August 17th 2013

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Articles from this issue:

CANBERRA OBSERVED: Both leaders coy about levelling with the voters

EDITORIAL: What the federal election comes down to...

RURAL AFFAIRS: Behind the explosion of farm debt over the last 30 years

SOCIETY: Same-sex couples a tiny percentage of households

RIGHTS AND FREEDOMS: Conscience rights banished by our political elites

NATIONAL AFFAIRS: Treasurer's fantasy of a budget surplus by 2016/17

SOUTH AUSTRALIA: Victory for real marriage in SA

SOCIETY: Our children's lives invaded by sleaze

CHILD DEVELOPMENT: Equipping our young to cope with suffering and loss

CHINA: Have China's rulers forfeited the 'Mandate of Heaven'?

UNITED STATES: US government persecutes Zimmerman family

CULTURE AND CIVILISATION: Solzhenitsyn and the Russian renaissance


BOOK REVIEW: Low-life or lovable larrikin?

BOOK REVIEW: Intriguing blend of Christian themes, Arthurian legends and time travel

CINEMA: In defence of our humanity

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Behind the explosion of farm debt over the last 30 years

by Colin Teese

News Weekly, August 17, 2013

Private debt overhang is a problem for many Australians. In the cities, it is mortgage and household debt, much of the latter on credit cards at prohibitive interest rates.

We all know in our hearts, but prefer to put out of our minds, the fact that debt has to be paid back. That process is painful, no less for the economy as a whole than it is for the individual.

Queensland farmer and

research economist Ben Rees.

To some extent, Australia was, for the duration of the mining boom, able to avoid some — though not all — of the worst effects of debt pay-down. However, with the mining boom behind us, it is expected that we will no longer be able to avoid the downturn that currently grips most of the Western world.

The debt problem facing our farmers is something quite separate from household debt. Farmers need debt to survive through the production cycle. If the burden becomes too great for the farmer, then the resulting adverse impact is as great on our economy as it is on the individual farmer.

What follows is a generalised analysis of farm debt, underpinned by data from the Australian Bureau of Agricultural and Resource Economics (ABARE) and the Reserve Bank of Australia (RBA).

Debt will differ in impact and intensity across sectors of rural industry. Nevertheless, important generalisations can and should be made. For example, the impact on the viability and prosperity of country towns is directly related to the well-being of farmers.

Differing seasonal conditions and their relative intensity for particular areas is also important. This issue is by no means well understood. As Queensland farmer and research economist Ben Rees made clear in his paper, Rural Australia: Crisis 2012, it should be the subject of further research to ensure that the right solutions are matched with the right areas.

Rees’s paper, which he presented to the Rural Debt Round Table, Brisbane, on October 17, 2012, is a good starting-point for any examination of the problems of farm debt.

Using ABARE statistics, covering Australian farm returns and compiled in 2011, alongside information published in the Reserve Bank of Australia’s debt table D9, Rees defines the magnitude of the problem.

In 1981, the annual net value of farm production was about equal to debt. By 2011, the net value of farm production was just over AUD$10 billion; but farm debt was around AUD$65 billion — some six-and-a-half times greater.

Economic orthodoxy chooses to remain silent on the question of what lies behind the explosion of farm debt over that 30-year period. Indeed, the most recent study of Australian agriculture by our Productivity Commission — of which more later — chooses not to address the subject of farm debt at all.

Ben Rees makes up for this oversight. Farm debt in his view is a matter of crisis, both for farmers and for the nation. Moreover, he believes that farm debt problems arise directly from policy failure — more specifically, market failure arising from the economic policies Australia adopted post-1983. He observes that these deregulationist free market policies became the preferred policy direction of all major political parties, farm leaders, media commentators and, in his phrase, “some academics”.

These new economic ideas, which took hold in the mid-to-late 1970s, were developed as a preferred policy mix to tackle the phenomenon of “stagflation” — that is, economic stagnation and high unemployment combined with inflation — which was then afflicting many Western economies.

The emergence of stagflation coincided with the collapse in the early 1970s of the Bretton Woods system. For 25 years after World War II, this system had provided a stable framework for international trade and payments. It was based upon the idea of currencies of the 29 participating nations being tied to the US dollar. The dollar, in turn, was in pegged to a fixed price for gold.

The system collapsed when the US was no longer able to maintain the value of its currency in line with a fixed gold price. More or less stable currency relationships between countries were replaced by a new regime of floating exchange rates. This marked the beginning of a period of trade and financial instability, which has continued pretty much unabated ever since.

Rees believes that the problems of our farm sector, including its descent into crippling debt, are attributable to the changes in economic philosophy which followed the collapse of Bretton Woods. Rees introduces a highly technical discussion of why things went wrong for our agriculture and what must be done to make farming viable again in the 21st century.

Rees likens the debt problems of rural Australia to those facing the eurozone. If rural Australia was a member of the eurozone, international financial markets would refuse to fund it.

With funding unavailable from normal sources, our farm debt would be fed into international risk markets, where it would be traded at hugely inflated interest rates. Our rural sector would be rendered dysfunctional until bail-out money was provided as a trade-off for some kind of so-called “structural reform”. Presumably the bail-out agency would have to be some combination of state and Commonwealth governments standing alongside national farm organisations.

Thus far, as Rees explains, government agencies and farm organisations have closed their eyes to the problem of farm debt. Instead they have chosen to shuffle the problem of the farm sector over to a so-called “independent” agency, the Productivity Commission. That agency, a dedicated believer in the policies which have caused the debt crisis for our farmers, is unlikely to consider any ideas which might call into question those same policies.

Predictably, the commission finds little wrong with our farm sector that cannot be fixed by a combination of better farm skills (both financial and agricultural), faith in a free market system, and an unshakeable belief that farmers’ future prospects depend upon their ability to compete internationally.

This advice, of course, fails to take any account of the fact that Australian farmers’ most serious competitors, both for our domestic and export markets, are heavily subsidised by their respective governments.

Relying on exports of farm production has been the mantra of the rural-based National Party and farmer organisations for the past 25 years. The Productivity Commission in it latest report gives support to the same proposition.

It tells us that 60 per cent of our farm produce is exported. (At least this is an improvement on the fiction maintained for so long by the National Party that the figure was 75 per cent, despite all the contradictory evidence.)

Yet, on its own admission, the Productivity Commission’s 60 per cent figure includes meat, sugar, wine and other products which, elsewhere in the same document, it advises are classified as manufactures.

The commission’s simple “hands off and the free markets will fix everything” approach seems to have taken hold of both sides of politics. Farmers of course know better, and those among them who have read Ben Rees’s paper will know that if the problem is to be fixed, then something like what Rees suggests must be done.

Rees wants to attract an academic as well as a practical audience, so he takes his readers carefully through his diagnosis of what has gone wrong.

The detail of that need not trouble us. Put simply, Rees understands what has been well-known to informed observers of the farm sector, going back to our most celebrated farmer/statesman, John “Black Jack” McEwen, the long-time leader of the Country (now National) Party, an influential Cabinet minister and, briefly, prime minister (December 19, 1967 – January 10, 1968) after the death of Harold Holt.

An updated McEwen approach is needed. Farmers today must contend with what is, at best, a deeply flawed marketing system for the production and distribution of farm produce.

For the most part, farmers are producing what are essentially undifferentiated products. They comprise a large number of small producers in each sector, usually selling to a small number of well-organised buyers. Left unprotected, farmers are forced to compete with each other on price.

Worse still, when it comes to purchasing inputs — for example fertiliser, machinery or capital (including interest payments) — they are at the mercy of powerful price-setters. Both buying and selling, farmers find themselves on the losing side of any bargain.

As if this were not enough, most of their international competitors enjoy, to a greater or lesser extent, the advantage of a sheltered domestic market.

Unlike his National Party successors today, McEwen was alive to all of this. His answer was what became known as orderly marketing. Marketing boards for most agricultural commodities were built around the idea that the home market should be secure for local farmers. Producers could then make a decent living and consumers could buy reasonably priced food, while a surplus was available for export, the earnings from which could help enhance our foreign exchange reserves.

Internationally, commodity agreements were pursued wherever possible. With or without agreements, our farmers were better off. In particular, they could use the better prices on the home market to help meet subsidised export competition.

McEwen also recognised that year-on-year farm production was heavily influenced by climate uncertainties. Farmers needed, and should be able, to obtain access to finance on terms which took account of their special circumstances.

Compare this with today’s Australia in which unaided farmers are expected to match the full force of subsidised competition both at home and in export markets, while having to pay international prices for capital.

As Rees points out, this means that the terms of trade run heavily against our farmers. They can’t influence the price of the inputs they need for production, nor the price they receive for their output. They are caught in a classic cost/price squeeze.

The problems which Rees identifies in our farm sector are essentially those that McEwen successfully addressed all those years ago. Farmers needed then, as they do now:

a) marketing arrangements which take into account the special circumstances of the farm sector, and

b) access to capital on terms suitable for an industry plagued by production cycles, which are in turn at the mercy of an uncertain climate.

The question is whether the government and the community are prepared to recognise the nature of these problems and be willing to come up with realistic solutions for dealing with them.

The consequences of not doing so will be devastating for rural Australia.

Colin Teese is a former deputy secretary of the Department of Trade.



Ben Rees, Rural Australia: Crisis 2012, an 18-page paper presented to the Rural Debt Round Table, Brisbane, October 17, 2012.

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