THE CURRENT CATTLE INDUSTRY AND RURAL AND REGIONAL CRISIS
REPRESENTS A CHALLENGE
FOR THE NEW COALITION GOVERNMENT AND THE NATIONAL PARTY
Congratulations to the Coalition and the newly elected member for New England Barnaby Joyce on their election victory, and to Barnaby Joyce for his appointment as Minister for Agriculture and as Deputy Leader of the Federal National Party. Congratulations to Warren Truss the leader of the Federal National party for obtaining the important Ministry of Infrastructure and Regional Development.
The Cattle industry is in crisis and rural and regional Australia has been in long term decline for a decade or two.
Cattle Industry Crisis
Real cattle prices are now the lowest they have been since the 1970's. When you take into account the significant increase in the average carcass weights for cattle and calves since 1997 it can be seen that kilogram for kilogram the crash in cattle prices in 2013 is far far greater than it was in 1974. (see HuntBlog Newsletter 6 May 2013 at www.HuntBlog.com.au)
Meanwhile the cost of cattle production and the burden of government influenced costs and charges on the red meat industry has skyrocketed with Australia's government influenced red meat costs and charges now being significantly higher than those imposed on Australia's overseas competitors.
The burden of these government influenced costs and charges on Australian red meat producers is exacerbated by the fact that European, North American and South American farmers are, unlike Australian farmers, heavily subsidised by their governments.
In other words in competitive terms Australian red meat producers are hit by a double whammy – receiving little or no farm subsidies and high government costs and charges compared to their overseas competitors who receive high subsidies and enjoy the benefit of very low government influenced costs and charges.
Real Australian cattle prices have continued dropping in real terms to 1970's prices whilst domestic beef consumption has continued its long term decline at a rate of 1.7% per year down from 42.3 kg per person in 1997 to 31.4 kgs per person in the 2012/2013 financial year.
Some cattle properties are currently unsaleable and have dropped in value by up to 50% since 2007/08.
Australia has the most concentrated duopoly supermarket power structure in the world and Australian farmers supplying the domestic market are being financially squeezed to the point that they are at risk of becoming unviable.
As John Carter advises in this week’s Land Newspaper, Australian cattle producers receive less than 25% of the consumer dollar for their cattle whilst US producers are currently receiving 47%.
Rural and Regional Australia Caught in Perfect Economic Storm
Australia survived the GFC better than any other OECD country and has enjoyed a growing economy without recession for the last 20 years but the consequent downside has been that in recent years Australia has enjoyed (or suffered from) a high value Australian dollar and some of the highest interest rates in the world, which have put our rural export industries into a position of severe disadvantage with our overseas competitors and foreign investors in rural and regional Australia.
Rural and Regional Decline and Farm Debt
Not surprisingly as a consequence of this perfect storm of events, rural and regional Australia generally, and the $12B a year cattle industry that is heavily reliant on exports, in particular, are in severe decline.
Australia's farming debt has blown out to unsustainable levels during the last decade with many farm incomes below the level necessary to service existing debt with no borrowing capacity left to deal with natural disasters such as flood fire or drought let alone expansion to take advantage of the much touted Asian food Bowl opportunities.
Declining Rural Population and Declining National Party Constituency
Meanwhile the population in rural and regional Australia has been declining.
In NSW the population of Sydney increased by 10% in the first 10 years of this century with the population in coastal areas increasing by an extraordinary 60% whilst the population in rural and regional NSW dropped by about 20%.
Australia's population is forecast to increase to 42 million people by 2050.
75% of Australia's population currently live on the coast and the population of major cities have increased by 10% in the last decade.
In the 40 years between 1969 and 2010 the number of farms in Australia dropped by almost 25% and the rural workforce dropped from 430,000 in 1967 to 360,000 in 2008 and abattoirs have lost about 40,000 jobs in the last 30 years.
In the same 40 year period rural and regional infrastructure has fallen into decline relative to the infrastructure in the cities.
As Warren Truss said during his address to the National Press Club on the 29 August 2013 “unless we can bring business and people to regional cities and develop new commercial hubs, the projected 42 million people we are expected to have by 2050 will grind our cities into gridlock”.
To the National Party’s credit Warren Truss announced at the press conference on the 29 August 2013 that the coalition government would deliver a dedicated National Stronger Regions Fund with an initial allocation of at least $1B over the next five years for social and economic infrastructure in regions with high unemployment. Each project will require 50% matching contributions from the proponent or Local or State Government.
The National Stronger Regions Fund is a good first step with $200K per year for five years commencing in 2015 will barely scratch the surface of decentralisation work that needs to be done to develop the new regional commercial hubs and to bring business and people to regional cities and towns.
Free Trade Agreements
During the last decade Australia has fallen behind to both the United States and our South Pacific neighbour New Zealand in terms of negotiating free trade agreements with important trading partners.
Australia is still trying to negotiate a free trade agreement with one of its most important beef export markets, South Korea. Currently Australia’s beef exports attract a 40% tariff into Korea whilst Australia’s largest beef export competitor to South Korea, the United States entered into a FTA with South Korea in March 2012 which has already given the United States a 5.3% tariff advantage over Australian beef exports to South Korea.
More importantly Australia has failed to conclude its free trade negotiations with China which commenced in 2007 whilst our South Pacific neighbour New Zealand concluded its free trade agreement with China in October 2008.
In the first twelve months after New Zealand signed its free trade agreement with China, New Zealand’s exports to China rose by 25% and in the first quarter of this year New Zealand’s exports to China jumped by 32% led by dairy products, logs and meat, with New Zealand’s exports to China surpassing New Zealand’s shipments to Australia for the first time.
New Zealand also currently enjoys a 5% advantage over their Australian counterparts with respect to exports of mutton into a number of Middle East countries.
Australian free trade negotiation with Japan commenced in 2007 but are yet to be concluded.
Outdated Rural Organisational Structures
Over the last 50 years, in response to changing trade and economic conditions, Australia's red meat collective organisations have been restructured in almost every decade as the collective needs of the red meat industry and levypayers changed and evolved.
The last much needed and then overdue red meat industry organisational change was introduced by the then new Federal Agriculture Minister John Anderson when the Coalition came into government in 1996 after a long period in opposition.
There are many cattle and sheep producers and processors, including large and influential, as well as medium and small cattle and sheep producers and meat processors, who think that the current organisational structures are outdated and no longer adequately serving the collective needs of the red meat industry.
There are also many red meat levypayers who feel disenfranchised by the current MLA board selection process and the Cattle Council, which is meant to set policy and direct MLA operations on behalf of grass fed cattle producers, are strapped for cash and urgently trying to reform and refinance itself.
A number of other levy funded rural industry organisational structures that have been reformed since John Anderson's red meat industry organisational reforms were introduced in the 1990's such as the wool industry organisational structure and the egg, grain and pork industry structures all have some form of directly elected boards with greater levy payer enfranchisement than under the current red meat industry organisational structures.
It is an axiomatic principle of jurisprudence that to be effective, social and industry organisations need to be structured in a way that will deliver the outcomes needed for the industry or group that they represent and that as times and needs change and evolve so to do the collective organisational structures need to evolve or change if the desired outcomes are to be achieved.
Outcomes are the product of the structures that give birth to them. Structures that are outdated and inappropriate to the needs of an industry at a particular time or in particular economic circumstances are not equipped to produce the outcomes needed by that particular industry in those circumstances or times.
If the current Federal Government is going to achieve what it needs to do for rural and regional Australia during the next decade they will need to be able to work with strong and well structured industry organisations that are truly representative of their constituents.
Australia’s Food Bowl Opportunity
The 21st century has been tagged as the Asian century with skyrocketing living standards, improved diets and demand for protein rich foods from emerging economies bringing predictions of a doubling in global demand for food over the coming half century.
Consequently, food security is becoming an increasing concern to countries around the world as populations increase with available prime farming land and water resources decreasing and many countries are becoming increasingly concerned about their ability to feed their populations in the future.
Australia is generally regarded as having the opportunity in these circumstances to become the 21st century Food Bowl supplier for Asia.
State Owned Enterprises
Yet at the same time as commentators are talking up Australia’s opportunities to become the food supplier to Asia in the 21st century, Australia is allowing foreign government financed and state owned enterprise entities to buy up prime Australian farming and grazing land, and Australian processing and commodity trading and handling companies, to secure food security for the future for their citizens, at the cost of ours.
Margaret McKenzie, lecturer in Accounting Economics and Finance at Deakin University, recently noted that foreign investment in property is more restricted than domestic investment in property in all 34 members of the OECD and is also more restricted in 10 non OECD countries who are signatories to the OECD principle of "national treatment". At least 15 of these 44 countries have additional regulation with respect to foreign investment in rural land.
The realities are that most countries in the world limit or control foreign ownership of farming land in some form or other including Indonesia whose government has just announced an intention to buy one million hectares of Australia's Top End cattle breeding land to obtain a cheap and secure supply of live cattle for their domestic feedlots.
As the editorial in this week’s Land Newspaper suggested (and I paraphrase) “the sale of Top End cattle properties to Indonesian interests might be a short term solution to revive an ailing property market but (sic) there are plenty of questions being asked about the long term wisdom of allowing sovereign entities to gain control of our food industry supply chain”.
Again, as the Land Newspaper said commonsense must support Tony Abbott’s promise to reduce the threshold for consideration of farmland to foreign buyers by FIRB as to whether or not such a sale is of “national interest” from $248M to $15M.
More work, however, needs to be done to explicitly define the term “national interest” in relation to the sale to and control by a foreign sovereign entity of the elements of Australia’s food industry supply chain.
The good news for Australia is that Barnaby Joyce, Senator Nash and Liberal Senator Heffernan (who headed up an inquiry into foreign ownership of Australia’s food industry supply chain earlier this year) are on the case and have all expressed concern that the current “national interest” FIRB test is out of date.
The Task Ahead for the National Party and Government
So the challenges for the new Agriculture Minister Barnaby Joyce whose electorate of New England breeds some of the highest eating quality cattle in Australia, and Warren Truss the Minister for Infrastructure and Regional Development to address the issues facing rural and regional Australia are great indeed.
Some of the pressing issues that need to be urgently addressed include:
- the ever increasing level of Australia's uncompetitive government influenced costs and charges,
- the economic power of Australia's supermarket duopoly,
- the long term decline in per capita domestic beef consumption which has eroded Australia's most important and reliable beef market,
- the negotiation of free trade agreements that provide true parity after government charges and subsidies are taken into account and true parity with free trade agreements negotiated by Australia’s trading competitors,
- an active decentralisation policy to ease the overpopulation drain on resources and infrastructure costs in Australia's major cities and coastal areas and address the continuing decline in population and services in rural and regional Australia, and
- the need for improved rural and regional telecommunications, road and rail infrastructure,
- the need for reconstruction finance and a regional Development Bank to tackle the farm debt problem and provide long term "patient" finance to take advantage of the touted Food Bowl development opportunities,
- the red meat organisational industry structures which were set up in the 1990's are in urgent need of a review and an update to enfranchise their members and levy payers and make them relevant to service the collective needs of the red meat industry during the next decade,
- a long term plan to protect Australia's food security and control the purchase of Australian farming and grazing land by state owned or controlled entities or entities financed by foreign governments.
HuntBlog wishes Barnaby Joyce, Warren Truss and the Coalition Government well in its endeavours to address these important issues.
A fuller account of the issues raised in this HuntBlog Newsletter including source references for the matters raised in this Newsletter can be found at www.Huntblog.com.au by following the links to the document section of Hunt Partners website.
See in particular the HuntBlog linked document entitled “Beef's New Direction Strategic Plan 2010” prepared by Hunt Partners for the United Beef Group Forum hosted by Graeme Acton at Paradise Lagoons Rockhampton in August 2010. A forum that both Barnaby Joyce and Senator Bill Heffernan attended as guest speakers.