5. Resilience to drought in Australia

Abstract

This chapter examines resilience to drought in Australia. Relevant agricultural policy frameworks are first presented, including an outline of drought risk governance according to the three-layer framework. This is followed by a discussion of how the country’s agricultural sector stakeholders consider the five resilience dimensions in their approach to managing drought risk.

    

5.1. Introduction

Australia has a diverse and export-oriented agricultural sector. The country is a major world supplier of a variety of products, including beef, cotton, sheep meat, sugar, wheat, wine and wool. At the same time, the farming system in any given area is highly dependent upon the natural resource base. Given the arid conditions that prevail over much of the country, the majority of farms are broadacre operations (essentially, farms raising non-irrigated crops, cattle and sheep) (OECD, 2015[1]). Additionally, the overall policy environment is based upon a market-oriented approach. Consequently, agricultural producers are expected to be self-reliant in the face of multiple risks.

Scarce and variable rainfall is a feature of the Australian farming environment. Indeed, previous OECD work has shown that due to variable rainfall and other climatic conditions, Australian farmers are more exposed to systemic yield risk than producers in a number of other OECD member countries (Kimura and Antón, 2011[2]). This is largely driven by the near constant threat or presence of drought, which is a recurring feature of Australia’s landscape (OECD, 2016[3]).

The agricultural policy approach to drought has shifted over time, just as droughts have become more frequent, and projected effects from climate change indicate that they will become more severe in the future (Hughes, Lawson and Valle, 2017[4]). In fact, drought is such a frequent event that it is considered the responsibility of farmers to manage as a normal business risk. Accordingly, the broader agricultural policy emphasis with respect to drought is largely one of self-reliance, through preparedness and risk management – ensuring that farmers have similar access to welfare services as other Australians, and have the necessary business management skills to respond to these circumstances and adapt or transform their operations to become more resilient to this risk.1 This approach to drought policy has developed over many years, including through policy experiments involving farm groups, and in collaboration with Australian state and territory governments (Commonwealth of Australia, 2018[5]). This same emphasis on preparedness to better manage drought risk is also applied to other risks facing the sector. While this general approach remains in force, recent severe drought conditions have motivated additional emergency government support measures, and provisions of existing programmes have in some cases been adjusted.

At the same time, the continued development of comprehensive water policies, largely in response to increasingly intense droughts, has played a major role in the management of risks by irrigating farmers, especially in the Murray Darling Basin (OECD, 2016[3]; Gruère, Ashley and Cadilhon, 2018[6]). The Basin is an important agricultural region, accounting for 46% of the country’s irrigated agricultural production value in 2014-15 (MDBA, 2017[7]). The development of the market-based water allocation regime in the Basin has enabled farmers to anticipate and adjust to drought risks according to variable supplies, decreasing the overall costs of droughts for farmers (Mallawaarachchi and Foster, 2009[8]; Holley and Sinclair, 2016[9]). This may have lowered the need for complementary approaches to cope with droughts in those areas.

Although evolutions in water policy have implications for how farmers manage resources in response to drought risk, the role of Australian water policies will not be developed in this case study.2 Instead, this case study will focus on how agricultural policy development can help strengthen the resilience of farmers to risks. These policies are particularly important for broadacre farms that are outside of the Murray Darling Basin.

This case study will first examine Australia’s agricultural policy landscape as it pertains to drought, including an elaboration of the relevant policies and strategies in the context of the framework for risk management and resilience. It will then explore how the five dimensions of resilience are manifested in the country’s approach to managing risk for resilience to drought before offering some final concluding remarks.

5.2. Current agricultural policy landscape

The Australian agricultural sector is strongly market-oriented, with domestic and international prices largely aligned for most products. The country’s approach to agricultural policy reinforces this orientation – direct support to producers is low, the country has no permanent farm subsidy scheme, and investments in research and development constitute a substantial portion of overall support to agriculture. Australia’s agricultural risk management framework mirrors this market-oriented approach. Government involvement is largely limited to providing support that encourages risk management and preparedness, welfare and other services to alleviate personal hardship, and ad hoc financial assistance in response to catastrophic risks (infrequent events that have severe impacts) such as natural disasters and animal or plant disease outbreaks.

Drought is just one of a number of hardships that can adversely impact farming businesses, but it is considered to be part of farmers’ normal operating environment in Australia’s agricultural risk policy framework. As a result, farmers are expected to manage this risk. Accordingly, there are now few risk management policies that are explicitly designed to help producers prepare for or cope with this risk alone. Instead, the majority of agriculture policies and measures that help producers to absorb the impacts of drought or adapt to its effects are contained within a policy toolbox that is designed to help producers manage all types of risks. This approach ensures that risk management decisions are made by producers themselves, since they have the greatest knowledge about the individual risks they face. At the same time, some (state-level) measures that could encourage risk-taking behaviour have persisted, and the scale of the most recent drought event motivated some additional ad hoc measures as well.

Consideration of drought as a part of normal business risk reflects a substantial realignment of the country’s agricultural risk management framework over the past few decades. The most consequential revision was a significant reduction in the use of measures that provide ad hoc, ex post support to farm businesses, combined with an increasing emphasis on measures that aim to build risk management skills and provide support to farm households. This shift came about through a gradual evolution of the policy framework. Prior to the 1990s, the government considered drought to be a natural disaster. In 1989, drought was removed from the joint Commonwealth-State Natural Disaster Relief and Recovery Arrangements, after an analysis of the framework indicated that drought policy was poorly targeted, distorted farm input prices, and disincentivised farmers from preparing for drought. At that time, policy makers determined that a risk management approach, rather than a crisis management approach, was more appropriate to effectively confront drought. This view was formalised in the 1992 National Drought Policy (NDP), which encouraged producers to adopt self-reliant approaches to manage climate variability. However, the policy framework put into place as a result of the NDP still operated on the premise that some droughts were beyond the scope of producers to handle. Accordingly, the NDP included provisions for ad hoc, ex post assistance if producers were located in areas experiencing an “exceptional circumstances” (EC) drought event.

Periodic reviews of drought policy in the ensuing years concluded that assistance based on these EC declarations was preventing farmers from achieving the objective of self-reliance and also undermining climate change adaptation. The system of EC declarations finally ended in 2013 with the implementation of the Intergovernmental Agreement on National Drought Program Reform. The policy framework that resulted from the 2013 agreement significantly reduced the use of measures that provided ad hoc, ex post support to farm businesses based solely on the occurrence of drought, and placed increasing emphasis on measures that aim to build risk management skills and provide support to farm households (although some ex post assistance to farm businesses was still available). The recent signing of the 2018 National Drought Agreement (NDA) continues reforms in this direction, laying out a joint governance approach between the Commonwealth and the states and territories that emphasises preparedness, responsiveness and recovery, with a focus on accountability and transparency. This agreement emphasises better co-ordination across all jurisdictions with the goals of bolstering risk management practices and enhancing long-term preparedness and resilience. While the 2018 NDA remains in force, drought conditions in 2019 motivated some additional actions to assist farmers and communities in drought preparedness and response, including revisions to some existing farm-level assistance programmes, additional support for drought-affected communities, and continued support for investments in longer-term resilience-building initiatives. These actions were detailed in the government’s November 2019 Drought Response, Resilience and Preparedness Plan (Department of Agriculture, 2019[10]).

The policy emphasis on preparedness is also evident when visualising the different risk management strategies and policies in the context of the framework for risk management and resilience. The top three levels (on-farm resilience capacity, on-farm risk management strategies, and market tools) indicate the skills, strategies, and instruments employed at the farm level with minimal intervention from the government, while the bottom three levels (ex ante policies, ex post policies, and public goods and no-regret policies) detail the policies or government activities that either help producers manage farm risk or enable overall sector resilience more generally (Figure 5.1).

Figure 5.1. Strategies and policies employed in Australia for risk management and resilience

Source: Author’s own elaboration.

On-farm resilience capacities increase the ability of producers to cope with, respond to, and adapt to all levels of risk. Australian farmers use a number of strategies that enhance their resilience capacity. For example, off-farm income has become increasingly relevant for producers. On average, off-farm sources accounted for around one-third of net cash income for broadacre farms in 2018 (ABARES, 2019[11]), increasing to over 50% for small broadacre farms with a total value of sales of less than AUD 500 000 (representing about 66% of all broadacre farms) (Martin and Topp, 2019[12]). Australian farmers also keep cash reserves in the form of farm liquid assets, which can be used to cope with financial shocks. In 2018, average farm liquid assets were estimated at nearly AUD 250 000, or around 5% of average total farm business equity (ABARES, 2019[11]). In addition to the importance of diversified income and equity reserves, previous OECD work indicated that producers employed specific farm management strategies to cope with drought situations, including storing fodder, reducing farm maintenance, or planting a different type of crop (Kimura and Antón, 2011[2]).

There are some market tools available for producers to manage middle-range risks that may have implications for management of drought risk as well. The development of multi-peril crop insurance policies has long been considered in the context of the Australian market, but recent reviews have found such programmes are likely infeasible without substantial government subsidisation (National Rural Advisory Council, 2012[13]). Nonetheless, some relatively new, privately-operated multi-peril insurance products are currently available to grain farmers in Australia, although take-up is very low. Additionally, weather derivatives are also being developed for certain industries (Laurie et al., 2019[14]). Forward contracting and single-peril insurance policies are well-established for some products, but their uptake is generally quite limited.

The policy measures in place can be classified into three categories: ex ante tools to manage business risk; ex post programmes that offer temporary support for farmers in financial difficulties; and the provision of public goods or the implementation of no-regret policies that contribute to building agricultural sector resilience.

Australia’s ex ante agricultural policies mostly focus on providing farmers with the tools necessary to prepare for drought and other adverse events, helping them to either mitigate the effects of shocks, or adapt to changing climatic conditions. One of the most widely-used tools in this area is the Farm Management Deposits (FMD) Scheme (National Rural Advisory Council, 2012[15]). This programme allows farmers to set aside pre-tax income from primary production in a good year, which can then be drawn upon during later years as needed. First implemented in 1999, the programme was intended to help producers manage financial risks in preparing for future challenges due to climate variability or market fluctuations. As of July 2019, there were around 50 000 active FMD accounts holding AUD 5.9 billion in deposits (Department of Agriculture and Water Resources, 2019[16]).

Various tax measures also assist producers in managing fluctuating income (OECD, 2020[17]). Tax averaging3 is widely used. Data from the Australian Taxation Office in 2011 indicated that 97% of individuals who earned income from primary production had accessed the income averaging system (National Rural Advisory Council, 2012[15]). Other provisions of the tax code – including accelerated depreciation for investments in water facilities, fodder storage infrastructure and fencing – incentivise investments in assets that improve drought resilience by allowing these assets to be written off over shorter time frames.

Ex post agricultural risk management policies are mostly intended to help farm households cope with the impacts of adverse events and improve risk management. For Australia, most programmes in this space are available to all farms experiencing hardship, regardless of the underlying reason. The first of these measures is temporary farm household income support through the Farm Household Allowance (FHA) programme.4 Under the FHA, qualifying farm households5 receive assistance every two weeks to help cover basic household needs, for up to four cumulative years. It is paid at the same rate as other welfare payments, so a partnered person could receive a little over AUD 500 each fortnight. Aside from the payments, participating households are also entitled to a financial assessment of their business, as well as assistance to develop new skills or attend training (Department of Agriculture, 2019[18]). In October 2019, legislation was introduced to provide an additional Drought Relief Payment to producers that had exhausted their four years of FHA eligibility (Department of Agriculture, 2019[10]).

The government also funds the Rural Financial Counselling Service (RFCS) (around AUD 17 million annually), which provides free financial counselling services for farmers, fishing enterprises, forestry growers, and small related businesses in – or at imminent risk of – financial hardship.6 Counsellors assist clients to understand their financial position and the viability of their enterprise, and to develop and implement plans to become financially self-sufficient. This assistance is expected to help businesses become more resilient to risks, or to take steps to exit the industry with dignity if long-term viability is not achievable (Department of Agriculture, 2019[19]).

Finally, the government provides concessional business loans to farmers and agricultural businesses that demonstrate financial hardship, although the programme under which this assistance is delivered has also evolved. In 2018, the Regional Investment Corporation (RIC) was established, with part of its mandate to deliver and manage government-supported concessional loans intended to help farmers and small businesses prepare for, cope with and recover from drought. Loans offered through the RIC include Drought loans, AgBiz Drought loans, and Farm Investment Loans.7 The Drought and Farm Investment loans are structurally similar (producers can borrow up to AUD 2 million at subsidised interest rates, and applicant farm businesses must be in financial hardship), but drought loan eligibility requires farmers demonstrate that their income has been affected as a result of drought. In addition, from 1 January 2020, the RIC offered amended Drought loans whose terms included two years interest free.8 In contrast to products targeting farms, the AgBiz Drought loans offered loans of up to AUD 500 000 to small non-farm businesses that directly provide primary production-related goods and services to farm businesses in affected areas, that had experienced a reduction in turnover as a consequence of drought.9

Beyond policies and strategies to manage drought risks, the government also makes ad hoc, ex post interventions. In the context of the most recent drought, an ad hoc initiative was undertaken with the goal of improving short-term fodder availability. In 2019, the government secured access to 100 gigalitres of water in the MDB at AUD 100 per megalitre to increase the production of fodder, silage and pasture (Department of Agriculture, 2019[10]). Outside of federal initiatives, some state governments provide ad hoc, ex post drought measures to assist farmers with specific activities, including subsidies for freight and fodder.

Outside of specific risk management strategies and policies, the government also funds a variety of public goods and has enacted no-regret policies that help to facilitate on-farm resilience capacity. First, the government invests in a range of general services for the sector that help farmers to prepare for and mitigate risk, or adapt and transform to confront a changing risk landscape, including market information, weather and climate information, climate change planning and assessment tools, and support for research, development and extension. In the public sphere with respect to market information, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) produces quarterly crop updates as well as short- and medium-term commodity outlook reports that help producers make informed short-term production decisions.

With respect to weather and climate information, the Bureau of Meteorology (BoM) provides a variety of reports that are useful to producers. In addition to releasing near-term forecasts, the BoM publishes a monthly drought statement, bi-weekly climate and water resource projections for the ensuing three months, and a bi-annual “State of the Climate” report detailing long-term trends informed by historical data. The BoM also publishes periodic “Special Climate Statement” reports that examine in detail specific significant weather and climate events, including with respect to drought [see, for example, (Bureau of Meteorology, 2019[20])]. The development of additional drought indicators, including improved forecasts and local information on emerging impacts, is also foreseen (Department of Agriculture, 2019[10]). Additional efforts have also been undertaken to improve the availability and quality of actionable climate information for decision-making. To further support the agriculture sector in adapting to climate change and managing emissions, Agriculture Ministers from all Australian jurisdictions agree to a co-ordinated national approach to agriculture and climate change in 2019. The co-ordinated national approach will drive collaboration between jurisdictions focused on four priorities: deliver information and tools for better decisions and climate risk management, drive research and innovation to support adaptation and mitigation, strengthen market opportunities and business models to build resilience, and prepare for increasing biosecurity risks.

In addition to providing information on climatic conditions, the Australian Government also provides a wider set of planning and assessment tools, learning resources, data and projections to aid producers in making business decisions to prepare for possible future conditions under climate change.10 These tools include guidance and information on best practices for adapting to changing climate conditions, as well as managing climate change risks. As a specific example, the Australian Government is working to improve the accessibility of practical weather and climate information for farm-level decision-making through the BoM’s publication of 58 “Regional Weather and Climate Guides”. These guides” are designed to provide accessible, user-friendly information on weather and climate trends in local areas to help farmers understand and manage their climate risk (Bureau of Meteorology, 2019[21]). Producer planning and farm business management capacities are further strengthened through financial literacy programmes in the country’s school, vocational and tertiary education system.

Australia also places great emphasis on the importance of research, development and extension (RD&E), with total public and private RD&E investment in primary production, sustainable resource use, agricultural inputs and the processing sector reaching AUD 3.3 billion in 2014-15 (Millist, Chancellor and Jackson, 2017[22]). One component of Australia’s RD&E system is the co-investment principle between public research and private industry that funds the network of rural research and development corporations (RDCs). These RDCs invest in research agendas aligned with industry priorities (Productivity Commission, 2011[23]), and several RDCs publish specific advice on drought (Rural R&D Corporations, 2018[24]). In addition to research, the other notable public good that contributes to a farmer’s capacity to manage drought risk is extension services. Extension activities are carried out by various organisations and private providers, with state governments and universities also funding RD&E activities.

5.3. Australia’s experience in managing agricultural risks for resilience to drought

Australia’s current agricultural policy framework treats drought as a part of normal business risk. This represents a shift from historical frameworks, which treated drought as a natural disaster, and then continued to offer ad hoc assistance in cases defined as exceptional to historical averages (using drought declarations). But subsequent reviews of those frameworks questioned their effectiveness in helping producers to improve self-reliance and preparedness for drought. This move to redefine drought as a normal business risk also shifted the policy focus to an ex ante framework focused on preparation. The shift has helped to largely discipline ad hoc, ex post assistance, but some measures that distort producer incentives to manage risks persist, such as freight and fodder subsidies. The following section examines how the policy framework has affected producer incentives and decision-making, with wider implications for the resilience of the sector.

5.3.1. Emphasis on ex ante policies and prevention encourages farm-level action, but potentially distorting ad hoc, ex post assistance remains

The bulk of the agricultural policies that Australia has in place to help producers manage drought emphasise ex ante strategies and encourage producers to take a long-term view. Consequently, much of the assistance available today from the government for managing drought risk are ex ante measures, such as FMDs, tax measures, research and knowledge generation and adoption. While some ex post assistance is available (the FHA, for example), these programmes are largely not specific to a single event, most are targeted to the farm households with the greatest need (by means-testing), and programmes also include provisions that help farmers make adjustments to their business in ways that reduce their likelihood of needing to access the programme in the future.

At the same time, ad hoc drought assistance persists, and efforts to disentangle drought-specific support from needs-based assistance have proven difficult. Ad hoc measures continue to be offered, largely in the form of freight and fodder support or subsidies at both the national and state level [although one state government has recently announced that they intend to phase out these particular subsidies – see Queensland Cabinet and Ministerial Directory (2019[25])]. Additionally, recent relief packages included drought-specific supplementary payments for FHA recipients, in spite of the programme’s general availability. Furthermore, some programmes that were previously found to perversely encourage poor management practices and disincentivise autonomous preventative actions have persisted as well. Drought-contingent financing in particular has remained in the policy framework. Although EC-based interest rate subsidies ended in 2012 after having been determined to be counterproductive in terms of drought preparedness (Gray, Oss-Emer and Sheng, 2014[26]; Productivity Commission, 2009[27]), concessional loans that are contingent upon having experienced drought were subsequently put in place under the 2014/15 drought package (OECD, 2015[1]). While not all new loans available through RIC are predicated upon the applicant having experienced drought, farmers are only eligible for “Drought Loans” if they can demonstrate that their income has been affected as a result of drought (RIC, 2020[28]).

In spite of these recent ad hoc assistance measures, previous analyses have indicated that the support measures outlined in the ex ante preparedness framework are working, in that a significant share of farmers are adapting to producing in drier circumstances or transforming their operations entirely. At the enterprise level, for example, the government’s 2009 Drought Review reported that from 2002-08, about 70% of dairy and broadacre farms in drought declared areas (as defined by EC declarations) did not receive any drought assistance, suggesting that a sizeable majority of producers were able to cope with the hazard using their own management strategies (Productivity Commission, 2009[27]). Further evidence for the effectiveness of the ex ante framework can be found in research from ABARES, which indicates that during the 1990s, farm productivity fluctuated significantly between good and bad years, with producers focusing on maximising performance in good years to offset the bad. Since 2005-06, however, farm productivity has fallen less in poor years, indicating that farmers are adapting to drier conditions by adopting technologies or management practices that maintain productivity in drier years (Hughes, Lawson and Valle, 2017[4]). Other evidence suggests that even greater transformational change may be underway, with Australia’s cropping farms moving out of lower-rainfall areas and into zones with higher average rainfall (Hughes, 2017[29]). The growth of the wine sector in Tasmania is another notable example.

Although recent policy packages have reverted to providing more drought-specific assistance, they have also recognised the need to support research and investment for longer-term structural change as climates shift. This priority is embodied by the Future Drought Fund (FDF), which establishes a secure revenue stream to finance AUD 100 million-worth of drought resilience projects annually, with projects funded beginning in July 2020. FDF spending is obliged to target projects that enhance the drought resilience of all farms and communities as a public good, and do not solely benefit individual farm entities. Funds can be used for different types of projects, including research and innovation, extension, technology adoption, improved natural resource management, infrastructure, and community initiatives.

Government agencies and industry organisations – including the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), Commonwealth Scientific and Industrial Research Organisation (CSIRO), state and territory governments, farming organisations and industry groups – also undertake long-term foresighting exercises to estimate the likely impacts of the evolving risk landscape. While valuable in evaluating the risk landscape holistically, these exercises may not hold many insights for drought occurrence, given that drought is already acknowledged as a perennial risk.

5.3.2. Ex ante policy focus largely developed from an analysis of the trade-offs between potential future outcomes under different policy approaches

Over time, ad hoc assistance has been reduced and agricultural policies reformed to support the long-term competitiveness of the sector. This occurred through a process where stakeholders weighed the potential costs and benefits of different policy options, with the knowledge that the path of continuing to provide ad hoc assistance would be costly, impede normal structural change, and perversely undermine the long-term sustainability of the sector. Faced with these potential future outcomes, policy makers chose to largely focus on designing tools and initiatives to support the sector’s preparedness to manage risks and mitigate their effects, while continuing to provide farmers with health and wellbeing support, along with limited access to financial support in cases of hardship. This approach to drought risk also has greater ripple effects on other stakeholders both up- and down-stream from farmers in the value chain – namely, it ensures that markets and incentives are not overly distorted by policy. Nevertheless, although the policy toolkit continues to focus on prevention and long-term sustainability, completely eliminating ad hoc programmes has proven difficult. Even as the policy paradigm is oriented toward long-term competitiveness, there remains a tension between allowing structural change and transformation due to ecological constraints, and providing assistance to the producers who would likely exit the industry – with negative cascading effects for surrounding rural areas – as a consequence of that transformation.

5.3.3. Iterative participatory processes and policy evaluations are key to responding to evolving conditions

While drought is considered a normal farm business risk, drought response frameworks continue to be periodically assessed (in both dedicated consultative sessions and as a factor in wider policy development processes) to help ensure that policies are accomplishing their objectives without creating unintended effects. Evaluations typically take place during or in the aftermath of a major drought event in order to inform evolutions of policy frameworks, and involve consultation with a wide range of stakeholders. Recent evaluations during the development of the National Drought Agreement 2018 included public consultations, roundtable discussions, and summits with relevant stakeholders (including the general public, industry bodies, state and national farming organisations, and state and territory governments). For example, the National Drought Summit held in October 2018 brought together leaders from all levels of government, along with experts from the agricultural, charity, community, banking and finance sectors, with a view toward helping both farmers and communities cope with the current drought and improve their resilience to future events.

The Future Drought Fund referenced earlier was one initiative unveiled at the 2018 summit, and it too will be developed using participatory approaches. Work is now well advanced on developing a Drought Resilience Funding Plan – a high level framework to guide the approach for supporting future projects and activities. The draft Funding Plan is being informed by public consultation and independent advice from a committee of diverse experts in fields relevant to farming, agricultural economics, natural resource management, research and innovation, climate risk and rural and regional development. Public consultation on the Plan began on 29 October 2019 and closed on 13 December 2019. The Funding Plan will be reviewed every four years to ensure emerging priorities are appropriately captured and the Fund remains future-focused. To help inform these reviews, the Productivity Commission will conduct an assessment of each Funding Plan before it expires, including having regard to the economic, social and environmental outcomes.

One of the key outcomes of these types of collaborative processes is a mutual understanding of thresholds and responsibilities when it comes to managing risks. Since the first iteration of the NDP in 1992, the Australian Government’s policy objective has been to encourage primary producers to adopt self-reliant approaches. Although the measures and tools have evolved in the ensuing years, this message has driven the policy dialogue – farmers are responsible for managing their drought risk, but there are a number of tools that can be used if farms are facing hardship.

Policy reforms should be accompanied by clear messaging to inform stakeholders of the change, but even so, it may take some time to fully communicate new thresholds and responsibilities that result from shifting away from an ex post assistance framework to one based on self-reliance (in this case, away from the EC model of the past), since producers form expectations of support from earlier experiences. For example, during the 2019 independent review of the FHA, the panel of experts found that many producers held the viewpoint that the FHA was a drought relief payment, and they expressed frustration that they were not able to access it if they were experiencing drought but did not otherwise qualify (Lawrence, Somerset and Slonim, 2019[30]). Recent drought-specific supplementary payments offered to FHA recipients who have exhausted their four years of eligibility may further entrench this belief.

In addition, governments should be consistent in policy responses deployed at times of crisis in order for farmers to credibly believe that the policy position has changed in practice, and not just in principle. The Australian government has largely succeeded in this space by offering most assistance through means-tested interventions (such as the FHA or concessional loans), but changes to programmes in the midst of a crisis may confuse the message. The reinstatement of drought-contingent financing products during the 2014-15 drought referenced above is one such example.

Many of the individual agricultural support measures that farmers rely on during drought and other hardships have also undergone periodic independent reviews. For example, the FHA was reviewed in 2018, and a performance audit report of the FMD scheme was released in June 2019. These evaluations tend to be qualitative, and do not typically include a quantitative assessment of whether the policies are meeting their objectives in a cost-effective way.

5.3.4. Clear boundaries and market signals provide incentives for preparation and adaptation, and are supported by measures to build farmers’ resilience capacities

The Australian approach to drought risk encourages on-farm investments to improve resilience by clearly delineating the boundary on responsibility for responding to normal business risks, including drought – that is, the Australian government has a relatively limited role in responding to drought risk alone (instead providing welfare and business support in the form of concessional loans, and tools and information to improve farm decision-making), so producers must formulate their own management strategies. Further on, competitive markets for inputs and outputs ensure that prices provide the market signals necessary for producers to make their own decisions regarding resource allocations given their own individual risk profile.

At the same time, the policy framework also provides an array of tools that enable producers to take a proactive approach to on-farm risk management, and to improve their operation’s long-term sustainability. With respect to improved on-farm risk management, for example, the FHA and RFCS include provisions that help farmers make adjustments to their business in ways that reduce their likelihood of needing to access these programmes again in the future. Outside of programmes designed to support on-farm innovation and adaptation, the suite of tools that helps farmers manage fluctuating farm business cycles makes producers more resilient in the face of all magnitudes of adverse events. These tools include FMDs that allow producers to set aside cash reserves during high income years to draw on in low income years, tax averaging to smooth annual variation in tax liability, and accelerated depreciation for investments in water facilities and other on-farm infrastructure. Exposure to competition in domestic and world markets also plays a fundamental role in encouraging on-farm innovation.

On the sustainability front, initiatives such as the National Landcare Program allocates resources to farmers to improve their environmental performance. Additionally, there are some programmes that encourage farm-level innovations, including support from the RDCs, or initiatives such as the Smart Farms Small Grants programme, which funds the adoption of best practices in natural resource management.

Despite changing farmer demographics and variable skillsets across producers, programmes designed to improve farmer capacity for business management, entrepreneurship, or adaptation are not specifically targeted toward young farmers, who may have less financial capacity to deal with downside risk. At the same time, evidence from a pilot initiative on strategic farm planning with a view toward improved business management indicated that farmers who participated in such initiatives were disproportionately younger, suggesting that there could be some scope for targeting these types of initiatives to younger producers in future (Keogh, Granger and Middleton, 2011[31]).

The Australian Government has designed their overall policy toolkit with the intent of ensuring that programmes would not crowd out other farm-level risk management strategies. There is no evidence that widespread crowding out has occurred, but there also has been no explicit analysis of this possibility. At the same time, some products could have that potential. For example, low-interest government loans could drive down commercial loan interest rates as lenders seek to attract business in competition with government lenders – potentially crowding out private sector credit and limiting the overall availability of credit.

5.3.5. Substantial investments in public goods provide critical information and technologies to support long-term decision-making key to sector resilience

Given that self-reliance is the core underlying theme for drought management in Australia, no regret policies and the provision of public goods form a substantial part of the government’s role in ensuring resilience to drought. This is most evident in the generation of research on both the effects of climate change and new strategies to adapt to or manage its effects. In general, the Australian Government prioritises spending on general services support, with a large share of that spending directed toward agricultural knowledge and innovation systems, including various projects dedicated to improving resilience of farmers to medium- and long-term risks (particularly climate change) (OECD, 2019[32]).

The country’s current research programme is attuned to the need to strengthen approaches to managing climate risk for the industry and support adaptation and transformation. Research undertaken by CSIRO, ABARES and state governments, as well as projects commissioned by the RDCs, all investigate the impact of climate change on Australian agriculture. For example, CSIRO and the Bureau of Meteorology jointly developed Australia's next generation climate model: the Australian Community Climate and Earth System Simulator (ACCESS), which provides weather forecasts, cyclone tracking, fire weather forecasting, flood warning and climate information (CSIRO, n.d.[33]). CSIRO has also carried out research specifically targeting enhanced drought response capacity, including research into precision agriculture, development of drought tolerant plants, and development of new cropping practices. One highlighted tool is the “Pastures from Space” project, which uses satellite data to estimate pasture biomass, facilitating farm-level decision-making regarding sustainable management of feed resources (CSIRO, 2019[34]). ABARES reports have also contributed to the national dialogue, including by highlighting how climate affects the productivity of broadacre farms (Hughes, Lawson and Valle, 2017[4]). State governments are also funding climate change research, identifying possible localised impacts in their own regions. Work underway through the RDCs has analysed the effect of climate change on various industries. One initiative targeting improved resilience is the Rural R&D for Profit programme, which provides AUD 154.4 million in funding over eight years for RDCs to co-ordinate national-level research for the benefit of all producers Box 5.1. All of these research initiatives, in conjunction with other programmes, help producers to improve their resource management with a view toward adapting to volatile climate conditions.

Box 5.1. Improved farmer resilience under the Rural R&D for Profit programme

Two example projects under the Rural R&D for Profit programme illustrate the kinds of research investments underway in Australia to improve long-term resilience. The first, “Forewarned is Forearmed”, equips farmers and agricultural value chains with the necessary tools to proactively manage the impacts of extreme climate events by delivering improved seasonal forecasts of extreme climate events to adjust their management practices accordingly.

The second, “Mitigation of Climate Change Impacts on the National Wine Industry by Reduction in Losses from Controlled Burns and Wildfires and Improvement in Public Land Management”, seeks to reduce the impact of major fires on the wine industry. The project accomplishes this task by generating knowledge and new technologies to better manage bushfire risk, while also developing tools and techniques to remediate affected grapes and wine.

Public extension also addresses outreach and education on risk management. Extension services in Australia are funded under both public and private mechanisms, with total rural extension funding estimated at AUD 316 million (about half of that coming from the private sector) in 2014-15 (Millist, Chancellor and Jackson, 2017[22]). For example, in 2016 the Australian Government helped to fund the “Tactics for Tight Times” programme developed by Dairy Australia and the Regional Development programmes to increase farmer resilience and the business management capacity of producers in the dairy sector. The programme included technical extension advice and appropriate management strategies, along with advice on the financial implications of management decisions and various farm business planning scenarios.

Other public goods that contribute to drought resilience include early warning systems and general market information. Early warning information for drought covers a wide range of products, since drought is considered to be a slow-onset event. As noted above, the Bureau of Meteorology publishes seasonal outlook weather forecasts that provide information on drought conditions. In conjunction, ABARES publishes periodic commodity forecast reports, which are forward-looking and cover a range of potential risks – drought included.

Finally, the general policy environment is also relevant to strengthening sector resilience against drought. Other programmes that target long-term sustainability and land improvement likely have additional co-benefits for drought resilience. Many of these projects are funded through phase two of the National Landcare Program, which provides AUD 1 billion in funding from 2018/19 to mid-2023 for partnerships with governments, industry, communities and individuals to support natural resource management and sustainable agriculture. Two programmes benefiting agriculture directly funded through Landcare include the four-year, AUD 34 million Agricultural Stewardship Package (which includes grants to farmers to incentivise the adoption of improved biodiversity practices) and the AUD 55 million Smart Farms Small Grants programme (which funds uptake of sustainable agriculture projects and adoption of best practice natural resource management methods and runs through 2022/23). Additional government initiatives may also have relevance for the sector. For example, the government released its overarching National Climate Resilience and Adaptation Strategy in 2015.

5.4. Conclusions

Australia’s overall agricultural policy framework has moved away from a paradigm of government support towards an environment where farm-level decision-making is based on market forces. This approach has facilitated structural change within the industry, and has made better farm-level risk management an integral component of the farm business toolkit. In this context, Australia’s agricultural policy approach to drought risk has also evolved over time, even in a landscape where the frequency of extreme heat events and the severity of drought conditions have been increasing. The policy framework has shifted from being a system that provided substantial ex post assistance for drought (mainly in the form of Exceptional Circumstances interest rate subsidies) to one that emphasises self-reliance and the importance of the enabling environment; and that supports preparation and improved farm risk management as the most effective means of combatting drought and its effects. This focus on farm-level risk management appears to be succeeding – productivity has been less variable in drier years, and the increasing FMD drawdowns in drought-affected states indicates that many farmers are using available tools to manage their risks on farm during difficult years.

A number of drought-specific ex post measures remain, however – some programmes continue to offer subsidies that may disincentivise preparedness, distort markets and hinder structural adjustment. Moreover, some producers continue to expect this support to be available at the federal level. The availability of some programmes, such as freight and fodder subsidies, or support for water to produce feed crops, underscores the challenges behind the political economy of reform. Particularly with respect to the ad hoc support for water for fodder crops, it is unclear whether the measure is purely a political rent, or if in fact the move suggests that existing policies and water management paradigms are insufficient to support farmers in extreme drought. Similarly, while federal government policy is not to provide business support, this does nonetheless occur through concessional loans and other measures. Although this intervention is unlikely to impede structural change if well-targeted, it could become a problem if loan uptake significantly increased. As illustrated by the current drought, the pressure on policy makers to “do something” when droughts occur means that this is a risk that should be considered. Recent OECD work indicates that success in reforming policies can be achieved, however, through evidence-based problem definition, objective setting and evaluation, the alignment of governance and institutions with the policy change, strategic stakeholder engagement to build trust, the rebalancing of incentives and the use of an adjustable sequence of actions (Gruère and Le Boëdec, 2019[35]).

The government’s emphasis on the importance of research and innovation will be key to the future success of Australian agriculture. The sector faces continued challenges to productivity growth (which slowed considerably in the 2000s, largely due to adverse impacts from adjusting to a changing climate), so innovations in new technologies and production practices are needed to ensure that farmers can manage drought risk (OECD, 2015[1]). Accordingly, there may be scope to improve the cross-commodity linkages between sector-specific RDCs in the area of drought management and resilience.

One essential component in the evolution of Australia’s policy approach to drought over time has been the willingness of policy makers and stakeholders to periodically review their policy frameworks, question underlying assumptions, and analyse the trade-offs of different potential approaches. Both drought-specific policy reviews and assessments of specific measures or programmes have proven useful in advancing the policy dialogue. Many of these assessments were qualitative rather than quantitative, however. While qualitative assessments are valuable for gaining insights into how the policies can be improved, in some cases they would be helped by more systematic collection and analysis of data to ensure that the policies are meeting their objectives in a cost-effective way.

The mixture of different programmes emphasising a self-reliant approach contribute to the various resilience capacities in different ways. Safety net (FHA) and income smoothing policies (FMDs and tax averaging) undoubtedly play a role in helping producers to absorb the effects of shocks by providing access to financial resources in difficult years. They may also have wider effects on adaptation and transformation, since, for example FHA recipients and clients are required to engage in activities that are intended to improve their circumstances, including diversifying operations, adapting their farm business or exiting farming. Financial counselling can complement programmes like FHA by helping to facilitate long-term behavioural change. Financial counselling supports farmers in hardship to address their financial management practices and make adjustments to their business. Capacities for adaptation and transformation are incentivised by transmission of market signals and an emphasis on self-reliance, but government spending on innovation, research, extension and other public goods plays an important role as well.

Going forward, greater emphasis on the capacities needed to support the further transformation of the agricultural sector and individual industries in response to an increasingly drier climate will be important, with attention also being paid to the extent to which recently resumed ad hoc assistance measures may impede this transformation.

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Notes

← 1. It is worth noting also that previous periods of severe water stress also motivated government actors to make substantial changes to the country’s water markets. For more context, see Gruère, Ashley and Cadilhon (2018[6]).

← 2. Several recent OECD publications have explored this issue at length. Recent OECD studies have characterised the Australian water allocation regime (OECD, 2015[37]), described the management of groundwater use in agriculture (OECD, 2015[38]), assessed the development and evaluation of water policies related to agriculture in the Murray Darling from the 1990s (Gruère, Ashley and Cadilhon, 2018[6]), and discussed their propensity to mitigate drought risks in agriculture (OECD, 2016[3]).

← 3. Tax averaging ensures that farmers with fluctuating incomes do not pay more tax than salaried workers by averaging income over a given period and assessing tax on that average.

← 4. Note that the programme considers farm household income, and not farm income alone.

← 5. Eligibility is based on means tests for assets and income. For more details, see (Department of Human Services, 2019[36]).

← 6. FHA and RFCS are not formally tied to each other, but participants in either programme can access the other.

← 7. RIC does offer other products that are not intended for producers preparing for or recovering from drought. For example, RIC began offering an a new loan product in June 2019 – the AgRebuild loan – in response to the north and far north Queensland floods of January-February 2019, with loans of up to AUD 5 million available for eligible loan applicants, with a two-year interest-free period.

← 8. Existing customers were also eligible for a two-year interest-free period.

← 9. For more details on terms of eligibility, see https://www.ric.gov.au/agbiz-drought.

← 10. See https://www.climatechangeinaustralia.gov.au/en.