The Real Farm Crisis is a Lack of Credit

The Real Farm Crisis is a Lack of Credit

Arron Patrick recent commentary piece in the Australian Financial Review titled ’Cash Trial Shows Drought Was a Fake Farming Crisis’ would have no doubt raised the temperature for many farmers who have missed out on the recent rains.

Aaron’s thesis is that the drought is a fake crisis and despite the sob stories most farms were fine proven by the fact that the amount of money stashed in Farm Management Deposits grew rather than shrank over the course of the big dry. He points out that even in the state hardest hit the withdrawal per farm business averaged less than the cost of six cows indicating that the cry of wolf might have been a little overblown.

Western Australian Farmers Federation tends to agree with Arron’s overarching view that the current mix of drought policies rolled out over the last 18 months reek more of political desperation aimed at saving seats rather than farms.

If the government was serious about drought policy it would go back a decade to the last national drought forums and lock in around a position that Australia has been working towards for over thirty years albeit in fits and starts, that is farmers have a responsibility to prepare and manage for drought alone.

Farmers have to understand that government cannot and will never be the lender of last resort, nor is it responsible for providing water and fodder for livestock no matter how loudly the wireless howls with the sounds of Alan Jones demanding the government do more.

But we disagree with Aaron Patrick on the issue of the importance of Farm Management Deposits. As a reserve to tap when credit dries up this financial instrument makes eminent common sense and it seems the farmers who have built up there reserves have been well prepared to manage their way through this drought without having to draw upon them. Come a third, fourth or fifth year of drought, fire, flood or market collapse due to disease of pestilence then they will no doubt drawn down very rapidly.

It’s those who don’t have FMDs and who are demanding ongoing government farm subsidies or farm income support while sitting on assets of up to $5m that we don’t defend. Patrick is right to call them out as having access to a form of dole four out of every ten years that would never be tolerated in the city.

Farmers know it’s not welfare that keeps farmers farming it is access to capital, its time the we had a debate about ending farm welfare and fixing the problem of access to risk capital for those who want to farm on when the rains stop and their equity dries up.

If the government is serious about farm financial resilience in tough times they should be looking at ways to end the penalty interest rates that banks hit farmers with when their equity hits thresholds that are out of whack with the risk banks face.
While the banks are happy to lend 90 or 95% on a million dollar apartment to someone with less than 12 months work experience they demand 30% – 50% farm equity simply because of the supposed high risk nature of the underlying asset.

Anything less and the interest rates head towards double digits. This defies the history of farm asset prices and the inherent stability of rural land as an asset, something that cannot be said for inner city high rise apartments.

This year across Western Australia we are hearing stories of banks hitting farm businesses that have posted large losses and seen equity levels fall with penalty interest rates.

In the case of these farms that are under financial stress what they really need is not an annual $14,000 welfare cheque and penalty interest rates but access to long term capital at reasonable rates of interest.

What won’t provide this capital is mad cap drought policy on the run, ideas like the governments Rural Investment Corporation RIC better known as Barnaby’s Bank with its $4 billion in reserves designed as a drought support mechanism.

As a means of supporting farmers it is a failed policy, having leant out a few hundred million to a few hundred farmers, far short of the billions needed to get stressed balance sheets recapitalised in Western Australia let alone across all of Australia.

What political commentators in Australian Financial Review should be exploring is why hasn’t the government looked for a private solution to a private problem. What the industry needs is more competition in the rural financing sector and banks to change their attitude to backing farmers when their equity levels fall.

One possible simple solution to changing attitudes to farm risk that was recently put up to the government is a farmers mutual rain insurance scheme that encourages farmers to manage risk via the traditional method of income insurance.

Just as the government and banks back first home buyers into their first house via income insurance the federal government should be looking to the private sector to back farmers into some form of industry insurance scheme so they can back out of farm household welfare.

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