Abbott slips one past the drought-weary

Labor has its unions and the Liberals have the Nationals.

Like the unions, the Nationals have long been in decline because of strong labour productivity growth in the agricultural sector and, more recently, the rise of populist independents.

Tony Abbott ’s $280 million in concessional loans for drought-affected farmers is an attempt to shore up the crumbling barrier.

The drought, which is concentrated in NSW and Queensland, is not a natural disaster (Abbott could only bring himself to describe it as “akin to" a natural disaster), and it does not threaten Australia’s agricultural and resource base.

What it does threaten is an acceleration of the rationalisation of the agricultural sector. That would strengthen the farm sector’s drought resistance. But it would be a political disaster for the Nationals.

The Australian climate is one of the most variable in the world and droughts are a regular part of the farmers’ business environment and management. If farmers can’t make enough money in the good times to see themselves through droughts of the current dimension, they aren’t viable. And, if droughts are becoming more frequent and more severe, that means farms have to get bigger, better managed and more geographically or financially diversified.

Long-term challenge

At the national level, that seems to be the long-term challenge.

In 2008 the Bureau of Meteorology and the CSIRO warned that the extent and frequency of exceptionally hot years had been increasing and this was projected to continue, with exceptionally hot years likely to occur every one to two years, on average, from 2010 to 2040.

Exceptionally low rainfall years were projected to become more frequent in south-west Western Australia, the South Australian agricultural region, Victoria and Tasmania.

But, as the Productivity Commission has found, the most drought-vulnerable farmers are not necessarily those facing the greatest climate variability.

The commission’s 2009 drought assistance inquiry showed that factors such as small-farm scale, land degradation, low levels of liquidity, and lack of diversified income sources were more likely to increase the vulnerability of farms to drought and other adverse shocks.

The stronger a farm’s financial performance was in the non-drought years, the less likely the farm was to be affected by a drought.

Data unearthed by the commission showed the top 25 per cent of performers among broad-acre farms had generated positive cash incomes and business profits in all years since 1988-89, including the years when they faced a drought.

Drought managers

“During the 2006-07 drought, the farm cash incomes of this group were flat, but strongly rebounded in ­2007-08, to be around $9000 higher in real terms than the previous peak in 2001-02," the commission said.

However, the bottom 25 per cent of farms had not recorded a positive cash income since 1994-95. Nor had they made a profit in any of the 19 years to 2007-08.

Farmers with capital, economies of scale, and management skills can properly manage drought risks.

They can do this by spreading land holdings geographically to reduce the risk that the whole business will be drought-affected at the same time, by building financial reserves and off-farm investments, and through the use of share-farming, price hedging, fodder storage and so on.

But that takes investment and probably a good deal of foreign capital, which the Nationals also seem to find threatening.

Unfortunately Abbott’s cheap loans will lessen the pressure on farmers to either make those investments themselves, or get out of the way of those who can. By reducing the pressure on less-viable farmers to sell out, the government is helping preserve the very industry structure that makes a large numbers of farmers vulnerable to drought.

Media scepticism

Abbott’s announcement on Wednesday was met with scepticism from the Canberra media.

He and his agriculture minister, Barnaby Joyce , spent most of their time trying to defend the indefensible.

Unfortunately, it seems that scepticism has not yet rippled very far out into the wider community and Joyce, for one, was very relieved.  

“We are dealing with people who are mums and dads and this is why it’s so humbling when we hear the vox pop that was taken around Central Station in Sydney, when people say, ‘We get it. We understand it’," he told the television cameras.

Never mind. Agriculture will become a bigger deal as Asia’s burgeoning middle-class adds its weight to the global demand for western food.

The farming sector’s rump of undersized, undercapitalised farms and their weak productivity growth will become a live national issue.

That’s when the mums and dads of vox-pop land really will get it.

The Australian Financial Review