Return to search

Australia’s drought policy is of little benefit to investors

The Australian government’s interventions in the sector to subsidize farmers struggling with drought may ultimately do more harm than good.

Risk is a fact of life for investors – and investing in agriculture comes with its own unique risks.

Climate change has the potential to worsen the risk profile of many aspects of agriculture, by reducing yields, lowering land values and even affecting commodity prices in unforeseen ways.

And there is perhaps nowhere among major farming nations where climate change could have such an obvious immediate impact as in Australia.

The recent report from the Intergovernmental Panel on Climate Change that examined what the world might look like once global warming has reached 1.5-degress Celsius above pre-industrial temperatures received a disappointing response from Australian politicians, to put it mildly.

Michael McCormack, the deputy prime minister, (who, for our non-Australian readers, is also the leader of the National Party; ostensibly the party that represents the countryside and, thus, farmers’ interests) said government policy would not change based on “some sort of report”, seemingly ignoring the fact that the IPCC’s efforts represent the broadest scientific consensus available on the risks associated with climate change.

This year, drought has hit many farmers in real ways across New South Wales, Queensland and Victoria. Moreover, while there is disagreement about attributing the severity or frequency of droughts to climate change, the evidence is clear that temperatures are rising and rainfall is becoming less reliable in many regions.

Last week, the Australian government announced a new A$5 billion ($3.5 billion; €3.1 billion) Drought Future Fund.

Prime Minister Scott Morrison said the money will be used for community services, research, assisting the adoption of technology, providing advice, and for infrastructure to support long-term sustainability in the event of drought, through capital and ongoing initiatives.

It remains to be seen on what precisely the cash will be used for in individual cases, but one thing that was mentioned multiple times in the PM’s media rounds following the announcement was providing upgrades to water infrastructure.

If this is done in a coordinated, strategic way, this should be welcomed. But if it is carried out in a reactive, ad-hoc manner – as many fear it will – it could be counterproductive, as subsidizing individual farmers will not help fix the structural challenges the sector is facing.

When talking to ag fund managers, more than one has bemoaned the perception problems created by media coverage of drought in Australia, where starving livestock are shown in bone-dry paddocks. Of course, this is the reality for some. But for many, it is not – or, at least, their farming operations are performing well enough that this isn’t threatening the viability of their business.

There has been pushback from some corners of the industry this year against the notion of hand-outs for farmers, with Agribusiness Australia CEO Tim Burrows sticking his head above the parapet repeatedly on the issue and getting some public flak for it.

As one fund manager told us: “The best way to prepare [for drought] is for businesses to be profitable – that then makes them sustainable. Propping up the bottom end just perpetuates the problem and makes it harder for the good operators to continue to thrive.”

Short-term drought relief does have a place, but it should be sensibly packaged within a wider framework of reforms and investment.

Currently, beyond potential benefits gleaned from increased R&D spending that was mentioned by Morrison in passing, it’s hard to see how well-run, large-scale farms owned and operated by investors and fund managers will make much use from what is largely a package of subsidies. And unlike their counterparts in Europe and elsewhere, Australian farmers often pride themselves on being subsidy-free.

The fear among several investors we’ve spoken to is that intervention from the Australian government is unfair for those who have taken on the risks inherent in agriculture and managed them well to generate a return.

After all, as one manager put it: the government doesn’t intervene to manage risk for investors and operators in other sections of the economy, so why should it in agriculture?

Write to the author at daniel.k@peimedia.com