Monday, March 17, 2008

Farmers facing drought & climate change

A lot of my research efforts over the past year or so have been devoted to thinking about the implications of climate change for managing biodiversity. In part this reflects my ‘greenie’ orientation which I think is consistent with my general conservative political philosophy.

Gradually however I have come to see conservation issues as part of a broader range of economic management problems including water resource management issues and agriculture as key auxiliary problems.

I posted here on climate change and biodiversity – a paper eventually published in revised form in Agenda (preprint here), here on agriculture business opportunities from climate change, here on joint agricultural and biodiversity management issues in relation to climate change – this resulted in this academic paper which is as yet unpublished, here on a remarkable paper by Terry Hillman on water resource management (not necessarily related to the issues of providing environmental flows) in the Murray-Darling to protect the environment, here on the proposed cap and trade scheme, here on the nexus between food supply, energy and climate change issues and most recently here and here on the water buyback policies.

I was pleased this evening to see a Four Corners show on the human dimensions of climate change and drought for six families in mallee country in north-western Victoria. It is all too easy for unthinking economists to treat struggling farmers much as they treat the unemployed as an inevitable ‘problem’ that inevitably arises as a consequence of economic and environmental changes. I hope I don’t ever come to even indirectly do this.

The picture was of a group of fairly optimistic farmers – perhaps overly optimistic - who have faced an 11 year drought and borrowed increasingly using their property as security in the hope that next year will be a good season. This optimism is often sustained by rejecting the hypothesis of climate change – the presumption is that the current drought will end and things will return to normal. One argument against this view is that the current drought is hotter than previous long droughts.

There is also a picture of experimentation and adaptation in response to climate change – new crop varieties being trialled, new land use technologies (‘farming systems’) employed and so on. The presumption is that it is the flexible well-managed properties that will do well.

The Commonwealth government is subsidising half the interest costs faced by farmers in difficulty – a policy widely disliked among economists on ‘moral hazard’ grounds – it encourages poor performers to hold on. Surprisingly to me there were strong divisions within farming communities over exactly this issue.

Also interesting to me is the fact that certain supply effects – for example increases in grain prices globally – are inducing farmers to ’hang on’. There is also a possibly related move of large corporations into the farming sector. These corporations can diversify their land holdings across different regions to smooth their cash flows – and in the case of livestock truck animals away from drought affected areas. These avenues are not so easily open to family farms suggesting one rationale for the increasing corporatisation of this sector (I posted on one such Australian company in the past).

My overriding impression from this show is that the optimism of some of the farmers seemed misplaced. Many too seemed very happy to depend on public handouts to keep them operating even though their businesses seemed at best marginally viable. Hanging on too long deletes a farmer’s equity in his or her property and carries a longer-term penalty. I strongly agree with Dr. Brian Fisher (who appeared on the show) that the decision to exit an agricultural business should be left to the market.

I'd be interested to hear from readers - particularly those with connections to rural Australia - whether I have caught the flavor of rural issues accurately or not in the remarks above.


Leon Bertrand said...

There are good reasons to doubt the severity/existence of climate change.

Why, for instance, has the globe been cooling in the last ten years?

hc said...

There are very few good reasons to think this in the mallee regions of Australia with steadily rising temperatures and the worst drought in history.

Yobbo said...

Even if you accept the entire AGW model hook, line and sinker, there is simply no way to tell whether climate change would be a net benefit or a net loss for the mallee region of Victoria.

The model just isn't meant to be so precise.

Long periods of drought have always been part of life for Australian farmers, there's nothing new about them.

The only new thing is the willingness of the government to subsidise farmers who run their businesses poorly.

hc said...

I think it is a net loss. Temperatures will rise, rainfall may increase or decrease (but probably decrease) but runoff and streamflow will fall as evaporation will be higher. Its in the area where forecasters believe losses will occur.

I agree that providing subsidies to farmers who are trying to hang on in a situation where their underlying business is unprofitable is inefficient - it is also environmentally destructive and can leave the farmers worse off if the debt they are accumulating cuts into the equity value of their properties.

This equity value can finance a change in occupation.

David Rubie said...

The interest rate subsidy isn't really for the farmers, it's for their creditors. If all the farmers decided that their properties were best sold and tried to leave with whatever equity they had left, who are they going to sell to? I'd seriously doubt that given a change of attitude (family farm, owned for 100 years etc. big sentimental value, grandad worked his fingers to the bone) there would be a single buyer for some of those marginal properties. Fire sale prices mean no equity for the farmer and a loss for the bank. I can't see it being allowed to happen, no matter whether the enterprises make sense as a business or not.

mangoman said...

I am a farmer and come from generations of farmers - although not on the same land. Not all of those generations have been able to always sustain themselves from the farm alone and I have been no different.

Changing conditions are something that farmers deal with constantly. You identify a nice little niche in the market and the government makes a decision that wipes out your competitive advantage, or the weather changes - either as a result of long term climate change or a drought or flood - and your current crops of choice fail.

Whatever it is you simply try to work out how to deal with it and either keep going or walk away. What you need is the best possible information and analysis on which to base your decisions.

I don't favour subsidies or other financial assistance to farmers and don't accept them. On the other hand, I can understand some being grateful for the help if a government is going to provide a handout that will reduce pressure for a while.

Perhaps what is happening in the mallee is really just a continuation of a movement that has been underway for many, many years - get big or get out.