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Statement on the wheat industry by John Kerin

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DPIE91/82K 26 March 1991


The Government's recent decision not to institute a Guaranteed Minimum Price (GMP) for wheat for the 1991/92 season was based on full consideration of the state of the industry and the implications of its decision.

Federal Government support for the wheat industry is already substantial: National Interest Cover for wheat exports amounts to over one billion dollars while underwriting of Australian Wheat Board (AWB) borrowings is of a similar magnitude.

In addition, the Government is firmly of the view that carry-on assistance to wheat farmers is best supplied to individual farmers rather than through an industry-wide subsidy. This assistance is already available through the Rural Adjustment Scheme.

The Government's decision is final. I am taking this opportunity to put on record the facts behind this decision.

In general, the Government has been moving away from marketing schemes which give the wrong signals to producers. The world grains market is a high risk market. Risk management commences with planting decisions.

Uncertainty regarding the forthcoming wheat season has been caused, fundamentally, by last year's record Northern Hemisphere crop and massive export subsidisation by the EC and US. As a result, the Australian net pool return was

sequentially revised downward to $A115-$120 per tonne for 1990/91. This means that farm returns to Australian growers have almost halved over the last 2 years - from $A160 in 1988/89 to $A83 in 1990/91.

Wheat grower organisations and many growers stated that unless the Commonwealth Government (ie the taxpayer) agreed to a GMP of $A151 per tonne some growers would be unable to fund the planting of the 1991 crop.

The Government was therefore faced with the dilemma of trying to decide what level of assistance, or subsidy, would induce the planting of a wheat crop which would be neither too large nor too small, assuming that there will be a normal "break" to the season with southern Australia receiving soaking rains.

After much consideration the Federal Cabinet decided not to set a GMP for the following reasons:

1. There is a strong possibility the downturn for wheat will be short. It is not likely that there will be another record Northern Hemisphere crop in 1991. Recent sales to Egypt and the USSR (facilitated by this

Government) have seen a firming of prices and Australia's exchange rate is easing back as the US economy strengthens. Forward quotes are rising and the end of the Gulf war has restored some OECD confidence.

2. The Government recognises the possibility of low world prices continuing, but has assessed there is a 50% probability of $A150/tonne or better because the area planted to wheat worldwide appears set to fall in 91/92

(US and Canada being down 11% and 9% respectively). While we will not have an accurate picture of the size of the Northern crop until April/May, we also have to balance likely reduced demand by China and the USSR with

normal growth in other markets and the stocks-to-use ratio.

3. If it rains, and given the income situation of the wool industry and the on-farm capacity for production switching in the wheat/sheep belt, a "high" GMP (ie $A151 per tonne) would have run the risk of inducing a big crop, some of which would have to be placed into high risk export markets requiring credit and long

repayment schedules.

If a GMP had been set too "low" (eg $A120 per tonne) banks would still follow a policy of credit rationing. "Too little, too late" would have been the criticism.

Any decision to reintroduce a GMP would have involved the Government breaking down its policies for the commercialisation of the cropping sector domestically and reducing the prospects for a more international

approach to grains/legumes marketing.

4. The Government realises many growers are cynical of the much heralded "level playing field" analogy and the GATT talks that seemingly go on forever, but the fundamentals also have to be realised: Australia cannot win if we get into counter-subsidisation and try to match the rich

industrial giants in giving wheat away. If Australia were to implement production and/or export subsidies the EC and US would simply increase theirs, drawing on their greater population/taxation base. We cannot beat the

EC's subsidy of $US140 per tonne!

5. While there may be some reduction in wheat plantings in Australia, alternative crop plantings will increase. There have only been three years since World War 2 when the wheat crop has been 20% less than the ongoing

average - and this was due to drought or quotas.

6. The Government accepts that the 82/83 drought and the farm crisis of 1985 and 1986 have robbed the farm sector of some of its capacity to bounce back. However, estimates by the Australian Bureau of Agricultural and Resource Economics (ABARE) show an average farm cash operating surplus for wheat and other crop farmers of

$52,900 for 1990/91 (due to pool payments from previous years).

This, plus the limited level of response to recent 1988/89 pool payment offers, indicates that growers' financial positions vary across the spectrum. The figures also indicate that the level of negative farm cash operating surpluses for the bottom 25% of growers was worse two years ago than now.

7. The structure of debt and income of family farms over the last three years, plus advice from State Rural Adjustment Authorities, the banks, and Rural Counsellors, indicate that assistance would be better

directed to individual farmers rather than the whole wheat industry. The Rural Adjustment Scheme (RAS) is best placed in this regard.

8. In reaching its decision the Government did not rely only on aggregated economic information by ABARE. We are aware of the very strong cases that have been put by the WA and SA Governments and organisations such as WAFF

and the UFS.

9. The Government is already supporting the Australian Wheat industry. AWB borrowings are underwritten and the contingent debt as "national interest" liability cover by the taxpayers for wheat is now over a billion

dollars. Even a "capped" GMP would imply some additional risk in a world wheat market place which is becoming more volatile, GATT agreement or otherwise.

10. The Government is addressing the whole question of the rural downturn and the way in which the States, RAS Authorities and the sector’s financiers can best address it. Next month I will be taking to Cabinet a submission

to ensure that the funding levels and structure of RAS are adequate in the current circumstances.

All wheat growers should be aware of the above to enable them to make planting decisions for wheat or other crops in the light of the total information available and free of prejudice.

The Australian Wheat Board has conducted seminars in wheat-growing areas to ensure this information is available. I encourage all farmers to use the information available from the AWB and to seek advice from other relevant authorities before

making planting decisions.

Finally, I can assure wheat growers - and all farmers - that this Government is working to assist them to maximise their returns with all the resources available to it and in the face of very difficult external circumstances.

For more information contact:

Simon Grose 06 2777 520