What's going on out west that there often seems to be a rural crisis happening somewhere? Part 2 - Terms of Trade.

Last week two influences crucial to understanding  what is going on for farmers today were introduced  - Climate and Terms of Trade
This week we look at Terms of trade.
Terms of Trade refers to the ability to make a profit that enables them to adapt to changing environment and technology.

Over the years the terms of trade has only gone one way - tighter. That means the farmer finds it harder to make a reasonable profit or return on investment.

Surveying the scene on John McKeon's property at Roto, near Hillston

Farmers, as a general rule, are price takers.The price being set by international supply and demand, which in the past has often been distorted by government policy to ensure stable food supply (especially in Europe after WWII when they suffered extreme food shortages, which then resulted in the '50's meat and dairy " mountains" ).

 Even today governments want cheap food for their people, often at the expense of farmer long term viability. You can then add into that duopoly purchasing power and distortion of supply/ demand ratios.

Farmers face unbalanced trading power where you have a large number of farmers trying to market to a few merchants who can then play one farmer against another to buy the produce at a cheaper price - this can then set a lower floor in the price attainable.

The duopoly purchasing power of the two major food retailers  in Australia results in further distortion of supply/ demand ratios. The classic example is the price of milk crashing because of the price war between Coles and Woolworth's running a loss leading market technique to get customers through the door. Usually the fresh milk market is considered the premium end market for milk for producers and processors, however, this strategy resulted in a downward pressure on returns to the milk processors and subsequently the farmers. When so much of the retail market is controlled by two companies (80 % combined in Australia) the option to sell elsewhere at a better price is extremely limited. If you are in a position to gain a supply contract to these companies, they virtually dictate the terms and conditions and hold the bargaining power if you wish to maintain the contract.

The issue of profitability is exacerbated in a variable climate such as Australia because the farmer relies on profits in the better years to carry him through the poor years. In the past that was not an issue, especially in the 1950's, and a farmer would reasonably comfortably handle a drought or a couple of tough production or trading years. However, today the terms of trade are much tighter and the ability to accumulate reserve funds are considerably diminished. Add on to that, decisions like the temporary banning of live exports to Indonesia (which effectively cut off income immediately for producers and transport contractors and will take many months ,even years to restore) and you have the right environment for financial failure of a large proportion of the agricultural sector as we are experiencing now, including the effects of the subsequent northern drought.

Farming in Hillston is dependent on a huge underground aquifer.

Farmers also face uneven market power.We are producing agricultural products for export and local consumption in a first world country with all the checks and measures and wages we believe we must have for our way of life, competing with countries with much less efficient but lower production standards and costs than Australia. These low cost countries then see the opportunity to export to Australia below Australian cost of production - especially horticultural products- and probably at much lower health and safety standards.




What are the solutions ? 

1) Long term finance at realistic cost is a must - we used to have a good system with the old Development Bank which was absorbed by the Commonwealth Bank and unfortunately, closed down.

2) Every effort to improve profitability through terms of trade - whether that be by reducing red tape and ability to adapt caused by such things as the draconian native vegetation regulations (which mean farmers are limited in their ability to make decisions about changing land for more profitable production) and ensuring a level market, not distorted by uneven market power or "dumped" imports.

3) The ability to claim tax write offs in good years for drought prevention measures (some of which we had back in the post WWII era).

Canola crop on the Hillston-Griffith Road

Agriculture will always be a significant industry in Australia. It is sustainable industry and it feeds all our peoples. Awareness of this by all Australians needs to be raised so farmers feel supported in their role. At present they feel unacknowledged and blamed by conservationists. Farmers feel they bear the brunt of the need to make changes to practices to conserve water and the land.

 Education of the city based population as to its constraints and opportunities is very important if we are to prevent strangulation of agriculture by emotionally imposed restrictions rather than science based development of modern agriculture.

* Blog information, this week is largely quoted, or summarised, from an article by- 

 Bruce Crosby, past farmer and agricultural contractor involved in soil and tissue sampling and testing and a member of Moree Uniting Church,  in response to a request from the Rural Chaplains for information on this topic.