What business are they in?

You’d think that we’d have learnt something about land speculation over the last 200 years but in Rum Corps to white- shoe brigade by Jim Forbes and Peter Spearritt – thanks to Currency Lad for the link – the authors show that practices started by Macarthur and the officers of the Rum Corps are alive and well today.

THE CROSSING OF the Blue Mountains by Blaxland, Wentworth and Lawson in 1813 paved the way for further land grabs. Desperate convicts who dreamt of a fabled Shangri-la beyond the Great Dividing Range were bitterly disappointed, but for the acquisitive and avaricious the vast tracts of grassland over the mountains were a speculative paradise. Legislation in 1829 divided the new lands into strictly defined portions, the Nineteen Counties, settlement outside which was forbidden on pain of prosecution. With limited resources and the inability to properly police such a vast area, the colonial authorities were playing little more than a game of bluff. Population pressures, increasing livestock numbers and sheer lust for land quickly led to the emergence of “squatting”, as settlers moved beyond the established county boundaries and pegged out their own in defiance of the administration. With little effective recourse, the Government reluctantly accepted the presence of the squatters and handed over Crown land for nominal lease and licence fees.

Pioneers, some motivated solely by greed, claimed much of the continent. While the house rules varied, speculative interests invariably held the winning hand. In South Australia EG Wakefield’s theories of colonisation, which attempted to regularise the process of land distribution and settlement dispersion through fixed uniform sales and systematic selection of immigrants, were abandoned after the fledgling colony became bankrupt in 1841. Absentee land-holders and speculators moved in, clinging to Adelaide while buying and selling property, lining their own accounts but contributing little to the economy of the strained colony. Western Australia adopted a pragmatic approach from the outset, rewarding rather than resisting squatters with secure tenure and bonuses for those who discovered new pastures.

The opening up of Queensland produced a land rush of enormous and bloody dimensions. The quest for acquisition and the expansion of the white frontier occasioned a quiet but vicious dispossession of the indigenous population, as settlers with both “the will and the weapons” brutally extended the concept of absolute and exclusive proprietary right over a previously communal resource. Meanwhile, back in NSW and Victoria, policy attempts, such as the selection acts of the early 1860s, which aimed at ensuring productive use and dispersing the land ownership, were overborne by raw cupidity as the grab-and-hold ploys begun in the early years of settlement continued. Practices such as dummying and peacocking (picking the key riparian parcels of a run, leaving the residue useless to anyone else) ensured that regional lands remained locked away in the grip of the giant pastoral companies and kings in grass castles.

The profit incentive overwhelmed any political attempts to regulate distribution and use of Australia’s regional lands. Rapacity, not regulation, was the guiding principle of early land distribution, sketching a framework for agricultural land holdings that endures to this day. The fact that the Australian grazing industry remains an extreme example of land concentration, with millions of hectares held by the top 50 producers, is testament to the colonial legacy.

One of the few maxims I can remember from learning how to run a business was making sure that the enterprise manager knew exactly what business they were in. The example of ‘myopia’ most often trotted out was that of the demise of the railways in the USA. Railway owners never saw the destruction of their industry because they didn’t see trucks and planes as competition – they didn’t understand that, rather than being in the railways business, they were in the transportation business. Much the same thing can today be said of primary industry. Are they in the food and fibre business or the real estate business ? An article in The Australian Financial Review : Wednesday 30th March 2005 by Alan Mitchell gives the statistics that suggests the latter.

They say that things are always crook in the bush. But are they? According to the Australian Bureau of Agricultural and Resource Economics, the average return on investment in farming over the past five years was higher than for either the money or equity markets. This is despite the fact that the period includes the most exceptional drought that any tearchoked farmer or rural politician can remember.

That’s right. ABARE’s latest report on farm performance shows that in the three years to 2003 – 04 the average broadacre farm achieved a rate of return on investment of almost 8 per cent. Farmers’ equity in their businesses at the end of last financial year was higher than in any year since the 1980s. How can that be so? Well, while weather conditions have been poor, high prices for livestock and grain, low interest rates and a spillover from the real estate boom in the cities have combined to boost farm incomes and rural land values. According to ABARE, broadacre farm prices have increased by more than 50 per cent on average since mid 2001.

The impact of soaring land prices on the financial position of farmers can be seen from the ABARE estimates of farm rates of return. For the most profitable of the largest broadacre farmers, the average rate of return including capital gains in the three years to 2003 – 04 was 18.2 per cent That was 2.5 times the rate of return achieved by the farming business excluding capital gains. For the smallest, and generally least profitable, farms the average rate of return with capital gains was 5 per cent, compared with 3 per cent when capital gains are excluded.

Few will begrudge the farmers their capital gains. But perhaps the capital gains should have implications for government policy. For one thing, it raises the question of why we, the taxpayers, are providing drought assistance in the form of grants rather than loans. The idea of income contingent loans, along the lines of the higher education contribution scheme (HECS), has been suggested by researchers including Bruce Chapman, an architect of HECS, as an alternative to the present system of drought relief. Chapman’s argument was based partly on equity considerations. The average taxpayer, he said, was less wealthy and had fewer other economic advantages than the majority of farmers assisted through drought relief. Many economists object to drought relief in principle because, they say, it excuses farmers from managing one of the basic risks of their business. People can go into farming with insufficient capital, skip investment in dams and water conservation, and overstock their farms, safe in the knowledge that the government will bail them out when there is a drought. Governments have partly bought the economists’ argument. They encourage (with yet more concessions) farmers to put aside money for bad years, and supposedly they offer grants only when the droughts are exceptionally bad. But there is still a problem in Australia of too many undercapitalised and poorly managed small familyfarming businesses. Half of all farmers produce only 10 per cent of agricultural output. Small farms are less productive than large ones because more efficient farming techniques demand large scale production in order to capture their advantages. The big farm businesses earn rates of return that are comparable with other industries. The small ones are often barely profitable at all and are vunerable to unlucky breaks such as droughts.

The issue of size and productivity is also connected in a surprising way with the question of rural land prices. Rural land prices, ABARE tells us, have been going up partly because of rising farm incomes. But the general increase in residential property prices since 1997 has also resulted in an increase in demand for rural land from urban Australians seeking a rural lifestyle and investment. According to Neil Barr of the Victorian primary industries department, research in the US has shown that landscape amenity is the best predictor of rural area population change. Land that is close to major cities, has good views, is close to water and has a benign climate, attracts migrants from the urban areas. ABARE says the largest increases in rural land values have been in the pastoral north and the near urban and coastal fringes of the south. The near urban are on average small and relatively less efficient, and the opportunity for them to be consolidated into more productive larger farms is limited by the high cost of land. Unfortunately, that situation is aggravated by government policies, such as drought relief and the rural giveaways in the last election campaign, that allow the inefficient to remain on the land.

As is my Sunday wont, I watched Landline and marvelled at the whinging grape growers, and wondered at the recent Darwin meeting of agriculture ministers where they speak again of drought payments, industry restructure grants and general handouts to farmers. We obviously haven’t learnt anything from history – the money’s in the land not in the produce of the land – but inefficient farmers can’t face the music and look again (still) to their suburban cousins for another handout.