Coping with change - Farm level adjustment and policy reform

Transitionalassistance for policyreform in AustraliaAustralia does not give long termcompensation to the ‘losers’ ofpolicy reform. But transitionalassistance has been provided incertain circumstances. It usuallyreflects the social welfare andequity issues associated with theeffects of the reform. The keyprinciple in providing assistance isto use measures that will facilitatechange and the transition ofresources.Two recent experiences ofAustralian policy reform are worthexamining. They demonstratethe relationship between a majorpolicy reform and the subsequentstructural change. They alsoused different approaches in theprovision of transitional assistance.The two examples are:• the dairy industry and the overnightelimination of marketsupport following a lengthyperiod of phased reductions inassistance for manufacturingmilk; and• the citrus industry and a phasedreduction in tariff protection.Dairy deregulation was an unusualexperience in policy reform. It wasthe final act of a reform processthat began 14years earlier andwas supportedby most of theindustry. Followingtwo years ofdiscussions betweenthe industry andgovernment thedecision wasannounced ninemonths before itwas implementedand there was someuncertainty about the implicationsfor milk prices. Initially averagereturns fell by up to 18% in thestates that focused on fluid milksales and there was a substantialreduction in farm incomes.A number of dairy farmers retiredfrom the industry – farm numbersdeclined by more than 17%during the first three years of aderegulated market (table 2). Butmost other farmers reacted to thedecline in returns by expandingoutput. After a short period ofadjustment there was a recovery inmilk production and the industry’sexport performance has beenmaintained.The government providedrestructuring assistance to helpfarmers adjust to the effects ofthe reform. Transitional assistanceworth A$1.74 billion was providedto all farmers in the form of a grantbased on their individual exposureto the price support measures. Thegrants were an explicit paymentin place of the implicit assistancethat would have been obtained ifa phased approach to reform hadbeen adopted.The dairy assistance wasdecoupled from current or futureproduction decisions. There wereno conditions on how the grantcould be used and no requirementto exit the industry. Most farmerswho remained in the industry usedthe grant for financial and on-farmrestructuring.Structural change in the citrusindustry is a more typicalexperience of trade related policyreform. It was a phased approach2. Australan dairy industry adjustment to policy reformYear ending 30 June 1999-00 2000-01 * 2001-02 2002-03 ** 2003-04 **pre-reform← → post reform periodNumber of farms number 12 896 11 839 11 048 10 654 9 611change - 260.0 -1 057.0 - 791.0 - 394.0 -1 043.0Output per farm '000 litres 842 891 1 020 969 1 048% change 8.8 5.9 14.5 -5.0 8.1Herd size head/farm 168 184 192 192 211% change 2.8 9.1 4.5 0.1 9.7Milk yield litres/head 4 996 4 847 5 309 5 038 4 965% change 5.8 -3.0 9.5 -5.1 -1.4Milk production m litres 10 847 10 547 11 271 10 326 10 075% change 6.6 - 2.8 6.9 - 8.4 - 2.5Dairy product exports '000 tonnes 776 729 786 722 647% change 17.8 - 6.1 7.8 - 8.2 - 10.3* Market deregulation occurred on 1 July 2000. Source: Harris 2005a.** Widespread drought conditions.

to reform where orange growerswere given time to adapt to achange in market conditions.From 1988-89 the industry had toadjust to a reduction in the tariffon frozen concentrate orange juice(FCOJ) from 35% to 5% over aneight year period.The effect of the reform wasamplified by a decline in the worldprice for FCOJ. Market pricesfor processing fruit declined by45% during the implementationperiod. Some growers left theindustry and some diversified intoother products. Others changedtheir fruit varieties to reduce thedependence on processing fruitsales (table 3). There was no longterm industry contraction and theindustry’s export performance hassignificantly improved.The citrus reform wasimplemented in a way thatprovided implicit transitionalassistance as growers did nothave to immediately absorb thefull effect of the tariff cut. Thepressure on returns led to industryrequests for extra assistance. Thegovernment responded with anA$8.4 millionindustrydevelopmentprogram towardsthe end of theimplementationperiod.The citrusprogramprovidedassistance forprojects aimed Orange treesat improvingindustrycompetitiveness.It did not provide any directassistance to growers. Instead itprovided indirect assistance thatencouraged growers to take aparticular course of action in theiradjustment decisions.The key point that emerges fromthese two experiences is thatfarmers were able to adjust tothe change in market conditions.Some older farmers retired andsome moved into jobs outsideagriculture. Those that remainedtook steps to improve theperformance of their farm businessand in both cases the industryperformance improved after aperiod of adjustment.The impact of both reforms wasnot as severe as expected and thetransitional assistance helped tofacilitate the structural change.The key principles were theassistance was provided for alimited period and market pricesdirected the adjustment. Itshowed that long term incomesupplements are not requiredto sustain an industry after theremoval of industry supportmeasures.3. Australian citrus industry adjustment to policy reformYear ending 30 June 1987-88 1992-93 * 1997-98 2002-03 **pre-reform← →postreform periodTotal orange crop '000 tonnes 486 691 566 633- processing fruit '000 tonnes 293 397 279 309% share of crop 60.3 57.5 49.3 48.8- export sales '000 tonnes 48 82 117 133% share of crop 9.9 11.9 20.7 21.0Gross value of production A$m 151 215 258 337Unit value of production A$/tonne 306 344 516 562Sales of processed orange fruit '000 tonnes 292 450 487 655FCOJ imports ^ '000 tonnes 14 64 229 378- market share % share 4.8 14.2 47.0 57.7World price of FCOJ A$/t 3 338 1 206 1 288 1 496- price in Australian market A$/t 4 547 1 595 1 555 1 807* FCOJ import tariffs progressively reduced from 35% in 1988-89 to 5% in 1996-97. Source: Harris 2005b.** Widespread drought conditions.^ Fresh fruit equivalent.

ConclusionsAdjusting to the pressures forchange is an inevitable aspect ofindustry development. Australianfarmers have shown considerableresilience and capacity to adaptto changing market conditions.Fluctuations in world pricesand exchange rates affect farmreturns in most industries. Butthe Australian experiences showfarmers can successfully adapt andthere is no reason farmers in othercountries could not do the same.The two experiences of policyreform demonstrate that farmerswere able to adjust to a significantchange in market conditionscaused by reductions in support.Some older farmers retired andsome moved into jobs outsideagriculture. Those that chose toremain were not passive marketparticipants. They took steps toimprove the performance of theirfarm business and in both cases theindustry performance improvedafter a period of adjustment.The impact of both reforms wasnot as severe as expected and thetransitional assistance helped tofacilitate the structural change. Thekey principles were the assistancewas provided for a limited periodand market prices directed theadjustment. It shows that longterm income supplements are notrequired to sustain an industryafter the removal of marketsupport measures:• farmers make structuralchanges that can improveindustry performance whentheir income position changes;• income support weakens theincentive to make adjustments– farmers are less responsive tothe change in returns that comefrom policy reform.The aim of transitional assistancefor policy reform should be toEvedon Park Bush ResortThe Jenour family have farmed the property at Evedon Park since the late 1960s. Theproperty supported beef cattle, fat lambs and dairy cattle over the years. In 1984 theydiversified into a bush resort and since then have gradually grown the development so thatit is now a popular venue for conferences, seminars and meetings as well as bush holidays.Source: Options for Change-New Ideas for Australian farmers, RIRDC Publication 03/030facilitate change rather thanprovide a longer term welfarepayment which can stifle theincentive for self improvement.The best way to facilitate structuralchange is to make the full impactof the reform transparent. Thisalso means transitional assistancewill be more effective if it istransparent.A phased approach to reform wasused for the Australian citrusindustry. It delayed the full impacton farm returns and gave growerstime to adjust. This approachprovides some implicit transitionalassistance but it can lead to alonger adjustment process. It is nota transparent form of assistance asit gets mixed up with others factorsaffecting market returns.An overnight approach was usedfor the final act of reform inthe Australian dairy industry. Itincluded a one-off restructuringgrant instead of the implicitassistance from a phased approachto reform. The assistancewas transparent and farmersgot immediate, undistortedprice signals on the full effectsof the reform. It created astrong incentive for farmers toimmediately assess their futureprospects and consider theiroptions for change.Coping with change is not easy.When faced with the effects ofpolicy reform farmers will adjustin different ways. It depends onindividual circumstances andthe opportunities to improvethe physical and financialperformance of their farms. Thesocial dimensions of change canbe managed with transitionalassistance as an element of thepolicy reform:• the Australian experiencesindicate the best approachis to use limited, short termassistance that does notdictate the way farmers shouldrespond;• the income effects of thechange in market returnsshould be allowed to shape theadjustment process.

Industry Adjustment toTrade Related Policy Reformby David HarrisThis report investigatessome Australian experiencesof industry adjustment topolicy reform. Four industrycase studies are examined– dairy, citrus fruit, pig meatand rock lobsters. Each casestudy involved a differenttype of policy change. Thethree agricultural industrieshave experienced adjustmentpressures from trade relatedpolicy reforms. The rocklobster industry has adjustedto the removal of open accessrights to a naturally occurringresource.RIRDC Publication No.05/173,110 pages, $26Industry Adjustment toPolicy Reform – A case studyof the Australian dairyindustryby David HarrisThe Australian dairy industryhas recently experienced apolicy reform that involvedthe over-night removal of allprice support mechanisms. Itwas an unusual event becausepolicy changes are usuallyphased-in or announced withseveral years warning. In thiscase farmers had limited timeto prepare for the effects ofthe reform. Consequentlythe Government providedrestructuring assistance worthA$2 billion to help farmersadjust to the new marketenvironment. This publicationshows how farmers reactedto the effect of a substantialchange in industry support.RIRDC Publication No.05/110,99 pages $21To order these or any otherRIRDC publications pleasephone 02 6272 4819 or visit ourwebsite: www.rirdc.gov.auAgricultural Trade PolicyMade EasyBy A. Stoeckel and G. Reeves,Centre for InternationalEconomicsDemystifies the language ofinternational trade negotiationsand promotes greaterunderstanding among primaryproducers and the broadercommunity. (Also translatedinto Spanish and Portuguese)Australian agriculture is highlydependent on world marketsfor its prosperity. However,many of these export marketsface extensive barriers totrade through a combinationof border restrictions anddomestic support. In othermarkets Australian agriculturemust compete with subsidizedexports from other countries.Australian governments andfarmers have campaignedagainst these barriers foryears. A problem with theagricultural negotiations is thecomplexity of the conceptsused to tackle the variousforms of farm support. Thisbooklet on agricultural tradepolicy aims to make senseof the complex concepts ofagricultural policy for farmers,policy makers and the public.With better understanding ofwhat is at stake and why, betterdecisions will follow.RIRDC Publication No04/170; $15 (Also translatedinto Spanish and Portuguese)Rural Industries Researchand DevelopmentCorporationLevel 2, 15 National CircuitBarton ACT 2600Phone: 02 6272 4819Fax: 02 6272 5877Email: rirdc@rirdc.gov.au.Web: http://www.rirdc.gov.auRIRDC Short Report No.06/140This paper is by David Harris andis based on the findings of twoRIRDC reports on adjustmentto policy reform – Harris 2005a,Industry adjustment to policy reform– A case study on the Australiandairy Industry, RIRDC PublicationNo. 05/110, $21 and Harris2005b, Industry adjustment totrade related policy reform, RIRDCPublication No. 05/173, $26.These reports belong to RIRDC’sdiverse range of over 1500research publications and are partof our Global CompetitivenessR&D program which aims toidentify important impedimentsto the development of a globallycompetitive Australian agriculturalsector and support researchthat will lead to options andstrategies that will remove theseimpediments..Most of our publications areavailable for viewing, downloadingor purchasing online through ourwebsite:• downloads at www.rirdc.gov.au/fullreports/index.html• purchases at www.rirdc.gov.au/eshop