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Property rights and market forces

By David Leyonhjelm - posted Thursday, 4 August 2011


The tug of war between farming and mining is in danger of becoming a zero sum, winner-takes-all contest. One side argues that if mining prevails, Australia will run out of food. The other side says that if farming wins, Australia will go broke. Governments and the public are being asked to choose a side.

If the issue were subject to market forces, it would sort itself out. Where land was more valuable for farming, mining would not occur. If mining generated more profit, it would take priority. If food production fell, prices would rise and encourage production in other areas. And in many cases a combination of farming and mining, with due consideration for each other, would yield the highest overall profits.

The reason the market cannot operate freely is that around 150 years ago state governments passed legislation claiming mineral rights for themselves. Farmers and other landowners merely own the surface of their properties.

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Prior to that, under common law, landowners retained all rights beneath their land including mineral rights except for gold and silver. In the USA that remains the situation, although it is now virtually unique. Most countries have taken the same approach as Australia.

To farmers the result sometimes looks like a zero sum game. Although there are rules for negotiating access, exploration and mining can occur on their property whether they like it or not. They are entitled to compensation for any loss of value of their farm or enterprise, but receive no benefit from anything extracted. They may be partially or completely out of business for a long time or indefinitely. Moreover, while compensation is typically adequate, there is a risk it may be non-existent if a mining company goes broke or causes widespread disruption such as harm to a subterranean aquifer.

Miners, not surprisingly, point to the economics. Mining dominates the economy in a way that agriculture did a century ago. It is mining, not agriculture, that pays for schools, hospitals, roads, bridges and numerous other government funded services. Mining is what saved Australia from the GFC and is the reason our economy is holding up compared to the rest of the world. Moreover, coal seam gas has the potential to free Australia from reliance on imported oil. Locking mining out of farm land would be economic suicide.

The notion that some farm land is too precious or productive to allow mining under any circumstances is utter nonsense. Australia produces more than twice the food it requires for its own consumption. Furthermore, while some farming land is obviously more productive than others, most land can be used for farming given water and fertiliser.

It is nonetheless understandable that farmers resort to such emotive arguments – they have little else to rely on. And unless governments come up with an acceptable method of reconciling the competing interests, they will continue to find themselves under assault from both sides. Ignoring it will not help.

Despite what the law says, a system in which land owners are automatically entitled to a share of anything extracted would be a step in the right direction In the US, landowners are able to weigh returns from farming against the potential of mining. There is simply no need to quarantine highly productive land – it would not be worth sacrificing for mineral extraction unless it generated more in royalties.

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If lifestyle considerations were more important to the landowner than economics, extraction that was compatible with continued farming such as coal seam gas might generate lower expectations of royalties than an open cut mine.

It is no accident that the US has half of all the world's oil wells, and that its coal seam gas industry is considerably more advanced than ours. A key difference is that landowners have skin in the game - ownership of mineral rights is a primary motivator for exploration and extraction.

For governments, the solution is to create an environment in which a market based approach can emerge. But for that to occur, a more rational approach to property rights is needed. Already there are separate titles for land, water and mineral rights relating to the same property. If and when the carbon farming initiative is implemented, there will also be titles for carbon credits. At the very least, the transparency of a single registry is essential if conflict and confusion are to be avoided.

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About the Author

David Leyonhjelm is the Liberal Democrat Senator for NSW.

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