The Productivity Commission has valued trees over lost farm incomes

Under conditions of declining industry terms of trade, increasing farm efficiency and rising productivity become the keys to long-term survival for farm families. Rural literature is replete with recognition of the role of increased efficiency and rising productivity at both farm and industry level to overcome the historic differential between rates of change in input and output prices in the struggle to maintain farm income.

Given the established policy direction and subsequent industry acceptance of benefits flowing from increasing efficiency and rising productivity, it should come as no surprise that under conditions of long-term real commodity price decline, efficiency and productivity improvement become the focus of farm management decision making.

Improved management techniques, application of technology, reconfiguration of farm resource use, and purchase of additional land are the parameters for increasing efficiency and lifting productivity on fully developed properties. For underdeveloped grazing properties, bringing relatively unproductive timbered land into a more intense production system through improved pasture becomes a realistic alternative to farm buildup. For an underdeveloped agricultural property, clearing virgin timber from idle land is a more logical option than farm build-up. Very often equity reasons dominate the decision for further development of underdeveloped land relative to purchasing additional developed land.

An un-discussed side effect of a prohibition on clearing remnant vegetation will be the impact upon young farmer entry. “Starter blocks” for young farmers are generally underdeveloped properties that lend themselves to improvement through development. The rising income generated by development flows on to increase farm valuation. Over time, the young farmer consolidates financially. At some future point, the young farmer has the choice of continuing with the development program or cashing out and using his improved financial position to buy a fully developed property somewhere else. His start in farming is, however, made possible by tapping the potential of an underdeveloped property.

Failure to acknowledge the underlying forces that drive the decision-making process at farm level is a serious shortcoming of the Draft Report. Because no direct link is established with why farmers need to clear remnant vegetation on underdeveloped properties the position of the farm sector is considerably weakened in the current debate. Political parties with electoral support agendas are thereby given an opportunity to deny the real world at farm-gate level for urban electoral support. Further, failure to establish the link undermines The Draft Report’s valuable contribution to the debate by allowing the criticism that an adequate understanding of how the farm sector actually works in the real world is not demonstrated.

Analytical Framework – the Coase Theorems

In The Problem of Social Cost (pdf, 62Kb) Coase identifies the problem for analysis as:

Should A be allowed to harm B or should B be allowed to harm A?
The problem is to avoid the more serious harm.

What this means is: should the values of the environmental movement be allowed to structure the drive for efficiency, productivity and long-term viability of the rural sector; or should the drive for efficiency, productivity and long-term viability of the rural sector be allowed to erode values of the environmentalist movement?

Which harm will least damage overall social welfare of the Australian community?

The answer is found by determining whether the value of the damage to environmental values will be greater or lesser than the value of lost potential rural production and its flow-on effects right through to impacts on the balance of payments and the value of the $AUD.

Findings in the Draft Report suggest that the former will be more damaging than the latter.

Joseph Felder (2001) presented the Coase analysis in simpler terms as the Coase Theorems 1,2,3: