A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
grain farming
  Editorial  
 

Australian agriculture, a model on the verge of bankruptcy?



by Guillaume Joyau,
2014 graduate of the Lille Institut Supérieur d’Agriculture (ISA)
1



A bank has recently liquidated Walton Investment, one of the major grain farming operations in Queensland, Australia. In spite of its significant size (12,000 hectares or 29,650 acres), an intensive production and capital system allowing economies of scale and very low production costs, the firm had built up an AU$30 million debt.

This bankruptcy is not an isolated case in Australia, but a major tendency to excessive debt in agriculture. The country’s agricultural debt is expected to reach AU$66 billion. Some organizations, such as the Rural Finance Roundtable Working Group, are speaking of “the crisis of the agricultural debt” and are estimating that a third of all farms will perish, or will face major restructuring, in the coming years.

Along with New Zealand, Australia has one of the most liberal trade regimes in the world, and among those most involved in international negotiations. The country was also behind the creation of the Cairns Group, which was extensively implicated in the negotiations of the Uruguay Round, and later of the Doha Round. Since the 1980s, the Government has progressively withdrawn from the agricultural sector, and opened up its borders, thus letting markets and agricultural operators manage its agricultural sector. The country is among the nations granting the least support to agriculture, and assumes that agriculture must be market-driven. As a result, some activities had to be restructured.

As it is the case for the Canadian Wheat Board (CWB), the Australian Wheat Board, was the sole buyer at the national level, and was in charge of regulating grain prices. This monopoly on grain domestic purchases was abolished in 1979, and markets were totally deregulated in 1989. In the early 2000s, export markets were also deregulated and, pursuant to its liberalization process, the Government privatized the Australian Wheat Board. The public body thus became a private company owned by agricultural producers. All public financing linked to the Australian Wheat Board were overturned. The entity was to be financed by a levy on grain exports, which remained Australia’s monopoly. Ultimately, Cargill bought the Australian Wheat Board (AWB Limited), and export controls were terminated in 2012, thus achieving the total liberalization of wheat markets.

Single export desks also existed for barley, rice and sugar. These public structures were providing Australia with a powerful trading edge with highly centralized governments, such as in India, China or Japan.

The dairy sector is also a textbook case. In 2000, the Government completely retreated following a 15-year dismantling of the dairy policy. Support programs to ease the transition to markets replaced policies for several years, before they were also dissolved. Yet, the number of dairy farms declined by 25 percent in only a few years, due to bankruptcies or restructuring processes. Milk prices rose for consumers, while prices and producers’ revenues declined to the benefit of retailers, who were in a strong position to negotiate, since processors were in a situation of production overcapacity.

Today’s Australian agricultural policy leans towards subsidies to agricultural trade organizations for research and development, support to irrigation work to curb extreme climate events and insurance systems linked to climate disasters. The course is indeed carried out; through such programs, the Government assists agricultural producers in adjusting to market conditions and increasingly extreme climate events, but those who cannot adapt perish.

Such very liberal policy forced agricultural producers to restructure, but the number of farm operations sharply declined. Many producers are experiencing a critical financial situation, in spite of obvious competitive advantages. Land prices are among the lowest in the world, and the access to very large acreages cuts down mechanization costs. Yet the competitiveness of Australian agriculture is marred by a steadily growing indebtedness problem. It accounted for 32 percent of the gross production value in 1980, 51 percent in 1990 and reached 156 percent in 2000. Such record rate of indebtedness is becoming a problem. The level of compensation for agricultural output is not sufficient to allow farmers to make principal repayments. Excluding climate disasters, margins are quite low, but the significant Utilized Agricultural Area (UAA) permits adequate incomes. But climate disasters are becoming increasingly more frequent, and incomes from agricultural output cannot compensate this climate risk to repay the borrowed principal.

For the past four years, Walton Investment has suffered from the major flooding of 2011 followed by two droughts. As losses accrued, the financial situation prompted the banks to liquidate the firm, since the potential of covering debt through output became too shaky. The sale of both land and equipment will not even be enough.

Walton Investment is not an isolated casualty of the ultra-liberalization of the Australian agricultural market. The situation leads to an overreliance on bank financing in an uncertain context for both climate and market risks. In 2013, the Rural Finance Roundtable Working Group launched an initiative to establish a reconstruction bank––the Australian Reconstruction and Development Board. Financed by the Australian Central Bank, the fund’s mission is to alleviate the agricultural debt, and implement a reconstruction and rural development policy .

A taboo issue, farming indebtedness that could quite shake the trust in the benefits of a liberal model applied to agriculture for all involved.

The bankruptcy of Walton Investment, a 12,000-hectare Australian operation, is not an isolated case, and should make us realize the perils of governments’ progressive withdrawal from agricultural policies.

This article is useful in stating the case: Some farming operations presenting every comparative advantage and generating extremely low production costs are going bankrupt because the liberal model no longer gives them an adequate compensation to repay their loans. These farming operations are powerless to meet their debt obligations if they are hit with the slightest climate or market event over two consecutive years.

Based on our information, these failing businesses are having tremendous difficulties in finding buyers. Bank financing has become extremely expensive. And for good reason, since banking institutions now classify agricultural businesses as high-risk debtors!

The Europeans cannot remain silent on the consequences of agriculture liberalization. Our European farming businesses are already showing signs of frailty, especially regarding the ongoing erosion of margins. How will they resist to a succession of climate events or price hyper-volatility occurrences at a time when the CAP discards its risk management tools?

The challenges of the future not only concern the environment, but also concern production and the producers.

If agriculture must conform to the sole market rationale, the food security and independence of the European Union will never obey markets!

momagri Editorial Board



1 guillaumejoyau@gmail.com


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Paris, 11 December 2018