The Australian, Business Opinion piece 3 February 2014.
THE Australian agricultural sector is one of the most resilient in the world producing some of the world’s most prized commodities. Australian farmers have world-renowned expertise, facing some of the toughest conditions with minimal government subsidy assistance.
However, there are times when even the best are put to the test. With a record-breaking dry period in many areas, particularly Queensland and NSW, combined with extended heat waves, political action, pricing pressure and high rural sector debt, the pressure is on to survive until the next rain.
The government’s first response is to increase drought assistance, primarily through the farm finance package, offering $420 million of concessional loans for the next two years.
The farm finance package is available at varying levels state-to-state, with up to $1m available in the Northern Territory at 4.5 per cent interest.
Agriculture Minister Barnaby Joyce said: “It’s not based on an assets test, it’s not based on an off-farm income test, it’s based on a needs basis.”
The government is expecting recipients of the concessional loans to repay them within five years and will take security over assets. This will create liquidity issues for producers down the track. Considering banks will take first mortgage over most assets in the event of business failure, the government will be next in line.
While the government has said that concessional loan eligibility is viability based, applicants must also show difficulty in repaying existing debt. Prudent financial management does not suggest that taking on additional debt to fund existing debt obligations is a good idea. This strategy only delays the inevitable.
Compared with some other years, there is no doubt that the current seasonal conditions, especially in Queensland, are extremely tough. Many primary producers are simply looking to survive, and once the season breaks, focus on rebuilding.
The difference with the current drought is the high debt levels within the rural industry.
Fortunately, interest rates are currently low.
However, the agricultural sector needs to consider the situation in an increasing interest rate environment that is highly possible in coming years. The industry requires structural change over and above immediate support to have a lasting effect.
Efforts can be made by producers to avoid this situation, such as saving in the good times to stock up for the bad, and making early, sometimes, tough decisions, when seasons are unfavourable.
Using other farm finance solutions, such as farm management deposits are great, and the interest subsidy program could be extended to ease the burden of interest payments rather than accruing additional debt.
Social support in rural and regional areas is critical. The pressure of maintaining family and relationships is highly stressful for many people living and working on farms.
People will survive financially and businesses can regenerate, but the glue is farming families, communities and social groups in regional areas. Without these, there is nothing holding regional communities together. The government’s initiatives in increasing social support are beneficial and need to include social and family assistance and counselling, not just financial advice.
Farmers don’t want handouts. They want support from the broader community and their government to ensure that there isreinvestment in the infrastructure, research and development and trade facilities on which they rely.
Farmers will continue to be resilient, but we must work with the community and the government to take care of supply chain post-farm-gate. If we can manage this, the industry will become more sustainable, allowing farmers to withstand tough times, such as prolonged drought or flood.
The argument that the taxpayer should not be supporting an ailing industry, as was the stance with the automotive sector, is contentious. The difference is that the farmland, water, food and the environment which farmers are charged with caring for are a matter of national security.
Investment in the industry is not just to support the farmers, but for the long-term benefit of Australia. We are spoilt for choice and many do not appreciate or value the safe and secure food supply we currently have.
There is no simple solution, but we need to consider the outcomes and behaviour we are trying to drive and foster programs that will deliver on these outcomes. There needs to be incentives to plan early for natural disasters, slow years and unforeseen events. This will help build business stability and longevity as a viable rural industry.
There is $420m that could be invested very wisely in this instance, for example on importing cotton seed, compact fodder and nutrition supplements rather than adding debt in the form of handouts.
The perfect storm is upon us with a crippling drought, low commodity prices, volatile economic markets and an alarming debt book.
The short-term outlook is tough if we don’t receive widespread rain, although the medium to long-term looks favourable with burgeoning demand from a growing global population.
What better fundamental than investing in demand driven by the primal needs of an increasing affluent, growing population?
Now is the time to act and reap the rewards that agriculture has to offer so that we don’t look back in a decade and see nothing but wasted opportunity and people going bust.