Most farmers would agree with the findings of the Productivity Commission’s Draft Report on the Impacts of Vegetation and Biodiversity Regulations: that current policy direction and legislation have had negative impacts upon rural production and farm viability. The Commission’s confirmation of the inadequacy of the financial packages on offer will also come as no surprise to landholders.
However, within the Draft Report there are two major shortcomings that will allow the debate “off the hook” and reduce the opportunity for achieving constructive change to the established policy direction and structure. Failure to identify any direct link between farm decision-making and land clearing is a serious structural weakness that places property owners at a distinct disadvantage in the debate over vegetation management. The links are the underlying direction of rural policy and the long-term decline in industry terms of trade, with the consequence that farm management is forced to focus continually on the need to improve efficiency and increase productivity to maintain farm income and long-term viability. Clearing of standing timber becomes a logical management decision on underdeveloped properties as an alternative to farm build-up.
Second, the robustness of the analytical framework of the Draft Report is weakened considerably by limited application of the chosen analytical tool, Coase’s “Problems of Social Cost”; and failure to illustrate the relevant third Coase Theorem under which property rights are delimited by government regulation or legislation. It can be shown theoretically, under delimited property rights that a policy of zero land clearing will prove costly to the Australian community by lowering overall social welfare. The model of delimited rights is particularly relevant to the Queensland situation with its large tracts of remnant vegetation and a current temporary ban on remnant-vegetation clearing to become permanent from 2006.This requires an underlying assumption of fairness and impartiality by government.
It is also possible to use the Coase analysis to structure a solution that would incorporate trading of property rights. Consequently, the initial inefficient delimitation of property rights can be moved to a more efficient and equitable allocation and increase social welfare of the Australian community to the optimum. This would require a fundamental change in direction of the current debate.
Forces Driving Farm Decision Making
While the Draft Report often refers to environmental policy, the underlying role of agricultural policy is not recognised. Consequently, it is difficult to find anything related to the role of agricultural policy direction and its impact at farm level upon profitability, viability and decision-making.
The direction of policy begun in the 1970s was to allow market forces to drive structural adjustment to create a viable market-orientated rural sector highly competitive internationally through increased efficiency and rising productivity. The Rural Adjustment Scheme and Agriculture Advancing Australia are examples of policy instruments specifically designed to assist the necessary structural adjustment demanded by the underlying policy direction.
It is a brave economist who is prepared to argue that underlying policy direction in any industry has no impact upon decision-making at enterprise level.
The Productivity Commission Draft Report (1999) on the effects of competition policy clearly recognised the role of industry terms of trade upon the farm sector.
Australia’s primary producers are generally "price takers" on world markets. They have little control over prices they receive and, hence, limited capacity to pass on cost increases
For the record however, between 1960-61 and 2000-01 industry terms of trade fell from an index value of 222.9 to 99.6 (ABARE Australian Commodity Statistics, 2001). This represents an annualised averaged decline of two per cent in industry terms of trade.
A break down of the component parts of the terms of trade demonstrates the significance of terms-of-trade decline as an important factor influencing decision-making at farm level. Over the 40-year period to 2000/01, the prices-received index increased at the annual rate of 3.7 per cent while prices paid rose by 5.8 per cent. This left a gap between input prices and output prices of 2.1 per cent that had to be filled by increased real output. Real output actually did slightly better, rising by 2.7 per cent (calculated from value of GVFP and the Prices Received Index).
Despite this increase in real output, the index of real net value of farm production fell from 199 to 139 representing an annual average rate decline of 0.9 per cent. To increase real output under falling net real income, production had to be financed by credit; and RBA statistics on rural debt show that annualised indebtedness rose on average by 8.8 per cent. The inference from this is that rising cost imposts drive production decisions, which in turn are financed by increasing debt.
This is an edited version of Ben Rees's reponse to the Productivity Commission, Submission DR227.
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