The US FTA issue highlights policy failures in Australian agriculture

Sources: ABARE Australian Commodity Statistics 2003, p17
RBA Statistical Bulletin Financial Supplement March 1981 p115
RBA Statistical Bulletin Dec. 2003, pS40

Annualized Growth

Annualised time-series analysis demonstrate costs rise faster than farm production. In 1961, costs represented 62.5 per cent of GVFP; but by 2001 were 79.6 per cent. NVFP increasing at 4.9% annually suggests that nominal farm income fell proportional to production. With farm input prices rising in sympathy with the CPI, Real NVFP declined – 0.9% annually, inferring real value of farm income also declined

With farm costs outstripping GVFP, farm production expansion had to be funded by credit. Debt statistics and correlation analysis support an assertion that costs drive production, which in turn drives debt.

Over the long term input prices rise more rapidly than output prices and this explains the decline in terms of trade. This reflects a mal-distribution of market power across input suppliers, producers, and output markets; and persistent and protracted oversupply in commodity markets. It also suggests protracted oversupply in commodity markets. In terms of competitive efficiency this would indicate a number of issues:

• Les than optimal allocation of resources with respect to the wider economy
• Rigidities of factor markets across land, labor and capital
• Imperfect information flows
• Monopoly power exercised in both input and output markets

Agricultural policy inherently believes that increased efficiency and rising productivity will maintain profit margins under long term real price decline. This is not substantiated in the real world. Australian farming has become financially fragile over a long period. Consequences have been:

• Long-term falling real farm incomes
• Declining rural and regional business fortunes
• Narrowing of the industrial bases of regions
• Population redistribution to urban and sponge city destinations
• Contraction of services
• Rising levels of poverty
• Inability to hold the young and talented in rural communities
• Suicides levels of national significance in older males
• Overall damage to the social fabric of rural communities

If these perverse policy outcomes are to be remedied, the policy measures necessary  will be costly to public sector budgets at all levels. The wider community will pay the price in reduced services across education, health, transport, infrastructure expenditure, and law and order.

Because of these perverse policy outcomes, rural sector living standards have declined in contrast to rising urban living standards. Urban attention has begun to focus upon lifestyle issues such as conservation and the environment. Conflict between urban and rural Australian over lifestyle issues is now emerging.