Stewardship incentives – commentary and critiques

STEWARDSHIP COMMENTARY

This page is reserved for responses to the June 2018 discussion paper From Red to Black to Green and other supplementary material.


Jock Douglas AO – 7 July 2018

“Your concept is excellent and deserving of trial application at the very least. Continuous improvement in land management has to be in the mindset of the landholder. Regulation is needed for the bottom line of environmental protection but to achieve a widespread environmental management improvement activating, an ongoing reward system will be the key factor for achieving continuous positive landholder responses.”


Ben Rees B. Econ.; M. Litt. (Econ.) – economist and farmer, Dalby – 10 June 2018, updated 25 June 2018

Engels Law In Australia: The Evidence

 

 

 

 

 

Compiled from ABS Publication 5206 , Table 8 Household Final Consumption Expenditure (HCFE)

  • Data is from September 1959 to March 2018
  • Data is original and in current prices

Empirical evidence of Engel’s Law in Australia challenges contemporary rural policy which is based upon ‘supply creates demand’; or, Say’s Law of Markets. Consequently, agricultural production must operate under either increasing returns to scale or constant returns to scale. Two centuries of empirical evidence provided by Engel’s Law analysis confirms that agriculture operates under the Law of Diminishing Returns; or, decreasing returns to scale.

The significance of returns to scale is overlooked in agricultural policy. If increasing or constant returns to scale prevail in the real world, then the policy of economies of scale would be successful. However, because decreasing returns to scale apply in the real world, returns to scale are limited by the Law of Diminishing Returns. In other words, at some point, there is a maximum level of output where marginal costs equal marginal returns. Beyond that point, further production becomes unprofitable.

Because Engel’s Law pertains both domestically and internationally, globalised free trade cannot prevent agricultural sectoral decline over time as economies grow and mature. Under globalisation, free trade is simply political spin. In reality trade agreements are either bi-lateral or multi-lateral in which case parties to agreements quietly continue to protect important industries and sectors.

In 1929, The Brigden Report had this to say about industry protection:

It is quite certain that without a tariff it would have been possible to have obtained a larger national income per head- but for a considerably smaller population. The maximum income per head for Australia would probably be obtained by reducing it to one large sheep-run with the necessary subsidiary and sheltered industries and a few rich mines- and a population of 2 million”. (p.70).

At the time of publication of the Brigden Report; the Australian population would have been approximately 6.3 million. Essentially Brigden is saying that industry protection made possible a more equitable distribution of income which allowed Australia to support a larger population than possible under free trade. Industry protective instruments structured an industrial base sufficient to employ a workforce drawn from a population base three times that possible under free trade. Brigden goes on to criticise free trade (laissez faire economics) on the grounds of distribution of economic welfare.

“…the policy of laissez faire in any country allows the natural inequalities of capacity, and the acquired or inherent inequalities of property, to operate to the fullest extent to the diminution of welfare”. (p. 93).

In the twenty first century, it is time agricultural policy recognised the real world which has prevailed since 1856 when Engel first postulated his Law. A constructive debate on the role of agriculture and distribution of income in the twenty first century is long overdue.

Brigden Report, The Australian Tariff, An Economic Inquiry, Melbourne University Press, 1929.

Explanation of scale

There are three returns to scale: increasing returns which generally applies only to public enterprises; constant returns to scale which is rare; and declining returns to scale, the general picture of industry in the real world.

Decreasing returns to scale underwrites the Law of Diminishing Returns when maximum efficiency in production is reached as marginal costs equal marginal revenue. Beyond that point, marginal costs are greater than marginal revenue which means average costs also run ahead of average revenue. Consequently industry becomes inefficient and uncompetitive. A common cause is over-capitalisation as producers try to contain costs and lift profit from economies of scale derived from applied technology.


Ben Rees – 30 June 2018

I recently came across my previous submission on the Agricultural Competitiveness White Paper Rural Australia: Anatomy of Policy Failure, February 2014.


Charles Nason “Banoona” 14, 17 July 2018

Not just sheep and cattle

I would suggest that the issue of kangaroos be addressed as they can also contribute to over-grazing and landscape degradation. Old surveys suggest population densities in the Maranoa vary from to 2 ( in the west) to 4 ( in the east ) acres per kangaroo, and in the past 10 years this could be at least by 50% more as the reds have migrated east due to dry conditions.

My calculations on water use suggest they probably contribute to 50% of total grazing pressure in a dry time. Kangaroos are a little like trees, producers are not against their presence, only when it impacts on their bottom line. Exclusion fencing is simply a reaction to poor management of our natural resource within the landscape.

Remember that the marsupial fences marked on leases from the late 1800s were exactly that: to control roos not dingoes!

Producers destock in anticipation of drought, but the broader society does not.

The old concept of being paid agistment fees for kangaroos has much merit – simply an extension of the stewardship payments concept . It might just cause society to really think how many ‘roos it really wants and possibly encourage effective ways in harvesting this potentially valuable resource.

As Graeme Webb writes in The Belly of the Beast : “To conserve something you need to create value for it”.

Restrictions on clearing really do hurt profitability

Many urban people and policy makers appear to  not fully comprehend the dramatic effect that restricting  tree clearing has on producers’ productivity and thus profitability. The work of scientist Bill Burrows and groups he led have firmly established this. This is why “clearing “ is such a polarising issue and producers have reacted so strongly in the tree clearing debate recently.

The ABARE reports of the 1990s predicted this strong reaction . The enormous rural debt  ( MLA northern beef situation report , QRAA surveys , papers by Ben Rees plus anecdotal evidence) suggests  that producers are not covering their true long-term cost of production. So any reduction in productivity will have significant effects on their individual  income and consequently regional incomes. I believe  this will reverse  decentralisation which is not desirable for  the public good.

Recent discussions  of the balance between trees and grass seem to overlook or neglect  the important interaction of climate , rainfall cycles , soil types etc in the formation and evolution of vegetation communities over time . There appears to be limited understanding of the dynamics and thus the understanding is very static and thus unrealistic .  However  trees do have significant production benefits in browse , shade , nutrient cycling , wind breaks plus environmental and as well as the  non-production ( social and cultural )  benefits. Some of these effects have been quantified but much more needs to be done to help determine the optimal balance.

Managing a landscape for production ( as this is what producers  are rewarded for , not environmental outcomes )  is a constant and expensive battle for producers. I would suggest the supposedly huge “clearing” figures in Qld may be more a reflection of a catch up of re-clearing than increased clearing of “virgin“ communities.

The point I am making is that vegetation is very dynamic and mankind  can manipulate it. Our Indigenous people changed our vegetation from a fire-sensitive community to a fire-dependent community over their 60 K plus year occupation of Australia . We are now removing fire from the landscape and too much of the public lands in my area now I believe are “beyond fire’ as well as being non-traditional as well as becoming moribund  . The state of  Queensland public lands do not inspire confidence that governments can manage them well  which is  compounded by extremely  inadequate funding levels.

I think the challenge now is to use our (limited ?) understanding of the landscape to formulate a vision of the landscape we need to cater for a population tending towards 30 million people and urgently put processes  in place to achieve this.


Charles Nason, “Banoona” 18 August 2018

Drought policy is not the same as stewardship policy but a conception of a well-managed future landscape lies at the heart of each; and the tools to confront the two themes are likely to look rather similar.  Drought has captured the media’s attention and now is arguably the time to address both challenges.

Drought is the consequence of man’s (farmers’) failure to manage climatic variability. We need to change the reward structure , we need to reward those who do not have a drought whereas now we reward those who do . Current subsidies mean that it is in landholder’s best interest to have a ‘drought’. If farming were more profitable, drought would not be such a big issue. Droughts expose the underlying profitability problem so are a symptom of a deeper underlying cause.

There is also the parallel issue of ‘supply’ security (not only fuel). All of the protein meals are in short supply . Molasses may become scarce as presumably significant supplies are committed to overseas markets. I acknowledge that it is difficult to set aside strategic reserves for such occasions as we do not want farmers to become ever more risk-prone. Ben Rees’s comment “It is not market failure but policy failure” sums this up well.

(Former Treasurer Peter) Costello made the statement after the 2002 drought that it had reduced the growth rate from 3.5% to 2.75% . This suggests that an industry which contributes only 2.5% to GDP and in which production was reduced by only 20% has an enormous multiplier (flow on) effect. Of course, drought affects industries other than agriculture, but agriculture is the most climate-sensitive industry, so the generalisation is reasonable.