Thursday, August 25, 2005

Plight of Australian farmers

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In Australia we often heard about the plight of farmers. Through the 1980s farmers achieved high prices for their product, and were encouraged to take on high levels of debt to buy adjoining properties or to finance expensive farm machinery. In some sectors like wool, wheat and milk, market prices were historically regulated, so the farmers understanding of market trends, cycles and unpredictability was probably not the greatest - though they can`t claim total ignorance. The reality is however that they acted in good faith. In many cases, farmers say they were talked into taking out expensive loans and derivatives contracts, products with which they were unfamiliar.
The question is - What responsibility do the bank`s have when selling these products? Capitalism is a wonderful system if there is an attempt to understand the customer - empathy as opposed to seeing the customer as purely a `profit target`. Business ethics starts with company executives. Sadly executives are just as blind as governments, customers and employees. Ethics (or the broader issue of philosophy) is not raised in schools and thus is seldom taken up in university.
Should there not be a responsibility of the farmer to understand the products he buys. Yes, but how does a farmer or anyone know if he knows everything? But the same question applies to the bankers. Did the bank executives or subordinates take legitimate steps to protect customers and understand their product?

The plight of the farmers is however mostly the result of falling commodity prices. Commodities have fallen in real terms for decades, and that trend is only likely to change in the short term when demand rallies. Farmers did not understand that trend, nor could they anticipate the adoption of protective tariffs and subsidies by the world`s largest industrial economies to shore up their farm sectors, resulting in the dumping of agricultural commodities on global markets at prices well below local production. If farmers are loosing from subsidies, then our manufacturers must be benefiting by not having to carry such imposts. So why isn`t our manufacturing sector more competitive? If they are benefiting, why is there no scheme to recoup their `winfall` and redistribute to farmers? Why is there no effort to apply punitive imposts upon those governments that profess to have free markets, yet distort market prices for the sake of their own farmers. Their strategy demands that our government have some strategy. Sadly there are measures, but its on the premise of charity or subsidies rather than justice. This establishes an ugly precedence, resulting in farmers seeking protection of their industries and looking to governments for solutions. This is all contrary to effective market mechanisms. A market is only as effective as its participants.

We see the effect on their psychology at a protest meeting in Gloucester, NSW. This community is largely better off than most because it has witnessed the rapid growth in coastal property prices as city retirees sell out their properties for rural lots. But these people are looking for government`s to respond, and certainly responses are warranted, but there is alot farmers can do. Why do Australian farmers insist on growing farm products in markets where they can`t compete, where their labour costs are excessive, where they are not able to generate the productivity gains to overcome those higher wage costs. They make a virtue of their hard efforts, but to work hard for nothing is not noble - its stupid unless there is the promise or expectation of long term substantial gain.

Not all Australian farmers are loosing money. The great majority of production comes from the higher capitalised farms with larger equipment and larger acreage. Those farmers struggling to make money are working long hours, have smaller farms that have tighter margins. Some of these farmers do OK because they are have supplemental off-farm income, eg. A wife or children working in the local town. There is nothing wrong with this strategy if it works for them, but there is no justification for these people to blame the markets. Their unwillingness to change reflects their unwillingness to incorporate. Profitability is an option to them - but they need to make a choice - either:

  1. Passive strategy: Rationalise their farm investment by amalgamating with neighbouring farmers, ie. By accepting a stake smaller stake in a larger farm
  2. Active strategy: Sell their farm and invest in Chinese farm production.
  3. Retirement: Sell the farm and invest the proceeds - in farming or elsewhere.
There is no necessity for Australia to be a farming nation - there are plenty of poor countries who will be able to do it cheaper. Farmers can however capitalise on their natural resources by investing their money and skills in these countries. The mining industry has displayed such flexibility - why can`t farmers? When did farming become an intrinsic elment of culture to be enshrined. Is that is the way - it will by necessity be in museums.

Not all food imports and substitution of our exports is the result of Asian supply. NZ has emerged as an important compeetitor because of its weaker currency and lower production costs. It really doesn`t matter. Its a market reality. NZ is not a protected market, and in many respects Australia production is subsidised. Australia offers subsidies for environmental maintenance, water, etc. Water is too cheap in Australia given its scarcity, which also means a great deal is wasted on low-value production because too many farmers have invested in lifestyle rather than income. Eventually these `water credits` will go to the highest bidder - vineyards and cotton farmers - producers of higher value output. These sectors of the economy are booming.

The reality is that Australia can compete in a great many agricultural sectors - generally the high value sectors, or those where food cleanliness and preparation are highly regarded. The message for farmers is that they have to move towards:
  1. Higher value export products
  2. Niche high value products
  3. Packaged food preparation

Traditionally farmers have lived autonomously, and displayed no applitude for working with their fellow men in a corporate environment. They are inclined to be head-strong and stoic, but there are just too many factors they can`t control. The reality since the late 1980s is that farmers are largely price-takers with seasonal surpluses driving prices down, allowing buyers to set prices. They have even resorted to downstream investment in raw supplies to keep prices low and to improve product quality. Farmers need to amalgamate and perhaps even move up the food chain to form relationships with restaurants and food distributors. Sadly because of their culture - the mainstay of which is inept people & negotiating skills - they are not prepared. Farmers have not responded to the increasingly sophistication of farming by learning a broader range of skills. Those that have - prosper eventually - usually at the expense of those who play the `victim` card with government - waiting for hand-outs. Global food retail groups are trying to reduce their product costs, and undercutting rival suppliers with in-house brands.

Australia remains highly cost-efficient in broadacre farming areas like dairy, beef, lamb and several grains, as well as some seasonal advantages. But NZ, Sth Africa, Sth America and China have emerged as significant competitors since Australia`s currency rose due to mineral exports. China is pinching NZ`s markets, so NZ is taking ours under the FTA agreement. Australian cost competitiveness is trailing NZ by 30% - let alone other competitiors.

- Andrew Sheldon www.sheldonthinks.com

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