10.5 Drought Assistance

Background

The Commonwealth provides significant assistance to farmers through various drought assistance and farm finance initiatives.

In the past, drought assistance involved the declaration of Exceptional Circumstances areas. For an area to be declared, it had to demonstrate that it was experiencing a rare and severe event (occurring on average once every 20 to 25 years) resulting in severe downturn in farm income over a period of greater than 12 months.

Farmers in Exceptional Circumstances-declared areas were eligible to apply for a number of programmes, with the key ones being:

  • the Exceptional Circumstances Relief Payment (ECRP), which provided payments equivalent to the Newstart level but with a more generous assets and income test; and
  • the Exceptional Circumstances Interest Rate Subsidy (ECIRS), which provided a subsidy of between 50 and 80 per cent of interest payable on loans, to a cap of $500,000 over five years.

At the height of the last drought, in 2007-08, combined drought assistance payments were around $1 billion. Although the Exceptional Circumstances framework was not intended to be used as long-term income support, some declarations lasted for over 10 years (Productivity Commission, 2009).

In its 2009 review, the Productivity Commission found that the Exceptional Circumstances system was inequitable as it applied differential treatment to farmers inside and outside declared boundaries and to farmers compared to non-farm businesses who also face major business risks.

In response to the national drought review, the previous Government announced that the Exceptional Circumstances arrangements would be replaced. A new assistance arrangement – the Farm Household Allowance – is scheduled to commence on 1 July 2014 to replace the existing ECRP. This new allowance is an income support safety net that will be available to eligible farm families in periods of financial hardship regardless of the source of that hardship.

Separately, the previous Government introduced the Farm Finance Concessional Loans Scheme, providing $420 million over two years to fund productivity-enhancing projects and debt restructuring. Concessional loan rates are available for the first five years of the loan. This programme is delivered by States and the Northern Territory through various delivery agencies including regional adjustment authorities.

A range of other, non-drought related, assistance is also available for farmers. These include income averaging, which allows income and tax payable to be averaged over a maximum period of five years to reduce fluctuations in tax obligations. The Farm Management Deposit (FMD) Scheme also addresses fluctuations in cash flow by allowing farmers to set aside pre‑tax income from primary production in years of high income, which can be drawn down in years of low income. Farmers can hold up to $400,000 in FMDs and can earn up to $65,000 in non-farming income, increasing to $100,000 from 1 July 2014 (Department of Agriculture, 2013).

Drivers

The key driver of Commonwealth expenditure on drought assistance under the Exceptional Circumstances system was climate variability, with expenditure cyclical and dependent on weather conditions.

Lower farm net cash income, off-farm income and liquidity and higher debt levels were correlated with higher rates of assistance, even within Exceptional Circumstances declared areas (Productivity Commission, 2009).

The widening of eligibility criteria under the Farm Household Allowance to include non‑drought financial hardship will likely mean that broader economic conditions will also become a driver of Commonwealth expenditure.

Issues

Drought assistance

Drought and farm assistance is complex and regularly subject to review and changes. Reforms announced by the previous Government are in the process of being implemented, with substantial details yet to be announced.

Continuation of drought assistance can discourage drought-preparedness and self-reliance. Extending assistance to all situations creating financial hardship may exacerbate this problem. While the Farm Household Allowance is intended to only be available for up to three years, the significant number of farmers who received assistance for more than three years under the Exceptional Circumstances arrangements indicates that there will likely be pressure to extend this time limit.

Interest rate subsidies and concessional loans

A number of reviews over the past two decades have been highly critical of interest rate subsidies (Department of Agriculture, Fisheries and Forestry, 2012). Particular findings have included:

  • as the greatest assistance is provided to those with the largest debt, there is an incentive to increase debt and/or not reduce debt in the face of drought, even when this would be the most prudent business approach if a government subsidy were not available;
  • recipients may actually be less responsive to drought conditions, as financial assistance increases funds available to spend on variable inputs, allowing farmers to maintain production at levels higher than that justified by the climatic conditions, with consequent environmental impacts;
  • there can be disincentives to diversify income to off-farm sources, as there are caps on off-farm income that could be earned and still be eligible for the subsidy;
  • interest rate subsidies provide a competitive advantage to recipient farmers over non‑recipient farmers; and
  • interest rate subsidies can distort the market for agricultural land by propping up land values, reducing the ability of viable farmers to expand and new farmers to enter the sector (Department of Agriculture, Fisheries and Forestry, 2012; Productivity Commission, 2009).

The Productivity Commission also found that there was little rationale for government intervention in relation to debt, as viable farm businesses had continuing access to credit.

While the previous Government abolished the Exceptional Circumstance Interest Rate Subsidy, it replaced it with a concessional loan scheme. This scheme is likely to produce similar perverse incentives as the interest rate subsidy.

Farming is often a capital intensive business, however this is also the case in other sectors such as manufacturing. Firms in these sectors need to put in place financial and business structures to allow them to manage and respond to fluctuations in trading conditions and longer-term structural shifts in competitiveness. Maintaining interest rate and debt support for farmers is inconsistent with the treatment of non-farm sectors.

Potential areas for reform

The Commission recommends abolishing the Farm Finance Concessional Loans Scheme. The Scheme encourages farms to take on more debt, when there is little evidence to suggest that farm businesses that are viable over the longer term have difficulty accessing commercial finance.

This is consistent with the Commission’s recommendations to cease providing other government loan facilities and financial assistance, such as that provided to exporters (through the Export Finance and Insurance Corporation) and renewable energy companies (through the Clean Energy Finance Corporation).

Beyond the Farm Finance Concessional Loans Scheme, the Commission has not undertaken a full reassessment of drought support which would involve a comprehensive look at farm assistance through the tax system and outlays.

However, the guiding principle in drought policy should be to ensure that farmers face incentives to prepare for drought and other climatic and economic conditions. Weather variations are a normal part of farming and should be incorporated into risk management practices. There may be opportunities to further consolidate drought and farm programmes.

References

Department of Agriculture 2013, Farm Management Deposits, Canberra.

Department of Agriculture, Fisheries and Forestry 2012, Summary of Findings on the EC Interest Rate Subsidy of Previous Drought Policy Reviews, Canberra.

Productivity Commission 2009, Government Drought Support, Report no. 46, Final Inquiry Report, Melbourne.