The ad hoc approach to drought is unhelpful, according to a leading economist

The University of Melbourne’s Professor John Freebairn told the Australasian Agricultural and Resource Economics Society conference, Melbourne, subsidies for farm inputs and outputs resulted in the undesirable misallocation of national resources.

“They provide a blunt welfare safety net,” Professor Freebairn said.

While direct funding of household incomes to reduce poverty better-targetted equity, it was difficult to implement.

“Longer term and sustained programs to assist decision makers to adapt to variable seasonal, and other conditions, is desirable.

“Most farmers, if they are given the right incentives, will actually choose to balance the problems of droughts and low commodity prices.

“The real problem is this sort of ad hoc stuff, is dulling the incentives, for some of them to do that.”

Professor Freebairn said there was compelling evidence, across countries and over time, individual farmers with personal incentives and access to private information were better and more productive decision makers, than governments.

"Ad hoc political responses, to each drought, should be replaced with longer term policy interventions, across good and bad seasonal conditions."

Professor Freebairn said drought subsidies led to misallocation of limited national labor, capital and other resources from the rest of the economy.

“Society efficiency costs of farm business subsidies are much the same as the efficiency costs of tariffs raising the price of imports,” he said.

Subsidies also held up inevitable structural changes, which resulted in a future with a more productive farm sector and high family farm incomes.

 “Subsidies increase the costs for smart farmers, who have planned for, and adapted to, drought to buy out less successful operators.”

Subsidies during drought were “a very blunt policy instrument” to support families facing poverty.

“Given the limited amount of fodder, available during a drought, most of the fodder subsidy will be passed back to suppliers of fodder, with the buyer price rising by the subsidy.”

Assistance on interest was of no income support for farmers, who were free of debt, or reluctant to take it on.

“They provide greater assistance to large borrowers, who often have above-average incomes,” Professor Freebairn said.

Governments directed scarce taxation funds to farmers, each time an inevitable drought occurred, because of general perceptions of the wider population and governments as farmers as “special” in providing food.

“Droughts provide graphic material for the media and some families fall into poverty.”

“Images of farming as the foundation and exemplar of Aussie culture and heritage are important.”

Professor Fairbairn said many city residents didn’t realise the help given to farmers was not in the long term interest of the country or farmers.

“Not only is that slowing up the necessary structural adjustment of the agricultural sector, but a lot of good farmers are also realising ‘I am wearing some of these adverse effects'.

“I guess the real challenge we have got is for the rest of the community to understand droughts and floods are recurring events.”

He said farming had always gone through structural adjustments.

“We have many fewer farms now than we had 20 years ago and that was less than 30 years ago because scale economies are becoming more important, machinery is becoming more important.

“A smaller number of farmers are farming more productively, producing much more food and fibre than their grandparents did.

“With the growth in population, Australia is going to play a big role in providing food to that growing population.”

Professor Freebairn said more effective ways of preparing for drought included education programs and collection, analysis and distribution of meteorological and other data on seasonal conditions.

Hands-on education and support for individual farmers to develop more appropriate decision strategies added to a “more robust and self-sufficient farm sector.

They should be available over time and offered during both good and drought seasons.

Professor Freebairn also raised questions about the Farm Household Allowance scheme, as it did not extend to small businesses, such as restaurant owners, builders and mechanics.

“This favorable treatment of farm families, relative to other small business families, raises horizontal equity issues,” he said.

“Details of the design of the means test for eligibility for direct income grants to mitigate poverty among farm families raises many challenges.”

Eligibility for the FHA considered income, assets and mutual obligation, but the variability of income, over time, made income measurement arbitrary.

“Some farm households, dependent on livestock, may have a one-off cash flow income boost, from the forced sale of animals, yet be in a longer-term low-income situation.”

He said most farmers with low incomes had considerable assets, in the farm, even if it was difficult to borrow against them.

“The much more generous asset test for the FHA, relative to Newstart, is debatable; with the arguable justification that farmers need to maintain the farm, and face fewer opportunities for other employment than Newstart recipients.”

Government funding of mental health, social and other support for the wellbeing of farmers and families, adversely affected by drought, could be an important social equity instrument.

Federal Agriculture Minister David Littleproud said the government was responsible for, and proud of, the Farm Household Allowance scheme, which is a safety net for household expenses for small farmers.

“The FHA, the Drought Future Fund and a suit of preparedness programs are about a long term coordinated drought policy that builds long term resilience and helps farmers’ recovery,” Mr Littleproud said.