MICHAEL KEATING. Drought Assistance: Is it efficient? Is it fair?

Australia is currently experiencing a severe drought; possibly the most severe on record. Not surprisingly there have been calls for governments to do more. Some have even claimed that Australia lacks a proper drought policy. This article discusses the key features of an ideal drought policy, and what are the respective responsibilities of those being assisted – mainly farmers – and governments that are the principal source of any assistance.

The starting point for any consideration of drought policy in Australia, must be a recognition that drought is an endemic feature of Australian agriculture. The possibility of recurring droughts must therefore be planned for and not just treated as bad luck, for which farmers themselves bear no responsibility. Furthermore, the advent of climate change means that we can expect droughts to become even more frequent in future, and this alone should prompt a review of farming practices.

The reality is that seasonal conditions have always varied enormously in Australia. Farmers should have the primary responsibility for managing their farms so that they can survive most of these seasonal variations. This is no more or less than is expected of producers in any other industry. Also, other producers would be expected to insure against hazards that they cannot absorb themselves, such as floods or fires.

But if it is believed that somehow insurance against bad droughts is too expensive for farmers and that government assistance is warranted, then I submit that conditions under which this assistance should be very tightly specified in advance, and then enforced. I don’t think this is the case at present. Indeed, the last time that drought assistance was properly administered was by the Hawke-Keating Governments when the late Senator Peter Walsh was Finance Minister. Walsh was a Western Australian wheat farmer, and he knew quite a lot about droughts. Under his guidance, drought assistance was limited to “exceptional circumstances”, and these were tightly defined so that they rarely occurred.

My second point flows from the first, and that is that the too-ready availability of drought assistance helps create droughts. This is because farmers tend to base their production plans on what they consider approximates a normal year. The too-ready availability of drought assistance reduces the risks associated with a bad year, and thus encourages over-cropping and over-grazing. If farmers know that their mistakes will be bailed out, then they have an additional incentive to maintain their herds even when the risk of not having enough feed is quite high. They anticipate that the taxpayer will bail them out if it doesn’t rain, and that they will be able to buy-in the additional (subsidised) fodder when they might need it.

For example, earlier this year farmers engaged in fattening cattle could have sold their cattle before the drought became really severe at a reasonable price. However, some decided to gamble that it would rain. Despite the risks, these famers gambled that the crops they had planted to give their cattle extra feed through the winter would mature, and they would get an even better price for their beasts by selling later. As it happened it didn’t rain, their crops to provide the additional feed all withered, and they are now facing selling their stock off in terrible condition, at rock-bottom prices. These farmers will typically get some relief from the government, but if they had thought that the government would not bail them out in this way, I strongly suspect that they wouldn’t have run the risk of over-stocking their properties in this way in the first place.

What also concerns me is that if someone investing in another industry lost a lot of money, no-one would think that they were deserving of assistance from the government. But in both cases, the decision represented a gamble against a risk. The only difference is that farmers expect their gambles to be bailed out whenever they fail, whereas for the rest of us we have to take responsibility for our own decisions and their consequences.

Third, I note that a common reaction to this drought is to criticise governments for not building more dams. For example, Tony Walker in last Saturday’s SMH, states that ‘since 2003, just 20 larger capacity dams have been built, 16 in Tasmania’. Similarly the Commonwealth Minister, David Littleproud has been calling on the States to build more dams, and has castigated the Premier of Victoria, Daniel Andrews, for his observation that building more dams will not make it rain. The truth is that the principal areas affected by this drought form part of the Murray-Darling river basin, and with the Murray River struggling to reach the sea in most years, we don’t need more dams to further reduce the river flows. Instead, we need to buy the water back from marginal irrigators, who would willingly like to sell, and quit the industry.

For my part, therefore, I am glad that only 4 dams have been built on the mainland since 2003. I bet none of these dams were economically justified, in which case we are better off as a nation limiting dam building.

The truth is that to the best of my knowledge there isn’t a single example of an irrigation scheme in Australia’s history where the water charges have ever recovered all of the irrigators’ share of costs. Even the Snowy Scheme, which has paid for itself, did not seek to recover its costs from the irrigators, who for decades got their water for nothing. Instead, the cost of the Snowy Scheme has been largely recovered through the charges levied for its electricity.

Nevertheless, there was a relatively brief couple of decades, where under the competition policy rules agreed by COAG in the early 1990s it was agreed that irrigation water prices would be set to recover the cost of all new investment, but no attempt was ever made to impose that form of market discipline retrospectively to recover the cost of the existing irrigation capital stock. Furthermore, as might have been expected, even this form of market discipline on future irrigation investment broke down once the National Party got hold of the water portfolio under Barnaby Joyce, and a Liberal-National Party Government was returned in NSW.

There is no other industry, however, that gets the cost of its basic inputs subsidised by the taxpayer in this way. The rest of us pay the full price for our power, fuel and light, and all other inputs. The consumers of urban water pay the full cost of their water, with prices now set to recover the cost of the more expensive de-salination plants that are now needed to supply sufficient water in a drought. No wonder water is scarce in a dry continent when the farmers do not even pay the cost of providing it.

Thus, to sum up my argument so far:

1. The main responsibility for drought proofing their farms should lie with the farmers, and drought assistance should only be available in “exceptional circumstances” that are tightly specified in advance and then enforced,

2. I don’t think we should be building more dams unless they are economically justified, and on the past record that is extremely unlikely.

In addition, given the impact of climate change, I think we need to be prepared to reassess where more-intensive farming is viable, and in that context, what constitutes a drought, and what is only a “new normal”. Some farms may have to consolidate further so that the land is farmed less intensively, given the fall and/or increased variability in the average rainfall. This would of course mean tightening the definition of what constitutes the exceptional circumstances that would constitute a drought in future. It would probably mean some farmers quitting the industry, and this may require some form of government assistance to help them make the adjustment and find alternative employment. This may sound tough, but numerous other employees have similarly lost their jobs because of structural changes beyond their control.

Indeed, what gets me is how farmers in this country are always seen as somehow more deserving of what can only be described as charity. At the same time, many of their supporters are complicit in the meanness that now limits assistance to unemployed people and other disadvantaged citizens. For example, the Minister for Social Security was recently reported as saying that she thought it would be a waste of money giving more assistance to welfare recipients as it would only flow on to drug dealers and pubs. However, the vast majority of unemployed people are unemployed through no fault of their own – rather the structural changes that led to their losing their jobs were imposed upon them, which then enabled the rest of us to live better. On the other hand, as I have shown above, a key reason why many farmers lose money in drought years is because they gambled on the weather and did not take sufficient precautions to store fodder and/or reduce the size of their herds. In other words. they are largely responsible for their predicament, whereas unemployed people mostly are not.

Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.

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8 Responses to MICHAEL KEATING. Drought Assistance: Is it efficient? Is it fair?

  1. Raja Junankar says:

    This is an excellent article by Michael Keating arguing that farmers know that the Government will bail them out so they do not have to worry about droughts. Further he argues that farmers do not pay an economic price for water: if they had to pay an economic price for this scarce commodity, they would not grow thirsty crops like rice and cotton. Instead of just building more dams, the government should limit some crops from being farmed, either by diktat or by removing the “saviour of last resort” for farmers and making them pay an economic price.

  2. John McCabe says:

    Excellent comment about the apparent futility of dams approved and constructed ” I am glad that only 4 dams have been built on the mainland since 2003.” In Queensland the Paradise Dam, over 15 years since commissioning , still has less than 20% available water allocation utilised, and is now having to undergo water shedding and reconstruction to minimise the chances of collapse following earlier repairs.
    And the Rookwood Weir/Dam proposal on the Fitzroy River, Central Queensland is subject to a bidding war between the Federal LNP, and the Queensland Labor Government. The bids appear to have reached a climax of not only funding the full costs of construction but also full costs of delivery to downstream users who may or may not exist.

  3. Michael Hart says:

    If I may add a few further points. Mr Keating is correct when he says that the responsibility of drought proofing lies with the farmer and building more dams is neither viable nor necessary. The great majority of people who are involved in agriculture already well understand the variability of the climate and need no lesson on that from any policy expert. It is more the case that any focus on drought and agricultural policy is dominated by large agribusiness interests and rural development policy and practices even more skewed by the mining industry and the National Party are but the paid lackeys of big business. Water management (a complete mess in this country) is biased to big agribusinesses (big irrigators or those gaming the water rights rackets) who are experts at privatising profit and socialising the losses and they combine cynically prey upon the gullability of bureaucrats and city politicians alike to convince them otherwise. The reality is that this form of agriculture has no future in Australia and especially one that is now warming and drying out but the demands for help will come loud and long from such interests, and their ‘mates’ will oblige.

    Small and medium sized farms are starved of capital and cash flow because the biases and prejudices of the capital markets favour large businesses with plump assets that can be retrieved by the lenders if that capital is at risk. Because they are starved of capital they rely on cash flow and because of the behaviour of big businesses and free and open markets their cash flow is constantly squeezed and any profit margin or livelihood reduced. So no cash flow no capital improvements no improvements results in deteriorating rural landholdings, deteriorating infrastructure and reduced future opportunity.

    In my district I can find not one single neighbour who has sought or asked for any form of government assistance or drought relief nor has any such assistance been sought via way of local politicians. Everyone has managed their stock levels down, or reduced their plantings and done their best to marshall their dwindling resources to keep some core elements of their land and enterprise functional enough to manage a rebound and change in fortune. After all why would you even go near a government agency or department such as CentreLink, the service is crap, the goods are defective and the last thing anybody wants who is in rural areas is government fools involved in their affairs or lives – there are enough unfortunate people and poor people in their communities for them to see and hear first hand what government assistance smells and looks like.

    No the drought assistance we want is for government to stop giving handouts to large scale rural businesses, stop funding foolhardy large scale irrigation projects and stop allowing water rights to be marketed to the highest and wealthiest bidder. We want you to put your money into local environmental projects such as landcare, local community services such as the schools and the hospitals, the roads and road crews and to kick the rear ends of every telco and the minister responsible for the diabolical shambles which is rural communications. We know how to manage the land and our businesses. But most importantly we want policy that recognises that the reason this drought is different is because the climate is different and the reason the climate is different is because all of us have not understood some very simple lessons that every farmer knows, you cannot farm the same paddock year in year out without destroying its viability, you cannot get bigger returns without putting something back in and you have to put aside something from today”s harvest for tomorrows.

  4. Lorraine Osborn says:

    Michael Keating is correct. The Nationals, enabled by the Liberals in the dysfunctional co dependency of the coalition, have no capacity let alone inclination, to drive the massive overhaul of land and water management and agriculture practise that’s urgently needed to ensure the viability of the land and by extension, the nation.

  5. Michael Hart says:

    There is much with which I would concur about some of the observations and sentiments concerning farming and droughts; i.e climate variability and planning, land management and planning, business management and planning. And yes there is a tendency for ‘gamblers’ to attempt to game the system for their own interests and benefits, but that is also human nature and not specific to farmers.

    Indeed, what gets ME is how bureaucrats and economists in this country are always seen as somehow more deserving of being believed or accepted for what can only be described as uncharitable misplace reasoning. At the same time, many of THEIR supporters are complicit in the meanness that now limits assistance to unemployed people and other disadvantaged citizens. They are also complicit in fostering a view that continues that misplaced reasoning. As you have shown above, a key reason why many farmers lose money in drought years is because they gambled on the weather and did not take sufficient precautions to store fodder and/or reduce the size of their herds. In other words. they are NOT largely responsible for their predicament, whereas unemployed people mostly are not EITHER. Farming is also not just about fodder and animals, it also includes cropping and a wide range of other horticulturally derived products – LET ME PUT IT THIS WAY- THE FOOD YOU and everybody else PUT IN YOUR MOUTH EVERY DAY IS THE RESULT OF FARMING and FARM WORK. You criticise and prognosticate on the benevolence of government and other institutions because farmers gamble in the face of variability, well it may amuse you to learn but it has always been like this human being started farming, every year is a gamble on how much rain, how much sunshine, how much wind, how much demand etc etc.

    But sometimes just sometimes you can plan prepare and manage your land, to keep the grass, get rid of the animals, preserve the water, remove the noxious weeds, get rid of the introduced feral exotic pest, plant trees you can take every step and apply every little bit of scientific and cultural knowledge you can to make the activity sustainable and viable and THEN – ONE DAY IT STOPS RAINING AND ONE DAY IT GETS HOTTER AND ONE DAY THE WATER SOURCE DRIES UP, THE TREES DIE AND THE GRASS WITHERS AND THE ANIMALS PERISH (NATIVE AND FARMED). NO AMOUNT OF PLANNING can foresee the worst drought ever and it is getting worse not better SO if we can not manage charity or empathy in those circumstances then we all deserve to starve and perish together.

  6. Peter Small says:

    A very good essay. But Government does have a responsibility where farms are too small as a result of bad Government Policy. Future Governments cannot walk away from the mistakes of past Governments, particularly when people have been encouraged to take up land were any self respecting economist could have advised otherwise.

  7. Evan Hadkins says:

    Farming isn’t like other industries because people won’t starve without a new chair.

    More broadly, we need to ensure necessities for people not profits for corporates – which would lead to a very different approach to assisting farmers I think.

  8. Kien Choong says:

    Is the author therefore suggesting that drought insurance ought to be mandatory?

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