EMBARGO Till 3.30 p.m. 18/2/70
“Agriculture and Public Policy”
Given at the Annual Conference of the Australian Agricultural
Economics Society in Melbourne on 18 February 1970
by C. R. Kelly (Member for Wakefield)
When I returned to the backbench, I thought I ought to catch up with agricultural economic thinking, which I now realise had not stood still while I was sitting pre-occupied in a Ministerial chair! I thought that one useful way of doing this would be to attend this Seminar, so I eagerly signed my registration papers. The next thing I knew I was billed to speak. It seems a funny way of learning!
I have had no academic training. I hesitate to say I am a farmer pure and simple. Simple, anyway. We have been farming the same land for about 100 years now, and my grandson, the fifth generation is now in place. I am proud of the past performance of my family as leaders in rural thinking, and speaking for myself, I am more interested in the true welfare of farmers than I am in politics. So I speak to you today as a farmer. They say that:
“Only the toad beneath the harrow knows
Exactly where each tooth point goes.”
Well, this toad knows!
That the harrow is now really harrowing there is no doubt. I am well aware that we farmers are always inclined to foresee imminent ruin just around the corner. In spite of my farming background, I have always tried to check this tendency in my fellow-farmers to be too gloomy. I well remember a meeting of farmers in a well-favoured part of my electorate a few years ago when we were really making money. For an hour we wailed at the wall, bemoaning the cost price squeeze, high tariffs — everything! The chairmen then asked me, in rather a threatening tone, to say what I, as their Member — was going to do about it. I thought about this important and delicate question for some time, and then said mildly that I had nothing useful to suggest except that they get on their bikes and go home. There was a pregnant pause, a howl of laughter — I am glad to say — and they got into their Bentleys and went home!
But now we really have something to be gloomy about. The costs of our inputs have risen by an average of 2.4% a year for the last ten years, and the prices for our produce have only risen by 1.1% a year during this period. While productivity increases may have helped to offset these price movements for a portion of this ten years, for the last three years product prices have fallen steadily each year while farm input prices have increased steadily during the same period.
That the farmer is being hurt there is no doubt, but there are not many of us now. Some people are now asking, “Will it matter to the economy if the rural sector goes down the drain?” There was a time when a depression in the rural sector spread like ripples in a pool throughout the Australian scene. With our economy broader based, the effects are not nearly so serious, although I suspect they will be much greater than some optimists expect. It is true that serious droughts have not recently greatly slowed down the economy, but the effect of a drought is usually limited to two years. The down-turn in the rural sector looks as if it will last a lot longer than this.
The effect on our trade position too, has changed with the rise in mineral exports. Still, last year rural exports made up 55% of our total exports, and I have seen a projection which still leaves rural exports carrying about 40% of the burden by the middle of the 70’s. So a rural slump will still have important consequences on the trade figures.
However, the main threat to the economy of a rural slump is the real risk that the Government (in trying to help farmers) will do the wrong thing at the wrong time, and this will exacerbate the position of the farmer and lead to misallocation of resources both within and without the rural sector, and this will tend to bleed the economy quite seriously.
That the Government is concerned about the position there is no doubt. So indeed it should be. Some of the farmers’ problems are Government influenced, e.g. tariffs, wage policies, inflationary pressures, closer settlement schemes based on dairying etc. And in these Welfare State days everyone expects to be looked after. So I am sure the Government will do something to try to rectify the position. It is important that what it does is really helpful — not harmful.
How not to help
It is not hard to be destructive and point to examples of what not to do. The easy example is the dairy industry. I will not enter into the argument as to whether dairymen are efficient or not. They may well be. I know too, that there are less dairy farmers in Queensland and the Northern coast of New South Wales, that is, in the really difficult areas, than there were. But I also know that we are now producing more and more butter and that any system that encourages the production of increasing quantities of produce which we have increasing difficulty in selling is fundamentally foolish. One day the props which shore up the industry will break under the strain, and when that happens we may expect to be half-drowned in a flood of very stale butterfat, and this is not a pleasant prospect. This will almost certainly happen when we produce more vegetable oils than we need in Australia, and I think that this will happen within a very few years when the wheat-grower turns to safflower and linseed. There has been no pressure to do this until now, but when the wheat-growers bring the know-how and plant to bear on linseed production you just watch the figures rise. Then how we will justify the present restrictions on margarine I don’t know, and when margarine gets the green light the cow will take an awful kick in the udder.
I know that the reconstruction of dairy farms is the hope of the side. I think the idea is fundamentally sound, but it doesn’t seem to catch on. Why? One of the reasons is that we are subsidising the industry through domestic price arrangements, devaluation and industry subsidies at the rate of about $100 million a year. This has the effect of keeping people in the industry. We now offer them $5 million a year to reconstruct and hope they will leave the country, or at least consolidate their holdings. Consolidation is, of course, sound, but it would happen much quicker if we were not paying so much to keep people in the industry.
Wheat
The Wheat Stabilisation Plan is held up as a model of the kind of support that an industry should get — at least it used to be until recently. I agree that the idea of all of the wheat being sold through the Wheat Board is sound, and I commend the Board for its performance in recent difficult times, and indeed previously. But it is the stabilisation component in the Plan about which we ought to be suspicious. Wheat stabilisation discouraged me from growing wheat, when the world was hungry for it in the 1940’s, by keeping the price artificially low. It has recently encouraged me to grow wheat when no-one wants it by keeping the price artificially high. Or it did till quotas came in and imposed limitations. And now my quota is so small that I wouldn’t grow any wheat at all if I didn’t want to keep my quota alive. If I could sell it, I would.
The other element in the wheat scheme is the homage that we pay to the golden calf of the cost of production. Most of us in the industry have known that the figures were wrong and that a wheat-grower who couldn’t produce wheat at what was said to be the cost of production had no right to be helped. But the cost of production figures was kept high and this has certainly been a temptation for black marketing and an inducement to continue with the production of wheat, when it was fairly obvious that the supply was going to exceed the demand. And the high cost of flour milled from this wheat has, like the high price for Australian butter, been a factor in increasing living costs and wage demands. Both have, in the end, been paid for by exporters.
Wool
That wool is in trouble I know to my personal sorrow. Something should be done about it. There is a scheme lurking in the wings which masquerades as a cost compensation scheme. This is a nice name for a wool subsidy. Its supporters claim that it will insulate the industry from cost pressures around it. I knew that the pressures are there, but I also know that in the long run the only way to really help the industry is to do something about the pressures. To think that after our disastrous experience with wheat and dairy produce we would, with open eyes, embark on another exercise to do the same thing to wool seems incomprehensible. To insulate an industry from costs around it is the kiss of death to that industry. Say the world gradually comes to need wool less and less, as it may; are we to encourage the production of more and more as we did with butterfat?
And we will be up for really big money if we embark on the exercise. To offer us woolgrowers less than 5s a lb. is going to seem a bit petty. This would cost about $100 million, and 75% of this would go to 25% of the growers. But to limit the subsidy to the small grower would be even more silly. By some machination or other I would devise a way to divide myself into two for the purpose of selling wool. Secondly, those of us in the industry know that one of the few means available to us (as individuals) to reduce our costs is to produce more wool — in other words, to become larger woolgrowers. Limitation of the subsidy to the small grower would tend to push us in the direction opposite to the way we ought to go.
These three illustrations of the effect of subsidising export rural industries should suffice to show that salvation does not lie along that road. There are four basic reasons for this. One is that there is something fundamentally foolish about taxing Australians so as to subsidise the consumption of people overseas even though other countries may think that they can afford the luxury of doing so. Secondly, subsidies insulate industries against pressures and stop them from making changes which they must sooner or later make. Thirdly, G.A.T.T. is supposed to prohibit subsidies on exports and this it has effectively done with canned fruit. Fourthly, we have now two elections every three years and the pressure for popularity tends to prevent the Government giving an industry the medicine which is necessary for its well-being.
I am well aware that if the question as to whether farmers should be subsidised was simply a matter of equality of treatment with secondary industry then our case would be irresistible. The amount of subsidy we would receive would be small beer compared to what secondary industry receives by tariff protection. Away back in 1963 my estimation of the subsidy component which a large paper company received by tariffs worked out at $14 million a year. I have always wanted some economic student to do a Master’s thesis measuring the consumer subsidy that the chemical and plastics industry receives in a year. I have an idea that it would make the dairy industry subsidy look quite modest. So equity is on our side. But you remember the limerick:
“He was right, dead right, as he drove along
But he was just as dead as if he were wrong.”
Rural subsidies can be justified in justice; the trouble is that they almost always end up harming the industry they are supposed to help.
There are other panaceas we should regard with suspicion. Giving in to a sentimental, unthinking clamour for irrigation at any price is an example of what I have in mind: “The desert shall bloom as the rose” — and all that kind of nonsense. And the myth that the soils of the inland are all fertile, when we all know that the quick response of most arid soils to rain is due to their lying fallow most of the time, and this much-vaunted fertility soon disappears when irrigation water is regularly applied. And the myth that irrigation is the answer to maintaining stock numbers during droughts. I am not against irrigation as such, but when the taxpayer is asked the carry the burden of the capital costs of the engineering works — as he almost always is — and then is expected to subsidise the products grown on the same land — as he often is — the whole business becomes plain economic nonsense. To persist with this sloppy sentimental approach to irrigation is to waste resources in a dangerous manner, and will damage farming as well as the economy.
Another thing that we should watch with care is the clamour for protection for small farms, just because they are small. This question will be dealt with in detail later in the Seminar, by experts. But let me tell a story of a friend in England, a big farmer and a good one. When we met last I had a look at his farm figures. He had the subsidy component in one column and its size was staggering. I see him fairly frequently as he dodges around the world, avoiding (I think is the word) taxation. I remonstrated with him that he surely could not expect to continue to get such largesse. “Don’t worry, Bert,” he replied, “I shall be alright as long as there are enough poor struggling farmers around me!”
What to do
So far I have dealt with what NOT to do. Now I must tackle the far harder task of saying what the Government COULD do which would really help.
The first suggestion is that the Government should lead — not follow. I do not think we should foist a marketing scheme on an industry if the industry doesn’t want it, but there is far too much standing about waiting to be told what to do by industry leaders, who, after all, are frequently too close to their problems to see them in the national perspective which should prevail in Government decisions and who are, in many cases, as anxious about their popularity as we politicians. I am delighted, for example, to see the Government take decisive action at last about the Merino embargo. The present Minister for Primary Industry, Mr Anthony, is showing encouraging signs of realising that nettles don’t hurt if grasped with a firm hand. His authority and reputation will increase if it happens more often.
The Government should lead, not follow, and in doing this I suggest its philosophy should be influenced more by its national economic responsibilities and less by short term political considerations than has often been the case in the past. The instances of what not to do that I have mentioned, are but some of the many examples of this inversion of priorities.
For fairly obvious reasons we in the rural sector must come to terms with the basic economic and long-term political facts of life. We cannot go on indefinitely producing goods for which there are no profitable markets. Nor is it politically realistic to expect the Australian electorate (which is now more than 85% urban consumers) to continue meeting the high and growing subsidies needed to keep relatively few rural producers profitable. And this is particularly likely now the community does not so much need to do it for economic reasons. Even the once dominant wool industry now accounts for little more than 4% of a G.N.P. that is growing at about 7% per annum, and though wool is still a considerable export earner, woolgrowers are not going to immediately stop producing wool for sale overseas because it’s unprofitable. Whatever happens many will have little option but to continue production for at least many years.
In other words, the Government could serve us best by facing us with the realities of our situation rather than by feeding us the myths about our greatness and importance that we like to hear. Farmers are not economists. They look to and trust their political leaders more than most. The responsibility of these leaders to deal with them in a straightforward, even if unpopular manner is thus very great.
Similarly, governments would serve us better if they encouraged the self-reliance on which we must ultimately depend rather than encouraging us to believe our cause and needs so holy that adequate community help cannot be denied, should we get into trouble. There is also a grave and growing danger of farmers becoming disenchanted with their governments when these promises fail to materialise. Many who invested heavily in wheat production in recent years are already among the disenchanted. And this is not good for farmers, the government or the nation. When policies for change have to be implemented (as ultimately must be the case) mutual trust will be an essential ingredient of the success of these policies.
Furthermore, greater encouragement of self-reliance among farmers in the context of greater understanding of the realities of their situation, would almost certainly bring forward useful “self-help” proposals. Nor would such approaches to their problems necessarily lack farmers’ appreciation. An example is the recent self-help move by some woolgrowers to make changes in their industry through a large commercial organisation called Economic Wool Producers. Little is known of this but its basic philosophy is set out in a brochure sent to growers. However, the message of “face facts and help ourselves” does appear to be receiving gratifyingly strong support.
This is not to say the Governments could or should not help. They can and must — particularly as a substantial measure of rural industry problems stem from government policies. But I do suggest that this help must be given in the light of the economic and other realities of the national scene and of the industry concerned. This aid should be mainly by way of assistance to meet, and where necessary, to adjust to, those realities.
Helping our rural industries to live with the realities of the Australian economy and their overseas markets involves policies in two main areas: the economy as a whole and the industries themselves.
Our national income, the cake we all share, is now growing faster than almost ever before — about 7% per annum in constant price terms. This extra wealth can be made available to Australians either by reducing prices or by increasing incomes or by some of each. In practice, few prices fall and most rise, so the increased wealth is mainly distributed by higher wages, salaries and dividends rather than by lower prices; and in fact price indexes rise more often than they stay still.
Just for the man who sells his labour to keep his share of this growing cake, his real wages must thus rise at least as fast as the G.N.P. And few would deny his right to this. But the rural producer who is also an exporter with stable (or declining) prices, loses both ways. He does not share in the growth of the national cake because his prices do not rise and his costs are raised by this growth in national wealth.
There are many practical reasons why increases in a nation’s real wealth cannot be entirely or even largely distributed by price reductions. But there are policies which could help the exporter by increasing the areas in which prices could be reduced and restraining the tendency of others to rise — policies which would in turn reduce the need for money wages to increase so much to give wage earners a fair deal.
Everyone, of course, agrees we should do more about inflation. But with elections every year we do far too little about it. Immigration policies might well warrant a closer look. If they are adding too great an inflationary strain then we should start to ask why we want so many migrants. The answer often is to help us do our work. Yet in the same speech you often hear that we must subsidise certain industries because they employ a lot of labour, and so create employment for immigrants. This seems to be an example of sloppy thinking. Both arguments can’t be right.
Similarly, the Government should realise that high home consumption prices for agricultural products are paid for by the unprotected exporting industries in the end. This is far too often forgotten. Some of the burden of the high cost of Australian butter is carried by the dairying industry itself, but most is borne by wool. I do not say that home consumption prices are wrong. But we should not be afraid to measure them, and know who pays for them.
Similarly, we have a more clear-eyed approach to the tariff question. I am glad to see how much tariff thinking has improved during my Sabbatical leave — but the Government must be made to clearly realise that each tariff is a burden on exporters, primary and secondary. How big is the burden is a subject for much argument. I have seen figures used by the Department of Trade which deserve nothing but contempt. They estimate that the tariff increases the average woolgrower costs by 85c a pound of wool. Even if all tariff effects on farmers’ direct purchases were included in this calculation (which I doubt), we should not overlook the much higher indirect effect of tariffs on the general cost structure which is paid for by the unprotected export industries in the end.
There is also something that seems to me odd in the policies we adopt in some trade negotiations. We plead our undeveloped status to justify preferential treatment when in fact we have a greater proportion of our work force employed in secondary industry than has the U.S.A. We are very vigorous negotiators, but I would be much happier if I were sure we were negotiating in the right direction. Let me give two examples. In 1966 I was in Bombay looking at a plant where they were reconstructing Australian dried milk powder. I asked them if they had any difficulty in getting supplies. They replied, “There is plenty of powder available, but we lack foreign exchange.” In the afternoon I visited a most efficient cotton textile factory, and the management was bemoaning the fact that we had just but a 55% duty on cotton sheeting to stop it coming into Australia and so earning foreign exchange.
And what would our negotiating position be with the U.S.A. regarding their devastating duty on wool, if we were more reasonable about tobacco? The indirect subsidy through tariff protection and excise revenue foregone for tobacco is about $400 an acre a year. If we are really injuring wool to save an industry which, after we have saved it, costs us $400 an acre every year to support, then it seems a bit odd to me.
I also wish we could do more about restrictive trade practices. We may mean well but we haven’t done very much. Why do we need twice as many retail outlets for petrol per 1,000 motor cars as they have in the U.S.A.? If we had fewer outlets, the retail margin could be lower. Yet we do not seem to be able to prevent the petrol companies from combining to have pricing arrangements which make it profitable for them to have a petrol station on every corner. The exporter pays the extra cost in the end.
But while more enlightened policies in these and other fields could reduce inflationary pressures and aid the markets of rural exporters, there are important practical limits to what can be done. Without using the limitations as excuses for inadequate policies (as is often the case) farmers should be made fully aware of them and thus of the extent to which they must adjust to live profitably in the changing circumstances of our economy and of our markets. And this includes advising us fully and honestly of the extent to which it is practical for government to assist us.
In this other area — of specific policies towards rural industries — the need to come to terms with the basic economic and long-term political facts of life, is even more pressing.
I am sure for example, that the Government is concerned about the rural sector and will do something generous. A subsidy of 5c a pound on wool would cost about $100 million per annum. But if we have that kind of money to use I hope that we have the courage and wisdom to use it in ways that are in the long term helpful, not hurtful. Might this money not be better spend aiding mobility and reconstruction within the industry, say be freeing the lines of credit which hinder (among other things) the transfer, aggregation and reorganisation of many farms and properties.
I am not suggesting there is no place or case for subsidies. Indeed the profitability and financial situation of many farmers is now such that they are in no position to implement the changes necessary to make them profitable even if this is what they knew they had to do. But I am concerned that whatever assistance is given should assist towards a solution of our problems, not merely postpone dealing with them, for they’ll surely grow.
Why not have a look at our present policy of income tax concessions for non-farm profits which avoid taxation by being invested in land development, and so increase the price of land and the cost of land development in some areas. The present policy has worked well in the past. But if the taxpayer is to subsidise development in this way and then has to subsidise the produce from the development, it looks a bit queer.
Why not have another look at death duties? We only get about 1% of Commonwealth revenue from this source and yet it is a grave burden on the producer. I am certain the burden of probate is far more serious than is land tax. The latter is an annual charge which we can plan for. Probate hangs over us like a drawn sword with its uncertainties of time and amount. And its progressive nature works against aggregation. I commend the government for its action in this matter in the last Budget.
There are many other measures I could suggest which would help provide cures rather than opiates. But the main plea I make to the government is that it should assist by itself squarely facing up the realities of the situation and by encouraging farmers to do the same.
Turning again to wool. If we merely subsidise its price where do we stop? If virtue is to be the measuring stick we will all qualify — farmers, I mean, not economists or M.P.’s. If it is not virtue, is it to be need? That means the poorer an industry is, the more it is to be helped. So you keep an industry going because it is either inefficient, or demand for its product has fallen. The judgment cannot have been made by the size of its contribution to exports or butter would get very little and wool a lot. And before long we would all end up by taking in one another’s washing with the Government directing a bit more to this laundry or that and the nation, as well as the growers, being damaged in the process.
We must help without hurting; but as in most things in life the greatest and most lasting benefit is seldom found in the most pleasant short-run alternative. And you generally find that the popular things are done long ago. This is true for Governments as well as for farmers.
I hope the discussion which follows will tell us more of these alternatives and the means by which they can be realised.
