Dry Paddocks, Damp Policies: Drought Assistance Strategies and their Effectiveness


Research Paper 6 1995-96

Alan Burdon
Economics, Commerce and Industrial Relations Group
11 September 1995

Abbreviations

ABARE

Australian Bureau of Agricultural and Resource Economics

NDCC

National Drought Consultative Committee

NDP

National Drought Policy

NDRA

National Disaster Relief Arrangements

NFF

National Farmers' Federation

RAS

Rural Adjustment Scheme

SOI

Southern Oscillation Index

Contents

Major Issues 1. Introduction
1.1 Purpose of this Paper
1.2 Related Parliamentary Research Service Papers
2. Extreme Drought and Role of Governments
2.1 Definition of Drought
2.2 Major Droughts in Australia
2.3 Physical Causes of Drought
2.4 Commonwealth and State Government Drought Assistance under Natural Disaster Relief Arrangements
2.5 Removal of Drought from Natural Disaster Relief Arrangements
2.6 Drought Policy Review Task Force
2.7 National Drought Policy
2.8 Overseas Experience
3. Development of Current Drought and Response by Governments
3.1 Lead up to Drought
3.2 Structure of Australian Broadacre Farming Sector
3.3 Development of Current Drought
3.4 Production Losses due to Drought
3.5 Farm Incomes
3.6 Commonwealth Assistance for Drought-Affected Farmers
3.7 Commonwealth Drought Assistance Packages
3.8 State Government Assistance
3.9 Role of the Financial Sector
3.10 Community Assistance
4. Effectiveness of Drought Assistance Measures
4.1 Objectives of Commonwealth Drought Assistance
4.2 Is the Current Drought Extreme?
4.3 Will Farmers be Forced off the Land?
4.4 Preservation of Breeding Stock
4.5 'Ad Hoc' or Developed Relief Measures?
4.6 Do Assistance Measures Conform with the National Drought Policy?
4.7 Transaction-Based Subsidies
4.8 Determination of 'Exceptional Drought Circumstances'
4.9 Financial Incentives for Farmers to Prepare for Drought
4.1 Restructuring of Marginal Agricultural Regions
5. Preparing for the Next Drought
5.1 Future Drought Assistance
5.2 Need to Improve Financial Position of Farmers
5.3 Other Issues to be Addressed
Table 1. Australian Wheat Production and Exports: 1986-91 to 1994-95
Table 2. Broadacre Farm Average Cash Incomes: 1992-93 to 1994-95
Table 3. Broadacre Farm Average Business Profit: 1992-93 to 1994-95
Table 4. Commonwealth Funding Commitments for Drought Assistance: 1991-1995
Figure 1. Principal Commonwealth Drought Assistance Measures
Figure 2. Australian Wheat Production and Exports: 1986-91 to 1994-95
Figure 3. Broadacre Farm Average Cash Incomes: 1992-93 to 1994-95
Figure 4. Broadacre Farm Business Profit: 1992-93 to 1994-95
Endnotes
Appendix A. National Drought Policy
Appendix B. Chronology of Commonwealth Drought Assistance Since 1971
Appendix C. Drought Exceptional Circumstances

Major Issues

Drought is a recurring feature of Australian agriculture and the severe drought in eastern Australia which began in 1991 is the latest in a succession of nine major droughts identified by the Bureau of Meteorology since records began in the 1860s. The description of the current drought as the 'worst ever' in some quarters is debatable, but this question is really of little relevance given the different pattern and impact of each drought and the different circumstances of the rural economy at the time.

Widespread and generally substantial falls of rain in most agricultural areas of south eastern Australia during April and May 1995 are the strongest indications yet that this severe drought might be near an end, at least in the climatic sense. While those regions which have been affected by drought will take some years to restore their physical and financial situation, the political and emotional pressures arising from the drought are set to ease substantially.

With parts of central and southern Qld as well as northern NSW having experienced drought conditions for more than four years there have been frequent vivid media portrayals of the harsh physical impact of the drought and the considerable personal hardship it has brought to people living in affected areas.

While the present drought has not been as significant a feature of the national economic landscape as that of the early 1980s it is nevertheless estimated to have reduced growth in GDP during 1994-95 by 0.8 per cent. In total the drought has caused losses to the Australian economy estimated at $5 billion, resulted in around 23 000 fewer jobs than would otherwise have been the case and caused a significant reduction in export income. Further, there has been a significant additional 'cost' of at least $700 million stemming from the assistance committed by the Commonwealth and State Governments over the course of the drought as well as substantial contributions from the general public.

As with previous droughts there are lessons to be learned and hard questions to be faced about the long term economic and environmental impact of drought policies so that farmers and rural communities can be better prepared to face the inevitable next drought. In the national interest, the effects of drought on rural businesses, regional economies and the national economy should be minimised. As the present drought would appear to be entering its recovery phase it is timely that the Commonwealth and State Governments review the effectiveness of drought relief policies free of the pressures of providing immediate relief to farm families. No matter how economically sound drought policies are, however, it must nevertheless be recognised as a political fact of life that at some stage severe droughts are going to cost governments large amounts of money to alleviate hardship and support those farming communities affected. No matter what management strategies are employed, farms cannot be totally insulated from major droughts.

Drought relief policies have been a difficult and contentious area particularly since the Commonwealth Government's sudden decision in 1989 to remove drought relief from the Natural Disaster Relief Arrangements. Subsequently the Commonwealth and the States agreed on a National Drought Policy (NDP) based on the principle that drought was a recurrent natural event. The objectives of the policy are to encourage the agricultural sector to adopt a self-reliant approach to managing for drought, to maintain and protect Australia's agricultural and environmental resource base during severe drought and to ensure early recovery of agricultural and rural industries, consistent with long-term sustainability. The current drought is the first test of the effectiveness of this new 'risk-management' approach which reflects the economically rationalist ideology favoured by governments in recent years.

While drought preparedness and self-reliance are certainly worthwhile long-term objectives for farmers and should be encouraged by governments, the practical situation is that during extended drought farmers need cash to support the farm business and maintain the farm household. For many farmers, the current drought occurred at the end of a rural downturn with cash reserves depleted by low commodity prices and events such as the collapse of the wool market. Other farmers who had borrowed heavily faced substantial interest payments. Despite the excellent wheat harvest in 1993-94 the agricultural sector was, in general, in poor financial shape to cope with the extended drought which compounded many farmers' financial problems particularly those who were barely viable under favourable seasonal conditions. At end June 1993, total farm debt was $17.3 billion which represented a 48 per cent increase (in nominal terms) from the $11.7 billion owed in 1988.

Since 1989, the main instrument for the delivery of drought assistance has been the exceptional circumstances provisions of the Rural Adjustment Scheme (RAS) which also cover other situations considered beyond the farmer's control such as disease outbreaks. The RAS is, however, essentially a structural adjustment program aimed at assisting individual farmers with sound long-term prospects to return to profitability rather than a welfare scheme. The use of the RAS to alleviate personal hardship has not been without problems.

In times of financial hardship, many farmers have been precluded from access to the welfare and social security assistance available to other sectors of the populace due to their asset base. As the drought developed and its scale increased the Commonwealth Government progressively eased conditions for access to welfare benefits particularly through the introduction in September 1994 of drought relief payments for farm families which were provided through social security arrangements.

The Commonwealth Government's initial response to the provision of drought was to provide incremental funding through the RAS on a case by case basis as requests from Qld and NSW were considered. By mid 1994 the scale of the drought and pressures were such that a need arose for more comprehensive drought packages which were announced, belatedly in the view of several commentators, in September and December 1994. The packages committed a total of $276 million. By mid May 1995, over 10 000 farm families had been approved for Commonwealth drought relief payments announced in the September 1994 package. For the financial year 1994-95 to mid May, about 3800 farmers had been approved for drought exceptional circumstances under the RAS. By May 1995, the Commonwealth Government had committed over $560 million in drought assistance since 1991.

The governments of NSW and Qld also introduced a range of schemes to supplement Commonwealth assistance. The drought situation and coordination of assistance have also been addressed by Commonwealth and State Ministers responsible for agriculture through the Agriculture and Resource Management Council of Australia and New Zealand which held a special meeting for this purpose in September 1994. There was also considerable concern by the general community for the hardships being faced by farmers and besides direct initiatives to supply food and fodder to rural communities, over $9 million, which was matched by the Commonwealth Government, was donated to the Farmhand Appeal.

At the time the NDP was agreed in August 1992, large areas of NSW and Qld were already affected by drought and these States have subsequently continued to provide transaction-based subsidies for the transport of fodder, stock and water. Such subsidies have been strongly criticised as encouraging an assistance mentality and 'compensation-based' farming as well as encouraging overstocking.

Several of the regions worst affected by the current drought are those marginal agricultural regions such as the Western Division of NSW and South West Qld where dry conditions would appear to be the norm rather than the exception. Drought is, however, not the only contributor to hardship in these and other areas where it is now recognised that closer settlement schemes earlier this century have resulted in many farm enterprises being too small to be economically viable. Other factors include severe land degradation, low profitability and high debt levels. An expectation that government assistance will always be forthcoming whenever dry conditions occur would hinder the structural adjustment necessary. A clear need exists for the development of regional adjustment strategies to achieve a sustainable agricultural industry in these areas. Substantial commitment of government funds appears inevitable if this objective is to be achieved. Clear principles and responsibilities should also be determined at the outset, otherwise a further layer of confusion could be added to an already complex and difficult situation.

While the response of the Commonwealth and State Governments to the current drought has not been without criticism as being ad hoc crisis management in response to media sensationalism, the Commonwealth Government has, nevertheless, preserved the general thrust of the NDP. There are, however, indications that the self-reliant approach has been compromised which could reinforce the perception of some farmers that, whatever their state of preparedness, governments will automatically bail them out during drought.

A particular problem which needs to be addressed is the declaration process defining 'exceptional drought circumstances' which is a necessary condition for farmers to access immediate Commonwealth drought relief measures. The definition of drought for agricultural purposes does not lend itself to an objective scientific definition and political and other pressures will inevitably intrude a large degree of subjectivity into the decision making process. A further difficulty is that the States use different processes and criteria for drought declarations. After over four years of drought conditions, the Commonwealth and State Governments are still grappling with this problem to which, bearing in mind the great diversity in agriculture and climate in Australia, there is probably no real answer.

A range of policies and programs is now in place to deal with the effects of the current drought. The degree to which farmers take up drought preparedness measures such as the taxation incentives announced by the Commonwealth Government in 1994 should also be closely monitored. The next step for governments is to address the important issues arising from the drought such as the long term sustainability of agriculture in those areas severely affected by the drought and the need for drought relief policies to be tailored to meet the different needs of sectors such as the livestock and the cropping sectors. In this context it could be useful to examine experience in South Africa which also has variable rainfall and severe droughts and has linked the provision of drought relief to specified maximum stock carrying capacities on individual properties.

There is a risk that budgetary pressures will influence governments to phase out drought expenditure as soon as the drought breaks and that other policy issues will overtake drought policy for government consideration. Realistically, drought policy can only be formulated in a political environment free of the immediate pressures of severe drought. The implementation of effective strategies to minimise the effects of future droughts will be a most difficult and costly exercise. A commitment from the Commonwealth and the States to an integrated and scientific approach to drought preparedness could achieve results but full cooperation between governments, farmers and rural communities and substantial funding will be essential factors.

1. Introduction

Despite good rainfall in April and May 1995, large areas of NSW and Qld are still suffering the effects of the prolonged and severe drought which began in 1991. This drought has caused large losses in agricultural production and considerable financial hardship to many farmers and rural businesses with consequent social problems in many rural areas. The extent and severity of the drought continue to have considerable effects on the national economy.

The Prime Minister has been among those who have recognised the acute human and social problems faced by farmers and communities in the worst affected areas:

What this long drought has put at risk is the future of the family farms which sustain and in large part define the bush. There is an element of our culture at stake here, a way of life, as well as a vital part of our economy.

He added that this drought has also highlighted an awareness of the need for sustainable agriculture:

It might be that another generation will look back on this drought and say that it was a turning point. That it was the drought which made us aware of the need to renovate and restore the land, to use it sensibly and sustainably-that this was the moment when rural industry and the environment got onto the same track.(1)

The response of the Commonwealth Government to the current drought has been significantly different from its response to previous droughts. Following the severe drought of 1981-82, a number of major initiatives were taken by the Commonwealth Government to attempt to mitigate the effects of subsequent droughts. Important changes to the approach to drought relief included consideration of drought as a recurrent natural event rather than a 'disaster'. Commonwealth assistance was targeted to those particular farmers in financial distress rather than to whole sectors of the agricultural industry through subsidies on purchases of fodder and transport of stock, fodder and water. Commonwealth support for the farm business, as against the farm household, is now predominantly in the form of interest subsidies on loans provided by the financial sector. This measure was first introduced during the 1982-83 drought.

In August 1992, when the present drought was in its early stages, a NDP was agreed by the Commonwealth and States.(2) Shortly afterwards, the RAS, which had been nominated as the main instrument for the delivery of Commonwealth drought assistance, was extensively refocussed towards productivity improvement, sustainability and self-reliance. There was also a separation of assistance aimed essentially at supporting the farm business from welfare measures aimed at meeting the day-to-day living expenses of the farm family.

As the drought spread and intensified, pressure on governments from farmers, rural industry bodies and community groups for additional relief measures increased accordingly. In response to these pressures, a number of significant changes and additions were made to the drought assistance measures originally in place. These included changes to the definition of exceptional drought circumstances to enable farmers(3) to access drought relief payments for farm households and obtain additional support through the RAS for the farm business.

1.1 Purpose of this Paper

The current drought which began in 1991 was the first test of the effectiveness of the new strategies for drought relief under extreme drought conditions. It would be useful for future drought policy formulation to examine the reasons why, shortly after strategies were put into place, changes in drought policies occurred, their effectiveness in preserving agricultural industry in drought affected regions, their effectiveness in alleviating hardship to farming families and their role in ensuring a strong recovery at the end of the drought.

This paper outlines:

the occurrence of major droughts in Australia

Commonwealth Government drought assistance policies; and

the development of the current drought and response by governments.

It discusses:

the adequacy and effectiveness of drought relief policies; and

what experience can be gained from the current drought.

The paper provides background to the response of governments to the current drought and draws together comments from agricultural leaders and economists. A number of serious problems and difficult questions which need to be addressed by the Commonwealth and State Governments are also canvassed.

The paper does not include any changes to the pattern of the current drought or policy developments occurring after May 1995.

1.2 Related Parliamentary Research Service Papers

A major objective of drought policies is the maintenance of sustainable agriculture through proper natural resource management. The community-based Landcare movement could make a considerable contribution to this objective. Important policy issues relating to Landcare were examined in a recent Parliamentary Research Service paper by Baden Williams, Landcare and the Mythical Money Tree.(4)

Social issues are covered in a recent Parliamentary Research Service Background Paper by Margot McGinness, Social Issues for Rural and Remote Australia(5). The linkages between the agriculture sector and regional economies and issues on farm adjustment are addressed in forthcoming Parliamentary Research Service papers by Richard Stayner of the Rural Development Centre.

2. Extreme Drought and Role of Governments

Extreme climate variability is a characteristic of Australian agriculture. Australia is the driest inhabited continent and periodic severe droughts threaten both the financial and the environmental sustainability of its agricultural sector. At the turn of this century, Australia was in the grip of one of the worst droughts ever recorded. Since then six further major droughts have occurred including the current drought.

When the severe drought which affected much of eastern Australia during the early 1980s broke in the autumn of 1983, it could have been expected that many lessons would have been learned from this drought and earlier droughts. In particular, it might have been expected that more effective policy measures would have been developed to increase drought preparedness and to ensure better targeted and more efficient relief measures. Observers commented at the time that:

If Australia doesn't plan now for the next drought, it could be as crippling as the last one.(6)

Attention was also drawn to the criticisms of the drought policies applying at that time pointing out:

  • the ad hoc nature of the policies
  • the high costs of administering Commonwealth drought relief; and
  • the way drought policies discriminated against farm managers who prepared for dry times.

This section briefly outlines the history of major droughts in Australia and the development of Commonwealth Government assistance policies and programs to provide some perspective to the current drought and the response by governments.

2.1 Definition of Drought

A wide range of views and perceptions exist about drought from individual, industry and national viewpoints. From a meteorological viewpoint drought relates to a deficiency in rainfall. The Bureau of Meteorology identifies a serious deficiency when, for a period of three months or more, rainfall falls within the lowest ten per cent of all previous totals for the same period of the year. A severe deficiency occurs when the rainfall for the period is within the lowest five per cent of previous totals for that period. Other concepts of drought were examined and attempts at an objective definition were reviewed extensively by the Commonwealth Government's Drought Policy Review Task Force (the Task Force) established in 1990.(7)

The Task Force considered that the main factor that sets drought apart from the concept of aridity, or normal variations in rainfall, is that those areas considered to be affected by drought are being used for commercial or social purposes that depend upon certain levels of rainfall. In the agricultural context, the adequacy or otherwise of rainfall depends upon:

  • the condition of the land at the time
  • the adequacy of pasture and crop responses to that rain; and
  • the type of agricultural activity being undertaken.

Drought referred to as agricultural drought therefore occurs whenever seasonal conditions are unable to support existing agricultural activity over an extended period, either due to the degree of climatic variability experienced or to the particular agricultural activity involved. What may be drought in one area or on one property is not necessarily drought in other areas or on other properties. As an example of different agricultural activities, the immediate impact of drought is generally more severe on crop production than on livestock production, but it can take up to five years for livestock industries to recover from the drought, while recovery in the cropping sectors is much quicker.(8)

While maintaining that an objective and scientific definition of drought is not central to a proper understanding of the concept of drought, from either a farm management or government policy perspective, the Task Force nevertheless adopted the following working definition of drought:

drought represents the risk that existing agricultural activity may not be sustainable, given spatial and temporal variations in rainfall and other climatic conditions.

This definition of drought and indeed the whole concept of 'agricultural drought' begs the question, however, as to whether the existing agricultural activity in a region is, in fact, appropriate for that particular region and therefore whether those particular agricultural activities should ever have been established. There are increasing concerns that some agricultural activities in low rainfall areas are not sustainable and supporting those activities through drought assistance will lead to further environmental degradation.

The Task Force also recognised that no two droughts are the same and that while it is not possible objectively or scientifically to define lesser and extreme droughts, if seasonal conditions deteriorate for extended periods, the risks involved may increase beyond the capacity of individual producers to address on a normal commercial basis and government assistance may be warranted.

As well as the physical effects of drought, its impact on farm businesses has been referred to as a financial drought. Drought causes marked reductions in farm cash operating surpluses available for consumption or investment purposes which can increase the financial vulnerability of farms to later declines in commodity prices. At the national level it has been estimated that for the period 1949-50 to 1977-78, climate variability was responsible for some 39 per cent of total variation in farm income.(9)

The pattern of the current drought and the resulting financial stress on individual farmers have been described quite graphically by a farmer from Walcha in northern NSW:

This drought is different because it's been a culmination of years of dry, patchy weather-mini droughts, I suppose you'd call them. And then we've gone into this one in '94 which has been a rip-roarer. It's a combination of dry periods where people have delved into their reserves so much that the banks say, listen, no more, you're at the limit of your overdraft. So that's all gone, the water's all gone-and the whole thing just snowballs.(10)

2.2 Major Droughts in Australia

The Bureau of Meteorology has identified nine major droughts in Australia since the keeping of records began in the 1860s not including the current drought. There have also been six other droughts of lesser severity but nevertheless causing appreciable losses in large areas of several States. The Bureau has listed the nine major droughts and commented on their consequences:

1864-66

All States affected except Tasmania.

1880-86

Southern and eastern mainland States affected.

1888

All States affected except Western Australia.

1895-1903

One of the worst droughts to date with practically the whole of Australia affected. Sheep numbers (then more than 100 million) were halved, and cattle numbers cut by more than forty per cent.

1911-16

Wheat crops affected in most States, sheep numbers declined by 19 million and cattle by two million.

1918-20

Parts of WA were the only areas completely free from drought.

1939-45

Prolonged drought that affected crops and/or pastoral areas in all States. Sheep numbers fell from 125 million in 1942 to 96 million in 1945.

1958-68

A major drought period, second only to 1895-1903 drought in severity. The latter two years resulted in a forty per cent drop in the wheat harvest, a loss of 20 million sheep and a decrease in farm income of $300-500 million.

1982-83

Extensive drought affecting nearly all of eastern Australia, particularly severe in south east Australia. Several areas recorded lowest ever rainfalls, total losses estimated in excess of $3000 million.(11)

The incidence of droughts was examined in 1983 as part of the report Water 2000: A Perspective for Australia's Water Resources to the Year 2000 which states that in every one hundred years:

  • twenty one years are likely to be free of major droughts
  • sixty two years will be marked by drought which covers an area of less than twenty per cent of the continent
  • fifteen years will be marked by drought over twenty per cent but less than forty-fifty per cent of the continent; and
  • two years will be marked by widespread drought which covers more than forty-fifty per cent of the continent.(12)

Considering the incidence of drought on a State basis, NSW Agriculture has examined the twenty three years from 1972 to 1994 inclusive based on monthly drought declarations by the Department. There were no full years during which the State was entirely free of drought declarations and only three years during which the State could have been considered as essentially 'drought-free' with only small areas of the State drought declared for part of the year. In the north-west, winters have seen drought declarations in around twelve of the twenty three years while the south of the State has fared well with few summer drought declarations.(13)

The above analysis raises some questions about the validity of the process of drought declaration within NSW which is initiated by an application to the State Government from the local Pastures Protection Board. Standing arrangements for drought relief in NSW such as subsidies for the transport of stock, fodder and water come into operation immediately following the declaration of drought. A risk thus exists that the availability of assistance under these procedures could encourage the declaration of drought and discourage its revocation. There is little encouragement to livestock producers to reduce stocking levels and conserve pasture when overgrazing might serve to bring forward a drought declaration.

Criteria for the declaration and revocation of droughts differ significantly between States. For example, South Australia has not formally declared 'drought' for over ten years in contrast to the practice in NSW and Qld. This situation gives rise to anomalies between States for the same farm activities. Similar anomalies between declared regions and other areas arise within States. The Task Force agreed that it can be argued that each system reflects the unique climatic, regional and industry requirements of each State but the different systems and criteria create a fundamental difficulty in using State declaration procedures as a basis for Commonwealth support.

The above difficulties were recognised by Commonwealth and State Ministers responsible for agriculture and in October 1994 the Agriculture and Resource Management Council of Australia and New Zealand agreed to a harmonised, rather than uniform, system of drought declaration as a basis for an application for Commonwealth support. States may continue to make their own drought declarations to activate their own procedures and policies.

2.3 Physical Causes of Drought

In recent years a greater understanding of the physical causes of droughts has arisen as scientific knowledge of the various interactions of climate factors has increased. A major influence on our climate has been identified as what is referred to as the El Nino phenomenon which can be measured using an index known as the Southern Oscillation Index (SOI). Details of this climatic phenomenon are covered in a Parliamentary Research Service Research Note by Greg Baker published in March 1995.(14)

During an El Nino event the odds of eastern Australia receiving rainfall in the lowest thirty per cent have been calculated at about 6/4 on with odds for rainfall in the highest thirty per cent at 16/1 against. In 1982-83, the biggest El Nino of this century occurred and corresponded to the severe drought of 1982-83.(15)

The SOI has been strongly negative for much of the 1990s. In March 1995, however, the SOI was positive and the highest for more than four years giving hope that the drought was coming to a close. Although the SOI again turned negative in April 1995 other indicators such as ocean temperature patterns across the Pacific are returning to normal.

The effect of climate on the financial performance of individual farm enterprises has been examined by the Qld Department of Primary Industry. Studies suggest that in the northern grain belt, over a ten-year period, 78 per cent of the total profit from growing wheat is derived from the best three years and the worst three years run at a loss. The Department has related rainfall variability associated with the SOI to wheat and sorghum yields in north-eastern Australia. Yields tend to be higher or lower depending on whether the SOI is consistently positive or negative through late autumn. Farmers could thus gain some advantage by adjusting their inputs in response to a seasonal forecast. A simulation model has indicated that, on average, profit increased when the rate at which nitrogen fertiliser is applied follows such a strategy.(16)

2.4 Commonwealth and State Government Drought Assistance under Natural Disaster Relief Arrangements

There is a long history of government involvement in the provision of emergency relief in severe droughts. Campbell points out that as long ago as April 1866, after widespread drought, Henry Parkes, then Colonial Secretary of NSW, journeyed to the colony's southern districts, inter alia,

to entertain applications from the agricultural poor for a loan of seed wheat to enable them to crop their lands for the coming season.(17)

Under the Constitution, the Commonwealth has no specific powers on drought relief or natural disaster relief which consequently remain a function of the States. Under section 96 of the Constitution, however, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit and usually the conditions for Commonwealth assistance are jointly agreed by the Commonwealth and the relevant States.

After Federation, State emergency aid was supplemented with Commonwealth assistance. From 1960 to 1970, the Commonwealth Government matched State government expenditure for disaster relief including drought on a dollar for dollar basis for the relief of personal distress and hardship and the restoration of public assets to their pre-disaster condition. There were exceptions to this policy such as in 1965-66 when the Commonwealth met all expenditures by the NSW and Qld Governments on agreed measures to mitigate the effects of drought. This was done because no assistance in the form of grants for personal distress and hardship was available. Had such assistance been given then presumably the Commonwealth Government would have given aid on a matching dollar-for-dollar basis.(18)

Figure 1: Principal Commonwealth Drought Assistance Measures

From 1971 until 1 July 1989, Commonwealth drought assistance was provided under the Natural Disaster Relief Arrangements (NDRA) and each State developed its own drought assistance policies, generally within the context of the NDRA. Under NDRA, the States initially fund assistance measures and then seek reimbursement from the Commonwealth. The amount of Commonwealth payments to the States is based on a formula which, with the exception of personal hardship and distress, reflects the States financial capacity to absorb the costs of disasters. States meet all costs up to a threshold after which the Commonwealth meets an increasing proportion of total costs as they increase. These arrangements minimise Commonwealth involvement in relatively minor disasters whilst heavily involving the Commonwealth in assistance for major disasters, relief for which would be beyond the resources of the States.

Drought relief payments under the NDRA were substantial. From 1973-74 through to 1981-82, the Commonwealth Government provided $152.2 million in drought assistance and between $50 million and $100 million was provided from State treasuries.(19) A further $340 million was provided by the Commonwealth during 1982-84 covering the severe drought of 1982-83 which included payments under the Drought Relief Fodder Subsidy Scheme and the Drought Relief Interest Subsidy Scheme. The core measures of assistance included concessional loans to farmers unable to obtain funds from commercial sources, freight subsidies and subsidies for livestock slaughter. In the 1982-83 drought, purchased fodder and interest rate subsidies were introduced.

Apart from the specific drought relief measures under NDRA, the fact that drought relief was provided under this program reinforced the concept that drought was essentially a natural disaster rather than one of a number of risks and uncertainties which characterise agriculture and need to be managed accordingly.

Towards the end of the 1982-83 drought, the Commonwealth and State Governments through the [then] Australian Agricultural Council initiated an examination of drought policy based on recent experience. A report prepared by a Commonwealth/State working group of officials on government policies for drought was subsequently released in 1983. The report recommended against the use of practically every drought policy measure employed in the preceding years recommending that only concessional finance for carry-on, restocking or restoration purposes be retained. The report also recommended that the Drought Relief Fodder Subsidy Scheme and the Drought Relief Interest Subsidy Scheme should not be reintroduced in future droughts.(20) This report which argued against the 'sacred cows' of fodder, water and stock freight subsidies and rebates was described at the time as 'having stunned most rural producer organisations'.(21)

The above working group also recommended that a representative group be formed to continue its work and the Commonwealth established the National Drought Consultative Committee (NDCC) through the Australian Agricultural Council to continue the review of drought policy. A Commonwealth proposal that drought carry-on loans should be provided through the RAS met with considerable resistance from the States and the National Farmers' Federation (NFF) representatives on the NDCC and in 1985 the Australian Agricultural Council endorsed the continuation of drought carry-on loans within NDRA.(22)

Drought policy then disappeared from the agenda of the Australian Agricultural Council until July 1988 when a report from a working party which examined the effects of drought assistance measures and policies on land degradation drew the following conclusions:

  • there was considerable discrepancy between the frequency of drought declarations in various areas and the occurrence of rainfall deficiencies
  • drought assistance was being provided to counter production deficiencies caused by meteorological and other factors; and
  • most forms of assistance offered are primarily for welfare or carry-on purposes, and most have negative effects on land resource conservation or drought preparedness and on management generally.(23)

The Council noted the report and agreed to seek comment from interested parties.

At the time of the establishment of the NDCC, the Primary Industry Survey commented that the review of drought policy 'promises to be one of the most contentious exercises in Australian agriculture for many years'.(24) The prediction that drought policy would be a contentious exercise was all too true and up to the present day drought policy continues to be the subject of considerable debate.

2.5 Removal of Drought from Natural Disaster Relief Arrangements

In April 1989, the Commonwealth Government announced its decision to remove drought unilaterally from the NDRA Scheme as of 1 July 1989. The Government stated at the time that alternative arrangements:

will focus on ensuring that future drought relief measures are consistent with the Commonwealth's rural adjustment and soil conservation management objectives. They will also emphasise a more equitable, efficient and environmentally responsible approach to the amelioration of the consequences of drought.(25)

The reason for this decision was recognition that the major failings of the drought relief mechanism under natural disaster arrangements were in the process for defining the occurrence of drought and the distribution of assistance payments. Many areas were drought declared for long periods. For example, in NSW, the Cobar Pasture Protection District was drought declared for forty four per cent of the period 1957-82.(26) In 1989, some shires in Qld had been either partially or completely drought declared seventy per cent of the time since 1964.

Senator Walsh, the then Minister for Finance, also claimed that abuses of the scheme had occurred in Qld which had received $48.2 million, that is ninety two per cent of the total of $52.5 million of national drought assistance outlaid by the Commonwealth under NDRA over the previous five years (1984-88).(27)

The reaction of the States, farmers and rural institutions to the removal of drought from the NDRA was mostly critical. While recognising that the onset of drought was more progressive and that the 'event' may last longer than other natural disasters, Gary Goucher of the NFF claimed that a sound argument could be made for providing assistance for droughts which are of extraordinary severity. Goucher recognised, however, the problems resulting from the drought declaration process:

It is reasonable to conclude that if drought is a regularly recurring event in a certain area, it is less likely to give rise to the personal stress and extraordinary economic disruption at which disaster is aimed. If drought assistance is judged to be too readily available in some areas then the fault lies with the failure of the declaration process to take account of the frequency and probability of drought.(28)

The removal of drought from NDRA did, however, provide an opportunity for the Commonwealth to formulate a more sensible agro-economically, environmentally and financially based drought policy. Concurrently, therefore, the Minister for Primary Industries and Energy, John Kerin, announced the establishment of an independent Task Force to review drought policies. The Task Force included representatives from the Commonwealth and State Governments and rural institutions as well as farmers and scientists and was required to seek submissions from interested parties. The Task Force was requested to provide a preliminary report by 30 June 1989 on interim arrangements for assistance.

2.6 Drought Policy Review Task Force

The terms of reference for the Drought Policy Review required that, in order to assist the Commonwealth Government in formulating equitable, efficient and environmentally responsible policy approaches for dealing with the effects of drought, the Task Force:

  • identify policy options to encourage primary producers and other segments of rural Australia to adopt self reliant approaches to the management of drought; and
  • consider the integration of drought policy with other relevant policies including structural adjustment, social welfare, land management, conservation of breeding stock and animal welfare.

In considering the outcome of the review, it is important to note that the Task Force essentially undertook a policy review which was a significant departure from many previous reviews of drought which adopted a more technical focus on the incidence of drought and the possible severity of its effects.

Among the total of eighty nine submissions received by the Task Force, that from the Grains Council of Australia stated, inter alia, that:

... changes in climatic conditions and the risk and uncertainty which accompany such changes are an inherent commercial reality of Australia's extensive farming ... . If farmers are to manage and survive these changes, they must learn to stand on their own two feet, without the prop of Government financial assistance. But, the Government does have a clear role to play in creating an environment, including fiscal incentives, which facilitate farmers adjusting to, and preparing for, drought.(29)

As an illustration of the divergent views of rural organisations on drought policy, the Grains Council policy was severely criticised by the NSW Farmers Association whose President described parts of the Council's policy on drought aid as 'drivel'.(30)

In its interim report released in July 1989, the Task Force recommended that carry-on funding for severe drought circumstances arising over the following twelve months be provided under the RAS. The Commonwealth Government accepted this recommendation which meant that Commonwealth subsidies would no longer be available for transport of fodder, stock and water and that drought assistance through interest subsidies would be targeted to those farmers suffering financial stress but with good prospects of longer term profitability.

The final report of the Drought Policy Review Task Force Managing for Drought was released in August 1990 and has provided the framework on which subsequent Commonwealth drought policies have been based. The report was comprehensive and contained fifty-eight recommendations which included the following:

  • against reinstatement of drought within NDRA
  • against establishment of any relief scheme for drought based on a natural disaster concept
  • Commonwealth and State governments should implement a NDP
  • a NDP should focus attention on the respective roles of producers and governments in implementing a self-reliant, risk management approach to drought
  • the provision of Commonwealth assistance under a NDP should be independent of State declaration procedures
  • against the provision of subsidies or rebates for purposes such as the purchase of fodder and the transport of fodder, stock and water under a NDP
  • income support needs of rural families in severe financial difficulties are appropriately addressed through the RAS; and
  • a review of income and other taxation arrangements for capital intensive industries such as agriculture be undertaken in a sustainable development context.(31)

The response of State governments and rural industry to the recommendations of the report was disappointing, in that most comment focussed on, and was critical of, the recommendations that drought should not be considered as a disaster and that subsidies for the purchase of fodder and the transport of fodder, livestock and water should be discontinued. Many of the other recommendations of the Task Force do not appear to have been seriously considered by the States and were not pursued by the Commonwealth with any vigour.

In May 1991, the Minister for Primary Industries and Energy, John Kerin, announced the Commonwealth's new drought policy which was based on the recommendations of the Drought Policy Review Task Force. The three key elements of the policy which replaced the interim arrangements in place since drought assistance was removed from NDRA were:

  • a fundamental recognition that drought is a natural, recurring feature of the Australian climate and one of the ongoing commercial risks of rural enterprise
  • financial assistance to farmers to be provided through the RAS. Emphasis would be placed on individual assessment of farms and targeted assistance based on this assessment; and
  • the new approach to drought management would be implemented through other Commonwealth policies and programs to ensure that farmers can make more informed and strategic responses to manage drought according to their particular circumstances.(32)

Land conservation policies and the Landcare program were nominated as two examples of existing frameworks within which drought management principles would be implemented.

In November 1991, the Senate initiated an inquiry into a NDP and appropriate government responses to the recommendations of the Drought Policy Review Task Force by its Standing Committee on Rural and Regional Affairs which issued its final report in July 1992. The Committee considered that drought should not be reinstated within NDRA as this would compromise the development of a self-reliant, risk management approach to drought. The Committee also recognised that drought is a recurring feature of Australia's climate that must be prepared for and managed.(33)

2.7 National Drought Policy

In August 1992, Commonwealth and State Ministers responsible for agriculture agreed a NDP (refer Appendix A) which was stated to be based on principles of sustainable development, risk management, productivity growth and structural adjustment in the farm sector. Drought was seen as a normal feature of Australian agriculture which should be treated as such. The primary source of Commonwealth funding during drought would be the RAS which would be revised to focus more sharply on sustainable long-term profitability at the farm level, based on structural adjustment and productivity growth. New measures were also foreshadowed to provide support for farmers unable to meet day-to-day living expenses.(34)

The objectives of the NDP are to:

  • encourage primary producers and other sections of rural Australia to adopt self-reliant approaches to managing for drought;
  • maintain and protect Australia's agricultural and environmental resource base during periods of extreme stress; and
  • ensure early recovery of agricultural and rural industries, consistent with long-term sustainable levels.

Under the NDP, farmers would have to assume greater responsibility for managing the risks arising from climatic variability. This would require the integration of financial and business management with production and resource management to ensure that the financial and physical resources of farm businesses are used efficiently. To assist risk management through income smoothing and the creation of financial reserves, the Commonwealth introduced an improved Income Equalisation Deposit scheme which included provision for a Farm Management Bond. Withdrawals from the Farm Management Bond can only be made without penalty in periods of hardship arising from circumstances such as drought and other natural events.

The RAS would be the vehicle for providing assistance to farmers in times of exceptional circumstances which encompass not only drought but also commodity price falls, disease outbreaks and other situations beyond the farmer's control. Provision of this assistance would depend on the degree of financial hardship of the farmer rather than drought per se and would be provided only to those with sound long-term prospects in farming. The RAS Advisory Council has described the circumstances under which assistance may be provided:

Where drought is unusually prolonged and severe and is beyond reasonable expectations regarding farm business planning and risk management strategies, the exceptional circumstances provisions of RAS may be invoked. Exceptional circumstances support will facilitate improvements in productivity, the provision of carry-on finance and debt reconstruction for those farmers with long-term profitability prospects.(35)

Under the exceptional circumstances provisions of the RAS, special interest subsidies of up to 100 per cent of the interest rate on commercial loans and/or existing debt may be provided jointly by the Commonwealth and the States.

The NDP allows for the States to provide drought assistance measures in addition to those adopted by the Commonwealth but these should not compromise the overall direction of the national policy. States may provide transaction-based subsidies at their sole discretion and expense as a transitional measure and agreement was reached that these type of subsidies be phased out as soon as possible.

Other new initiatives under the NDP included commitments to:

  • fund a communication strategy for the NDP which taps into the States' networks
  • fund education and training related to risk management and drought preparedness based on whole farm planning
  • support additional measures under Landcare
  • fund research and development for drought, including climate forecasting; and
  • ensure better co-ordination of research and development (R&D) on drought by the Resources R&D Corporation, the Rural Industries R&D Corporation and other R&D corporations.

There was a mixed reaction to the NDP from rural organisations. While the NDP was generally welcomed by the Grains Council of Australia as being based on principles regarded as being critical to a vibrant and efficient grains industry it was criticised by the NFF as not going far enough. The NFF President, Graham Blight, commented that there were two major problems with the approach and claimed that drought affected farmers were discriminated against compared with victims of flood and bushfires:

First, drought is treated differently to other natural disasters such as floods and bushfires, where more flexible assistance is available under NDRA. Second, to qualify for drought assistance under the RAS, farmers must be judged to have sound long term prospects in farming. This means those who do not fall into that category will not be eligible for drought assistance. That is discriminatory and inconsistent with the support provided to victims of floods and bushfires and the Government's commitment to social justice.(36)

A chronology of Commonwealth drought assistance measures since 1971 and announcements of relief measures for the current drought is at Appendix B. The principal drought relief measures are also illustrated in Figure 1.

2.8 Overseas Experience

Australia is not unique in experiencing severe droughts. There are direct climate and agricultural similarities between Australia, South Africa and parts of North America.

South Africa provides a particularly relevant comparison. Both South Africa and Australia have extensive grazing coupled with the world's most variable rainfall and severe droughts which can last for several years. Until new policies came into force in South Africa in 1990, payments for agricultural drought relief were high being more than A$1 billion for the financial years 1979-80 to 1988-89. Criticisms of the drought relief arrangements echoed those in Australia:

Periods of drought declaration were excessive (up to 70 per cent of the time over a thirty year period for some districts) and were more related to overstocking than to climate. The effects on land degradation were serious and relief assistance to the grazing sector could be interpreted as exacerbating the problem. One senior agricultural official commented that "drought relief was the main cause of veld [natural grassland pasture] erosion in South Africa".(37)

A basic principle of the revised policy arrangements in South Africa is that drought relief is only available when drought assumes disaster proportions and is linked to maximum carrying capacity. Drought declarations are based upon the recommendations of a local Drought District Committee submitted to the National Drought Committee in Pretoria. The main criteria for assessing drought are:

  • rainfall over the past three seasons
  • veld condition; and
  • condition of stock.

The main difference in policy compared with Australia, however, is that for a farm to be eligible for drought relief it must be registered as a 'conservation farm'. Such farms must adhere to the carrying capacity allocated to their land by ensuring that stock numbers remain below the carrying capacity at all times otherwise they are disqualified from the scheme for at least five years. Following declaration of drought by the National Drought Committee, stock numbers on conservation farms must be reduced to a nucleus herd comprising one-third of the approved carrying capacity of the farm within four months. During drought declaration, a monthly subsidy is paid for each allocated livestock unit together with additional assistance for finishing stock to be sold, extra fencing and the transport costs of fodder for the nucleus herd. Smith has commented that:

So far the scheme has worked successfully and the regulations have not been modified by appeals to the Minister or other political pressures. Criticisms are that the administration of the payments is relatively slow and a sense of disbelief by non-conservation farmers that they are not eligible for assistance.(38)

Although the introduction of such a scheme would be a most radical step for Australian farmers to contemplate, let alone accept, it should not be discarded as a policy option, particularly if the level of financial support were to be substantial and the only real alternative available to individual farmers would be to exit agriculture.

In the United States, federal aid is provided to farmers under disaster assistance and emergency crop loss programs under the 1990 farm bill when either planting is prevented or crop yields are abnormally low because of adverse weather and related conditions. Another avenue of support is crop insurance through the Federal Crop Insurance Corporation. Although crop insurance is available for a wide variety of crops, it is not always available in each location where a crop is grown. The disaster assistance programs are quite complex and the level of assistance varies between different crops.

3. Development of Current Drought and Response by Governments

The current drought dating from 1991 has been the first test of the effectiveness of the new strategies for drought relief. In addition, the drought relief measures announced by the Commonwealth for relief of the current drought represent a commitment of over $560 million to date. Adding expenditures by the States, there will have been a commitment of at least $700 million from governments by the time the drought breaks. This is a considerable expenditure of public funds which merits a close examination of the effectiveness of the various programs of drought relief, in particular their success in achieving the objectives of the drought strategies formulated after the drought of 1982-83.

This section outlines the development of the current drought and the response of the Commonwealth and State Governments and the community to the pressures to provide assistance to preserve farm businesses and relieve personal hardship.

3.1 Lead up to Drought

Following the severe drought of 1982-83, rainfall patterns in most agricultural regions were generally around or above average until the onset of drought in central and southern Qld and northern NSW in 1991. Australia was not, however, totally drought free during this time with several regions such as the Eyre Peninsula in SA and parts of Qld, Tasmania and the NT suffering severe rainfall deficiencies. While the impact of drought on individual farmers and the local economies of these particular regions was severe, the implications from a national perspective were relatively slight compared with the 1982-83 drought. This is illustrated by the expenditure by the Commonwealth of a total of some $60 million on drought relief under NDRA over the five years 1984-85 to 1988-89 compared with total expenditure of $341 million on drought relief over the two years 1982-83 to 1983-84.

It is important to note that prior to and during the initial period of the current drought, farm revenues had significantly declined such that many farmers were already under considerable financial stress at the onset of the drought as shown by the decline in farmers' terms of trade which is the ratio of prices received to prices paid. Terms of trade fell by 9 per cent in 1989-90 and 14 per cent in 1990-91 as a result of falls in commodity prices and the collapse of the wool market.(39) Those farmers who had borrowed heavily during the mid 1980s were in a particularly vulnerable financial position as a result of the rises in interest rates which subsequently occurred. The drought therefore compounded many farmers' financial problems particularly those who were barely financially viable under favourable seasonal conditions.

The financial problems of farmers in the broadacre(40) sector coming into the drought were illustrated by the Australian Bureau of Agricultural and Resource Economics (ABARE) which showed that in 1994-95, farms came into drought from a far worse financial position than they did in 1982-83. Using the measure of farm business profit which is defined as farm cash income plus buildup in trading stocks, less depreciation, less the imputed value of operator, partner and family labour, in 1982-83, broadacre farms averaged a profit of $18 000 in 1994-95 dollars whereas in 1993-94, broadacre farms averaged a loss of $4300. Moreover in 1981-82, average farm business profit had been positive for the previous four years whereas in 1993-94, broadacre farms had averaged a loss for the previous four years.(41)

3.2 Structure of Australian Broadacre Farming Sector

In examining the effects of the drought and the relief measures undertaken, it is helpful to be aware of the large variation in individual farm size and output. A survey and analysis by ABARE shows that in 1992-93, a relatively small number of broadacre farms produced a large proportion of total output:

  • One third of broadacre farms produced 70 per cent of the broadacre sector output. These farms were relatively large operations with positive rates of return on capital but high debt levels averaging $290 000 per farm leaving them more exposed to interest rate increases
  • A further 20 per cent of broadacre output is produced by the one third of broadacre farms of medium size, being about one quarter the size of the large farm group. Most of the medium sized farms appear to be operated as commercial enterprises although their incomes and rates of return on capital are relatively poor. Many of these medium sized farms could be struggling to earn sufficient income to meet debt commitments, capital investment and living expenses
  • The remaining one third of broadacre farms are the smaller farms which produce just 8 per cent of total broadacre output. These smaller farms are predominantly relatively small livestock producers and are mostly unprofitable when considered solely as agricultural enterprises. Non-farm income is relatively high and it is clear that non-farm income plays a substantial role in meeting living and even farm expenses.(42)

The results of the above survey and analysis by ABARE highlight both the diversity of the broadacre farming sector and the need for caution in the use of data averaged across the whole sector. There are large differences between different farming operations within the broadacre sector and the situation facing specialist crop producers and mixed crop and livestock producers is very different to that facing specialist livestock producers. For example a decision by grain producers as to whether to plant is an 'all or nothing' issue depending on the moisture level in the soil and the prospects of follow-up rain.

A prime aim of drought relief is to maintain the agricultural base by preserving those enterprises with good prospects of long term viability. Adjustment and drought relief policies should therefore be tailored to meet the different needs of the different groups in the broadacre farming sector. There could also be a case for specific drought relief policies to target those farm enterprises which supply the bulk of agricultural output.

3.3 Development of Current Drought

Although it is difficult to identify with any precision when a drought begins, the current drought began to affect southern Qld and northern and western NSW seriously in early 1991. By October 1991, the drought had extended so that forty shires and eight towns and cities in Qld, covering about two-thirds of the State, and 65 per cent of NSW were drought declared. Other regions seriously affected by severe drought in 1991-92 were the Kimberley region of WA and several districts of the NT.

As can happen during droughts, there was some easing of the situation in particular areas following rain. For example by April 1992, the drought declared area of NSW had dropped to 42 per cent of the State but by July 1992, the drought declared area had risen once again to 68 per cent of the State. In 1992-93, there was an improvement in seasonal conditions in much of the drought affected area of NSW and south east Qld but other regions of Qld remained in drought. The drought extended significantly in 1994 affecting most of NSW, much of Victoria, southern SA, the south and west of WA and north-eastern Tasmania. Through 1994, the drought steadily worsened such that by September 1994, about 83 per cent of NSW and 40 per cent of Qld were drought declared.

By December 1994, more than 5 000 farmers were receiving Commonwealth drought relief payments. The hardest hit areas included the Darling Downs in Qld and the wheat areas of northern NSW where many farmers have not produced worthwhile winter or summer crops since the onset of drought in 1991. Although good rainfalls have occurred in many drought-affected areas of Qld and NSW to date in 1995, large areas of Qld and two-thirds of NSW remained drought declared at end May 1995. By mid-May 1995 the number of farm families receiving Commonwealth drought relief payments had exceeded 10 000.

In February 1995, Commonwealth drought support was extended to farmers in several areas of the Eyre Peninsula in SA whose incomes had been severely affected by two consecutive years of drought. A further extension of drought assistance followed in May 1995 to Western Victoria and additional regions in NSW.

3.4 Production Losses due to Drought

Losses in production and exports due to the drought have been severe and have had a significant effect on the national economy. ABARE has estimated that for each one dollar decline in the net value of production in the farm sector, there is a decline in the non-farm sector of around fifty cents. ABARE has also forecast that economic growth in 1994-95 is likely to be around 0.8 percentage points or around $3.6 billion lower than would otherwise have been the case due to the adverse effect of the drought. In 1994-95, real gross farm product is forecast to fall by 25.2 per cent from the previous year which is comparable with the 1982-83 drought when farm output fell by 23.8 per cent. The 1982-83 drought occurred, however, in a period of weak non-farm sector activity, with national economic output falling by 2.5 per cent in 1982-83.(43) ABARE has also estimated that without the drought rural exports would have been $2 billion higher in 1994-95.(44)

The NFF has estimated a similar drop of about three quarters of one per cent of Australia's GDP. Overall the adverse effect of the drought on the Consumer Price Index could be an increase of around half of one per cent.(45) Drought has, however, conflicting effects on food prices. Using meat prices as an example, initially prices tend to fall as farmers sell stock to reduce their herds but then rise to reflect increases in the cost of fodder and then rise further as farmers restock at the end of the drought. The cost of drought thus tends to spread through the whole community.

There could also be a further loss of up to $2 billion in the non-farm economy, seriously affecting the capacity of the economy to reduce unemployment, especially in regional areas.(46) In this analysis the NFF used a multiplier effect closer to two. This figure is twice the multiplier used by ABARE and signifies a decline in the non-farm sector of at least one dollar for each dollar drop in farm production. Although quantifying the effects of the agricultural sector's reduced income on the general economy depends greatly on the multiplier effect assumed, there can be little doubt that the non-farm sector has also suffered from the effects of the drought.

The reduced rate of economic growth as a result of the drought also impacts on employment growth in the economy. ABARE estimates that employment in both the farm and non-farm sectors will be reduced by a total of around 23 000.(47)

The effects of the drought on wheat production are shown in Table 1 and Figure 2 which illustrate the drop in production in NSW and Qld due to the effects of drought. It is of interest to note that since 1991-92 wheat production in Qld has remained well below the average of 1.32 million tonnes (Mt) for the previous five years whereas wheat production in NSW recovered in 1992-93 and 1993-94. The amount of export wheat forecast for 1994-95 includes carry-over from the relatively high wheat crop of 1993-94.

When a severe drought is followed by favourable seasonal conditions, crop yields on land which has been fallowed for some time can be significantly above average. This can greatly assist farmers to recover financially as long as prices remain firm.

Table 1: Australian Wheat Production and Exports: 1986-91 to 1994-95

 

1986-91
(annual average)

1991-92

1992-93

1993-94

1994-95
(e)

Million tonnes

Million tonnes

Million tonnes

Million tonnes

Million tonnes

Australian Production

14.4

10.6

16.2

16.5

9.0

Australian Exports

12.0

7.1

10.3

13.8

6.8

NSW Production

4.1

2.2

4.2

5.1

0.8

Qld Production

1.3

0.3

0.7

0.6

0.2

Sources: ABARE, Commodity Statistical Bulletin, 1994; ABARE, Crop Report, No. 89, 6 June 1995; and Rees R, Cockinos A, Outlook for Wheat, Outlook 95, ABARE, Canberra: February 1995.

(e) estimate.

Figure 2: Australian Wheat Production and Exports: 1986-91 to 1994-95

Coarse grain production has also been severely affected by drought with Australian coarse grain production forecast to fall by 56 per cent to around 4.4 million tonnes in 1994-95. To

maintain feedgrain supplies to the Australian livestock industry, it has been estimated that between 500 000 and 1 000 000 tonnes of grain will need to be imported, most of which is expected to be grain sorghum and corn from North America.(48)

State government ministers and officials have commented on the value of lost production due to the drought. In evidence before the Senate Standing Committee inquiring into drought policy in early 1992, a Qld State Government officer commented:

if [the drought] goes on for another twelve months, the estimated value of loss of production in 1992 is $1 430 million. That is in addition to the $965 million that was lost in 1991.(49)

In October 1991, losses suffered in NSW were estimated by the State Minister for Agriculture at $645 million.(50) Subsequently the NSW and Qld Governments have estimated total losses due to the drought at some $5 billion.(51)

While estimates of the losses in farm production and their flow-on to other sectors of the rural economy are necessarily imprecise, there can be no doubt that the current drought following the rural downturn of the late 1980s has had a major impact on the regional economies of large parts of NSW and Qld. The loss in export income resulting from the drought also impacts adversely on Australia's balance of payments on current account.

3.5 Farm Incomes

Fortunately, outside the drought-affected areas, a noticeable recovery in the rural sector began in 1992-93. Excellent seasonal conditions in southern Australia and higher grain, beef, lamb and milk prices combined to lift average incomes. During the year, average farm cash income, which is cash receipts less cash costs, for broadacre agriculture rose by 25 per cent on the previous year. Wool prices, however, remained low and the average farm cash income for those 70 per cent of sheep industry farms with receipts of less than $100 000 was zero.(52)

There was again a general improvement in average farm incomes in 1993-94 with those for broadacre farms rising by 32 per cent over the previous year as a result of good seasonal conditions outside the drought areas. In NSW, wheat and other crop producers improved their average farm cash income by 61 per cent compared with the previous year.(53)

In 1994-95, however, average farm cash income for broadacre farms in NSW is forecast by ABARE to fall by around 56 per cent to $19 500 per farm, with some 26 per cent of farms expected to have negative farm cash income. The largest relative falls in income are expected in the wheat and other crops industry where average farm cash income is expected to fall from a surplus of $161 700 in 1993-94, when many farms had well above average crops, to a loss of around $8300 in 1994-95. Farm cash incomes in the livestock industries in NSW are expected to remain relatively unchanged in 1994-95. In Qld, average farm cash income for broadacre farms is expected to fall by around 15 per cent to $33 200 with some 26 per cent of farms expected to have negative farm cash income.(54)

Using average farm income figures obscures the relative positions of farms affected by drought compared with those unaffected. Those broadacre farms for which 1994-95 was their third successive year of drought recorded falls in average farm cash incomes of over 30 per cent between 1992-93 and 1993-94, and expect a further fall of 60 per cent in 1994-95. More than one third of the farms in this latter group are estimated to have recorded a negative cash income in each of the three years.(55)

Table 2 and Figure 3 illustrate the differences in farm cash income for broadacre farms affected and unaffected by drought.

Table 2: Broadacre Farm Average Cash Incomes: 1992-93 to 1994-95

Type of Farms

Per cent of farms

Farm Cash Income

1992-93

1993-94

1994-95

$

$

$

All Broadacre

100

30 328

40 150

33 800

Not in Drought

51

33 655

40 870

44 500

In Drought 1994-95

34

31 421

47 440

25 000

In Drought 1993-95

11

32 804

22 700

9 200

Source: Topp V, Martin P, Gooday J, and Parameswaren B., Farm Financial Performance -Outlook and Analysis, Proceedings of ABARE Outlook 95, Canberra, February 1995:307-328.

Figure 3 : Broadacre Farm Averages Cash Incomes

Examining profitability or farm business profit rather than farm cash income provides an indication of the general financial health of the broadacre sector. This sector comprises about 75 000 farms from the total 120 000 farms in Australia and accounted for 53 per cent of the value of farm production in 1994. Farm business profit is a measure of the gains to be made from farming after allowance has been made for:

  • the value of the labour input reported for each proprietor and family member
  • the notional rundown or depreciation in the value of plant and improvements; and
  • the value of the buildup or rundown in inventories of stock or produce held on farm over the year.

The financial performance of broadacre farms both affected and unaffected by drought in terms of farm business profit is shown in Table 3 and Figure 4. As can be clearly seen, those farms affected by two years of drought are suffering considerable financial stress.

Table 3: Broadacre Farm Average Business Profit: 1992-93 to 1994-95

Type of farms

Per cent of farms

Farm Business Profit

1992-93

1993-94

1994-95

 

 

$

$

$

All Broadacre

100

-16 308

-4 290

-13 000

Not in Drought

51

-8 406

+2 680

+3 100

In Drought 1994-95

34

-15 194

+3 130

-26 800

In Drought 1993-95

11

-38 627

-27 700

39 200

Source: Topp V, Martin P, Gooday J, and Parameswaren B., Farm Financial Performance -Outlook and Analysis, Proceedings of ABARE Outlook 95, Canberra, February 1995:307-328.

Figure 4: Broadacre Farm Business Profit

3.6 Commonwealth Assistance for Drought-Affected Farmers

Table 4 summarises the announcements of Commonwealth funding during the development of the drought. They are also listed in the chronology of Commonwealth drought assistance measures in Appendix B. The text which follows provides more detail on several of these initiatives.

The announcement by the Commonwealth Government in May 1991 that drought relief for farmers would now be provided under the RAS was followed by discussions with the States on the implementation of this decision. Subsequently, in September 1991 under the carry-on provisions of the RAS, the Commonwealth allocated funds of $4.3 million to Qld and $2.2 million to NSW to farmers affected by the developing drought and the rural downturn.

 Table 4: Specific Commonwealth Funding Commitments for Drought Assistance: 1991-1995

Date

Total commitment

Specific to NSW

Specific to Qld

Remarks

$m

$m

$m

Sept 1991

6 0

2.2

4.3

RAS carry-on

Sept 1992

14.0

7.0

7.0

Pilot drought scheme

March 1993

2.5

 

2.5

Pilot drought scheme

April 1993

11.0

1.0

5.0

$5m wool producers
$6m non-wool prod.

August 1993

1.8

 

1.8

training support for grain growers

Sept 1993

3.1

 

3.1

drought exceptional circumstances

Oct 1993

2.0

 

2.0

drought exceptional circumstances

Dec 1993

7.1

 

7.1

drought exceptional circumstances

August 1994

14.0

5.0

2.5

$5m training
$1.4m counselling etc.

Sept 1994

164.0
(over 2 years)

 

 

1st drought assistance package

Dec 1994

112.0
(over 4 years)

 

 

2nd drought assistance package

Feb 1995

11.3

 

 

Eyre Peninsula, SA

May 1995

40.3

33.0

 

about $6m to Victoria

Total

379.5

 

 

 

Source: Media Releases and RAS Annual Reports

At that time, the States were required to match Commonwealth funds on a dollar for dollar basis, but in view of the severity of the rural downturn and in recognition of the financial implications for the States of the transfer of drought relief from natural disaster arrangements to RAS, the Commonwealth agreed in October 1991 to increase its contributions to a two to one ratio. At the same time the Commonwealth announced measures to allow easier access to social security benefits for farmers facing extreme hardship.

In August 1992, Commonwealth and State Ministers responsible for agriculture agreed on a NDP. At the same time, in recognition of exceptional drought circumstances facing farmers in parts of NSW and Qld, the Commonwealth provided an additional $14 million under RAS within the NDP framework to be split equally between NSW and Qld. under the extreme drought measures contained within the NDP framework. The requirement for the States to match these funds was waived on the grounds that the States had already contributed significant funding for drought assistance.

The additional assistance from the Commonwealth was in the form of interest subsidies up to 75 per cent on new and existing farm debts, with a limit of $30 000 per farmer. The interest subsidies would be for 12 months and could be used for a wide range of activities including carry-on, restocking, restructuring of existing debt, productivity improvement and expenditure to prepare for future droughts. The Commonwealth urged the State governments to consider topping up the interest subsidy to 100 per cent. Qld subsequently topped up the maximum interest subsidy payable to 100 per cent while NSW topped up the maximum interest subsidy to 80 per cent.

In accordance with normal conditions for RAS assistance, the farm business would need to be assessed as profitable in the longer term and the farmer able to access commercial credit as well as being temporarily in severe financial difficulties. Following the announcement of major revisions to the RAS in September 1992, the drought assistance measures were referred to as the Pilot Drought Scheme. As the drought developed the Commonwealth made a series of additional allocations of funding to Qld and NSW to meet the needs of various farming sectors which included an allocation in April 1993 of $5 million specifically for drought affected wool producers.

3.7 Commonwealth Drought Assistance Packages

As the drought spread and intensified, pressure increased on the Commonwealth Government to extend the support measures in place through the RAS and the social welfare system and in September 1994, the Commonwealth announced a comprehensive drought assistance package. The measures in the package were aimed at families and communities experiencing exceptional circumstances in the worst drought areas. The

package was costed at $164 million over two years and was justified by the Prime Minister in national interest terms:

If only for the sake of fairness, we must take these measures. But it is also in the interests of the national economy to take them. It is in the interests of the long term sustainability of our rural industries. It is in the interests of the environment. It is in the interests of all Australians to take them.(56)

The key elements of the package were:

  • a Drought Relief Scheme to address the immediate cash flow needs of the worst affected families through a Drought Relief Payment up to a maximum of almost $400 per week, depending on family circumstances. Payments were to be subject to the income and off-farm assets tests which apply to the Job Search Allowance. Farm assets are, however, not subject to assessment. The Austudy farm assets test was also removed for all families in exceptional drought areas
  • Farm enterprise support through the allocation of an additional $74.25 million to RAS over 1994-95 and 1995-96, together with a commitment to fully fund all farm enterprises eligible for drought exceptional circumstances assistance. The maximum annual individual assistance limit on RAS interest payments was raised from $50 000 to $100 000 and the cumulative limit over five years was raised from $100 000 to $300 000. To assist farm enterprises to recover from the drought, applications for assistance could be accepted up to six months after the termination of the exceptional circumstances declaration. The requirement for farmers to sell all off-farm assets before being able to access the exceptional circumstances provisions was relaxed in recognition of situations whereby assets had been acquired by farmers to provide for their retirement. Investments in bona fide insurance and superannuation funds were therefore excluded from the assets test and an assets test of $163 500 would apply for other off-farm assets
  • provision of further resources for rural financial and social counselling in drought areas including increasing the number of Commonwealth funded rural and business counsellors to 140 [from 118]; and
  • provision of $10 million of Commonwealth funds to match the 'Farmhand' community appeal.

The Commonwealth also foreshadowed a range of measures to encourage the adoption of a self-reliant approach by providing incentives for farmers and rural communities to better protect the agricultural resource base during drought and encourage improved land use. These additional measures were announced in December 1994 in a package costed at more than $112 million over four years including:

  • an enhanced Farm Management Bond Scheme to encourage farmers to build cash reserves for downturns such as drought
  • taxation incentives through an investment allowance of 10 per cent for expenditures of up to $50 000 per taxpayer per annum until 2 000 on fodder and water storage for livestock, water conveyancing and minimum tillage equipment
  • additional funding of $10 million over two years for structural adjustment in drought-prone areas on a regional basis
  • additional funding for landcare projects and better linkages between landcare and labour market programs in drought areas; and
  • easing of eligibility conditions for JobSkills and JobStart programs in drought exceptional circumstances areas.

At the same time additional regions of NSW and Tasmania were declared as exceptional drought areas.

The taxation measures were originally intended to come into effect on 1 July 1995, but in response to representations from farming organisations, the Commonwealth subsequently brought them forward so that the drought investment allowance came into effect on 23 March 1995 and the Farm Management Bond arrangements from 7 April 1995.

These drought packages were generally well received by farmers and farm organisations. The main area of criticism related to the criteria for defining exceptional drought regions. As could be expected for any scheme of this type with eligibility dependent on inclusion in a defined geographical area, farmers on the border of exceptional drought regions were dissatisfied. Not surprisingly, those regions which considered themselves to be drought-affected and missed out on inclusion sought a revision of the criteria. Other criticisms of the package were that rural businesses and local government councils did not receive any direct assistance.

In February 1995, the Commonwealth Government agreed to provide exceptional circumstances drought assistance of up to $11.3 million to farmers in the Eyre Peninsula of SA whose incomes had been severely affected by two consecutive years of drought. At the same time the Commonwealth offered financial support to the SA and WA Governments to develop and implement regional adjustment strategies for the drought affected regions of the Eyre Peninsula of SA and the Gascoyne/Murchison region of WA.

In May 1995, the Commonwealth Government approved the extension of exceptional circumstances drought assistance to additional regions of NSW and the Wimmera area of Western Victoria at an estimated cost of $40.3 million.

The 1995 Budget provides $282.3m for assistance to farm families and rural communities affected by the current severe drought in 1995-96. These outlays allow for the continuation of drought related exceptional circumstances declarations through most existing areas until 31 December 1995. They do not make any allowances for any extension of declarations to other areas. This funding is to meet previous commitments. No new drought assistance programs were announced. Essentially, for 1995-96, $148.2m is being provided as assistance to farm households through social security and welfare arrangements and $134.1m is being provided to support farm enterprises and rural communities, mainly through the RAS.

From the announcement of the first drought relief package in September 1994 until May 1995, over 10 000 farm families have been approved for Commonwealth drought relief payments and $47.7 million has been paid. For the financial year 1994-95 to April 1995, about 3600 farmers have been approved for drought exceptional circumstances payments under the RAS at a total expenditure of $67.9 million of which the Commonwealth has contributed over $50 million.(57)

To summarise, the amount and type of Commonwealth financial assistance increased as the severity of the drought, its long duration, and the scale of its effects became apparent. The first payments were made in 1991 with relatively small amounts of carry-on finance under the provisions of the RAS. Since then, Commonwealth assistance measures have progressively increased to comprehensive assistance packages costing in the hundreds of millions of dollars. Senator Collins, the Minister for Primary Industries and Energy, stated in May 1995 that the Commonwealth has committed more than $560 million for drought assistance since 1991.(58)

Despite some disagreements on the amount and type of support, the Commonwealth and State Governments have generally taken a coordinated approach to drought relief. Apart from the normal bilateral consultation and cooperation between the Commonwealth and the States at ministerial and official level, the response of governments to the drought was considered on a formal basis at the regular meetings of Commonwealth and State Ministers responsible for agriculture.

As the severity of the drought increased, however, it became necessary for the Agriculture and Resource Management Council of Australia and New Zealand to hold a special meeting in September 1994 to review the drought situation and coordinate action. At this meeting the Council agreed to adopt a coordinated national approach to drought declarations and reaffirmed its support for the principles of the NDP adopted by the Commonwealth and the States in 1992.(59)

3.8 State Government Assistance

As the drought developed NSW and Qld introduced a range of schemes to supplement the assistance provided by the Commonwealth.

By December 1994, in NSW, the range of measures introduced included:

  • freight subsidies for farmers in drought declared areas to meet half the cost of transporting stock to and from agistment, movement of fodder, water cartage for stock and domestic purposes;
  • interest subsidies to farm related businesses up to a maximum of $5 000 per business
  • contribution of up to $1 500 for farmers participating in the Australian Bankers Association Debt Mediation Scheme
  • vouchers of $50 value redeemable against farm and business electricity accounts and vouchers of $30 value to assist with domestic electricity accounts; and
  • exemption of stamp duty payments for refinancing primary production loans.

Other measures included assistance with school expenses, town water cartage subsidies, rent relief on agricultural and grazing leases in the Western Districts and additional funding for family support programs.

In February 1995, the NSW Government announced a number of additional drought relief measures in a package costing $30.5 million. The additional measures included subsidies up to 80 per cent of interest costs to help farmers purchase seed, fertiliser and fuel for crop planting and a $10 million payroll tax rebate scheme for rural businesses adversely affected by the drought.

By the end of 1994, the range of measures put in place by the Qld Government included:

  • the Drought Freight Subsidies Assistance Scheme which provides subsidies for the cartage of water and fodder to sustain livestock on drought declared properties and the transport of livestock returning from agistment following drought and for restocking purposes. By February 1995, around $34.6 million of assistance had been provided since 1991-92;
  • Drought Restocking Loans up to a maximum of $100 000 at concessional interest rates of six per cent to cover restocking requirements;
  • Drought Crop Loans up to a maximum of $40 000 at concessional rates of six per cent to assist primary producers involved in broadacre, grain and fodder crops to purchase seed, chemicals, fertiliser and fuel;
  • Small Business Drought Assistance of $5 million to meet operating and other essential costs by way of interest subsidy up to a maximum of $5 000 per annum for two years;
  • interest free loans to local authorities whose rate income has been affected by the impact of drought on ratepayers;
  • Urban Water Supplies assistance to cart water for urban use for towns suffering from water supply problems; and
  • additional $10 million for maintenance of roads in drought-affected local authorities.(60)

Since 1991-92, the Qld Government has allocated $109 million for drought support.

The effectiveness of the various Commonwealth and State responses to the current drought is examined in Section 4 of this paper.

3.9 Role of the Financial Sector

The role of banks and other financial institutions in supporting farm enterprises through drought is critical, particularly with Commonwealth drought assistance through the RAS being based primarily on interest rate subsidies with the commercial sector providing the loan principal. The advantages for government and the financial institutions were outlined in a previous Parliamentary Research Service Background Paper:

For the government:

  • the risk of default is carried by the financial institutions; and
  • a willingness to provide additional loan capital is an indication of the longer-term viability of the farmer.

For the financial institutions:

  • the interest subsidy provides additional assurance that loans will continue to be serviced
  • restoration of farmers to profitability should ensure continued servicing of loans at commercial interest rates.(61)

At 30 June 1993, total farm debt was $17.3 billion of which nearly $10 billion was owed to the major trading banks. This level of debt represents a 48 per cent increase (in nominal terms) over the previous five years from the total farm debt of $11.7 billion in 1988. ABARE expects the average farm business debt for broadacre farms to increase by around 4 per cent during 1994-95 which compares with a slight decrease in 1993-94.(62)

In recent years the banks and other financial institutions have been severely criticised by farmers and rural institutions. Submissions to the inquiry into banking and deregulation by the House of Representatives Standing Committee on Finance and Public Administration in 1991 included complaints by rural borrowers about their treatment by banks which ranged from allegations of failure to notify changes to interest rates to forced exiting from farm properties. The Committee concluded that:

claims of widespread bank foreclosure in rural Australia for other than commercial reasons are overstated. However, in a number of cases it was clear that some banks were taking unreasonable action to force farmers in default of their loans to leave their properties. Some banks were also reluctant or simply refused to negotiate with rural borrowers facing financial difficulties. In these cases banks need to adopt a more sympathetic approach so that these farmers can attempt to trade out of their difficulties rather than being forced out of the industry.(63)

The inquiry in 1994 by the Senate Rural and Regional Affairs and Transport Reference Committee into Rural Adjustment, Rural Debt and Rural Reconstruction examined the role of the financial sector concluding, inter alia, that:

there is little doubt that following deregulation in 1983-84 the banks, in pursuit of market share in the face of heightened competition, made loans based on security levels offered by existing equity but without sufficient regard to the capacity of clients to repay. This approach, together with the very high interest rates in the late 1980s, played a significant role in the development of a debt crisis which continues to affect many farmers.

There is also evidence that some banks and financial institutions behaved in an insensitive manner when farmers encountered debt difficulty, sometimes with little regard for the social consequences of their actions.(64)

The Senate Committee noted, however, evidence suggesting that, more recently, some banks have adopted a more responsible and sensitive approach to the plight of farmers overwhelmed by debt, drought and poor returns and are negotiating with them on a case by case basis.

While banks are understandably reluctant to publicise such schemes, there are reports of banks setting aside parcels of debt carried by farmers in drought areas on an interest free basis to be repaid when the farm enterprise recovers as an alternative to foreclosures in a depressed rural real estate market.(65)

In August 1994, Senator Collins, the Minister for Primary Industries and Energy, also commented favourably on the attitude of the banks, stating that the Government was maintaining close links with the banks and that the banks were being extremely responsible.(66) The Prime Minister, however, subsequently criticised the banks for failing to see the potential of Australia's rural industry and the capacity of Australia's farmers to run profitable and productive concerns.(67)

3.10 Community Assistance

As the drought spread in 1994, a growing awareness of the problems being faced by the rural community developed in the capital cities without doubt stimulated by graphic media portrayals of withered crops, poorly nourished stock and extreme personal hardship. The general community rallied to assist farmers, the most prominent initiative being the Farmhand Appeal which was launched in August 1994 by media interests to provide short-term relief for farming families. Up to April 1995, $9.2 million was donated by the public through individual, community and corporate initiatives. The Commonwealth Government agreed to match public donations on a dollar for dollar basis allocating $10 million in the 1994-95 budget for this purpose. The funds have been made available largely to farming communities not eligible for drought assistance measures under the exceptional circumstances provisions and around 8000 families, mostly residing in NSW, have been assisted. Several other locally based schemes were launched to provide cash and goods to farming families such as train and road convoys of fodder to NSW from communities in Victoria.

4. Effectiveness of Drought Assistance Measures

This section examines the effectiveness of the drought assistance measures taken by the Commonwealth and State Governments in response to the current drought in meeting their objectives in providing emergency relief to farm families and maintaining a sustainable agricultural sector in the drought-affected regions.

4.1 Objectives of Commonwealth Drought Assistance

Before examining the effectiveness of the Commonwealth's drought assistance measures, it is instructive to look at both the magnitude of the current drought (see Section 4.2) and the objectives of the assistance as outlined in the NDP agreed by the Commonwealth and the States in August 1992 which are to:

encourage primary producers and other sections of rural Australia to adopt self-reliant approaches to managing for climatic variability;

maintain and protect Australia's agricultural and environmental resource base during periods of extreme climate stress; and

ensure early recovery of agricultural and rural industries, consistent with long-term sustainable levels.

The role of governments is outlined thus:

Government will help create the overall environment which is conducive to this property management planning and risk-management approach. We will encourage producers to adopt improved property management practices through a system of incentives, information transfer, education and training, landcare group projects and research and development; and

During severe downturns, Governments will act to preserve the social and physical resource base of rural Australia, and will provide adjustment assistance in the recovery phase. Support will be available to those with sound prospects who are temporarily in financial difficulty.(68)

Malcolm has commented that:

Like the revamped RAS, the new drought policy goes some way to meeting economists' criticism of drought policy of the past.

but adds, perhaps somewhat cynically, that:

Despite the claims about expected self-reliance of farmers under the new drought policy, whether things are to be much different from the past probably will be known as soon as the first dry spell, or rural by-election, arrives.(69)

4.2 Is the Current Drought Extreme?

Although each major drought is different in its duration, intensity and location there are common factors in the response of farmers and their industry spokespersons. Before it has progressed very far, each drought is hailed as the 'worst ever', the 'worst this century' or the 'worst in living memory'. There are predictions that thousands of farmers will have to walk off their properties and breeding herds will be decimated requiring at least a decade to rebuild. For example the Qld President of the Sheep and Wool Council is reported in April 1993 as stating that:

50 per cent of graziers would walk off their properties unless adequate assistance was given immediately.(70)

It is perhaps ironic that at the same time as the above statements were being made, banks and other rural financial institutions were being urged to support the agricultural sector by providing additional finance to carry drought-affected farmers and their families through the drought and not to foreclose on farm enterprises unable to service loans and with little prospects of financial recovery even in favourable seasonal conditions.

Although the present drought is certainly severe and has extended for several years in some areas, it can be inferred from historical rainfall data that in several regions affected by the current drought, the average rainfall since 1950 has been significantly higher than the average rainfall for the preceding fifty years. The question, however, as to whether the current drought is, or is not, the worst ever is probably of little relevance given the different pattern and impact of each drought and the different circumstances of the rural economy at the time.

4.3 Will Farmers be Forced off the Land?

As to whether large numbers of farmers will be forced off the land, Gow points out that an examination of farmer numbers before, during and after the last major drought of 1982-83 reveals that between 1981-82 and 1991-92, statistics demonstrate that the net number of farmers who left agriculture was close to zero. Defining a farm enterprise as an agricultural establishment with an estimated value of agricultural operations greater than $20 000 per year, as has been used by the Australian Bureau of Statistics, in 1981-82 there were 122 408 farm enterprises compared with 122 054 in 1991-92. In between these years the number of farm enterprises rose to 128 707 in 1986-87 before declining in the face of the rural downturn.(71) In an overview of farm adjustment, Stayner has noted that the above estimates run counter to popular perceptions:

From time to time, farm adjustment becomes 'big news'. Typically, these are times when droughts, slumps in commodity prices, or high interest rates are making life miserable for a larger than usual number of farm families.(72)

adding that adjustment should be seen as encompassing a wide range of circumstances which are an inherent part of an open market economy while not dismissing the anguish and regret undergone by those farm families who unwillingly find themselves part of the adjustment process.

Although farmers in large areas of Qld have endured the most prolonged period of the current drought, a recent survey of rural debt in Qld indicated that there was no debt crisis which would force substantial numbers of farmers off the land:

Against the background of the difficult conditions in the rural sector over the past four years, the survey indicates that 92% of Qld's primary producers with farm debt currently have the capacity to service their debt in the long term. The relatively low 'at risk' and 'non-viable' percentage would indicate considerable financial discipline and good management by both primary producers and financial institutions.(73)

4.4 Preservation of Breeding Stock

Problems in relation to the preservation of the national breeding herd, with calls for subsidies on fodder purchases and the transport of fodder and stock, have been raised during the current drought. This issue was examined by the Drought Policy Review Task Force which used figures supplied by the Australian Meat and Livestock Corporation to question the extent to which the breeding base of the herd or flock was threatened by the severe drought of 1982-83.

While herd numbers fell by around two million head in 1982-83, cattle slaughterings accounted for only 25 per cent of this reduction.

Similarly sheep numbers fell five million head across the same period, but slaughterings of both lamb and mutton accounted for only one-third of this fall. Mortality rates were not exceptionally high, and the number of livestock shot in the paddocks was relatively low.(74)

The Task Force concluded that national herd and flock numbers suffered from the low rate of joinings or low calving rate during periods of climatic stress implying a short-term reduction in production levels, rather than a threat to the genetic base. Maintaining livestock numbers cannot be attributed to a single policy instrument such as drought assistance but other factors including technology, infrastructure, transportation, information services, animal husbandry and management techniques.

During the present drought, ABARE expected the Australian cattle herd to fall from 25.3 million in 1991-92 to 24 million in 1994-95. Slaughterings in 1994-95 were expected to fall to 8.1 million as against 8.7 million in 1991-92.(75) Preliminary results from the agricultural census for the 1994-95 season show that, contrary to expectations, the Australian cattle herd has actually increased over the drought years from 25.2 million at 31 March 1993 to 25.8 million at 31 March 1994 and 26.2 million at 31 March 1995.(76)

ABARE has commented on slaughter levels and the influence of the feedlot industry.

While drought would normally be expected to result in dramatically increased turnoff and slaughter rates, national slaughter levels, although high, have remained reasonably steady over the past few years.

An additional difference from the big drought of the early 1980s is that at the beginning of the current drought there were alternatives to immediate slaughter. Increased lot feeding provided a valuable option to fattening on pasture, increasing the availability of forage for breeding stock.(77)

ABARE added that the feedlot industry offers an economic alternative to the immediate slaughter of cattle during dry periods and that slaughter levels would have been much higher if not for feedlots. Compared with the previous severe drought, the livestock industry has now a number of options to reduce livestock numbers which would also include the live cattle export trade. While these options have assisted in 'drought-proofing' the cattle industry to some extent, the failure of grain crops and the resulting increase in feed prices has resulted in a reduction in the number of cattle in feedlots.

4.5 'Ad Hoc' or Developed Relief Measures?

Before examining the Commonwealth Government's responses to the current drought, there is a view that so called 'ad hoc' policy making in response to drought circumstances may not necessarily be inefficient. Simmons has compared what he refers to as 'band-aid' and 'increased preparedness' drought policies and states that.

Ignoring any potential non-farm social gains that might arise from drought policy, 'band-aid' drought policy is a lose-win game with tax-payers losing and farmers winning; it is really just a transfer payment. Alternatively, 'increased preparedness' drought policy is a lose-no win game where taxpayers lose and farmers are no better off.(78)

Simmons makes the point that the strength of 'band-aid' policy is in its reactive nature being targeted towards only those farmers who are drought-affected rather than the whole farming community. Under 'increased preparedness' policies all farmers must be targeted to help the few who will be affected by drought in the unknowable future. Weaknesses of 'band-aid' policies are that farmers can be led to increase their risk exposure in the expectation of relief payments and the possibility that drought declaration procedures may become politicised. In the latter event relief is unlikely to be distributed efficiently in terms of the policy goal of relieving drought related financial stress.

Despite the above views, there still appears to be a valid case for policies which increase drought preparedness since such policies recognise the likelihood that given the vagaries of the Australian climate nearly all farmers can expect to experience drought at some time.

While the concept of farmers adopting a risk management approach has been popular among governments in recent years in line with economic rationalist ideology, this will not of itself eliminate the effects of drought. A recent study by the University of New England's Centre for Agricultural and Resource Economics and NSW Agriculture has concluded that no matter what management strategies are employed, farms cannot be totally insulated from major droughts.(79)

This is a key conclusion recognising that it would not be practical, for example, for a livestock producer in an area generally with adequate rainfall to conserve fodder and set stocking rates on the basis that a severe drought is always imminent.

4.6 Do Assistance Measures Conform with the National Drought Policy?

It is useful to compare the assistance measures announced by the Commonwealth with the objectives of the NDP and ascertain whether the assistance was in accordance with or contrary to the policy. One could reasonably conclude that the establishment of the NDP and extensive revisions to the RAS during the early stage of the drought should have precluded the need for recourse to ad hoc policies to meet the developing situation.

At first sight the large number of announcements of relief measures and changes to conditions as outlined in the previous section of this paper suggests that drought policy was again being made 'on the run' and being addressed with 'band-aid' measures in response to the pressures from rural institutions and the media. The pressures on governments during a severe drought are considerable and have been described by Gow:

Drought is a heaven sent media event. It is visually stimulating and emotionally moving with its images of destroyed landscapes, dying animals, broken dreams and shattered lives. All emotion and no analysis, a perfect opportunity for media reportage ... Farmer representatives are out in the fields intoning gravely about the seriousness of the situation. Pressure thus builds on government to be seen to be 'doing something' about the 'disaster'.(80)

While some of the rhetoric at the time the Commonwealth's major drought assistance packages were announced in 1994 may have suggested a knee-jerk response to pressures, closer examination of the packages suggests that the majority of the measures were basically in accordance with the NDP.

In the August 1994 drought package, the basic principles of the NDP as it applies to farm businesses were upheld, the main announcement being a significant increase in funding for exceptional circumstances drought relief coupled with increases in the maximum individual assistance limits. In the face of determined lobbying the Commonwealth did not agree to any subsidies for fodder and transport and did not change the condition that RAS assistance can only be made available to those farmers with prospects of sustainable long-term profitability apart from those farmers who have made a decision to exit farming and are eligible for re-establishment grants.

For personal living expenses, the introduction of the Drought Relief Payment scheme provided an attractive alternative to Farm Household Support by providing farmers in exceptional circumstances drought areas with cash payments generally equivalent to and under the same conditions as Job Search Allowance. These payments are administered through social security arrangements and were foreshadowed in the NDP except that these measures were envisaged for situations of exceptional downturn whether brought about by drought or other factors. An alternative to the Farm Household Support scheme was well received by the rural community. Since its inception the Farm Household Support scheme has not worked well and has been subjected to considerable criticism from farmers' organisations, rural counsellors and others. The inquiry by the Senate Rural and Regional Affairs and Transport References Committee into Rural Adjustment, Rural Debt and Rural Reconstruction concluded in December 1994 that:

The Committee received consistent evidence that the farm household support program is a 'total failure' because of ill-defined operating guidelines, inadequate training for DSS staff and poor communication. The Committee agrees and recommend that this program should be significantly overhauled.(81)

The measures announced in the second stage of the drought relief package to provide incentives to farmers to better prepare for future droughts through taxation and other financial incentives such as the enhanced Farm Management Bond scheme are fully in accordance with the NDP. These measures have, however, been subject to criticism on efficiency grounds. Simmons recognises, however, that Farm Management Bonds are a more general instrument than drought bonds since access requires evidence of financial hardship which need not be specifically drought related and therefore Farm Management Bonds are more efficient than they initially appear to be but adds:

Thus, in summary, drought bonds unambiguously make farmers better off by increasing their utility, unambiguously make tax-payers worse off because they must pay for the policy and will cause increases in on-farm risk exposure that may have a negative effect on the environment.(82)

Some observers have commented that the Commonwealth's drought relief packages appear to have reinforced the perception of many farmers that severe droughts are an abnormal occurrence and that when a farm enterprise is faced with these conditions, governments will come to the rescue. There is thus a contradiction with the fundamental objectives of the NDP of adopting a self-reliant approach to managing for climate variability. Gow has put his views strongly:

Unfortunately the September 1994 statement by the Prime Minister destroys the self-reliant approach to management of drought by farmers. Farmers now know that the government will cave in if sufficient media created political pressure occurs.(83)

4.7 Transaction-Based Subsidies

A large proportion of the drought assistance provided by the governments of NSW and Qld is in the form of transaction-based subsidies for the transport of fodder and stock. In accordance with the NDP, the States may provide transaction-based subsidies or other similar based measures at their sole discretion and at their own expense as a transitional measure. The States did, however, agree to phase out transaction-based subsidies as soon as practicable to ensure the smooth transition to the measures available under the NDP.

The Drought Policy Review Task Force was highly critical of transactions-based subsidies on the general grounds that they encourage an assistance mentality and notions of 'compensation farming', sometimes referred to in the literature as the 'drought relief syndrome'. The absence of needs based eligibility criteria for these subsidies and rebates also means that they represent a form of welfare payment to primary producers to offset the financial costs of undertaking specific farm activities such as the freight of livestock or the purchase of fodder. Transaction-based subsidies can also be counter-productive and some of their effects are to:

  • discourage self-reliance
  • benefit mainly the freight transporters and fodder suppliers
  • encourage overstocking; and
  • exacerbate land degradation pressures.

An examination of the effectiveness and efficiency of the transaction-based subsidies by Freebairn following the 1982-83 drought concluded that it was likely that the subsidies would increase the severity of future droughts by lowering the incentive for farmers to adopt their own support strategies. He summarised the effects of the fodder subsidies as follows:

... the fodder subsidies resulted in a mixed pattern of gainers and losers. No more than one-half of the drought affected sheep and cattle producers received the subsidy. Some of the subsidy was gained by fodder producers and carriers and some went to overseas consumers of livestock products. Adverse price changes resulted in losses to sheep and cattle producers in non-drought areas, farmers in drought areas who used alternative strategies, such as feeding their own fodder or conservative stocking rates, and intensive livestock producers. While the subsidies increased the incentive to increase the number of animals on some farms, the aggregate industry increase was smaller because of modifying price effects.(84)

While it would not be feasible for NSW and Qld to phase out transaction-based subsidies during the current drought, the Agriculture and Resource Management Council of Australia and New Zealand reaffirmed its support for the principles of the NDP as recently as September 1994. On this basis farmers could not expect transaction-based subsidies to be made available by the States in future droughts.

4.8 Determination of 'Exceptional Drought Circumstances'

While it can be reasonably concluded that, despite the comments of several economists, the Commonwealth Government's response to the drought is essentially in accordance with the objectives of the NDP, one of the key factors which will determine the long-term effectiveness and efficiency of the drought support measures is the definition of the exceptional drought conditions which trigger the exceptional circumstances provisions.

As the Drought Policy Review Task Force concluded in 1990, the definition of exceptional drought is difficult and contentious. There has to be considerable doubt as to whether any scientific or technical methodology is capable of defining the declaration or revocation of the imprecise concept of agricultural drought as against climatic drought. Initially the Commonwealth used the criterion that for a district to be deemed by the Commonwealth to be in exceptional drought circumstances, it needs to have been drought declared for the previous two years. In August 1994, the Commonwealth relaxed the guideline allowing farmers to qualify if they are in drought now and have been drought-affected for two of the previous three years. At the time, Senator Collins, Minister for Primary Industries and Energy, stated that this guideline is designed to ensure farmers who have obtained one good crop in the past three years are not rendered ineligible for assistance.(85)

One difficulty is that the States use different processes and criteria for drought declarations. This problem was recognised by Commonwealth and State Agricultural Ministers who agreed in September 1994 to cooperate to draw up a uniform national approach to drought declarations. Ministers subsequently agreed in October 1994 on a more flexible system of drought and other exceptional circumstances declarations allowing more regional factors to be taken into account. These would include:

  • meteorological conditions
  • agronomic and stock conditions
  • water supplies
  • environmental impacts
  • farm income levels; and
  • scale of the event.

States would make initial assessments in accordance with these criteria and as a working guideline, exceptional circumstances would be indicated when the combined impact on farmers of the core criteria was a rare and severe occurrence. Applications for exceptional circumstances assistance would continue to be referred by the Commonwealth Minister to the RAS Advisory Council which would advise the Minister in terms of the agreed criteria. The Commonwealth Government would continue to be the final arbiter (see flow chart at Appendix C).

A State government perspective on extreme drought was given in a recent survey and report on rural debt in Qld which states that:

For the purpose of the Qld government's drought policy, it is an extreme event that is once in every ten to fifteen years that is considered a drought. An event of this nature is not considered an acceptable level of commercial risk to be born by any rural enterprise.(86)

The fundamental dilemma for governments in determining whether a drought is an exceptional circumstance is that in the absence of any methodology for scientifically determining whether an extreme drought exists, political and other pressures will inevitably intrude into the decision process. Under these circumstances a signal could easily be given to those regions where farming has an inherently high risk exposure that governments will bail out those farmers who are ill-prepared for drought and further discourage self-reliance. There is also a considerable risk that the inevitable departure of farmers in arid agricultural regions, which perhaps should never have been farmed and seem unlikely to achieve long term financial viability, could be hindered by an expectation that government assistance will be forthcoming during the inevitable dry spells.

To maintain the thrust of the NDP towards self-reliance, it is important that exceptional drought should be declared only on rare occasions such as once or twice in a life-time as suggested by the NFF in evidence to the Senate Standing Committee on Rural and Regional Affairs inquiring into NDP in early 1992. The NFF maintained that while self-reliance is possible in recurring dry periods, this is an unreasonable expectation in droughts that are experienced once or twice in a life-time and suggested the following definition of severe drought:

severe droughts of the type which statistically might be expected once or twice in a farmers working life will have physical and financial effects that will be difficult or impossible for a farm business to always be prepared to absorb without direct assistance.(87)

On the basis of the definition of severe drought suggested by the NFF, it could reasonably be concluded that those regions presently exceptional drought declared could expect such a declaration not more than every twenty years or so. Otherwise the risk exists that assistance under the NDP and the RAS exceptional circumstances arrangements could become a means of maintaining unsustainable agriculture in essentially arid regions. Should this eventuate, those shires in Qld and pasture protection districts in NSW which were drought declared for some 50 per cent or more for many years could be looking at being declared in exceptional drought circumstances for similar long periods.

One operational difficulty with the NFF definition would be that the statistical assessment required can only be made well into a drought or even after it. Assistance measures to give effect to the principles of the NDP would be required well ahead of such a time.

4.9 Financial Incentives for Farmers to Prepare for Drought

There can be little doubt that during drought conditions the most serious deficiency on farms is the shortage of cash rather than water and fodder as such. In 1992, in evidence to the Senate Standing Committee on Rural and Regional Affairs, Tim Scholz, President of the United Farmers and Stockowners of SA told the Committee that the following reflected the views of many farmers in his State:

It would be far better if we were given the ability to accrue a money haystack when times are good. We can look after ourselves. Those farmers who do not elect to use the better years to protect themselves could no longer go back to their farm organisation or to their government or their local member and say, 'Please help me out'.(88)

Other farmers' organisations have reiterated the preference for self-help. In a submission to the Drought Policy Review Task Force in 1989, the Grains Council of Australia recommended that:

the Federal Government's policy response to drought be confined to facilitating farmer self-help adjustment, and that provision for welfare assistance be made only in the event of severe and extreme drought circumstances.(89)

The package of measures announced by the Commonwealth Government in December 1994 contained a number of measures which serve to assist farmers to prepare for drought in the longer-term. These included an enhanced Farm Management Bonds Scheme to encourage farmers to build up cash reserves for downturns and taxation incentives to build up physical reserves such as fodder and water storage. The degree to which farmers, particularly those in the regions affected by the current drought, take up these fiscal incentives in the next few years should be closely monitored so that their effectiveness can be assessed when the next drought occurs.

4.10 Restructuring of Marginal Agricultural Regions

There are several agricultural regions where dry conditions or drought tend to be the norm rather than the exception and the farming community frequently seeks drought assistance. In these marginal, arid regions land degradation is a severe and growing problem. It is now recognised that many farm enterprises which date from closer settlement schemes earlier this century are too small to be economically viable and this encourages overstocking and environmental damage.

The Western Division of NSW which covers 42 per cent of the area of the State is classified as one of these regions. Research by NSW Agriculture shows that while present conditions may be bad, historical records show the region can expect decades of poor to well below average seasonal conditions. Years when rainfall recordings in the Western Division were well below average are:

  • 1883-84
  • 1888
  • 1896-1902 worst drought on record.
  • 1907-09 far worse in south-west.
  • 1912-14 patchy.
  • 1918-19
  • 1922-23 mainly in south-west.
  • 1927-29 patchy.
  • 1935
  • 1937-38 exaggerated by rabbits.
  • 1943-45
  • 1957-58
  • 1964-65 patchy throughout early to mid 1960s.
  • 1967
  • 1972
  • 1981-82
  • 1990-?(90)

The Western Division was also one of the regions examined by the Bureau of Rural Resources in 1993 in its study of regional adjustment and development needs.(91) It was one of the first of the arid pastoral areas to be settled by Europeans in the mid 1880s but over-estimation of the capacity of the grazing resource, high stock numbers, drought and rabbits have been cited as factors leading to a severely degraded environment by 1900.

Until the 1950s, NSW Government policy was to subdivide properties into a size that would support a single family and to lease properties on a perpetual lease basis. Although the maximum size of lease was increased in 1968, it has been argued that the majority of pastoral leases are too small to remain economically viable and to alleviate their financial situation, owners of small properties have overgrazed with resultant land degradation. Although it could be argued that property owners made their own assessment of the risks involved at the time of taking up leases, the degree of government involvement, in particular the restriction on maximum size, suggests that governments have at least a moral commitment to assist those owners of properties with little prospect of long-term profitability.

There are now about 1 350 grazing operations and it has been suggested that up to 400 families may have to leave the pastoral areas over the next few years. The study noted that climate is a major factor determining the success of pastoralism and other agricultural industries in the Division identifying that:

Lack of understanding of the significant fluctuations in fodder [supplies] in space and time as a result of the climate, and the importance of accommodating these, is thought to be a major cause of the Division's current problems.(92)

The study by the Bureau of Rural Resources also drew attention to land degradation issues in general pointing out that:

In the pastoral regions (South-west Qld, Western Division, Gascoyne) limitations in our understanding of arid and semi-arid landscapes, particularly the significant fluctuations in the availability of forage resulting from unreliable rainfall, have led to over estimation of grazing capacity by land administration agencies and pastoralists. This has resulted in the loss of much perennial vegetation and in the reduction of the drought resilience of these rangelands.(93)

Watson has identified that in the current drought, the worst affected areas have a history of government involvement in land management and uses the region in central Qld where the brigalow scrub was cleared (the brigalow belt) as one example along with the Western Division of NSW:

Repeated crop failures in central Qld-the former brigalow belt, with flukey rainfall for winter and summer crops-suggest cropping is only sustainable when opportunistic.

The brigalow was developed for cattle in the 1950s and '60s. The switch to cropping was encouraged by the beef collapse of the 1970s. Cropping is problematical in the brigalow, given the climate and pattern of settlement.(94)

Another region which is considered one of the most marginal areas of Australia is the Upper Eyre Peninsula in SA. A farmer with a property of just over 1 000ha producing wheat, oats, medium wool and mutton has described the conditions as follows:

Over the long term we have about three good years, four average years and three really bad years out of ten.(95)

The problem of such regions has now been recognised by Commonwealth and State Governments. For example, under the South West Qld Regional Adjustment Strategy, funding of about $17 million will be provided by the Commonwealth and Qld Governments as a special RAS program during the period 1994-95 to 1996-97. The problems of this area include severe land degradation, low profitability and high debt levels. A primary focus of the program will be to achieve sustainable grazing management of the mulga lands.

In its December 1994 additional drought relief package, the Commonwealth Government provided an additional $10 million of funding over two years for adjustment in drought prone regions. Regional strategies will involve property restructuring and productivity enhancement and the program will utilise RAS and Commonwealth and State Government social welfare, labour market programs and the National Landcare Program. In February 1995, the Commonwealth Government offered the SA and WA Governments funding from this initiative to develop and implement regional adjustment strategies in the drought affected regions of the Eyre Peninsula in SA and the Gascoyne/Murchison region in WA.

These strategies will necessarily result in some increased control of land management by State authorities to achieve environmental sustainability which could include controls on stocking rates and requirements for land reclamation activities and will require a number of farmers to leave the land. In South-West Qld for example, it has been estimated that 550 pastoralists have no immediate or long term prospect of achieving viability for their pastoral enterprise.(96) In recent years, however, the capacity for State governments to facilitate appropriate adjustment activities would appear to have diminished as most States have reduced their agricultural extension activities and the professional infrastructure required to tailor more sensitive responses to regional issues.

5. Preparing for the Next Drought

This section examines what might be done by governments to better prepare for the next severe drought whose occurrence is inevitable, only its timing, location and duration being unknown.

At the time the NDP was agreed in August 1992, the current drought was well under way. Although the change in the Commonwealth's approach to drought from it being a disaster to a natural occurrence had been signalled by the decision to remove drought from NDRA and the conclusions of the Drought Policy Review Task Force, it would appear that the message had not been received or certainly not accepted by many farmers judging by comments of farmers and their spokespersons in the rural press. For example, as late as 6 April 1995, an editorial in the rural press called for the eastern Australian drought to be recognised as a national disaster adding dire predictions:

only federal money can provide the resources and encouragement needed to sustain hand-feeding programs through another winter, to avert a sell-off of breeding stock on a scale that will decimate farm earnings for years to come.(97)

Professor Keith Campbell has strongly criticised the decision to remove drought from the NDRA and called for a return to natural disaster funding adding that:

this decision, followed by its adoption of the recommendations of a Drought Policy Review Task Force, lie (sic) at the roots of today's drought crisis.(98)

There was an expectation that relief measures for the current drought would be implemented along the same lines as those for previous droughts as indeed happened with the transaction-based subsidies offered by NSW and Qld. It could be argued that these attitudes may possibly have been nurtured or reinforced by elements of the Federal Coalition's drought policy announced in August 1994 which included:

  • support for the immediate introduction of a drought relief fodder subsidy scheme to help offset the massive cost of feeding livestock in drought declared areas, similar to that provided in the 1982-83 drought
  • the return of 'severe' drought to the Natural Disaster Relief Arrangements to ensure more assistance is available to both farmers and affected small businesses through concessional loans; and
  • suspension of the assets test on welfare payments such as JobSearch Allowance and Family Payment for farmers suffering extreme financial hardship as a result of events such as 'severe' drought.(99)

There is, therefore, a need to redefine the principles of self-reliance within the NDP as soon as the current drought ends to leave the farming community in no doubt as to the nature of future drought assistance and provide farmers with an opportunity to make the necessary adjustments.

A major consideration highlighted by the Prime Ministers' statement at the beginning of this paper is the linkage between drought policy and sustainable land use. Policy makers need to stand back from the immediate problems and hardship resulting from the current drought and examine strategies for the longer term. While it is clearly not possible to fully 'drought-proof' agriculture in Australia, there should be scope for mitigating its effects. Possible approaches could include the strategy implemented in South Africa of linking drought relief with reductions in stock numbers.

5.1 Future Drought Assistance

As to the assistance, if any, required prior to and during drought conditions, there is a clear need for an informed and rational debate once the current drought has broken and matters can be discussed in an atmosphere free of the political and emotional pressures arising from graphic media portrayals of the hardships being endured in the drought affected regions. A need is seen for a comprehensive examination by the Commonwealth in collaboration with the States of the effectiveness and efficiency of the drought relief measures implemented during the current drought. The Drought Policy Review Task Force which reported to the Commonwealth Government in 1990 could be a suitable model for such a review. A useful starting point would be to revisit the many constructive recommendations of the Task Force in the light of experience during the current drought.

A drought policy task force has already been suggested by the NFF to develop policies to facilitate recovery from the current drought for the various sectors of the agricultural industry as well as improving the capacity of farmers to provide for and manage future droughts. The recovery phase will involve issues reaching into Commonwealth and State Government programs and industry advisory services, financial institutions and welfare programs. The NFF will seek the support and participation of Commonwealth and State Governments, financial institutions and appropriate farm institutions.(100)

To support any review of drought policy a series of studies is suggested to establish how the drought assistance from the Commonwealth, States and the community was distributed and which group, agricultural industry or profile of farmers most benefited. It would also be useful for follow up studies to trace the progress of those farmers assisted under the exceptional drought circumstances provisions to ascertain the percentage of farmers who returned to sustainable long-term profitability and the time taken for recovery. The issue of the effects of the drought on non-farm businesses could also be pursued to establish once and for all whether a sound case exists for government support during extreme drought conditions.

5.2 Need to Improve Financial Position of Farmers

As outlined earlier in this paper, the financial position of many farmers at the onset of the drought in 1991-92 was weak following the rural downturn resulting from low commodity prices and for those farmers servicing high levels of debt, the very high interest rates of the late 1980s further diminished their ability to both prepare for and put aside funds for adverse seasonal conditions. A robust and financially secure agricultural industry is a necessary prerequisite for farm enterprises to survive severe drought conditions. The increased emphasis of the RAS on productivity improvement and the acquisition of managerial, technical, financial and business skills should greatly assist those farmers with good prospects of long term profitability to make the necessary adjustments to achieve sustainability.

State governments have also recognised the need to go beyond a short term response to the drought and plan for the future, [then] Premier Fahey of NSW stating that:

We must also ensure our farmers are in a position to trade their way out of the current difficulties when the drought does break(101)

When the current RAS was introduced in 1993, a commitment was made to undertake a comprehensive review after four years. This review would provide an opportunity to examine the performance and effectiveness of the RAS in its role as the vehicle for the delivery of Commonwealth assistance to farm enterprises during the current drought.

5.3 Other Issues to be Addressed

Simon Field, the Executive Director of the Australian Institute of Agricultural Science, has put forward a number of hard questions on drought policy. He recognises that during drought when rural communities are fighting for survival, these questions may seem insensitive but in the long term the answers may pre-empt much of the social and financial pain of drought. The questions include:

  • Have some farming areas enjoyed above normal rainfall for an extended period, and is the 'drought' in these areas a return to normality?
  • Should some low rainfall areas be removed from farming and the current occupants be paid as custodians of the land?
  • Have rural towns and shires developed drought strategies that fully utilise the human resources available?
  • Do we continue to provide drought relief to farmers who consistently avoid using risk management?
  • Do we encourage risk management by introducing a drought bond or insurance system, similar to the bond system imposed on miners or hail insurance, to ensure financial or environmental damage is repaired?
  • Is the wider community prepared to pay for the kind of rural landscape it wants?(102)

The above issues are interesting and debatable and addressing them will raise more difficult issues. The problems identified must be faced up to, however, before the next severe drought inevitably makes its appearance if the financial hardship and personal suffering of farm families are not to be repeated and land degradation is not to be exacerbated.

Finally it has to be fully recognised by governments that drought is only one of the pressures leading to financial stress on farmers with marginally profitable agricultural enterprises. As the current drought comes to an end and, hopefully, commodity prices strengthen an opportunity will arise for governments to implement more effective adjustment policies to assist those farmers with sub-economic or marginal farming operations to return to profitability or leave the industry. This will result in a profitable and sustainable agricultural sector, but can only be successful if the Commonwealth and State Governments collaborate in an integrated and scientific approach, and are prepared to commit very large amounts of funds up-front to meet the necessary capital expenditures for those farmers remaining in the industry and to provide substantial compensation for farmers leaving their properties.

A key issue, particularly for the States who have prime responsibility, is the difficult question of land management. It is doubtful that reliance on the rural property market to achieve adjustment through the land pricing mechanism will achieve the desired results. Particular contentious issues which need to be addressed include grazing leases in semi-arid zones and irrigation allocations in areas such as the Darling river catchment in NSW and Qld.

Endnotes

  1. Australia. Prime Minister (Paul Keating), Speech to the 40th ALP National Conference, Hobart, 26 Sept. 1994.

  2. In this paper references to a 'State' or 'States' may be taken to include the Northern Territory and the Australian Capital Territory except where otherwise indicated.

  3. Of relevance here is the definition of a farm enterprise since it is important to exclude hobby farmers and very small part-time enterprises from drought assistance. The Australian Bureau of Statistics (ABS) defines a farm according to the estimated value of agricultural operations (EVAO). Prior to 1986-87, farming enterprises with an EVAO greater than $2 500 were classified as an agricultural establishment. This threshold was raised to $20 000 in 1986-87 and subsequently raised to $22 000 in 1991-92. On this basis, there were 120 650 farm establishments in Australia at 30 June 1993. Adjustment of this threshold accounts for the effects of inflation and is a more accurate indicator of the number of commercial farms.

  4. Williams B, Landcare and the mythical money tree, Research Paper No. 22, Parliamentary Research Service, Canberra, 17 March 1995.

  5. McGinness M, Social Issues for Rural and Remote Australia, Background Paper No. 26, Parliamentary Research Service, Canberra, 6 Feb. 1995.

  6. Rural Development Centre, Lessons in the Dust, Inside Australia, Summer 1994: 12-14.

  7. Drought Policy Review Task Force, Managing for Drought, Final Report, Vol. 2, AGPS, Canberra: May 1990.

  8. Department of Resources and Energy, 'Water Resources Aspects of Drought in Australia', Water 2000: Consultants Report No. 13, AGPS, Canberra, 1983: 27.

  9. Department of Resources and Energy, 'Water Resources Aspects of Drought in Australia, Water 2000: Consultants Report No.13, AGPS, Canberra, 1983: 4.

  10. 'The Drought-A Real Rip Roarer', Worksafe News, Vol.10, No.1, Feb. 1995: 9.

  11. Bureau of Meteorology, Drought in Australia: 1991.

  12. Department of Resources and Energy, 'Water Resources Aspects of Drought in Australia', Water 2000: Consultants Report No. 13, AGPS, Canberra, 1983: 3-4.

  13. Map, Drought-Advance and Retreat, NSW Agriculture.

  14. Baker, G. El Nino and the Southern Oscillation Index, Research note No. 17, Parliamentary Research Service, Canberra, 7 March 1995.

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  16. Bureau of Meteorology, Farming a Sunburnt Country, 1994: 23.

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  40. Broadacre farms are those farms engaged mainly in running sheep or beef cattle and growing cereal grains, coarse grains, oilseeds or grain legumes.

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  60. Report on Rural Debt in Queensland, Queensland Rural Adjustment Authority, March 1995.

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  62. Topp, V., Martin, P., Gooday, J. and Parameswaren, B. Farm Financial Performance-Outlook and Analysis, Outlook 95, ABARE, Canberra, Feb. 1995: 313.

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  72. Stayner, R. Adjustment on Family Farms, Outlook '94, ABARE, Canberra, Feb. 1994: 26-34.

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  75. Collimore, C., Furmage, B. and Shaw, I. Beef and Veal, Australian Commodities, Vol.1, No.4, Canberra, ABARE, December 1994: 436-7.

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  77. Collimore, C., Furmage, B. and Walters, P. Outlook for Beef and Sheep Meat, Outlook 95, ABARE, Canberra, Feb. 1995: 90.

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Appendix A

National Drought Policy

Managing for Risk & Productivity

This document sets out the National Drought Policy agreed to by Commonwealth and State Ministers. The policy is based on principles of sustainable development, risk management, productivity growth and structural adjustment in the farm sector.

Definition of a Drought Policy

Drought is one of several sources of uncertainty affecting farm businesses and is part of the farmer's normal operating environment. Its effects can be reduced through risk management practices which take all situations into account, including drought and commodity price downturns.

The objectives of the Drought Policy are to:

  • encourage primary producers and other sections of rural Australia to adopt self-reliant approaches to managing for climatic variability;
  • maintain and protect Australia's agricultural and environmental resource base during periods of extreme climate stress; and
  • ensure early recovery of agricultural and rural industries, consistent with long-term sustainable levels.

The Role of Farmers and Government

Under the National Drought Policy, farmers will have to assume greater responsibility for managing the risks arising from climatic variability. This will require the integration of financial and business management with production and resource management to ensure that the financial and physical resources of farm businesses are used efficiently.

Government will help create the overall environment which is conducive to this property management planning and risk-management approach. We will encourage producers to adopt improved property management practices through a system of incentives, information transfer, education and training, landcare group projects and research and development (R&D).

During severe downturns, Governments will act to preserve the social and physical resource base of rural Australia, and will provide adjustment assistance in the recovery phase. Support will be available to those with sound prospects who are temporarily in financial difficulty.

State Governments may provide drought-assistance measures in addition to those offered by the Commonwealth, but these should not compromise the overall direction of the national policy.

  • States may provide transaction-based subsidies or other similar measures in times of drought at their sole discretion and at their own expense as a transitional measure. Agreement has been reached to phase out transaction-based subsidies as soon as practicable to ensure the smooth transition to the measures available under the National Drought Policy.

Policy Measures

The New Rural Adjustment Scheme

The Commonwealth Government is implementing a new Rural Adjustment Scheme (RAS) to further its commitment to more effective adjustment measures for farmers and a more productive, efficient and competitive rural sector.

The new RAS will be more sharply focussed on sustainable, long-term profitability at the farm level, based on structural adjustment and productivity growth. Changes involve a simplification of operations, with a single farm adjustment program, new funding arrangements including shared contributions between the Commonwealth and the States/Territories, and new accountability procedures.

  • The Scheme will also be a vehicle for providing assistance to farmers in times of exceptional downturn which encompasses not only drought but also commodity price falls, disease outbreaks and other situations beyond the farmer's control. Provision of this assistance will be governed by the degree of financial hardship of the farmer rather than drought per se and will be provided only to those with sound long-term prospects in farming.
  • New arrangements in the form of farm household support will be introduced for farmers, under certain conditions of hardship, who are temporarily in need of income to meet the day-to-day requirements of the farm family.

Ongoing measures

In normal circumstances, farmers will be able to obtain incentives through interest subsidies on commercial finance or grants to enhance the profitability of their businesses through farm improvement and development, support activities such as training, farm appraisal and planning services, and in special circumstances, carry on financial support as part of a program of productivity improvement. Eligibility for these measures will be based on sustainable, long term profitability, the merit of the proposed development project and need. Funding of this will be on a shared Commonwealth-State basis. There are also provisions to assist non-profitable farmers to leave farming:

  • Grants will be provided for farmers to improve their skills;
  • Grants will be available to assist with the cost of obtaining any financial assessment and counselling;
  • Projects which increase productivity may be on an individual-farm basis, involve collective action by groups of eligible farmers, or involve comprehensive packages of regional adjustment and development initiatives. This may be necessary where sustainable development is dependent on new investment essential for success of the overall project but not feasible for undertaking by individual farmers. This may also be linked to other activities such as Landcare.

The banks and other financial institutions will continue to play a major role in financing the farm sector. The banks have recognised the special needs of the farming community and have introduced flexible interest and capital repayment terms for farmers. RAS finance supplements these arrangements. Finance from commercial and RAS sources will form an integrated package of financial services to meet the demand from farmers for financing of their development projects.

In order to facilitate the adjustment out of farming of those who are considered to be unprofitable in the long term and who have a low asset base, the revised RAS includes a re-establishment grant which is available to eligible farmers on the sale of their productive farm assets.

Exceptional downturn

In times of exceptional downturn, interest subsidies above the level of 50 per cent of the interest rate on commercial loans and/or existing debt may be provided jointly by the States and the Commonwealth. Eligible farm businesses are those temporarily in severe financial difficulties, profitable in the long term, but can only access commercial finance if the interest is subsidised. Flexibility in the amount of assistance and the rates of any interest subsidy over 50 per cent will be a permanent feature of the National Drought Policy to avoid implementation of ad hoc policies in times of crisis.

Together with the flexibility that banks are prepared to offer on loan repayment terms, any additional interest subsidy would go a long way towards meeting the farmer's requirement for relief from payments during exceptional downturn.

Farm household support

New measures are to be introduced to provide support for farmers unable to meet day-to-day living expenses. Farmers who are in extreme financial hardship and who cannot obtain commercial finance for carry-on purposes will be able to access farm household support under new legislation to be administered by the Department of Social Security on an agency basis. The eligibility conditions for the new household support arrangements are still under consideration.

The above measures provide full coverage of assistance for adjustment/productivity growth; for support in situations of exceptional downturn, whether brought about by drought or other factors; for improving farmers' skills; and for extreme financial hardship.

Increasing self-reliance

Building Financial Reserves

Income smoothing and the creation of reserves can be useful tools in risk management. Mechanisms such as tax averaging and Income Equalisation Deposits (IEDs) have important roles to play in financial management. The Government has introduced an improved IED scheme, including a Farm Management Bond (FMB) provision, which will contribute to the development of a financially self-reliant and sustainable farm sector.

The Government will monitor other aspects of farm taxation and income-smoothing mechanisms such as tax-averaging to ensure that they do not prevent the new IEDs operating effectively and that they facilitate good risk-management practices. The Government will ensure that the entire package of income taxation and associated measures is providing both correct and consistent signals to farmers to encourage sustainable and efficient management systems.

The changes to the IED scheme and features of the FMB are as follows.

For IEDs:

  • a reduction in the withholding tax rate from 29 per cent to 20 per cent, unless the taxpayer self assesses otherwise;
  • an increase in the maximum amount of deposits from $250 000 to $300 000. This overall limit includes the amount deposited in Farm Management Bond;
  • a reduction in the minimum deposit required from $5 000 to $1 000;
  • allowing interest payable on deposits to be reinvested;
  • the above changes to apply from 19 August 1992.

The Farm Management Bond will be incorporated into the IED scheme with the following characteristics to apply from 1 October 1992:

  • an investment component of 80 percent;
  • the maximum amount that can be deposited in this bond is $80 000;
  • only taxpayers who are primary producers with non-farm taxable income of less than $50 000 are eligible to deposit;
  • withdrawals can only be made in periods of hardship arising from circumstances such as drought and other natural events;
  • withdrawals other than for specified events can be made, but the investment component will return to the normal IED level of 61 per cent;
  • deposits in normal IEDs can be transferred to an FMB, provided FMB criteria are met;
  • all other conditions attaching to the basic IED apply.

The tax system already has wide-ranging measures that provide incentive for expenditure on drought preparation. For example, expenditure on water conservation can be written off over three years rather than the useful life of the asset. This encourages expenditure on physical improvements for drought management. Further, the introduction of accelerated depreciation provisions from 26 February 1992 means that investment in fodder and grain storage can now be written off over much shorter periods than previously. The Commonwealth Government will monitor the effectiveness of existing measures, and consider introducing new measures if necessary.

  • However, any new measures will be carefully assessed to ensure that they are consistent with the objectives of the National Drought Policy in terms of planning and management strategies.
  • It is proposed that tax incentives for drought preparedness and whole farm management be examined in association with the 1993-94 review of income taxation measures for landcare.

Whole-farm planning

The widespread adoption of whole-farm or property-management planning is the major vehicle by which improved risk management, productivity growth and sustainable development will be achieved.

Property-management planning allows the integration of management strategies for the physical, financial, marketing and farming practices of individual properties. Through the use of tools such as land-capability assessments, farm budgets, marketing plans and decision-support systems, farm plans allow producers to identify the elements of risk within their businesses and take steps to minimise their impact.

A general improvement in the capacity of the rural community to increase self reliance will not be achieved until the majority of producers develop and implement an integrated property management plan. As discussed under Resource Management below, the Commonwealth will provide support for the development and effective use of property-management planning techniques.

Education and training

While many farmers arc already engaged in effective risk management and drought-preparedness activities, there is scope for providing opportunities for farm managers to upgrade their skills and learn new techniques.

Farmers will have access to information, education and training materials, courses and facilities that will increase their capacity to manage risk and to implement property management planning.

  • The Commonwealth will make a significant contribution towards programs which provide information, services, and training to assist decision making.
  • Steering groups will be established in each State to develop and implement programs targeted to particular needs of farmers and their advisers.

Research and Development

Research, development, demonstration and delivery are important elements of the policy package for improved management in a risky environment. Further, research and development can contribute to ameliorating the physical, economic and social effects of drought in the longer term. The Commonwealth will provide funding in this area.

Drought research for a profitable and sustainable rural sector is wide ranging, and includes whole farm management systems that integrate climate prediction, technical, biological and financial information; control strategies for weeds and pests; socio-economic factors and the needs of rural communities and farm families in times of stress; and research on on-farm and off-farm investment strategies for farmers.

The Commonwealth will develop an integrated national drought R&D program in collaboration with the States and the rural R&D corporations. It will be funded in the first instance by a Commonwealth allocation of $2.1 million over three years and with the intention that additional funds through collaborative contributions be provided by rural R&D corporations. The program will be aimed at enhancing the capacity of farmers to manage drought and it will seek both to bring together existing drought related R&D and to fund new R&D where present gaps or shortfalls exist.

Coordinated drought research is essential, given the diverse nature of the impacts of drought. The R&D funding organisations in the Commonwealth Primary Industries and Energy portfolio are well placed to initiate the establishment of a national drought R&D effort encompassing Commonwealth and State research, policy and management institutions. The Land and Water Resources R&D Corporation (LWRRDC) will administer the Commonwealth funds for the national drought R&D program and, with the Rural Industries R&D Corporation (RIRDC), will coordinate the funding and research activities of other R&D corporations and agencies. They will be urged, as part of their priority setting, to include drought-related issues in their work programs.

An important element of drought-related R&D will be extension and demonstration, thereby ensuring that the results of the R8D are accessible to farm managers. Efforts will be made to ensure that the gap between research results and farm practices is bridged, including research into the decision-making and adoption practices of farmers.

Rural Communities

Strong, resilient rural communities are very important to the future of the rural sector. There are a number of Commonwealth and State programs already in place to meet the economic and social needs of rural communities, including non-farm businesses. At the Commonwealth level, these programs include tho Business Advice for Rural Areas Program, the Marketing Skills Program, the Rural Industries Business Extension Service, Countrylink, the Rural Access Program and the establishment of telecentres. States also have complementary programs aimed at assisting rural families and communities to adjust.

Social support programs are already available to farmers and their communities in times of severe downturn and include emergency relief, health care, and financial and social counselling. These measures will continue to be monitored to ensure that these policies are coordinated and meeting tho needs of rural communities. New programs will be introduced if necessary.

Resource Management

The growth and prosperity of farming depend crucially on the resource base of the enterprise. Sustainable development principles must be applied to managing for drought and farm planning, including financial planning and risk management.

There are important links between the National Drought Policy and Landcare. Property management planning, for example, is central to the goal of ecologically sustainable development and to drought preparedness and risk management. The Commonwealth is providing $3 million through Landcare in 1992-93, with further funding annually until 1995-96, for education and training in property management and a range of landcare activities, with the objectives of the National Drought Policy clearly in mind.

The revised RAS will have the capacity to support drought preparedness strategies by farmer which involve the more effective use of water resources available on farm, where such an investment improves the long-term productivity of the farm.

There will be greater consistency between Government policies to ensure the sustainability, both economically and ecologically, of the resource base.

  • Governments will review land tenure arrangements to ensure that they are not structured in such a way to encourage overstocking or other poor management practices.
  • Water management is critical to both drought management and ecological sustainability. The trend towards greater cost-recovery charging and transferable-entitlement policies for water should encourage better water management, including during drought, by those with access to irrigation water. For those outside irrigation areas, tax incentives exist to encourage the storage and distribution of water.

Implementation of the National Drought Policy

Implementation of the National Drought Policy will involve two complementary sets of activities: an initial awareness campaign to publicise the policy change, and on-going education and training on risk management and whole farm business practices.

The Commonwealth will provide $1 million in 1992-93 and $0.5 million in 1993-94 to fund the communication strategy which will target farmers, farmer organisations and associated industry groups, accountants, advisers, banks and other financial institutions, landcare groups and other areas serving agriculture.

Training packages for sustainable farming, which incorporate risk management, landcare principles and drought preparedness will be developed for farmers and their advisers and delivered by States and Territories. This process will involve liaison with senior advisory personnel, farm management consultants and producer representatives in the States to ensure that the training packages and extension programs are relevant and meet the needs of farmers as well as their service providers.

Source: Australia. Minister for Primary Industries and Energy (Simon Crean), 'New National Drought Policy', Media Release No. DPIE 92/66C, 29 Aug. 1992.

 

Appendix B

Chronology of Commonwealth Drought Assistance Since 1971

1971

Drought assistance part of new National Disaster Relief Arrangements (NDRA).

1982-83

Severe drought in Eastern Australia.

1982

Introduction of Drought Relief Fodder Subsidy Scheme (cost $122.1m) and Drought Relief Interest Subsidy Scheme (cost $37.7m).

1983

Commonwealth/State Working Group releases report criticising drought policy measures.
Establishment of National Drought Consultative Committee.

1985

Australian Agricultural Council endorses continuation of drought carry-on loans within NDRA.

1988

Report of Commonwealth/State working group on effects of drought assistance policies on land degradation.

Apr 1989

Commonwealth announces decision to remove drought from NDRA.

Jul 1989

Interim report of Drought Policy Review Task Force.

Aug 1990

Final report of Drought Policy Review Task Force.

1991

Start of current drought.

May 1991

Commonwealth Drought Policy announced.

Sep 1991

Drought relief funds ($6.5m) provided to Queensland and NSW under RAS carry-on provisions.

Oct 1991

Easier access to social security benefits for farmers facing hardship.

Jul 1992

Report of Senate inquiry into national drought policy.

Aug 1992

National Drought Policy agreed by Commonwealth and States.

Sep 1992

RAS Special Drought Assistance ($14m) to Queensland and NSW. Announcement of major changes to RAS.

Mar 1993

Additional RAS Special Drought Assistance ($2.5m) to Queensland.

Apr 1993

Additional RAS drought assistance to Queensland and NSW for wool producers ($5m) and non-wool farmers ($6m).

Aug 1993

Training assistance for Queensland grain growers and farm employees ($1.8m).

Sep 1993

Additional RAS drought funding to Queensland ($3.1m).

Oct 1993

Additional RAS drought funding to Queensland ($2.0m).

Dec 1993

Additional RAS drought funding to Queensland ($7.1m).

Aug 1994

Additional emergency funding to Queensland and NSW ($14m).

Sep 1994

Commonwealth drought assistance package ($164m).

Dec 1994

Supplementary drought assistance package ($112m).
Additional regions of NSW and part of Tasmania declared as exceptional drought areas.

Feb 1995

Exceptional drought funds provided for parts of Eyre Peninsula of South Australia ($11.3m).

May 1995

Exceptional drought funds provided for additional regions of NSW and part of Victoria ($40.3m).

 

Appendix C

Drought Exceptional Circumstances

Drought Exceptional Circumstances

Source: Australia. Agriculture and Resource Management Council of Australia and New Zealand,
Record and Resolutions, Adelaide, 28 October 1994:8.


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