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.

Occupational Confidence

Recently I received an email with this observation:
"It’s a bit ironic, really. Farmers and farm managers are the least confident, whereas food trade workers are the second most confident"
The observation was made to a publication by Roy Morgan Research into the Consumer confidence by profession, April 2014, Perk of the job or occupational hazard? Consumer Confidence by profession.

Let me explain why it is not ironic, really the lack of confidence is understandable especially after looking at these graphs that agricultural economist, Ben Rees, is very handy at putting together. Both are available in the paper, Reconstruct or Rationalize Agriculture?
 In Chart 2 immediately below look at the red line and blue line.

Note the widening gap between Net Value Farm Production (NVFP) or in other words the dollars received at the farm gate and Gross value Farm Production (GVFP) or in other words how much agricultural production is worth to the economy.

The food trade workers are beneficial to that widening gap and their prospects have been rising every year.

Graph sourced:  Reconstruct or Rationalize Agriculture? Ben Rees; B. Econ.; M. Litt. (econ.)

Next look at the green line in chart 2; this is the real future killer for farmers - debt. The graph shows what many of us know in rural areas, that debt has got out of hand against what is received at the farm gate.

Then how are farmers able to service these increasing debt levels. In Chart 5 the story is told that would sink the heart of any optimist. The red line is the prices paid or the input costs to the farm, what the farmer has to outlay to keep the farm going. The blue line is the prices received or the farmers income.

No wonder there is a lack of confidence in the farm sector.


Graph sourced:  Reconstruct or Rationalize Agriculture? Ben Rees; B. Econ.; M. Litt. (econ.)

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.

Political fiasco drawing to an end, but the pain will linger on

An opinion piece written by Senator Barnaby Joyce which was published in The Canberra Times on 2 May 2013 and also sent out by Senator Joyce's office to all on email mailing list.


Julia Gillard told us that the economy was going so well that the deficit had blown out to $12 billion. The debt went up by another half a billion and now the earnest scribes who swore black and blue that the debt was not a problem are now looking earnestly at the camera saying it is. Meanwhile, Labor delivered a similarly confused explanation from the Windsor book of high Athenian rhetoric.

Cartoon sourced from here
Although from the US, all that needs changing is swapping the White House for Parliament House.


But we do have one cost that is proportionally going down and that is unfortunately, our defence spending, which is now at its lowest level since 1937. I find that the most powerful tool to engage the electorate is to suggest what would happen to our nation if we let this Green-Labor-independent political fiasco continue in the job.

At the current Wollomombi Falls trajectory, there would not be much among the rocks at the bottom to pick up.

The Greens want everything ever dreamt of in their Kubla Khan, Xanadu euphoria, otherwise known as party meetings, to be paid for by a mining tax. The fact that they can never nominate a mine they support or wish to expand seems irrelevant in the land of little pink clouds of happiness and chatty tea parties with hesitant girls, tardy rabbits, and mad milliners.

From our side of the political debate, my friend Clive has not been helping out. Clive, please, starting a party is what Bob Katter has made into an art house film. Why join him on the set? It is a little more difficult than what is first anticipated and new parties gather new ideas at about the same rate as they gather self-appointed messianic figures who wish to grace Australia with their unrecognised talent.

Business is sitting back biting their nails. Business wants certainty, sanity and honesty; it sees the government crab walking to a new tax to cover the National Disability Insurance Scheme because they have no money for its promises.

It is a genuinely essential program to look after those severely disabled, but to be genuine in your belief in this, the government must suggest what current plans would be cut to pay for it. Anything recurrent you borrow for is a sign of bad management and temporary in its sustainability.

Taxes are always a drag on economic growth. If you keep putting on a little new tax that won't hurt you, you will ultimately get to one that, in combination with all the others, economically kills you.

At this juncture my feelings are not excitement at what the polls say is an impending election win; my choice to stand in New England makes my participation in that event a lot less likely. My feelings live somewhere between apprehension and anger.

How did this harlequin political crowd manage to formulate such a financially disastrous voyage? If they had done nothing more than continue on from where the Coalition left off, if they had basically gone on holidays, giving instructions that nothing much should happen beyond the set course of 1997, then our position would be vastly better than it currently is.

I remember very well the excited glee as Labor members went around a barbecue in the Parliament House courtyard at the start of the global, but actually more US and Europe - financial crisis. They proclaimed that government had to "go hard, go early, go household".

I remember thinking they should have added "go off your head and go broke". It was like the kid who had just learnt a rude word in a foreign language and was showing all in the school yard how smart they were.

They had no knowledge or desire to genuinely delve into the vast complexities of the financial grammar or even to undertake the sober step backwards, to have a good sleep, cold shower and observe the situation and our very minor global role soberly.

Now, Michael Chaney, chairman of National Australia Bank and Woodside Petroleum, is comparing our financial fate to that of Ireland. I wish him better luck than I had a few years ago.

 Barnaby Joyce is the Nationals’ Senate Leader and the Opposition Spokesman for Regional Development, Local Government and Water.

Fiscal Cliffs

OK you most likely to have seen this one in an email someone has sent you but I believe it illustrates very clearly to a household level just what is the size of debts that governments can rack up on our behalf.
Now some homework - can someone repeat the same formula used here to illustrate the US debt to the Australian situation?