Drought Support

The Weekend Australian, March 6 – 7, 2010
A hand up, not a handout
Labor rethinks the assistance offered to farmers
Asa Wahlquist
      Droughts are not what they used to be, and changes to drought policy are long overdue. So when Federal agriculture minister, Tony Burke, this week announced interest rate subsidies would be axed from future drought policy, few who work in the area were surprised.  But they are still anxiously waiting for news of what will replace it.

      The irony of Burke talking about drought policy in Canberra while further north record-breaking rains were falling would not have been lost on him. This week also brought news that the nine months from June 2009 to February 2010 were the hottest on record in Australia, while the CSIRO released projections of a one quarter reduction in water availability in south-west Western Australia by 2030 – and this on top of a halving of in surface or river water since the mid-1970s.
      The National Drought Policy was introduced in 1992. It replaced the old disaster relief system with the assumption that droughts happen and farmers must prepare for them. But then the climate started changing.
     The last year much of south-east Australia had average, or above-average rain, was 1996. In 2002 an El Nino drought hit.  In 2006, river flows along the Murray River reached record lows.  Over the past ten years, the amount of water flowing into the Murray has been less than half the long-term annual average, falling to one fifth of the average in the last three years.  In October 2008 the Bureau declared the drought in south-east Australia the worst on record. The year 2009 was the second hottest on record for Australia, while 2005 the hottest.
      Since July 2001 over $4 billion has been spent on drought support.  In the 2009/10 budget, the Rudd Government allocated $715.3 million to drought support.
    Drought support comes in two forms: income support, or food on the table money, equivalent to Centrelink payments; and interest rate subsidies that provide business support.
     Interest rate subsidies were capped by the Howard government at $500,000 over five years. But Burke said some people are now reaching that limit. "They are in a situation now where they are making very hard decisions. The answer which has been proposed to me by my political opponents is, 'well we should boost the limit because people are getting near the cap'."
      Burke began a review of drought policy back in April 2008. The Productivity Commission report he commissioned found that the interest rate subsidies "can perversely encourage poor management practices and should be terminated". It said Farm Management Deposits, which enable farmers to save money untaxed in good years, and withdraw it and pay tax in the bad ones, "have encouraged farmers to be more self reliant and should be retained".
    Burke told the ABARE Outlook conference this week that farmers have told him the interest rate subsidy had helped some people "but it is hurting a lot of people". He argued that instead of getting out when the pain of drought hit, the subsidy prolonged the pain, and postponed the inevitable decision.  "I don’t believe I could leave it any longer before I acknowledge very squarely the extent of harm some of the policy settings are doing," Burke said.     Just two weeks ago the National Farmers' Federation, frustrated at the long delay, called on Burke to trial a new approach to drought management. President David Crombie called for a paradigm shift, "from drought relief to drought management and preparedness based on mutual obligation. We – as a nation – must rethink how we plan for, and deal with, drought in a changing climate".
     NFF executive director Ben Farghar acknowledges the subsidies "are not perfect. The key for us is, if interest rate subsidies are to be phased out or removed, what will in their place that will be a more effective drought management preparedness tool?"
    Burke does have alternatives in mind, but with negotiations still underway with the states, at this stage he is not saying what they are.
    Mark Hoskinson farms near Lake Cargelligo in one of the hardest hit areas of NSW. The chairman of the NSW Farmers' Association grains committee, a member of their drought taskforce, is also an active member of his drought-stricken community.
    When asked if he receiving the subsidy, Hoskinson prefers not to answer, saying: "put it this way, I don't know too many farmers that aren't receiving some sort of support from the government".
    After the drought of the early nineties, sky-high interest rates, the collapse of the wool market and low wheat prices, Hoskinson said there was "an enormous rationalisation and restructuring" of his mixed farming area in the mid nineties." Of all the young blokes I went to school with, I am the last one left, and I am 46."      
     There were several good years in the late nineties before the long drought hit.
   "The interest rate subsidy has worked. It kept farmers on the land, as it was designed for, but we all are carrying a lot bigger debts now than we were at the start of the drought," Hoskinson said.
     One of the exceptional circumstances criterion is for the area to be in a one in 20 or 25 year drought. But the Productivity Commission found some areas had been continuously drought declared for 13 of the 16 years to 2009.
     Most of the western division of NSW has been EC declared continuously since December 2002, and will remain so until the end of March 2011. The Victorian Mallee and northern Wimmera have been EC declared since March 2003 and that will expire in March next year.
     In October 2005, Mike Young, then an economist with the CSIRO and Jim McColl, a former South Australian director general of agriculture, published Managing Change.      They argued drought assistance actually worsened the situation rather than helping it
     Then-Agriculture minister, the National Party's Peter McGauran called it "a callous and highly inaccurate judgement".
     Young can laugh at the experience now, but it was pretty bruising at the time.
"We had it professionally reviewed, everybody said we were right, but there was a political furore."
      Young, who is now executive director of the Environment Institute at the University of Adelaide, said there is a "tension between treating people with kindness in times of hardship and looking after the future of the nation during times when landscapes are really stressed".
      He argues subsidies extract a great cost from the resource base, by enabling farmers to buy feed to keep livestock. "But the animals eat the paddock bare when it should have been spelled, before they eat the fodder so you get very serious degradation." And he asserts the subsidies send a policy signal "that says 'look, you don't have to worry about adversity because when it happens the government will bail you out'."
    Young thinks the subsidies give those who have not planned for drought, an advantage over those who have and are thus ineligible for the assistance. "When low interest-rate loans are offered to the bad managers, and they go and buy land because they can get access to it cheaply while those who are the best managers can't compete with them. So the best managers leave."
    Mick Keogh is the executive director of the Australian Farm Institute. He would like to see tax incentives for drought preparation and additional sources of income like environmental stewardship payment. "You could imagine a suite of measures along those lines that would create more stable income environments for farmers, and allow you to move away from the disincentives associated with interest rate subsidies."
    The current drought assistance has some deep inequities: only those in areas declared to be in exceptional circumstances can apply for farm income support. That makes farmers the only group in Australia whose access to welfare depends on geography, not their personal financial circumstances.  The NFF has called for the end to this system of delivering support based on lines on maps rather than on need.
      Burke has also reassured farmers, and the NFF, that the current policies will continue for the duration of this drought.
      At Lake Cargelligo they have had 200mm plus of rain since Christmas, sheep prices are good, and Hoskinson is hoping the seasons have at last changed. "We are looking forward to some good years. If we get a return to reasonably good commodity prices we can really produce some income for the country and get these farms back and running."
Support for those in exceptionally bad circumstances

Support is available for areas declared to be in exceptional circumstances.
     An exceptional circumstance event must be rare; that is, it must not have occurred more than once on average every 25 years.  It must result in a rare and severe downturn in farm income for at least 12 months. It cannot be planned for or managed as part of farmers' normal risk management strategies.  The situation must not be part of a long-term structural adjustment process, or of normal fluctuations in commodity prices.
    Exceptional Circumstances Relief Payment, or income support, for farm families in EC-declared areas is paid at a rate equivalent to the Newstart Allowance, subject to an assets and income test.
     Exceptional Circumstances Interest Rate Subsidies provide business support to farms that are viable but are in financial difficulties because of an EC event. Up to $100,000 in any 12 month period is available, and $500,000 over five years.        

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