8.5 Drought assistance

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 resulting in severe downturn in farm income over a prolonged period.

As well as income support, eligible farmers were able to access interest rate subsidies from the Commonwealth. 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.

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.

A new assistance arrangement — the Farm Household Allowance — is scheduled to commence on 1 July 2014 to replace the existing Exceptional Circumstance scheme. 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.

Continuation of drought assistance can discourage drought preparedness and self-reliance. Extending assistance to all situations creating financial hardship may exacerbate this problem.

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.

Previous programmes involving interest rate subsidies were abolished and have been replaced by concessional loans. Tax concessions also available to farmers include measures to manage income variability such as income averaging and the Farm Management Deposit scheme.

The Commission recommends abolishing the concessional loan 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.

Beyond this programme, 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.

Recommendation 37: Drought assistance

The Commonwealth provides significant assistance to farmers through various drought assistance and farm finance initiatives. The new Farm Household Allowance scheme scheduled to begin in mid 2014 will exist alongside a concessional loan scheme for farmers. The Commission recommends that the Farm Finance Concessional Loans Scheme be abolished.