COLIN – As risk of drought rises, Australian farmers struggle to invest

As risk of drought rises, Australian farmers struggle to investWhen a scorching drought struck eastern Australia in 2006, cattle farmers Robyn and Paul Kendal had to slaughter nearly all their livestock and spend around a year of their normal turnover on feed to keep the remainder alive.With a recurrence of El Nino, the weather pattern behind the drought, looming and dry conditions already affecting an area larger than South Africa, another major drought could be one struggle too many for farmers such as the Kendals.

andquotIn 2006, we saw the lowest amount of rains here since records began..

and we still havenand#39t recovered from that even today,andquot said Robyn Kendal, whose 3,000-acre (1,215-hectare)attle farm is about 500 km (300 miles) southwest of Sydney.Already one of the worldand#39s top agricultural producers, Australia has ambitions of becoming a andquotfood bowlandquot to Asia as it tries to diversify its economy to counter the waning of a decade-long mining boom that brought the country riches.

That goal is threatened by its harsh climate — private insurance to protect against drought is generally too expensive for farmers, undermining their capacity to invest to boost output as they must if Australia is to feed more of Asiaand#39s fast-growing middle class.Drought is a traditional foe in Australia, the worldand#39s third-biggest beef exporter and a big producer of crops such as wheat and sugar But an inability to contain the risk means less money available to channel into new equipment or technology for farmers already saddled with a record A$64 billion ($59 billion) of debt.

andquotIn Queensland, farmersand#39 interest payments as a proportion of their receipts is twice what it is elsewhere in the country,andquot said Peter Gooday, the head of farm analysis at the Australian Department of Agriculture. andquotIf you are struggling to meet your interest payments then that is your first thought rather than investing.

andquotAustralia and New Zealand Banking Group estimates that an additional A$600 billion in additional capital will be needed between now and 2050 to generate growth and profitability in agriculture, but current investment levels are well short.According to a recent farmer survey by Rabobank, only 25 percent of farmers said they planned to increase investment this year, amid concerns over forecasts for an El Nino — the chances of which the Australian Bureau of Meteorology has put at 25 percent at least.

Low subsidiesThe government does provide federal loans during tough times, as well as subsidies for fuel and tax breaks but, unlike in agricultural rivals such as the United States and Brazil, it does not subsidize insurance to pay out if drought hits output.According to an Organization for Economic Cooperation and Development (OECD) report, just 3 percent of total Australian farm receipts come from subsidies, ranking it the second lowest in a group of 34 countries, behind only New Zealand.

Traditional crop insurance in Australia typically covers only sudden disasters such as fire or hail. Drought damage is seldom covered and, when it is, the price is prohibitive.

Drought insurance would cost around A$15-30 a hectare, a government report estimated, so for the average farm size of 3,000 hectares (7,400 acres) that would mean A$90,000, more than half of the profit the average grain farmer made last year, data from the governmentand#39s commodity forecaster shows.Other more exotic financial instruments such as weather futures — which pay out if a predetermined amount of rainfall does not materialize — have also failed to take off in Australia, with farmers complaining that rainfall is measured at weather stations often far from their land.

Affordable insurance?Insurers say the reason drought cover is so expensive is due to a lack of historical data or knowledge of the productivity and yields of different pieces of land under dry conditions.Some major insurers plan to use satellite technology to get better data on things such as biomass and soil moisture to use in models that, based on weather forecasts, can determine yield estimates and make drought crop insurance more affordable.

Farmers could buy insurance against the risk of yields falling below that estimate, while insurers could share the burden using the reinsurance market, lowering costs.Using specialized sensors, satellites can zoom in and gather data from a single agricultural plot, monitoring crop growth.

Satellites are already monitoring land in Europe to verify subsidy claims under the Common Agricultural Policy, and they are being used in Asia and Africa to monitor food production in nations most vulnerable to extreme weatherJohn van Vegt, the managing director of insurance broker AgriRisk Services Pty. Ltd.

, said yield index products could emerge in a few years, though there was a lot of work to do. andquotI think there would be an appetite from farmers,andquot he said.

andquotIt would be in a language they could understand.andquotDroughts and productivityThe 2006 drought resulted in Australiaand#39s agricultural GDP falling by nearly 30 percent, according to government data, and the countryand#39s weather bureau is forecasting that such events will become harsher and more frequent.

The drought in Queensland alone last year meant farmers in the state recorded their lowest income on record, with the average farmer making a loss of A$77,000, according to government data With more than 80 percent of Queensland declared by the state government to be in drought, the outlook for the stateand#39s agricultural producers looks bleak.The dry weather means that the current wheat harvest for the 2014-15 crop year in Queensland is seen falling to 133 million tons, the Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES) said in June — 12 percent below the five-year average.

And analysts say that figure could fall even more with dry weather seen continuing until October at least.Cattle farmers in the state, Australiaand#39s largest livestock producing region, are also struggling.

Unable to find enough food or water for their animals, farmers have been forced to slaughter their livestock at record levels, pushing prices to all-time lows earlier in the yearWith such poor returns, farmers in Queensland will remain hamstrung in their capacity to invest in new technology — a key driver behind Australian agricultural productivity gains.A 2011 study by ABARES said around two-thirds of the increase in the monetary value of agricultural production in the last 50 years in Australia was down to gains in productivity, primarily driven by new technology.

andquotYou do need investment to improve productivity but I think it goes both ways,andquot said Graydon Chong, a senior grains analyst with Rabobank in Sydney. andquotIn order to encourage investment, Australiaand#39s agricultural sector needs to show growth in yields.

andquot*1 US dollar = 10792 Australian dolla.

SOURCE: Today’s Zaman