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Farm Finance package is flawed - and there is a better option

The Federal Government’s new Farm Finance assistance package includes concessional loans to help farms restructure debt and invest in productivity. But this is a back-to-the-future response that carries…

The federal government’s Farm Finance package includes concessional loans to help farmers restructure and improve productivity - but carries the risk of heaping them with more debt.

The Federal Government’s new Farm Finance assistance package includes concessional loans to help farms restructure debt and invest in productivity.

But this is a back-to-the-future response that carries the risk of increasing farmers' debt levels. There is a much better way.

The concessional loans in Farm Finance are not a new idea. In fact they were available for nearly 20 years until they were scrapped in 1992.

The justification for their removal two decades ago related to the deregulation of the Australian financial sector in the 1980s and a belief that the commercial financial sector is much better placed to judge the viability of farm operations than officials in state rural adjustment agencies.

There was also a reluctance for governments to compete with or usurp the role of commercial financial institutions in the delivery of finance to farmers.

In spite of the end of policy support for concessional loans, the idea regularly comes up when times are tough for farmers, whether caused by drought, flood or, more recently, the high Australian dollar.

However, last week’s announcement is the first time for a very long period the federal Government has wanted to spend resources in this way. But for many reasons it is a poor way to provide rural assistance.

A fresh approach - although not fresh in our minds because we have been analysing and modelling it for over 12 years now - is to offer farmers financial relief through what are known as income contingent loans; loans against which repayments are only made if and when the borrower can afford to do so. The best known example of an income contingent loan is HECS but the approach can be adapted to a range of policy applications.

The basic economics is that farming is an uncertain business. For many farmers the best forms of assistance are those which smooth incomes out across the business cycle, and the government has clearly recognised this with the extension of the successful Farm Management Deposits Scheme.

An income contingent loan is essentially a mirror image of this scheme, allowing farmers to borrow from future good years in order to meet the needs of the present bad years – with the loan only to be repaid if and when the farm recovered from difficult circumstances.

There are two important feature of this type of loan for farmers. One, compared to a normal loan in which repayments have to occur on a regular basis (which would happen with the loans of Farm Finance) is that there is default protection – the farm is not at risk of repossession due to inability to meet repayment obligations. Two, they make life easier for farmers because loans are only repaid when farm revenues are high.

Again, the loans of Farm Finance have to be repaid no matter what the circumstances facing the farmer is, and this creates a significant problem for borrowers even if the loans have low or subsidised interest. The risk of the concessional loan is that, while it might provide short term relief now, it adds to the debt burden, and therefore the level of repayments, faced in the next downturn if it has not been paid off in the interim.

Income contingent loans to support farmers in hard times are a good solution for governments and farmers. In order to satisfy taxpayers that their money is being spent wisely, governments need to ensure that support is directed at those who deserve it.

This can result in excessive ‘red tape’ and frustration for farmers who need to provide large amounts of financial data to prove their eligibility. To see how important this administrative issue is for the loans of Farm Finance just check out the eligibility criteria announced for the scheme and start to calculate the red tape this will entail.

As with any form of government expenditure, every dollar spent on drought relief is unavailable for other purposes, such as disability insurance scheme or the Gonski reforms. This then leads to other budgetary pressures. And many farmers experiencing short term difficulties are asset-rich. It seems reasonable that they are assisted when they are in need but return some of these funds to the community – who on average do not have the same level of wealth – when they are in a position to do so.

Modelling of this proposal suggests that income contingent loans provide a realistic alternative to interest rate subsidies or concessional loans for farmers.

Yet where is the debate for the use of income contingent loans? Irrespective of the merit of specific policy proposals, there is clearly a need for look more closely at the nature of farm business emergency relief, and this has to involve more than just the farm community.

In an era of tight budgets and mutual obligation in many areas of government support, it would seem appropriate that farm financial assistance relief be subject to further scrutiny, particularly when there is available a viable alternative that makes life easier for farmers and saves government resources.

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7 Comments sorted by

  1. Tyson Adams

    Scientist and author

    I'm not a fan of these loans, nor the financial assistance direct payments side. Much like the much touted multiperil crop insurance, they can falsely inflate farm values, falsely retain nonviable businesses in the industry, and falsely assume that a profitable farming business will be paying taxes in the future to offset the assistance.

    I am all for supporting the farming sector, but I think there are other ways it can be done. My personal preference is for an environmental management wage, such that farmers are land stewards first, farmer/business people second. This takes a proportion of seasonal risk away and reduces financial pressures to have cash flow to service interest repayments, whilst also making sure that wind erosion, revegetation areas and remnant areas are maintained.

    It is only one idea, but there are surely others that are not so hell bent on propping up dying businesses and accruing government debt instead of personal and business debt.

  2. Ewen Peel


    Certainly a better approach to the problem than the low interest loan. I was quite surprised when it was announced that the government was going down the low interest path. It never really worked then and probably wont now.
    Unlike back in 1992, the costs incurred by a typical farm to produce a years production have increased dramatically and the guarantee of a profitable income has decreased now that most commodities are in a deregulated market. You could also through in climate change as well.
    So when things don't go according to plan they can now get out of control a lot quicker than ever before. It is a lot easier to incur some very big debts if you have a couple of failed seasons, where in the past it might have taken longer depending on your equity.
    This type of loan and repayment schedule might have a good fit for existing debt and not new debt. At least then it would not be inflating feed and land values.

  3. Alistair Watson

    Adjunct Professor, Centre for Water Policy and Management at La Trobe University

    The case for HECS type loans for farmers is weak. Banks know enough about their clients to decide whether they are capable of paying off loans from expected income. The situation with students is completely different. Banks are not in a position to judge the financial prospects of young borrowers. Likewise, potential students are ill-informed. One shoe does not fit all.

    1. Bruce Chapman

      Director, Policy Impact, Crawford School of Economics and Government at Australian National University

      In reply to Alistair Watson

      In a perfect world, Alistair Watson may well be right. However, for various cultural and political reasons, governments want to act on behalf of farmers facing debt stress. The reality of policy making is that policy makers often end up pursuing second or third best options.

      Concessional finance for farmers was abandoned by the Keating government in 1992 because, to quote then Minister Simon Crean, the government ‘should support the commercial financial system rather than act to usurp or compete with commercial institutions’.

      Income contingent loans are a better option than the concessional finance the government is now offering – both for the individual farmer and the Australian tax payer. The case for any government intervention may be weak, but the case for concessional loans is considerably weaker than it is for income contingent loans"

    2. imogen birley

      logged in via Twitter

      In reply to Bruce Chapman

      Hi Linda and Bruce,

      a couple of questions if you don't mind.
      1. We have a lot of unpaid HECS in Australia that's quite a debt to the Commonwealth as I understand it.How would your proposal work to ensure that a HECS-style system for farmers didn't just become a major debt hole for the Commonwealth? This seems particularly relevant given that climate change will make current farming practices in some parts of the country very shaky indeed if not unviable, meaning many more bad years than good…

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    3. Linda Botterill

      Professor in Australian Public Policy at University of Canberra

      In reply to imogen birley

      We have modelled the proposed scheme in detail and believe that it is a viable, and superior, alternative to other financing options that have been proposed to support farmers. In a realistic scenario, nearly 90% of the money would be repaid within seven years. The uncertainty you mention is a general issue which applies to any government policy around farm support. If you are interested in the details, we have published a number of reports and journal articles on this proposal which explore questions of eligibility and safeguards to maximise repayment. These can be found through a simple Google Scholar search or by contacting one of us directly.

    4. imogen birley

      logged in via Twitter

      In reply to Linda Botterill

      Thanks very much for the reply Linda, I'll go hunting for your papers and get in touch if I have any trouble