AGRICULTURE: by Patrick J. ByrneNews Weekly
Getting rural policy on track
, January 8, 2005
Australian farmers on average receive the lowest farm-gate prices for their products in the developed world.
Australian consumers on average benefit from farmers supplying the lowest-priced food to food-processors and retailers in the developed world.
Australian farmers supply food and fibre to the biggest sector of Australian manufacturing industry.
Australian farmers make up just 4 per cent of the population, but with three-to-five jobs beyond the farm gate, about 16 per cent of the population depend on rural industries.
Australian agriculture constitutes the third highest productivity growth sector of the economy.
So, why is the farm sector suffering? To answer this question, one has to understand how other countries under the World Trade Organization (WTO) rules treat agriculture, and then match their policies with those being pursued in Australia.Trade rules
Colin Teese is a former deputy secretary of the Department of Trade, who negotiated many of Australia's trade agreements in the 1970s and '80s. He explained to News Weekly
, "There is an underlying reason why the 1947 General Agreement on Tariffs and Trade (GATT) - and now the WTO - sets the rules to allow for the orderly marketing and support for agriculture. It was understood by all member nations that farmers have a fundamental problem that is faced by few, if any, other industries.
"Farmers are price-takers when they sell their product to processors and supermarkets and when they buy their farm inputs. For example, one dairy farmer has no market power when he individually sells his products to supermarkets, or when he individually buys a tractor from one of the few remaining tractor companies. A farmer is a price-taker on both fronts.
"This means farmers are susceptible to economic exploitation by suppliers, processors and retailers. It also means that they cannot factor costs like environmental works - e.g., to fight salinity, undertake land preservation and water conservation - into the price of their product.
"Further, after the starvation that hit Europe and Japan after the huge wars of the 20th century, these powerful economies were determined to be self-sufficient in food production. Indeed, the European Union was founded on the principle of a single, subsidised European agricultural system. The principle that underpins EU and Japanese agriculture applies as much today as it did when the agricultural rules of the GATT were signed in 1947," he said.
This was borne out when the GATT evolved into the WTO and the new Agreement on Agriculture was signed in 1995. It continued a rules-based system, that aimed to risk-manage agriculture in five areas - (a) market access, (b) national food security, (c) domestic income support for farmers, (d) export subsidies and (e) provision of technical support to agriculture.
While Australian politicians and bureaucrats loudly decry the array of support given by European, US and Japanese governments to their farmers, the fact is that these supports are consistent with WTO agricultural rules.
The accompanying graph shows how Australia, pursuing free-trade policies, provides little support for farmers. Aussie farmers receive just 5 per cent of their gross farm income from government support.
Meanwhile, other major agricultural producers continue to substantially support their farmers. In the US, farmers receive 24 per cent of their gross income from government; in the EU 35 per cent; and in Japan 58 per cent. Across the developed nations making up the Organisation for Economic Cooperation and Development (OECD), the average support for farmers is 31 per cent of gross farm income.
Think of this situation in terms of Australian swimmers competing at the Olympics. Ian Thorpe is swimming the 100m, but he is forced to give his competitors an average head start of 26m (OECD 31 - Australia 5 = 26). His European competitor has a 30m advantage and the Japanese swimmer has a 53m head start.
While Australian farmers receive just 5 per cent of their gross income from government, OECD wheat growers' income from government is 36 per cent of gross: rice 80 per cent, dairy 48 per cent, sugar 50 per cent and beef 37 per cent. In the pool, how could Thorpie ever win with such handicaps?
These farm supports mean that when the excess production of the US, Japan and EU is sold onto the world market, the prices for products like sugar, dairy, wheat, etc, do not reflect the true costs of production.
The OECD's periodic report on agricultural support around the world also compares the prices farmers in different countries receive for their products and the costs to processors/retailers of food in different countries.
It shows that among the developed nations, Australian farmers receive the lowest farm-gate price for their products. On average, farmers in OECD countries receive a price 32 per cent higher than what Australian farmers receive.
It shows that Australian consumers benefit from having the lowest-priced food inputs to processors/retailers in the developed world. On average, processors/retailers in other OECD nations pay 37 per cent higher prices for food inputs than in Australia.
The low price received by Australian farmers partly reflects their high productivity. According to a report by the Australian Bureau of Agricultural and Resource Economics (ABARE), Australian farmers increased their productivity by 50 per cent over the past 25 years.Competition policy
The low prices received by farmers also reflect the slashing of tariffs and deregulation under National Competition Policy. The result is that Australian farmers are now being forced to sell their product on average at the "corrupt" world price, not only onto the world market but also onto their own domestic market, without the orderly marketing systems other countries have put in place under WTO rules.
This is driving farm incomes down. Average net farm income - what farmers have to live on - will hit zero around 2017, according to ABARE long-term trend figures, as pointed out by Dr Mark McGovern at QUT's School of International Business.
This should be a warning to Canberra that, if the rural sector is in trouble now, there is much worse trouble - economically and politically - not far away.
The tragedy for Australia is that agriculture, one of our higher productivity sectors, is headed for disaster. Why?
The answer lies in the rejection by Australian governments - Labor and Coalition - of the GATT and then the WTO rules which encourage governments to support agriculture.
Ben Rees and Dr McGovern outlined the problem in a recent paper, Regions between theory and reality: Agricultural policy and its impacts in Australia
. They explained that in the late 1980s, in the run up to the formation of the WTO, Australia formed the Cairns Group of nations to pursue free trade in world agriculture, and overthrow the rules-based system for agriculture.
Australia wanted the US, EU and Japan to dump its subsidy system, believing that if this could be achieved, Australia would be able to export into these huge markets.
But when the WTO Agreement on Agriculture was finalised in 1995, the Cairns Group completely failed in its bid. On the contrary, the WTO confirmed the orderly marketing and subsidy system that had been in place in the GATT since 1947.
As Rees and McGovern comment, "The rules-based system in effect thumbs its nose at the concept of agricultural trade based on theoretical free trade."
Did this failure wake up Australian policy-makers to world realities? No. Australia continued with the Cairns Group and at the same time deregulated many areas of agriculture, under National Competition Policy, arguing that if Australia did not deregulate, cut its tariffs and its support for farmers first, we could not expect other WTO nations to do the same.
Further, they argued, if we pursued free-trade policies now, our farmers would become more efficient and be ready to take advantage of the opening up of the US, EU and Japanese markets when these countries soon adopted the free-trade policies of the Cairns Group.
They insist that this is inevitable, because US and EU consumers will soon rebel at the cost of the huge subsidies handed out to farmers.
Such is the ongoing arguments of wishful, free-trade ideologues. While US, EU and Japanese subsidies look huge to a bureaucrat sitting in his Canberra office, the farm supports of the developed countries constitute only 1.2 per cent of their economies.
The reality is that the Cairns Group is set for a second major failure. The WTO agricultural round of talks is currently underway, and while the Cairns Group is once again pursuing free-trade policies, the major economic powers have no intention of reversing the agricultural policies that have been in place since 1947.
The Federal Government needs new policies for agriculture. The Prime Minister has expressed a wish for policies for his new government to develop Australia over the next 20 years.
For a country wanting to progress and develop its economy, the logical area to encourage investment in is its high productivity industries.
The Productivity Commission identify agriculture as Australia's third highest productivity growth industry, after communications and wholesaling.
If the PM wants to develop the Australian economy over the next 20 years, agricultural policies taking full advantage of the trading rules of the WTO must be a starting point.