One of the implications of the Covid crisis is that there is likely to be much more focus on economic nationalism in the future. Many of the weaknesses of globalisation have been exposed, especially the dangers of cross-border supply chains and what it means to have part of your economy dependent on other countries.
If Australia does draw back from globalisation — as opposed to trade, which will continue — then there should be more focus on our primary sector and how it could be better financed. Australia’s long history as a primary producer constitutes what economists call a ‘comparative advantage’: an economic area in which a country does best while giving up the least.
There are two massive problems in the way the rural sector is funded in Australia. First, farming in a country subject to severe weather fluctuations is cyclical and uncertain. Yet mostly farm funding is in the form of loans from banks on which regular interest payments have to be paid. In good times, that is fine. But if there is sustained drought or other poor weather, then income will fall and the interest burden will accumulate, sometimes eventually becoming unpayable.
What would better suit the industry is equity capital. With equity (share capital), income is paid out to shareholders in dividends. In good times, dividends will be high (dividend payout ratio agreements would need to ensure that); in bad times they will be low. It would mean that the type of finance being used would match the activity. There would be fewer farmers having to endure heartbreak as the banks foreclose on them.
The second problem is that there are few opportunities in Australia to diversify primary industry investment, either in terms of geographical spread or product type. If investments could be located across the continent, then downturns because of weather in one area are less likely to result in overall underperformance, reducing investor risk. If there is diversification in product types then fluctuations in international prices may also be evened out: if wheat prices were down, beef prices might be up, for example. If there is one cast-iron rule in investing, it is that diversification reduces risk without harming returns significantly. There is no reason to think that Australia’s rural industry would be an exception.
Low interest rates have meant the sector is under less pressure than usual, allowing farmers to reduce debt and build up notional equity in their businesses. But there