Agricultural Policy Monitoring and Evaluation 2018

Chapter 3. Australia

Support to agriculture

Australia has reduced its support to its agricultural producers continuously from already relatively low levels in 1986-88. Australia’s Producer Support (%PSE) is one of the lowest in the OECD area at 1.7% of gross farm receipts for the period 2015-17, with total support to agriculture (TSE) representing around 0.1% of GDP. Support to Australian agriculture is roughly equally split between support directly to producers (PSE) and general services support (GSSE).

Australia no longer uses any policy measures that convey market price support to its producers, meaning that domestic prices for its main agricultural outputs are at parity with world prices. In 2017, of the support that is provided directly to producers, around 46% was provided in the form of subsidies to input use. Much of this relates to measures that provide subsidies for upgrading on-farm water infrastructure to help reduce negative environmental externalities, and payments that seek to help producers deal better with droughts and other natural events through concessional loans at concessional interest rates. Much of the remaining producer support is directed towards risk and environmental management, with income tax averaging arrangements, farm management deposits and other environmental programmes accounting for 47% of the PSE (those payments are based on non-current area with production not required).

Australia has developed an extensive Agricultural Knowledge and Innovation System which, with the development of infrastructure, accounts for the greatest share of the general services support provided to the sector – respectively, these two areas account for 51% and 34% of GSSE expenditure. Over time, coupled with the move away from producer support, the share of general services in total support has increased from 6% in 1986-88 to 56% in 2017.

Main policy changes

In 2017, new policies were developed that increased the scope of the concessional loan arrangements. The use of concessional loans as an intervention to enable recovery from adverse events has a long history in Australia. During 2017, steps were taken to extend existing programmes for some producers. Specifically, Business Improvement Concessional Loans were introduced in July 2017 that expanded the pool of eligible farm businesses. Loans are only available to former recipients of the Farm Household Allowance, are capped at AUD 1 million, and are subject to specific eligibility criteria.

Australia has continued to foster its strong trade links with major trading partners. In March 2018, Australia and ten other countries signed the Comprehensive and Progressive Trans-Pacific Partnership. A month earlier, Australia also signed a bilateral free trade agreement with Peru. In June 2017, Australia concluded the negotiations for the Pacific Trade and Economic Agreement (PACER Plus). Australia continues to further negotiations with Indonesia, India and the European Union along with a number of plurilateral agreements.

Assessment and recommendations

• There has been continuous and significant progress on policy reform since 1986-88, reducing the level of support to agriculture as measured by the %PSE to under 2%. Australia also removed the potentially most distorting forms of support in the early 2000s, when remaining policy measures that conveyed market price support were removed. The remaining support programmes are targeted to risk management, environmental conservation and provision of general services.

• Since the end of the Exceptional Circumstances programmes in 2013, Australia has continued to reform its drought policies. An Intergovernmental Agreement is now in place that aims to focus drought support measures on encouraging drought preparedness and resilience. Most policy measures have moved in this direction, with recent policies on insurance and savings concessions focusing on market and producer-level decisions as the core response to risk. Despite this, in recent years there has been increased use of concessional loans with subsidised interest rates (concessional variable interest rates lower than commercially available interest rates). Similar past programmes have been questioned in terms of their the efficiency and effectiveness (PC, 2009). These measures should be reviewed to ensure they are effective and efficient responses to the challenges that are faced by the sector and do not encourage additional risk taking by producers or reduce overall sector resilience.

• The overall challenge for the future is to improve the economic viability of farms while ensuring a sustainable use of scarce resources, in particular, water. Water policy remains a contentious area, however, reforms completed to date have allowed market mechanisms to deliver scarcity pricing signals to producers. In this light, water market reforms and basin management should continue to be a policy priority, alongside efforts to help producers better adapt to climate change.

• Agriculture, through the opportunities provided to land owners, is covered by Australia’s Direct Action climate policy. There are questions about the programmes ability to deliver additional emissions reductions over those that would have occurred anyway. These provisions should be reviewed to ensure they deliver additionality with respect to purchases of land related emissions reductions.

• Australia should continue using its industry partnership arrangement through rural research and development corporations (RDCs) to foster innovation and the adoption of new technologies and practices, in order to improve productivity growth.

Figure 3.1. Australia: Development of support to agriculture

Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

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Support to farmers (%PSE) has declined gradually over the long term. During 2015-17, support has been less than 2% of gross farm receipts, well below the OECD average. The share of potentially most distorting support has decreased significantly over time due to decline in market price support (MPS) following reforms to various marketing arrangements, and sits well below the OECD average (Figure 3.1). Prices received by Australian farmers are on par with international prices, with only sugar producers the recipient of single commodity transfers (SCT) related to capital subsidies to reduce environmentally detrimental run-off (Figure 3.3). Most distorting forms of support now represents very small share of the (low) PSE. Overall, the value of farm support fallen by some 7% in 2017 due to a reduction in budgetary expenditures (Figure 3.2); as production levels also fell between 2016 and 2017, however, the %PSE has remained unchanged (Table 3.1). Expenditures for general services (GSSE) have increased over time, but growth has slowed over the most recent period. Total support to agriculture as a share of GDP has declined significantly over time with the majority of support made up of GSSE expenditure– around 56% of the total support is provided as GSSE.

Figure 3.2. Australia: Decomposition of change in PSE, 2016 to 2017

Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

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Figure 3.3. Australia: Transfer to specific commodities (SCT), 2015-2017

Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database). http://dx.doi.org/10.1787/agr-pcse-data-en

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Table 3.1. Australia: Estimates of support to agriculture

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Contextual information

Australia is the world’s 14^th largest economy (in 2016) and the sixth largest country by land area accounting for 10% of all land in the countries included in this report. It has a high GDP per capita, relatively low unemployment levels and low and stable inflation. While the largest share of total land characterised by low fertile soils, Australia nevertheless is an important producer and exporter of agricultural products. Agriculture’s share of the economy, both in GDP and in employment, has been falling over time, a trend that has continued in recent years. However, overall, agricultural exports remain significant and account for around 17% of total exports in 2016.

Australian agriculture has a strong export focus with many sectors heavily reliant on foreign markets as the primary source of their demand. Australia maintains a positive and growing agro-food trade balance. Around half of Australia’s agro-food exports target final consumption (around 54%) – that is they are delivered directly to foreign consumers – with the other half exported as intermediate goods that are further processed in overseas markets. On the import side, Australia import primarily final goods for domestic consumption with no further domestic-based processing – around 78% of all agro-food imports. This shows that domestic food processes are not reliant on imported intermediates for their own production activities. This lower reliance on imports is due to the ability to source competitively produced domestic inputs.

Table 3.2. Australia: Contextual indicators

	Australia		International comparison
	1995	2016*	1995	2016*
Economic context			Share in total of all countries
GDP (billion USD in PPPs)	403	1 181	1.5%	1.4%
Population (million)	18	24	0.6%	0.7%
Land area (thousand km2)	7 682	7 682	10.3%	10.2%
Agricultural area (AA) (thousand ha)	463 348	406 269	17.2%	15.1%
			All countries analysed1
Population density (inhabitants/km2)	2	3	38	45
GDP per capita (USD in PPPs)	22 099	48 243	9 650	24 866
Trade as % of GDP	14	15	10.2	14.3
Agriculture in the economy			All countries analysed1
Agriculture in GDP (%)	3.7	3.0	3.0	3.1
Agriculture share in employment (%)	4.9	2.6	-	-
Agro-food exports (% of total exports)	25.7	16.7	7.7	7.3
Agro-food imports (% of total imports)	4.7	6.7	7.8	6.7
Characteristics of the agricultural sector			All countries analysed1
Crop in total agricultural production (%)	50	58	-	-
Livestock in total agricultural production (%)	50	42	-	-
Share of arable land in AA (%)	9	12	30	30

Note: *or latest available year. 1. Average of all countries covered in this report. EU treated as one.

Source: OECD statistical databases, UN Comtrade, World Development Indicators and national data.

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Australia’s agricultural sector has continued to undergo structural adjustment on the back of continued reforms and the uptake of innovative technologies and practices. These developments have contributed to continued productivity growth. Productivity growth has been central to the continued viability, and competitiveness, of Australian farm businesses. However, productivity growth has lessened in recent years and over the period 2005-14, total factor productivity (TFP) growth in Australia (1.9% per annum) fell, but remained above the world average (1.6%) (Figure 3.6). Average TFP growth between 2005 and 2014 was well below that seen between 1991 and 2000, partly due to the increasing impact of climate change on the sector.

Figure 3.4. Australia: Main economic indicators, 1995 to 2017

Source: OECD statistical databases.

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Figure 3.5. Australia: Agro-food trade

Note: Numbers may not add up to 100 due to rounding.

Source: UN Comtrade Database.

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Agriculture in Australia is a large consumer of natural resources. In terms of water, agriculture consumes over half of all water withdrawals – a share above the world average, but one which has fallen significantly since the 1970s. Low water availability in Australia’s agricultural producing regions, which will be accentuated by climate change, is a principal factor limiting the expansion of agricultural activities. Agriculture is also the significant source of both methane and nitrous oxide and emits around 14% of Australia’s total greenhouse gas emissions.

Figure 3.6. Australia: Composition of agricultural output growth, 2005-14

Note: Primary factors comprise labour, land, livestock and machinery.

Source: USDA Economic Research Service Agricultural Productivity database. Available at: www.ers.usda.gov/data-products/international-agricultural-productivity/documentation-and-methods.aspx#excel.

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Table 3.3. Australia: Productivity and environmental indicators

	Australia		International comparison
	1991-2000	2005-2014	1991-2000	2005-2014
			World
TFP annual growth rate (%)	3.36%	1.94%	1.60%	1.63%
			OECD average
Environmental indicators	1995	2016*	1995	2016*
Nitrogen balance, kg/ha	19	20	33	30
Phosphorus balance, kg/ha	1.1	1.1	3.7	2.4
Agriculture share of total energy use (%)	2.3	2.9	1.8	1.9
Agriculture share of GHG emissions (%)	17	13	8.5	8.5
Share of irrigated land in AA (%)	0.4	0.6	-	-
Share of agriculture in water abstractions (%)	70	52	45	43
Water stress indicator	6.2	3.6	10	10

Note: * or latest available year. EU treated as one.

Source: USDA Economic Research Service. OECD statistical databases, UN Comtrade, World Development Indicators and national data.

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Description of policy developments

Main policy instruments

Australia’s agriculture sector remains strongly market oriented with domestic and international prices aligned for all of its major production activities. Support to agriculture is provided through a mix of direct budgetary outlays and taxation concessions. Budget-financed programmes are used to incentivise investments to improve preparedness in the face of risk (weather and market) through concessional loan schemes along with farm household income support during periods of hardship. Direct support is also provided to upgrade on-farm infrastructure with the aim of improving natural resource use and environmental management. Tax concessions form part of the policy approach aimed at helping producers manage production and market risk through allowing them to smooth their incomes and also provide further incentives for on-farm preparedness-related investments.

With a low level of direct government support to farmers and no permanent farm subsidy scheme, research and development (R&D) programmes are a major component of Australian support to agriculture. Rural research and development corporations (RDCs) are the Australian Government’s primary vehicle for supporting rural innovation and drive agricultural productivity growth. RDCs are a partnership between the government and industry created to share the funding and strategic direction setting for primary industry R&D, investment in R&D and the subsequent adoption of R&D outputs. A levy system provides for the collection of contributions from farmers to finance RDCs, and the Australian Government provides matching funding for the levies, up to legislated caps.

Australia has negligible tariff protection on imports of agriculture and food products; however, it has in place a number of sanitary and phyto-sanitary (SPS) arrangements to manage pest and disease risks that could harm the sector. These SPS arrangements mean that a number of import restrictions are in place for agricultural products from certain regions across the globe. Australia’s agricultural trade policy is directed towards seeking further market opening in multilateral, bilateral and regional trade agreements.

Australia has ten comprehensive free trade agreements in force, both regional and bilateral, with New Zealand (ANZCERTA 1983), Singapore (SAFTA 2003), Thailand (TAFTA 2005), the United States (AUSFTA 2005), Chile (Australia-Chile FTA 2009), the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA 2010), Malaysia (2013), Republic of Korea (KAFTA 2014), Japan (JAEPA 2015), and China (ChAFTA 2015). In total, agricultural trade covered by these agreements covered 67% of total Australian agro-food exports in 2016 and 59% of total agro-food imports.

While no specific policy instruments for agriculture have been developed in response to the 2016 Paris Agreement on Climate Change, Australia has in place a number of policies that include agriculture and will contribute to it meeting its commitment to reduce GHG emissions – including from land based sectors such as agriculture – by 26-28% in 2030 compared to the 2005 levels, as defined in the Australian Nationally Determined Contribution (NDC). In Australia, the Department of the Environment and Energy leads the development of domestic climate change policy issues across the Australian Government. Australian policy directed towards agriculture seeks to address both adaptation and mitigation, and to develop policy responses that maintain or enhance productivity, profitability and food security.

Australia has shifted towards a ‘Direct Action Plan’ to cut emissions across the economy. This plan involves moving away from a carbon tax or cap-and-trade arrangement to one where the government effectively purchases emission reductions from actors in the economy across a range of sectors. For large non-agricultural emitters, a ‘safeguard mechanism’ exists to keep emissions within baseline levels which is enforceable by Clean Energy Regulator under a range of graduated enforcement options ranging from advice to fines to forced corrective actions and also, in extreme situations, criminal sanctions (Australian Government, 2016). For agriculture, the Direct Action Plan builds on the Carbon Farming Initiative, a scheme where farmers and land owners were able to earn carbon credits by storing carbon or reducing greenhouse gas emissions on the land they own. Once registered under the Carbon Farming Initiative, the credits could be sold to those wishing to offset their emissions (Department of Environment and Energy, 2018a).

The Direct Action Plan is funded through the Australian Government’s Emission Reduction Fund (ERF). The ERF is a voluntary scheme that is open to farmers and land managers and allows them to seek funds (incentives) to undertake emission reductions and carbon sequestration (capture and storage of carbon) projects. The methods approved under the ERF must meet strict integrity requirements including in relation to additionality. Under the scheme, landowners and farmers who adopt approved Emission Reduction Fund methods can generate Australian Carbon Credit Units, which can be sold, either to the government through a competitive reverse auction, in which sellers engage in price bidding, or to third parties, to provide alternative or additional income streams, while benefitting the environment. The scheme does not set limits on agriculture and is entirely voluntary for the sector.

So far, six ERF auctions have been held. From these auctions the Australian Government has contracted a total of 191.7 million tonnes of abatement, of which approximately 83% (160 million tonnes) has been contracted by the land sector (which includes but is not limited to agriculture).

However, despite the integrity requirements in place, a number of studies have questioned the ability of the scheme to deliver additional carbon abatement relative to what may have occurred anyway (Burke, 2016; Fairbairn, 2016) and for the funded projects to deliver on their intended reductions – so far of the nearly 160 mtCO2e contracted, only about 15 mtCO2e has actually been reduced. Much of this rests on the issues around the asymmetric information that exists between the government and private actors. The approach also shifts the burden of emission reduction costs to the government and away from the sectors which generate the emissions themselves.

In 2017, the Australian Government reviewed its climate change policies to ensure they remain effective in achieving Australia’s international obligations – including the Paris Agreement on Climate Change. As a result of this review, the government plans to develop a long-term emissions reduction strategy by 2020. The strategy will explore the emissions reduction opportunities and implications across all major sectors of the economy (Department of Environment and Energy, 2017). For agriculture, as a major emitter and as land clearing continues to contribute to total emission (emissions from the conversion of forest to other uses stopped declining in 2015 and has remained stable since (Department of Environment and Energy, 2018b, p.18), future climate policies will likely impact the sector to a greater extent than in the past.

Domestic policy developments in 2017-18

In recognition of Australia’s history of drought events and the increasing likelihood of such conditions, Australian governments agreed (in 2013) to refocus policies to support farmers in time of hardship, regardless of the cause, and assist farmers manage and prepare for business risks, including climate variability. The Intergovernmental Agreement on National Drought Program Reform (IGA) provides principles, objectives and outcomes, and outlines the roles and responsibilities of governments in providing drought and rural assistance. This approach led to a number of policy developments including the introduction of the Managing Farm Risk programme, improvements to Farm Management Deposits, and income tax averaging arrangements. The success of the IGA in refocussing drought policy has led to Agriculture Ministers agreeing to extend the current IGA (due to expire 1 July 2018) until a new agreement has been finalised.

In 2017, policy developments related to increases in the scope of the concessional loan arrangements. The use of concessional loans as an intervention to enable recovery from adverse events has a long history in Australia. Primarily used for post-drought and natural disaster recovery, a number of reviews have questioned the efficiency and effectiveness of past programmes (PC, 2009). Notwithstanding past reviews, during 2017 steps were taken to extend existing programmes for some producers. Specifically, Business Improvement Concessional Loans were introduced in July 2017. These loans are available to producers, who have already exhausted, or are close to exhausting, their maximum 1 095 day Farm Household Allowance entitlement (a household based hardship payment) and who are deemed to need additional time to recover from financial hardship. The Loans are available under the Farm Business Concessional Loans Scheme, and are for debt restructuring purposes only. Loans attract the same conditions to those provided under the Drought Assistance Concessional Loans and Dairy Recovery Concessional Loans programmes and are capped at AUD 1 million (USD 0.77 million).

In September 2016, the Australian Senate referred the Australian dairy industry to the Senate Economics References Committee for inquiry and report by 24 February 2017. This was in order to establish a fair, long-term solution to disputes over pricing in Australia’s dairy sector, with particular reference to that of fresh milk. In February 2017 the Senate granted an extension to the committee to report by 30 March 2017. The Australian Government is considering the twelve recommendations contained in the report.

In November 2016 at the request of the Australian Treasurer, the Australian Competition and Consumer Commission (ACCC – an independent statutory authority responsible for the promotion of competition and fair trade in markets in Australia) commenced an inquiry into the competitiveness of prices, trading practices and the supply chain in the Australian dairy industry. In September 2017 the Treasurer granted an extension of the reporting period to 30 April 2018. The ACCC released an Interim Report in November 2017 and is currently considering industry feedback.

Meanwhile, while not government policy, the dairy sector has developed a voluntary code of conduct. The Code sets out good practice for milk supply contracts between farmers and processors and has been agreed in order to address a number of historical issues with past dairy contracts under the Australian Consumer Law (competition law) and Unfair Contract Terms (small business contracts) laws. The Code represents a voluntary industry-based attempt to resolve issues around contracting and pricing between participants in the dairy value chain, and has been adopted by most processors and a number of farmer representative organisations. It came into effect in June 2017 and is scheduled to be reviewed after 12 months.

Regulation of the agriculture sector was also the subject of a review by the Australian Government’s independent microeconomic advisory body the Productivity Commission (PC, 2016). The Commission’s report, released in 2017, suggested that a number of regulations affecting the sector were not justified, including restrictions on the use of land held under pastoral lease arrangements, state bans on cultivating genetically modified crops, barriers to entry for foreign shipping providers, mandatory labelling of genetically modified foods, and the regulated marketing of rice in New South Wales and sugar in Queensland. It also suggested that regulation was the wrong policy tool to deal with concerns over foreign direct investment and found that in a number of areas of justified regulatory interventions regulation making could be improved (around native vegetation, animal welfare and agricultural and veterinary chemicals). To date, the government has not responded to the findings and recommendations of the report.

Trade policy developments in 2017-18

Australia has remained an active participant in the WTO Committee on Agriculture, pursuing options for further reform that were considered at the WTO Ministerial Council in late 2017. Australian signed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) in March 2018 with 10 other countries. This agreement contains a number of provisions on agriculture with market access improvements expected in a range of countries across a range of products.

In February 2018, Australia signed a free trade agreement with Peru (PAFTA). Australia also completed and signed the Pacific Trade and Economic Agreement (PACER Plus) in June 2017. This agreement includes New Zealand and nine Pacific island countries – Cook Islands, Kiribati, Nauru, Niue, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu (which joined in September 2017). The agreement covers a wide range of agricultural products in most countries, however there are substantial phase in time periods of up to 35 years (Nauru), but commonly over the next 25 years. The Federated States of Micronesia, Palau and Republic of Marshall Islands, who remain part of the agreement, but are still completing their domestic approval processes prior to signing.

Australia and Indonesia have continued to progress the negotiations for the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) which began in 2010 but was reactivated in 2017. Both countries are aiming for a comprehensive agreement that seeks to improve greater economic integration in areas of trade and investment that goes beyond market access concessions (Government of Australia and Government of the Republic of Indonesia, 2017). Australia is engaged in a further eight FTA negotiations. There are three individual bilateral FTA negotiations with Hong Kong China, India and the European Union. The five plurilateral negotiations are the Gulf Cooperation Council (GCC), the Environmental Goods Negotiations, the Pacific Alliance Free Trade Agreement, the Regional Comprehensive Economic Partnership Agreement (RCEP) and the Trade in Services Agreement (TiSA).

References

Australian Government (2016), The safeguard mechanism – Overview, Canberra http://www.environment.gov.au/climate-change/government/emissions-reduction-fund/publications/factsheet-erf-safeguard-mechanism.

Burke, P. J. (2016), “Undermined by Adverse Selection: Australia’s Direct Action Abatement Subsidies”, Economic Papers, vol. 35, no. 3, pp. 216-229.

Department of Environment and Energy (Australian Government) (2018a), About the Carbon Farming Initiative, Canberra, http://www.environment.gov.au/climate-change/government/emissions-reduction-fund/cfi/about.

Department of Environment and Energy (Australian Government) (2018b), Quarterly Update of Australia’s National Greenhouse Gas Inventory: September 2017, Canberra, http://www.environment.gov.au/system/files/resources/c2a05f9f-b95b-4a0a-b10c-21b5eda91ced/files/nggi-quarterly-update-nggi-september-2017.pdf.

Department of Environment and Energy (Australian Government) (2017), 2017 Review of Climate Change Policies, Canberra, http://www.environment.gov.au/system/files/resources/18690271-59ac-43c8-aee1-92d930141f54/files/2017-review-of-climate-change-policies.pdf.

Australian Government and Government of the Republic of Indonesia (2017), Joint Statement between the Government of Australia and the Government of the Republic of Indonesia, 26 February 2017, http://www.pm.gov.au/media/2017-02-26/joint-statement-between-government-australia-and-government-republic-indonesia.

PC (Productivity Commission) 2009, Government Drought Support, Inquiry Report No. 46, Canberra.

Fairbairn, J. (2016), “A Comparison of Policy Instruments to Reduce Greenhouse Gas Emissions”, Economic Papers, vol. 35, no. 3, pp. 204-215.

Productivity Commission (2016), Regulation of Australian Agriculture, Report no. 79, Canberra