Finance Finance News Why Australia’s farmers are rolling in cash
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Why Australia’s farmers are rolling in cash

Drought is a selectively cruel beast. Some regions are hit hard, others spared.
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Conundrum: Australia’s farmers are suffering from a severe drought – but they are collectively rolling in cash with $5.75 billion in farm deposit accounts on September 30, a record amount for the September quarter. 

Drought touches the hearts of well-meaning Australians, encourages media hyperbole – “this existential crisis now facing our rural sector”, the ABC’s 7.30 declared on Tuesday – and provides endless dusty paddock photo opportunities for politicians desperate to be seen to care. 

But it also discourages inconvenient facts and rational policy making.

Drought is a selectively cruel beast.

Some regions are hit hard, others spared. Some individual farms get relief, while their neighbours don’t. Some well-run farm businesses handle the drought while others fail. Some wealthy businesses collect government and charity money, while some people with very little get nothing. 

The Reserve Bank’s Financial Stability Review earlier this month belled the difference between media and political impressions, and the reality of the financial health of our agricultural sector. 

“Drought conditions across eastern Australia continue to weigh on the farm sector and other businesses in affected regions. The direct risks to the financial system from the farm sector are low, with agricultural firms estimated to account for just 7 per cent of total private non-financial sector debt.

“The quality of banks’ loans to the sector does not appear to have deteriorated to date, with information from liaison with banks suggesting borrowers so far have generally been able to stay within their existing facility limits.

“Moreover, these firms appear well placed to service their short-term debts, with deposits held by primary producers under the farm management deposits scheme remaining at a high level.

“Other businesses in drought-affected regions are also experiencing difficult conditions as drought-affected farmers reduce their spending. If these businesses find it more difficult to service their loans as a result of reduced incomes, banks are likely to experience a deterioration in asset quality.”

They are high indeed – at record levels nationally and in each individual state except New South Wales, where the farm management deposits (FMD) are still not far off their previous September high – $1.34 billion compared with $1.43 billion the previous September.

The FMD scheme is sound policy to help primary producers manage the wild swings of good, bad and indifferent seasons by allowing them to claim a tax deduction for depositing funds in a good season in an FMD account.

In less profitable or tough times, they can withdraw cash from the FMD, whereupon tax becomes payable on it as income.

Aside from wisely building reserves in the good seasons, a well-managed agricultural business is able to reduce its tax bill when the money is rolling in and subsequently access it when the business is reporting a loss.

It’s a cash flow and tax minimisation tool that should make other businesses jealous. It’s not available to regional workers and non-primary production businesses that nevertheless also feel the pain of drought when farm work disappears.

As putting money into an FMD is a tax deduction, there is an annual peak in June and a seasonal partial rundown thereafter.

The national FMD total was $6.75 billion this June, up from $6.62 billion at the same time last year and $6.1 billion in 2017.

The withdrawals from June to September this year – $1 billion – were $101 million less than in 2018.

FMDs in NSW indicate the greater impact of drought in that state. FMDs peaked at $1.75 billion in June last year, easing to $1.43 billion in the following September. This year, FMDs peaked at $1.62 billion in June, falling to $1.34 billion last month.

Queensland FMDs totalled $1.34 billion this June and $1.23 billion last month after hitting $1.39 billion in June last year and $1.19 billion that September.

Victoria scored $1.38 billion this June and $1.21 billion last month compared with $1.26 billion and $1.12 billion respectively last year.

On the same basis, South Australia had $1.14 billion and $948 million this year compared with $1.11 billion and $906 million.

Western Australia was $1.15 billion and $916 million, up from $1 billion and $748 million.

FMDs do count in the non-farm asset test for farmers seeking the Farm Household Allowance – a form of Newstart for farmers but with vastly more generous terms and tests.

The federal government further liberalised the FHA last week.

Farmers can claim it for up to four years out of any 10-year period, the limit for off-farm income offsetting interest payments has been increased to $100,000 per family, and the farm asset test has been permanently lifted to $5 million, excluding the value of family home.

That’s $5 million net – asset-rich but income-poor during drought. And interest on any borrowings can be offset by up to $100,000 in off-farm income.

There’s certainly nothing anything like that for non-farm businesses or individuals who lose their income. Centrelink doesn’t treat Newstart recipients as kindly.

The RBA’s financial stability report noted: “Other businesses in drought-affected regions are also experiencing difficult conditions as drought-affected farmers reduce their spending.

“If these businesses find it more difficult to service their loans as a result of reduced incomes, banks are likely to experience a deterioration in asset quality.”

Employees of such rural businesses who lose their jobs will be left with the usual onerous Newstart conditions and scrambling for work in some of the promised community projects.

What a tractor salesperson might offer a shire council’s swimming pool refurbishment project is not obvious to me.

On top of the FHA liberalisation and last month’s announcement of $100 million for councils in drought areas and emergency payments to farmers, the federal government is reportedly about to announce many more hundreds of millions of dollars in drought aid with the National Party touting a $1.3 billion wish list.

And then there’s the government’s much-spoken-about-but-unspent $7 billion drought policy.

As is frequently observed, the worst time to formulate drought policy is during a drought.

It should be done between droughts with the aim of treating drought as a normal part of the business of farming in Australia.

The best farmers already know that. They use FMDs and other tools wisely.

As reported in this space more than a year ago, the Productivity Commission found we waste billions of dollars on drought “aid”.

And, according to a savvy old farmer of my knowledge, millions in charity donations don’t go where they should either.

For all the sympathy and funded empathy for rural communities suffering, for all that living through a prolonged drought is hell, it looks like millions and billions more will go the same way.

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