seven years, but the new laws require inactivity for only three years.
"People should be able to leave money in bank accounts for as long as they wish without the fear that the government might come along and steal it from them. To do so is an arbitrary acquisition of property by the government," said Mr Breheny.
"Parents saving for their children's education, young people saving for a home and others putting money aside for retirement are all at risk of losing their savings as a result of these changes," said Mr Breheny.
"The changes could have a number of unintended consequences. Such a regime provides a disincentive to saving money with a bank and may encourage people to hide their money under the mattress and away from the hands of government," said Mr Breheny.
"The government is desperately attempting to shore up its financial position before the budget is handed down in May 2013," said Mr Breheny.
"Tony Abbott and the Coalition must commit to repealing these changes if elected to government," said Mr Breheny. 

.

Lenders Mortgage Insurance - The Ned Kelly of the Insurance Industry

Most of you would know that if you wish to take out a housing loan from a bank or lending institution, where you have less than 20% of the value of the property, you will be required to pay a premium for Lenders Mortgage Insurance (LMI), that is usually offered by a third party insurer, not the financial institution.

The amount of this premium will depend on how much less than 20% deposit you have.

LMI insurance protects the lender from any losses that they may incur as a result of you defaulting on the loan or ceasing to make payments etc.

Even though the lending institution has a first mortgage and is able to sell your property, the LMI protects them against any short fall in sale price against the outstanding loan balance.

You may, or may not know, that LMI only protects the lender and does not offer any protection to the borrower. The LMI provider may then also take legal action against the borrower to recoup their payment to the lender.

Now, here is the “Ned Kelly” bit. Your Lenders Mortgage Insurance is taken out for the term of the loan and in many instances this is 30 years. However, through a change in work location, or for other reasons, you may decide to sell the property and purchase a home in another town, or need to purchase a larger home for an increasing family.

In this situation, you payment of premium for LMI, ostensibly for 30 years cover, is simply forfeited and your new home proposal is regarded as a new proposal subject to a new premium altogether – is this double dipping or not?

The key word is of course that the term of the policy is equal to the term of the loan, so when you pay out your loan, the term of the agreement has effectively ended.

There is some relief possibly available, depending on the wording of the policy, and you may get a partial refund of premium if you sell you home within 12 to 24 months and repay the loan. However, if you have held the property for longer than this then the premium paid, ostensibly for 30 years, is simply forfeited to “Ned” (the insurer)

You may also be able to get a partial refund within the first couple of years of you get a new valuation (rising market) that effectively reduces your Loan Value Ratio (LVR)

If you wish to substitute the security offered (your home) there may be no refund but no additional premium payable but the valuation must support the same quality of property.

If on the other hand you substitute security and there is an increase in the LVR or insured amount, then this will be deemed to be a new risk and a new proposal and a new premium payable on the new risk. A refund on the cancelled policy may be payable, but unlikely after one to two years.

So it is therefore preferable to have an ongoing loan of the same value with substituted security rather than just sell up and pay out the first loan and then identify and purchased another property with a new loan.

I doubt that many people actually get to keep their home for the full loan term of 30 years covered by Lenders Mortgage insurance and so these insurers, even though they have assessed the risk over the full term of 30 years, in a lot of cases, simply get away with your money after just a few years – just like “Ned Kelly”!