Shauna Phillips
School of Economics
Production risk and government policy:
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Final Exam
› Stand alone AREC3005 Final Exam Canvas site will be made live to students before the exam.
› On that site you’ll see a home page with exam instructions
› Exam will be released at the time/date of the exam in the Assignments
› The Assignments folder is also where the exam must be submitted.
Final exam Home Page
› AREC3005
› Agricultural Finance & Risk
› Some date 2022
› Date/Time:
› The exam is opened in the Assignments folder.
› Exam Duration: 2 hours 10 minutes + 30 min submission time.
› Exam Reading time = 10 minutes
› Exam Writing time = 120 minutes
› Exam Conditions: Open Book. Exam responses will be closely scrutinized for similarity or other apparent plagiarism or academic dishonesty, and will be checked by Turnitin.
› Detailed Exam Instructions for Students:
› IntegrityStatement
› The total mark of this exam paper is 80.
› This exam contains 4 questions. Students must attempt all questions.
› Students must upload answers to the Assignments folder of this Canvas site by ….
4 questions
› 3 questions- write essay style notes.
› 1 question – short answers.
› No need for a calculator.
› All material examinable, slightly more emphasis on material since mid- semester exam.
› Next week we will work through 2 sample exam questions
Production risk: drought
› Historically in Australia, severe extended and widespread droughts were expected roughly once every two of decades.
› Australia is an arid country-except for coastal regions. Driest inhabited continent plus climate is one of the most variable.
› Drought is a common production risk for agriculture – common in most places in Australia.
› Attempt to reflect these facts in policy -> farmers should manage risk
› Drought arises when there is insufficient water to undertake farming
operations.
› Millennium Drought, affected the Murray– (2002 to 2010).
› Federation Drought of 1895 to 1903.
› When should government step in?
› Most recently……
› Bureau of Meteorology (BOM) definition drought in Australia: rainfall over a three- month period being in the lowest decile of what has been recorded for that region in the past. However, there is real agreed definition, can be defined as meteorological, hydrological, agricultural, socio-economic.
› Recent history:
– 1996 – 2010 S.E Australia rainfall persistently well below average
– ‘Millennium drought’ was between 2001 and 2009 – ended with La Nina 2010 – 2011
– 2006 SE Australia second driest year on record, Murray-Darling particularly badly affected.
– 2014-2015 drought began to re-emerge SE Queensland and NE New South Wales.
– 2016 easing of conditions, but some parts SE Queensland and NE New South Wales
remained dry
– Drought continued through 2019
ABARES Drought Summary 2018
ABARES Drought Summary 2018
Crop production wheat-sheep zone reduced by 53% (mostly NSW) Offset to a degree by WA-larger than average wheat crop
Note 2018-19 drought offset by favourable economic factors: cropping productivity increased; high feed prices but high cattle saleyard prices.
Aggregate trends in farm performance mask significant variation between individual farms, industries and regions
Combined Drought Indicator NSW Dept Prmiary Industries
› The CDI comprises of four indicators: rain, soil water, plant growth, drought direction
NSW Summary
Non-Drought: 0.1 % Recovering: 0.2 % Drought Affected: 21% Drought: 52.1 %
Intense Drought: 26.5 %
CDI May 2020
CDI May 2022
Policy history (Godden,1997)
› Prior to 1971: Focus on ‘drought proofing’ agriculture through the expansion of irrigation.
– Irrigation scheme a major disaster
– “The Northern Myth” : cost benefit analysis on scheme- found that not only was the land unsuitable for large scale intensive agricultural development but the economics simply didn’t stand up when compared to the benefits of allocating the money in southern Australia. Irrigation schemes still fail to provide positive economic returns on public capital investment. Stage 2 of the Ord irrigation scheme ( cost $300m ; adds over 13,000 ha land. Initial proposal a $700m investment to develop a sugar – now proposed planting of sorghum to produce ethanol-monocultures attract pests that undermine profits- profits from cotton in the 1960s disappeared as pesticide costs rose). Distance from markets also a problem.
– Recent Green and white papers on agriculture call for more dams in Northern Australia part of government plan to develop Norther Australia.
– Murray- is a huge policy/enrivonmental/agricultural problem
Policy history (Godden,1997)
› 1971-1989: Federal & state government policy conducted under National Disaster Relief Arrangements and Recovery Arrangements(NDRRA). Included various support measures (e.g. interest rate subsidies, grants, rebates, loans, industry assistance). Drought support measure acted as form of risk management for those able to access them (Keogh, 2017). Federal-state dollar for dollar funding-states meet Federal spending
› 1989 decision to remove drought from the Commonwealth-State NDRRA – increasingly untenable to claim that drought a disaster in Australia’s variable
– partly driven by financial considerations
– policy described by some as “national Party slush fund”
Policy history (Godden,1997)
› Review set up: objectives -identify policy options which encourage primary producers to be self-reliant; to integrate drought policy with other relevant policy; advise on priorities for Commonwealth Government action in minimising the effects of drought in the rural sector
› 1990. Drought Policy Review Taskforce led to 1992 National Drought Policy. The underlying aim was to encourage farmers to adopt self reliance and better risk management measures rather than relying on government
Policy history (Godden,1997)
› The Task Force working definition of drought: “Drought represents the risk that existing agricultural activity may not be sustainable, given spatial and temporal variation in rainfall and other climate conditions”.
› Climate variability was seen as “clearly the norm” with extreme drought occurring when “agricultural production has been out ofequilibrium with variable climatic conditions for extended periods of time”.
› Task Force recommended the implementation of a national drought policy “as a matter of urgency”.
› Task Force argued that government assistance be provided in an adjustment context: Rural Adjustment Scheme (sustainable long term profitability) as the main assistance source
› Principles of self-reliance, risk management and recognition of drought as a natural feature of the climate.
› Drought would not be reinstated within the Natural Disaster Relief Arrangements.
› Policy aimed at developing of more profitable farm sector able to compete in deregulated market environment (as part of the broader national policy agenda of micro economic “reform”) and improve competitiveness in a sustainable manner.
› Distinction made between “normal” and “severe” drought (the latter provide for “exceptional circumstances” provisions of the Rural Adjustment Scheme)
› Schemes under the NDP:
– Continued Rural Adjustment Scheme (grants and interest rate subsidies (50-100%))
– Exceptional circumstances (EC) rule – Drought Relief Payments provided income support for farmers in EC areas
› Aim was also to assist those who were not able to be profitable over the longer term to leave the farm sector (adjustment assistance).
› Problems associated with adjustment assistance:
– Relationship between support and long-term adjustment as opposed to support during intermittent crises, and the separation of adjustment support ostensibly for efficiency reasons from the more general provision of temporary social security payments (Godden 1997).
Exceptional Circumstances
› Definition? In theory, an event of more than 12 months in duration and be a one-in-20 or 25-year event (ABARES 2012). For an event, such as drought, to be declared an exceptional circumstance, it had to:
– be rare and severe, that is it must not have occurred more than once on average in every 20 to 25 years and must have been of a significant scale
– have resulted in a rare and severe downturn in farm income over a prolonged period of time (that is, greater than 12 months)
– not be predictable or part of a process of structural adjustment (Botterill 2019)
› Problems with EC definition -trigger was declared in more than 5% of years, and in some locations for more than ten years over the period 1992–2008 (Productivity Commission 2009; Kimura and Antón 2011). “lines on the map” problem (admin boundaries). How to determine when a drought moves from “normal” to “exceptional”. Onerous and time-consuming application forms.
› Also, the frequency of droughts in southern Australia will likely increase with climate change (Hennessy et al. 2008).
› Climate change context – shift from “Exceptional circumstances” framework.
Drought Policy 1992
› EC drought relief instigated under 1992 National Drought Policy that recognised that providing assistance in response to a drought as a ‘national disaster’ does not support good risk management practices by farmers.
› 1997 onward, assistance provided in terms of – EC interest rate subsidies,
– EC relief payments
– Farm Management Deposit (FMD) : farmers can set aside pre-tax income in
good years for use in low-income years) (ABARES 2012).
› Farm Household Support Scheme: income and structural adjustment assistance for non-viable farms
› Welfare support for non-viable farms, business support for viable farms
Farm Management Deposits (FMD)
› Farm Management Deposits (FMD)
› Aim to help farms manage financial risk:
– fluctuations in cash flow- difficulties meet their business costs in low-income years
– -to increase the self-reliance of farmers. › Recent changes
– increasing the non-primary production income threshold for FMDs from $65 000 to $100 000
– allowing consolidation of existing eligible FMD accounts 2019.
Farm Management Deposits
CSIRO and BoM climatic assessment
› Climatic assessment looked at future climate patterns and the EC standard of a on in 20 to 25 year event.
› Report released 2008
› Review found drought conditions in Australia were likely to occur more
frequently and also be more severe
› Recommended drought assistance programs be restructured to help farmers prepare for drought rather than waiting until they are in crissi to offer assistance.
Productivity Commission Report 2009
› Argued EC trigger for drought discouraged good risk management
› PC argued assistance shouldn’t prop up “marginal” farm businesses.
– Expenditure by government during drought to be carefully evaluated in terms of incentives it provides to farmers to manage production risk.
– Providing funds to farmers whose enterprises are misaligned to the land and climate scape increases production risks, augments the costs paid by taxpayers, and exacerbates social costs.
– Support seen as “counterproductive if the aim is to promote a dynamic agricultural industry that is internationally competitive, and able to effectively manage risks”
Intergovernmental Agreement on National Drought Program Reform in 2013
› Coalition of Australian Governments (COAG) process:
– Aim to encourage farmers to better prepare for droughts and manage business
– End to Exceptional Circumstances Interest Rate Subsidies and Relief Payments. – As part of the new package of support, governments will provide:
– Farm Household Allowance (income support) without need for EC declaration – enhanced Farm Management Deposits Scheme
– farm business training-financial counselling service.
The Agricultural Competitiveness White Paper (2015)
› Sets out roadmap for practical action to grow the agricultural sector. › Several initiatives to help farmers prepare for drought:
– improved seasonal forecasting
– tax measures and farm insurance advice
– risk assessment grants
– funding for concessional loans
– Farm Household Allowance
– Rural Financial Counselling Service
– Farm Management Deposits Scheme
COAG 2018 The National Drought Agreement (NDA)
› The NDA: joint government approach to drought preparedness, responses and recovery, with a focus on accountability and transparency.
› Recognized in the agreement is the need to support farming businesses and communities to manage and prepare for climate change and variability.
› It focusses measures across all jurisdictions on bolstering risk management practices and enhancing long-term preparedness and resilience.
Intergovernmental Agreement on National Drought Program Reform 2018?
› Agriculture Ministers’ Forum (2018) extends Intergovernmental Agreement on National Drought Program Reform of 2013.
› “The agreement outlines the arrangements for implementing national drought program reform, replacing the Exceptional Circumstances arrangements”.
› IGA – between the Commonwealth and the states and territories.
Intergovernmental Agreement on National Drought Program Reform
› Dept of Agriculture & Water Resources (2019) › “Outcomes
– primary producers have an improved capacity to manage business risks
– farm families are supported in times of hardship.
› The following measures will be implemented under this agreement:
– a farm household support payment
– continued access to Farm Management Deposits (FMDs) and taxation measures
– a national approach to farm business training
– a coordinated, collaborative approach to the provision of social support services
– tools and technologies to inform farmer decision making.”
Policy tools in more detail (Dept of Ag. & Water Resources (2019))
› Farm Household Allowance
› Assistance to farm families experiencing financial hardship-eligible farmers up to 3 years of fortnightly income support- no need for EC
declaration.
› Farm Management Deposits (FMD)
› Help to manage financial risk- assists farmers to deal with fluctuations in cash flow (meet their business costs in low-income years )- to increase the self-reliance of farmers.
› Recent changes- increasing the non-primary production income threshold for FMDs from $65 000 to $100 000 & allowing consolidation of existing eligible FMD accounts 2019.
› Farm Business Training
› Building farmers’ capacity to prepare for/manage risk – improve risk management & decision making-Improves productivity, profitability and
viability of farm businesses.
› States and territories are responsible for encouraging the delivery and uptake of the national approach to farm business training.
› Farm business management skill set is included as part of the AHC10 Agriculture, Horticulture and Conservation and Land Management Training Package -nationally consistent training outcomes in farm business management. The national farm business training skill set includes the following units of competency:
Develop and review a business plan
Monitor and review business performance
Support and review business structures and relationships Manage risk.
Responsibility areas under IGA (Dept of Ag. & Water Resources (2019))
› The Commonwealth is responsible for:
– funding and delivering a time-limited household support payment based on farm needs
(reciprocal obligations that encourage resilience and case management).
– establishing and operating a Future Drought Fund, to enhance drought preparedness and resilience (legislation still not passed –argument about where funding will come from).
– providing continued access to incentives that support risk management, including taxation concessions, FMD and concessional loans.
– improving and maintaining time drought indicator information (BOM). › Each state or territory is responsible for:
– encouraging delivery and uptake of capability-building programs – animal welfare and land management issues during drought.
– Shared roles and responsibilities
Policy guidelines-focus on risk management
› Funding-$20.2 million over four years to help farmers with their decision making.
› Managing Farm Risk Program – one-off rebates (up to of $2,500 & not for insurance policy premiums) for advice and assessments to help farmers prepare and apply for a new insurance policy for drought and other risks.
› Examples of eligible activities:
– Eligible farms can apply for a rebate of the costs undertaking an assessment required by an insurance provider, compiling historical farm financial performance and production data, analysing insurance options based on a long-term, whole-of-farm risk assessment.
› To apply for rebate need a written offer or refusal from an insurer for a new or additional policy covering a peril or climatic event the farm uninsured against (last 5 years)-includes:
multi-peril insurance products
parametric products (based on rainfall or other climate factors)
single-peril products (eg. fire, hail and frost insurance).
Future Fund
› Future Drought Fund
› Established to provide funding for drought resilience initiatives.
› Fund starts with $3.9 billion. Earnings will be reinvested until the balance reaches $5 billion (expected in 2028-29).
› From 1 July 2020, $100 million will be made available each year to support Australian farmers and communities.
› Drought Resilience Funding Plan
– framework to guide funding decisions for the projects.
Potentially funded projects
› The types of things that could be funded may include:
– Restoring native vegetation for soil or water regeneration
– Financial and business planning for primary producers
– Training and information for primary producers in finance and business planning, managing climate risk and sustainable stock management
– Training and information on local climate variability and advice on climate risk applied to specific locations
– Research in drought resilience
– Improving data on fodder and impacts from drought, including market trends. ›.
Policy formation context
Source: Financial times
Drought policy context
› Currently no national drought policy
› Consequently, during periods of extreme drought policy decisions made in
ad hoc fashion in response to events
› News coverage of drought – great support for “the bush”
› Tensions between a policy process with clear structural adjustment objectives and the political pressures that arise during periods of severe drought (Botterill, 2017)
› Good policy formation requires data gathering, planning, consultation, calibration
Drought Policy Issues (Botterill )
› Difficulties in defining drought
– including distinguishing between “normal” and “severe” drought;
› High level of integration between the farm family and the farm business
– hence, should drought support should be directed at the whole farm unit or be limited
to the farm business?
› Question of structural adjustment, which has important implications with respect to eligibility for drought support programs, should support only be for farms that are viable in the long run?
› Structural adjustment naturally ties in with productivity in agriculture.
Market failure is basis for standard economic argument for government intervention (Hardaker et al. 2004)
› Market failure most severe for catastrophic risks – risks with low probabilities & high consequences
› Govt interventions can have risk implications
› Well designed policies can fail if public servants responsible for implementation incompetent,
corrupt under-resourced etc. (Murray ).
› Suggestion: policies to shift entire CDF to right – farmers prefer more income over less regardless of attitude to risk.
Is agriculture a special case for assistance?
› Why should government provide assistance in times of downturn if it does not do so for other sectors?
› Farming differs in that:
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