Wednesday, May 15, 2013

Comments On The Richmond Rural Crisis Summit Resolutions


Congratulations

Congratulations to Bob Katter, the Rural Debt Roundtable Working Group (RDRWG) and the Northern Gulf Graziers’ Group for organising the Beef Crisis Summit held at Richmond 7 May 2013.

A number of resolutions were passed at that meeting calling for a change in direction to ensure the sustainability of Australia’s rural export industries generally and the beef industry in particular.


Five Key Richmond Rural Crisis Summit Resolutions

The Rural Crisis Summit held at Richmond in Northern Queensland on Tuesday 7 May 2013 passed, amongst others, the following resolutions calling for:
1.                  the Federal Government to introduce a form of foreign aid to purchase 100,000 head of cattle from Northern Australia at a farm gate floor price of $1.50 per kilogram to reduce the risk of the Northern Australian Beef Industry collapsing;
2.                  establishment of a body to negotiate with the Indonesian Ambassador regarding further development of the live cattle export market;
3.                  the suspension of the $5 Transaction Levy on all drought declared shires and individually drafted properties;
4.                  the establishment of an Australian Reconstruction and Development Bank; and
5.                  the Federal Government to act to reduce the value of Australia’s uncompetitively high Australian dollar and reducing bank interest rates to internationally comparable levels.  

HuntBlog Comment on the Five Key Resolutions

1.         Government Cattle Purchase

The questions arising are:

(a)        If the Federal Government does buy 100,000 head of cattle in the form of foreign aid to Indonesia what will it do with them?

There appear to be two workable answers:

1.      live cattle export to Indonesia; or

2.      for the Federal Government to slaughter, process and package the cattle in Australia for distribution in Indonesia.

(b)       How would the Government decide which and whose cattle to buy?

Answer (a).
Live Cattle Aid to Indonesia

Unless the Indonesian Government agrees to accept the additional 100,000 head of cattle over and above the current quota, the net effect of the purchase of 100,000 head of cattle by the Government would be to deprive Northern Australian cattle producers from the sales of the same number of cattle to Indonesia and the only possible benefit to Northern Australian cattle producers would be if the proposed $1.50 per kilogram purchase price was higher than the price obtainable on the market for live exports to Indonesia.

The chances of Australia being able to negotiate live cattle food aid arrangements with Indonesia and establishing agreed distribution channels seems unlikely, especially in the short term.

A further question that arises of course is whether the Australian Government would be prepared to take the risk of footage being recorded showing the inhumane slaughter of cattle owned by the Federal Government in Indonesia.

Australian Abattoir Capacity

Whilst the sentiment behind The Richmond Rural Crisis Summit Resolution is admirable to the extent that the motion relies on the slaughter of the Government purchased cattle within Australia, it appears to overlook the reality that Australia’s beef abattoirs are currently all operating at full capacity – experiencing full shifts, extra shifts, double shifts, Saturday shifts at record weekly slaughter numbers with no capacity to kill any more.

To the extent that the call from the Richmond Rural Crisis Summit for the Federal Government to buy 100,000 head of northern cattle at a floor price of $1.50 per kilogram relies on slaughtering the cattle in Australia, the fact that Australian abattoirs are currently operating at full capacity, would seem to leave the motion dead in the water.
It is also unclear as to how the Government would overcome the fact that in the short term there are no logistics in place for the Government to can the beef and distribute it in Indonesia.

If the Federal Government did buy the 100,000 head of northern cattle and do a deal with abattoirs to slaughter them then the abattoirs who are already operating at full capacity would simply have to cut back on the number of cattle that they are already buying to make room for the Government cattle.

The net effect of the Government cattle purchase proposal would simply be that the producer would receive a subsidised $1.50 per kilogram which would probably be (at least on last week’s prices!) 30 cents above current market rates.

It would be simpler and more cost effective for the Federal Government to pay the affected cattle producers a direct subsidy handout, for the difference between the proposed $1.50 per kilogram and the market price being paid by the abattoirs.

Answer (b).
Whose Cattle Should the Government Buy ?

It would be practically impossible for the Government to buy the same percent of cattle from every Nothern Australian cattle producer.  If the Government favoured one producer over another there would be an outcry from those that missed out, that would be untenable for any elected Federal Government. 

2.         Negotiations With Indonesia on Live Exports

A Beef Central article on Tuesday 14 May 2013 described the meeting this week between Queensland Agricultural Minister John McVeigh and Northern Territory Primary Industry Minister Willem Westra Van Holthe, with the Indonesian Agricultural Minister Mr Suswono in relation to increased live cattle exports to Indonesia as positive.   

3.         Levy Moratorium

The questions arising are:

(a)        Is there power under the current Levy Regulations for the Government to suspend the $5 taxable Levy in drought declared areas?

(b)       The cattle price crash is affecting all cattle producers, whether they are in drought declared areas or not, so how is this proposal in accord with the Government’s levy principles and guidelines that levies must be applied equally amongst all members of the relevant industry?

Answer.      The suspension of the $5 transaction levy on all drought declared shires and individually drought declared areas would require amendment to the current levy legislation as the proposal would not comply with Principle 6 of the Government’s Levy Principles & Guidelines which apply to proposals for new or amended primary industry levies which states that:

-   the levy imposition must be equitable between levy payers.

So the short answer to questions (a) and (b) regarding the levy moratorium is no, the Government would not be able to make amendments to the levy regulations to suspend the $5 taxable levy in drought declared areas because it would be in breach of the Government’s Levy Principles & Guidelines.

4.         Reconstruction/Development Bank

The questions arising are:

(a)        How does a debt reconstruction function fit under one roof with development finance functions?

(b)       Will the combination of debt reconstruction and development finance functions under one roof give rise to a perception that the bank is being established to prop up failing businesses?

Answer       Again the short answer for both these questions is that on general principles reconstruction finance and development finance does not fit easily under one roof and if that were to occur the perception would be that the Bank was being established to prop up a failing industry. 

Economic rationalist concepts of the last half of the 20th Century resulted in the Development Bank concept falling out of favour because, rightly or wrongly, it was seen as unresponsive to market forces and often used to prop up unprofitable and unsustainable industries.

If Australia wants to seriously take advantage of the much touted Asian Food Bowl opportunities it is essential that long term finance is provided to fund innovation and development of the new rural industry focus with credit provided based upon the future profit that will flow from the innovation.

Essentially, traditional commercial banks need to mobilise finances, savings and term deposits and acquire liabilities that are individually small and protected from income and capital risk, consequently concentrating on short term maturity loans that are substantially liquid in nature. 

On the other hand, the credit required for most development projects tends to be individually large, substantially un-liquid in nature and subject to income and capital risk. 

5.         The Uncompetitively High Australian Dollar

On 7 May 2013, the same day that the Richmond Rural Crisis Summit meeting was held, the Reserve Bank of Australia reduced the cash rate to a record low of 2.75% and today the Australian dollar was trading at 99.75 cents to the US dollar, down from 102.72 cents to the US dollar on Monday 6 May 2013.

Conclusion

Congratulations once again to Bob Katter and to the Rural Debt Round Table Working Group and Northern Golf Graziers Group who have achieved so much by alerting the Australian public and Governments to the immensity of the challenge that the Australian cattle industry is currently facing.  

Since RDRWG commenced its rounds of crisis meetings across Australia:
·           the Federal Government has unveiled a $420M Farm Finance package for indebted farmers;
·           the Australian State & Territory primary industries ministers have agreed the framework for a new national package of Drought Programs to replace the existing exceptional circumstances arrangements;
·           the Reserve Bank has reduced the interest cash rate which has lead to or coincided with a fall in the value of the Australian dollar which have made Australia’s interest rates slightly less uncompetitive to those of our overseas competitors; and
·           the Queensland agricultural minister and the Northern Territory primary industries minister had a positive meeting with the Indonesian agricultural minister about a possible increase in live exports to Indonesia.

Whilst none of these measures may have gone far enough they are an important first step that may not have occurred without the efforts of Bob Katter and RDRWG. 

Another HuntBlog post setting out some thoughts regarding the underlying structural causes of the current crisis in the Australian Beef cattle industry and suggesting some possible alternative short and long term solutions will follow shortly.  

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