How weak competition forces up food prices along the supply chain

By Millie Muroi, Economics Writer

The first most of us see of our groceries is the end product – after all the planting, growing, shipping and packaging has happened. So when we’re hit with a big bill at the checkout, it’s easy to blame supermarkets for the expensive beef, carrot or turnip that ends up on our forks.

We know Coles and Woolies have received raps on their knuckles for their behaviour recently, including alleged false discounts to lure in customers. But it’s not just customers or the competition watchdog dishing out their disdain. And it’s far from just the supermarkets that have pointed questions to answer.

Dr Andrew Leigh, former economics professor and now assistant minister for competition and treasury, has had a deep-dive into the topic. It turns out the list of possible culprits when it comes to the costly lack of competition is longer than just the supermarkets – and it’s our farmers bearing the brunt of it.

Basically, while our household budgets are getting pushed by pricier produce, farmers are getting squeezed. They’re not just facing higher prices when it comes to key ingredients such as fertiliser and machinery, but also higher costs and unfair terms once their produce is ready to be processed, shipped off and sold.

How do we know this? There are a few key signs.

Concentration is one. “Industries with plenty of competitors tend to deliver better prices, more choices and stronger productivity growth,” Leigh said in a speech this week.

The fewer players there are in a market, the less competitive it tends to be. Less competition usually means lower wages, less choice for consumers and less innovation, with dominant businesses able to charge higher prices than they might otherwise be able to, since they don’t have to worry so much about being undercut or fighting to win over customers with bargains.

Analysis by economic research institute e61 last year found all Australian industries were more concentrated than those in the US, especially in mining, finance and utilities, in which the top four firms have more than 60 per cent market share.

Generally, we see a market as “concentrated” if the biggest four firms control one-third or more of it. In 2016, Leigh and his colleague Adam Triggs found more than half of industries in the Australian economy were concentrated markets. Since then, concentration in Australia has become worse.

Farming, though, is surprisingly competitive – at least for most commodities. So why are we still seeing higher prices at the check-out?

Part of it is thanks to supply chain issues, especially during the pandemic, which meant we couldn’t get as many materials and produce from overseas, reducing supply and driving up prices. Then there’s always the temperamental weather, which can dramatically cut harvests.

But it’s a growing domestic issue which is causing headaches for farmers.

Before anything even springs out of the ground or fattens up in a paddock, farmers are dealt a tricky hand. The largest four fertiliser companies, for example, control nearly two-thirds of the market and the top four hardware suppliers control roughly half of the market, according to Leigh’s analysis of data from IBIS World.

From high-tech harvesters to tractors and seeding equipment, machinery is a big cost paid by farmers. That means when there’s a lack of options and farmers aren’t able to shop around as much, their hip-pockets – and ours – are worse off.

If you think that lack of choice is bad, Leigh says it’s even worse when farmers go to repair and service their equipment.

Farming machinery makers have a lot of power – even more than carmakers – thanks to warranties forcing farmers to go to a specific dealer for servicing, and tech restrictions holding farmers back from accessing the parts, manuals and diagnostic software they need to make repairs themselves.

Then there are seeds. From these little things, big costs can grow. One paper from the US Department of Agriculture’s Economic Research Service in 2023 found the seed sector had become more concentrated. Between 1990 and 2020, the average seed price soared 270 per cent, and 463 per cent for genetically modified types.

The huge price increase partly accounts for the fact seeds have become better – for example, GMO varieties which have made farming more productive. But as Leigh points out, “there are not many other industries where the price of a key input has grown five-fold in 30 years.”

But that’s not all. Once the cattle has been raised or the blueberries grown, farmers have little choice or bargaining power when it comes to processing, transporting and selling produce.

When it comes to slaughtering cattle, the top five Australian processors accounted for about 57 per cent of the market in 2017, meaning cattle farmers had little choice in the prices and options they accepted. For fruit and vegetable processing, the biggest four companies hold about one-third of the market.

When the produce is ready to be sent out, farmers have even less choice. Two companies – ANL and Maersk – account for 85 per cent of the shipping freight industry in Australia, and four companies control 64 per cent of the market if farmers want to send things via rail.

Farmers, especially those who produce at a smaller scale, often become the “meat in a market concentration sandwich”. 

Farmers, especially those who produce at a smaller scale, often become the “meat in a market concentration sandwich”. Credit:Louise Kennerley

As Leigh points out, the risk of spoilage further limits viable options available to farmers.

Then there’s the supermarket sector, where Coles and Woolies control about two-thirds of the market – a higher share than every OECD country except New Zealand and Norway.

Concentration at all these points means farmers are at greater risk of facing power imbalances, which show up in things such as unfair contracts, where terms are obviously lopsided. Bigger players in these concentrated industries can generally muscle in with terms which are worse for farmers, such as restricting them from raising issues or selling things at unfairly cheap prices.

All of this not only puts pressure on farmers, but can reduce their ability and incentive to invest in improving their product and the way they do things.

As Leigh puts it, farmers, especially those who produce at a smaller scale, often become the “meat in a market concentration sandwich”.

There’s no easy fix in all this, but preventing too many mergers, where companies combine and gobble each other up to become even bigger, is key to promoting competition.

Of course, bigger companies are not always worse. Their scale can allow them to do things more cheaply. But too little competition can lead to pumped-up prices which flow all the way through from more expensive seeds and fertiliser to the prices charged by supermarkets.

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If you care about your offspring, you should support 'nature positive'

The most pressing problem we face is climate change. It’s even more important than – dare I say it – getting inflation down to 2 per cent by last Friday. But we mustn’t forget that climate change is just the most glaring symptom of the ultimate threat to human existence: our continuing destruction of the natural environment.

Economists are often accused of being too narrowly focused on markets and the market prices that move up or down to bring supply and demand into balance.

But one way they’ve widened their scope is by broadening the meaning of “capital”. Capital refers to anything that helps us produce the many goods and services we consume as part of our standard of living.

Historically, it has meant “physical” capital: the human-made tools, machines, factories, shops, offices and other buildings, as well as infrastructure such as roads and bridges.

To this, economists have added the “human” capital we have in our brains: the education, training and on-the-job knowledge that adds to the productive value of our labour.

And then they took account of “social” capital: the human relationships and networks, norms of acceptable behaviour and, particularly, the trust between people that make markets work more smoothly and lower the costs of doing business.

Finally, economists have recognised the importance of “natural capital”: the world’s stocks of natural assets, such as geology, soil, air, water and all living things. These natural assets deliver to us “ecosystem services” ranging from pollinating birds and insects, sources of fresh water, forests, marine life, arable soils and various absorbers of wastes.

As a former Treasury secretary, Dr Ken Henry, reminded us in a speech last week, human progress has relied on forms of industrial production, including modern agricultural practices, involving extracting non-renewable raw materials, such as iron ore, coal and gas, and making extensive use of ecosystem services.

Two hundred years ago it was possible to believe that all this economic activity was having no significant impact on our stocks of natural assets and their ecosystem services to us. Today, scientists tell us a very different story – and it’s much easier to see with our own eyes the damage we’ve done.

As Henry puts it, the extraction of non-renewable natural resources for industry has depleted the stock of natural capital directly. But it has also had an indirect impact. Most obviously, the burning of fossil fuels has damaged the atmosphere, the total supply of water in all its forms, and the earth’s surface, in a set of complex processes we call climate change.

But that’s not our only contribution to the degradation of natural capital. Because the industrial rate of use of ecosystem services has exceeded nature’s capacity to regenerate for at least several centuries, the stock of natural capital has been depleted – just as machines used in production depreciate more rapidly if worked harder and not properly maintained.

The depletion of natural capital over time reduces its capacity to supply ecosystem services that are critical to production. For example, soil fertility, the availability of well-watered farming land, and capacity of the atmosphere and the land to absorb the waste left by economic activity have all fallen over time.

“A degraded biosphere [of land and air] affords less protection from fire, droughts, floods and storms, all of which are growing in incidence and severity because of human-induced atmospheric change,” Henry says.

Wait, there’s more. The depletion of natural capital also reduces “environmental amenity” – our enjoyment of being out in nature. It also imposes adverse cultural impacts on indigenous peoples.

Economists are very aware that, to some extent, labour and physical capital can be substituted for each, one source of energy can be used to replace another, and resources can be used to produce machines that increase what we have available to consume.

These are the reason some economists have dismissed the fear that we have, or could ever, approach the “limits to [economic] growth”.

But Henry’s not convinced. “None of this human ingenuity, nor [physical] capital accumulation, nor increasing work effort has, thus far, done anything to halt the rate at which the stock of natural capital is being depleted,” he says.

“To the contrary, new technologies and more [physical] capital-intensive modes of production have accelerated its rate of depletion. And they have done little to reduce the dependence of industry upon the stock of natural capital.”

The distinguished American economist Robert Solow argued that for economic growth to be sustainable, the present generation has a moral obligation to “conduct ourselves so that we leave to the future the option or the capacity to be as well-off as we are”.

But Henry responds that: “The historical loss of natural capital denies us reason to believe that future generations will have the capacity to achieve our level of wellbeing. To put it another way, it would be irrational of us to suppose that we, in this generation, are custodians of sustainable development.”

Wow. He goes on to argue that so much has been lost, and with such serious consequences, a consensus has emerged that we must now commit to nature repair.

Have you heard of “nature positive”? It means halting and reversing nature loss, so that species and ecosystems start to recover.

Henry says the nature positive position “argues that for some time, perhaps generations, we must seek to restore environmental condition, understanding that without doing so, we cannot be confident that future generations will have the capacity to be as well-off”.

Wow. This is radical stuff. And it’s coming not from some Greens senator, but from a former Treasury secretary and former chair of the National Australia Bank.

In an interview in April, Henry said the Albanese government should establish a public fund to spur corporate involvement in nature positive protection and repair. The cost would be enormous, he admitted.

A last thing to surprise you. The world’s first global nature positive summit will be held in Sydney in early October. It will be hosted by the federal Minister for the Environment, Tanya Plibersek.

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A damaged environment leads to an unlivable economy

Economists are paid to worry about the economy, which they usually define fairly narrowly. And, like all specialists, they tend to overemphasise what they know so much about and underrate everything else.

Karl Marx usually gets the credit for saying that, in the economy, “everything’s connected to everything else”. The most conservative economist would agree. The economy is circular because what’s an expense to you, is income to me.

But what applies inside the economy applies equally outside it. Everything inside what we call the economy is connected to everything outside it. What is outside it? The rest of the world – the natural world.

The “economy” sits inside what we call “the environment”. Without the environment, there wouldn’t be an economy. Humans wouldn’t be here, and we wouldn’t need one.

When you step back from our daily preoccupations – at the minute, inflation and interest rates – the bigger picture reveals that economic activity – producing and consuming goods and services – mainly involves doing things to the natural environment: we clear the forest to grow food, scar the countryside to mine minerals, which we manufacture into a thousand kinds of machines.

As we get more prosperous, the population grows, our towns and cities get bigger and we clear more forest to build more houses, roads, highways and bridges. We pull more fish from the sea. We move around a lot. And we power it all by digging up fossil fuels and burning them.

As the population’s grown, but more particularly as consumption per person has multiplied, we’ve done more and more damage to the environment.

But here’s the trick: we’ve hit the environment so hard, it’s started punching back.

That’s why the most important economic event of recent times is not the latest rise in interest rates, it’s last month’s State of the Environment report – whose release was delayed until we found a government with the courage to break the bad news.

The report’s significance is not only its rollcall of how much damage we’ve done so far, but its account of the way that damage is damaging the humans who’ve done it.

We’ve been damaging the environment in many ways – loss of habitat and species, introduction of invasive animals and plants, pollution and waste disposal, salinity and other damage to soil and waterways, overfishing – but the greatest single source of damage, of course, is climate change.

The five-yearly report brings the bad news that climate change is compounding all the other problems. And whereas previous reports warned of future damage from climate change, this one shows it’s already happening – and getting worse.

It documents the extreme floods, droughts, heatwaves, storms and bushfires that have occurred across Australia in the past five years. The immediate effects have been millions of animals killed and habitats burnt, enormous areas of reef bleached, and people’s livelihoods and homes lost.

But there are many longer-term effects still to play out. Extreme conditions put immense stress on species already threatened by habitat loss and invasive species. An extreme heatwave in 2018, for example, killed 23,000 spectacled flying foxes, making them an endangered species.

Many of our ecosystems have evolved to rebound from bushfires. But now that the fires are coming more often and are more intense, the bush doesn’t have enough time to recover, which scientists expect will make it weedy – only those species that live fast and reproduce quickly will thrive.

But enough about plants and animals, what about us? While cyclones, floods and bushfires directly destroy our homes and landscapes, Professor Emma Johnston, of Sydney University, an author of the report, writes that heatwaves kill more people in Australia than any other extreme event.

Heatwave intensity has increased by a third over the past two decades. And climate change worsens air quality through dust, smoke and emissions. The Black Summer of 2019-20 exposed more than 80 per cent of our population to smoke, killing about 420 people.

As Liz Hanna and Mark Howden, of the Australian National University, remind us, clean air is just one of the “ecosystem services” the environment provides to you and me in the economy. Another is clean food. A lot of our recent complaints about the cost of living – the high cost of meat and vegetables, the mythical $10 iceberg lettuce – come from the delayed effect of the drought and the recent effect of the floods.

Yet another service is clean water. But many country towns had to truck in water during the last drought. Land clearing affects water quality. Run-off from agriculture damages water ecosystems and encourages algal bloom and species loss. More than 4 million people depend on the Murray-Darling rivers for their water, but the catchments are rated as poor or very poor.

Finally, the report reminds us that contact with (healthy) nature is associated with mental health benefits, promotes physical activity and contributes to overall wellbeing. Biodiversity and green and blue spaces in cities are linked to stress reduction and mood improvement, increased respiratory health, and lower rates of depression and blood pressure. Enjoy ’em while they last.

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Problems abound, but we could yet emerge as winners

As we begin to lift our heads and look beyond the lockdown, it’s easy to see the many other problems we face. It’s possible to view those problems with fear and disheartenment – and it suits the interests of many groups to play on our fears.

But it’s almost as easy to see Australia as still a lucky country, with a populace that’s confident, resourceful, committed to the “fair go” and capable of co-operating to convert our problems into opportunities to flourish.

The keys to making life in Australia better rather than worse are to face up to all the change being forced upon us, and to unite in finding solutions that share both the costs and the benefits as fairly as possible.

Ideally, we’d have a political leader who offered us a more united, optimistic and confident vision of the path to a better world, but the sad truth is the two main parties are locked in a race to the bottom that we can’t even be sure they’d like to escape.

In reviewing our problems, let’s start with the pandemic. There’s a risk that we’ve opened up too soon, that our hospitals are overwhelmed and death rates rise unacceptably, forcing the premiers to backtrack.

But it’s only a risk and, assuming it doesn’t happen, I think we can be confident the economy will bounce back strongly and quickly, as it did last year. It won’t be quite as strong as last year because the feds haven’t splashed around nearly as much money as last time.

Even so, most households have saved a lot of their incomes and, as we saw last year, will spend much of the increase over coming months.

At a global level, the risk is that the pandemic continues for years more, as long delays in vaccinating everyone in the poor countries allow new variants to emerge. That the rich countries, having hogged all the vaccines, then lose interest in the topic.

Our first post-pandemic problem is that the economy will rebound only to the plodding rate of growth we were achieving before the plague arrived. Like the other rich countries, our rate of improvement in productivity – production per worker – is anaemic.

Our business people are going through a phase where the only way they can think of to increase profits is to use every tactic to keep wage rises as low as possible. The penny is yet to drop that, since wages are their customers’ chief source of income, this is not a winning formula.

Other problems abound: ever-rising house prices that can’t keep rising forever; adjusting to the ageing of the population and the growing demand for aged care; continuing digital disruption, with all its benefits to users but upheaval in affected industries; handling the growing assertiveness of China, while still taking advantage of being part of the global economy’s fastest-growing region; and the less tangible but no less worrying problem of the breakdown of trust in Australian and global institutions and relationships.

All that’s before we get to our biggest problem – responding to climate change – which, with the Glasgow conference starting in less than two weeks, is also our most pressing challenge.

No issue better illustrates the lesson that, if we want to be on top of our problems rather than crushed by them, we must face up to inevitable changes being forced on us by forces we don’t control.

We must stand up to powerful interests – our coal, oil and gas industries, in this case – hoping to stave off the evil hour as long as possible. They’ll protect their own interests at our expense for as long as we let them. We must be suspicious of political parties accepting donations from these urgers.

We must resist the blandishments of populist politicians – yes you, Tony Abbott – promising to save us from sky-high power costs (we got them anyway) because we can just let the whole thing slide.

Now we have the farmers-turned-miners National Party holding themselves out as champions of the put-upon regions and using their veto over adoption of the net zero emissions target to extort money from the Liberals.

People in the regions, we’re told, bitterly resent Liberal city slickers sitting pretty while imposing all the costs of adjustment on the bush.

This conveniently ignores two points. First, farmers are the biggest losers from climate change and the biggest winners from successful global action to limit further global warming.

Second, as Scott Morrison rightly says, coal mining jobs in NSW and Queensland will decline as other countries reduce their own emissions by ceasing to buy our coal and gas. But acting to get on with making Australia a renewable energy superpower – including by exporting hydrogen, clean steel and clean aluminium – will create many new skilled manufacturing jobs – all of them in the regions.

But only if we stop thinking and acting like losers, and do what it takes to be winners in the new, decarbonised world.

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Farmers have most to lose - or gain - from climate change

Doesn’t it strike you as strange that the born-again Scott Morrison – by now, presumably, deeply ashamed of his public fondling of a lump of coal during his unregenerate days – is being held back from signing up to the target of net zero carbon emissions by that fierce defender of farmers and rural Australia, the National Party?

Farmers are, if you’ll forgive the expression, at the coal face of the damage climate change is doing and will keep doing to Australia. They’ll also be among the chief beneficiaries of successful international action to stop further increase in global warming.

By now there’d be few farmers who didn’t understand that. Certainly, all the main farming lobby groups, from the National Farmers Federation down, have endorsed the net zero target and want to get on with it.

So what’s the National Party’s problem? Just that it sees itself as champion of two regional industries, agriculture and mining. Trouble is, the miners have always seen their interests as lying in fending off action to reduce the use of fossil fuels for as long as possible.

The Nats’ allegiance to mining gets stronger as you move north, and reaches its peak in Queensland. And it’s not hard to guess which of the two industries has the deeper pockets when it comes to generous support for the party cause.

But not to worry. The Nats’ method of operation within the Coalition has long been to blackmail the Libs into shifting more money from the city to the bush. It doesn’t have to be well spent as long as there’s more of it. And all the nudging and winking coming from the chief national Nat, Barnaby Joyce, suggest the Nats (or most of them) will surrender their principled position as long as the price is right.

One part of the price could be to exempt agriculture from any effort to reduce its own emissions. But a recent report from the Grattan Institute says that would be a mistake for two reasons. Agriculture accounts for 15 per cent of our total emissions, so we won’t make it to net zero if it isn’t pulling its weight like other industries.

But also, now the big countries are serious about climate change and are requiring their own industries to shape up, they’ll be using a carbon tariff to punish exporters from those countries that aren’t doing likewise. Any excuse to protect their own farmers from our more-efficient operators would not go unused.

So let’s start at the beginning. Farmers are disproportionately affected by climate change, including by higher temperatures, changing rainfall patterns and increasing drought, bushfires and floods.

As Grattan’s James Ha reminds us, federal government research says changes in rainfall have cut farm profits by 23 per cent compared to what could have been achieved in pre-2000 conditions.

Cropping farmers have done worst, but if global warming reaches 3 degrees, livestock in northern Australia are expected to suffer heat stress almost daily. As the climate continues to change, the value of some farming land may fall considerably and some properties may become increasingly expensive to insure.

Agriculture’s emissions of greenhouse gases have fallen somewhat in recent years, but this is a result of the drought. As herd size is rebuilt, emissions will increase – until the next big drought.

About three-quarters of agriculture’s emissions come from cattle and sheep. Most of this is our 24 million cattle and 64 million sheep burping methane (which causes a lot more warming than carbon dioxide), and then the nitrous oxide (also worse than CO2) that comes from their poo.

Then come emissions from the use of diesel to fuel most farm equipment, emissions from the use of chemical fertilisers and lime, and emissions from plant matter left after harvest.

All this makes farm emissions difficult to reduce. There are vaccines and dietary supplements to reduce methane belching, but they are not yet well developed and are hard to use on wide-ranging animals.

Farm equipment has not yet been adapted to use electric motors. Even so, there are practices that could be changed to manage farms more efficiently and with fewer emissions.

State agriculture departments have spent much over many years teaching farmers how to bring their practices up to date, and they need to spend a lot more teaching farmers how to adapt to climate change and reduce emissions.

Similarly, the CSIRO has spent taxpayers’ money on advancing farm technology over many decades. We should be investing in technological solutions to limit methane emissions. Where farmers need to buy expensive new equipment, the government could help them with “income-contingent” loans similar to HECS loans to uni students.

Farmers will gain directly from emission-reducing practices that also increase their productivity. They’ll be enormously better off from whatever the global effort does to limit further warming.

And, remembering the “net” in net zero, they’ll benefit greatly from doing things that allow them to sell “carbon credits” to firms in other industries – so long as it’s not just another National Party boondoggle.

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Water reform report’s big smile hides its big teeth: much more to do

A quick look at the Productivity Commission’s draft report on national water reform reminds me of the repeated judgment from old Mr Grace, the doddering owner of the department store in Are You Being Served? as he headed for the door: “You’ve all done very well!”

Its review of the progress of the National Water Initiative signed by the federal and state governments in 2004 – encompassing agreements on the Murray-Darling Basin – is terribly polite, understated and relentlessly upbeat.

Apparently, governments have made “good progress” in having “largely achieved” their reform commitments. All that remains is just the need for a teensy-weensy bit of “policy renewal”.

This mild-mannered stuff and congratulatory tone bear no resemblance to my memories of meetings of angry farmers railing against stupid greenies and other city slickers; of their insistence that the immediate needs of irrigators and irrigation towns along the river take priority over the river system’s ultimate survival; of each state government’s insistence on favouring their own irrigators over those in states further down the river; of federal and state National Party ministers happy to slip farmers a quiet favour, avoid enforcing the rules and turn a blind eye to blatant infringements; of federal Labor ministers who, even with no seats to lose in the region, were unwilling to make themselves unpopular by standing up for the rivers’ future.

I remember that the Howard government spent billions of city slickers’ money helping individual farmers make their irrigation systems more resistant to evaporation and seepage when all the benefits went to the farmer and none to the river system.

I remember all the infighting between government water agencies, and the mass fish kills during the recent drought in NSW and Queensland, for which the managers of the system accepted no responsibility.

Fortunately, reporters are adept at ignoring all the happy flannel up the front of government reports and finding the carefully hidden bad bits. And fortunately, we have the assistance of long-standing water experts, including the economist Professor Quentin Grafton, of the Australian National University, whose summary of the report on The Conversation website is headed: “Our national water policy is outdated, unfair and not fit for climate challenges.”

“The report’s findings matter to all Australians, whether you live in a city or a drought-ravaged town. If governments don’t manage water better, on our behalf, then entire communities may disappear. Agriculture will suffer and nature will continue to degrade,” he says.

The report’s proposal to make “water infrastructure developments” a much larger part of the National Water Initiative is a critical way to keep governments honest. For years, state and federal governments have used taxpayers’ dollars to pay for farming water infrastructure that largely benefits big corporate irrigators, Grafton says.

Last year the Morrison government announced a further $2 billion for its Building 21st Century Water Infrastructure project. Such megaprojects, he says, perpetuate the simplistic myths of the early 20th century that Australia – the driest inhabited continent on Earth – can be “drought-proofed”.

When governments signed the original initiative in 2004, they agreed to ensure investments in infrastructure would be both economically viable and ecologically sustainable. But many projects appear to be neither.

The report notes, for example, that the construction of Dungowan Dam in NSW means “any infrastructure that improves reliability for one user will affect water availability for others”. The “prospect of ‘new’ water is illusory”.

The report warns that projects that aren’t economically viable or ecologically sustainable can “burden taxpayers with ongoing costs, discourage efficient water use and result in long-lived impacts on communities and the environment”.

Equally disturbing is that billions of dollars for water infrastructure are presently targeted primarily at the agriculture and mining industries, while communities in desperate need of drinking water that meets water quality guidelines miss out, Grafton says.

Fortunately, the report isn’t so house trained as to avoid mentioning the gorilla the Morrison government prefers not to notice. There’s a lot about the consequences of climate change. It says droughts will likely become more intense and frequent and, in many places, water will become scarce.

In Grafton’s summary, the report says planning provisions were inadequate to deal with both the millennium drought and the recent drought in Eastern Australia. The 2012 Murray-Darling Basin Plan, for instance, took no account of climate change when determining how much water to take from rivers and streams.

The present federal government actually dismantled the National Water Commission in 2015, meaning we no longer have a resourced, well-informed agency to “mark the homework” and make sure the reforms were being implemented as agreed, Grafton says.

In 2007, the worst year of the millennium drought – and the year John Howard feared he’d lose the election if he didn’t match Labor’s promise to introduce an emissions trading scheme – Howard remarked that “in a protracted drought, and with the prospect of long-term climate change, we need radical and permanent change”.

Grafton says we’re still waiting for that change. “If Australia is to be prosperous and liveable into the future, governments must urgently implement water reform.”

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Working from home takes us back to the future

If there’s one good thing to come from this horrible year, surely it’s the breakthrough on WFH – working from home. This wonderful new idea – made possible only by the wonders of the internet – may have come by force, but for many of us it may be here to stay.

If so, it will require a lot of changes around the place, and not just in the attitudes and practices of bosses and workers. With a marked decline in commuting – surely the greatest benefit from the revolution – transport planning authorities will have to rethink their plans for more expressways and metro transport systems.

If we’re talking about fewer people coming into the central business district and more staying at home in the suburbs, over time this will mean a big shift in the relative prices of real estate. For both businesses and families, CBD land prices and rents will decline relative to prices and rents in the suburbs.

In big cities like Melbourne and Sydney, as so many jobs have moved from the suburbs to office towers in the CBD and nearby areas, the dominant trend in real estate has gone from position, position, position to proximity, proximity, proximity. Everyone would prefer to live closer to the centre.

If you measure the rise in house prices over the years, you find the closer homes are to the GPO, the more they’ve risen, with prices in outer suburbs having risen least.

But if WFH becomes lasting and widespread, that decades-long trend could be reversed. If you don’t have to spend so much time commuting, why not live further out, where bigger and better homes are more affordable and there’s more open space?

Maybe apartment living will become less attractive compared to living in a detached house with a garden, with a corresponding shift in relative prices. And if we’re going to be working at home as a regular thing, maybe we need an extra bedroom to use as a study.

It’s interesting to contemplate. But before we get too carried away, let’s remember one thing: in human history, there’s nothing new about working from home. Indeed, when you think about it you realise humans have spent far more centuries working at home than not.

We’ve been working from home – not having a factory or office to go to – since we were hunters and gatherers. That was all the millennia before the beginning of farming about 10,000 years ago.

In all the years before the start of the Industrial Revolution in Britain in the 1760s, most people earned their living from farming, and farming was done next to – and sometimes inside – the hovels of peasant workers or, in less feudal times, the homesteads of farmers.

You know that in Europe and other cold climes, families lived with their farm animals during winter. Much work would have been done in nearby sheds.

In the Middle Ages, most tradespeople worked at home. Blacksmiths, carpenters, leather workers, bakers, seamstresses, shoemakers, potters, weavers and ale brewers made their goods in their homes and sold them from their homes.

This was work suitable for women as well as men, and it could be combined with childcare and other, income-earning farm work.

In the early days of capitalism, from the 1600s to until well into the Industrial Revolution, much use was made of the “putting-out” system, as The Economist magazine describes in a recent issue.

“Workers would collect raw materials, and sometimes equipment, from a central depot. They would return home and make the goods for a few days, before giving back the finished articles and getting paid,” it says.

“Workers were independent contractors: they were paid by the piece, not by the hour, and they had little if any guarantee of work week to week.”

Is this ringing any bells?

Being economists, the magazine notes that when Adam Smith wrote The Wealth of Nations, in 1776, it was perfectly common to work from home. Smith famously described the operation of the division of labour in pin-making – not in a dark satanic mill but a “small manufactory” of perhaps 10 people, which could well have been attached to someone’s house.

Eventually, however, the putting-out system gave way to full-on manufacturing in factories – despite the resistance of the machine-smashing Luddites who preferred the old ways.

The move to factories was an inevitable consequence of the development of bigger and better machines in the unending pursuit of economies of scale. Workers moved from the farm to the factory and then, as technological advance continued, from highly automated factories to city offices and, eventually, sitting at a desk staring at a screen.

It’s economic development and the pursuit of ever-greater material prosperity that opened the geographic divide between home and work. Which is not to say that further technological change – including the advent of Slack and Zoom – can’t make it possible to bring them back together for many, though obviously not all, workers. Provided, of course, that’s what workers and, more significantly, bosses see as being to their advantage.

Here, too, it’s worth remembering a bit of history. The Economist notes that, according to some economic historians, workers were exploited under the putting-out system. Those who owned the machines and raw materials enjoyed enormous power over those whose labour they used.

It was difficult for workers spread across the countryside to team up against the bosses and their take-it-or-leave-it offers. Crammed into a big factory, however, workers could more easily join together to ask for higher wages. Trade unions started to grow from the 1850s onwards.

Happy speculation aside, there’s no certainty how much working from home will take on. If it does, there’s a risk that will be because bosses see it as a new way to cut costs. That really would be turning the clock back.

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Zero net carbon choice: do we want to be losers or winners?

You may regard economists as a dismal lot, always reminding us of the cost of this or the risk of that. But there’s one prominent economist with a much more positive story to tell.

Professor Ross Garnaut is more prophet than gloomy economist, a man with the vision of a better future that our politicians have lost as they squabble over votes.

The Morrison government trembles at the thought of the Paris agreement’s goal of achieving zero net carbon emissions by 2050. All it can see is the need for higher taxes and the loss of jobs in coal mining. Garnaut, by contrast, sees a golden opportunity for us to shift from an industry in terminal decline to a new set of industries with bright prospects in the low-carbon world that’s coming.

Garnaut foresees that, if we rise to the challenge of climate change, we "will emerge as a global superpower in energy, low-carbon industry and absorption of carbon in the landscape".

This vision is set out in his latest book, Superpower, which seems to offer something for everyone. Do you regret the decline of manufacturing? Garnaut sees how we could give it a new lease on life.

Have you always thought that, rather than sending our minerals off for further processing abroad, we should do it ourselves? Garnaut sees how we can.

With climate change making the land hotter, drier and more prone to bushfires, do you fear for the future of farming? Garnaut sees the bush getting a whole new source of income and activity.

Do you fear that, with the decline of coal mining, regional Australia will be left even further out of the economic action? Garnaut see all the new industries created by the world’s move to renewable energy being located in the regions.

Of course, as the author of two government reports on our response to climate change, Garnaut has form as a prophet. In his first report in 2008, he relied on scientists’ advice to predict that "fire seasons will start earlier, end slightly later, and generally be more intense. This effect increases over time, but should be directly observable by 2020."

On the other hand, Garnaut now admits that even his second report, in 2011, has been overtaken by events. Then, he calculated that the cost of moving to renewable energy would come early and reduce our rate of economic growth for many years before it was eventually outweighed by the benefits of climate change avoided.

Now, he sees that the move to renewable energy won’t cost a lot, low-carbon electricity will be cheaper and will give us major new export opportunities. These more positive benefits will come earlier than the benefit of less climate change.

The cost of moving to all-renewable electricity has been transformed by two things. First, the huge reduction in the cost of solar panels and lesser falls in the cost of wind turbines and batteries.

Second, by the fall in global interest rates to record lows, which seem likely to persist. Whereas much of the cost of coal-fired electricity comes from the cost of the coal, with solar and wind power almost all of the cost comes from setting up the system – sun and wind are free. Lower interest rates mean the capital cost is much reduced.

So far, a chunk of Australia’s prosperity derives from our huge natural endowment of coal and gas. Now Garnaut has realised that, relative to the size of our population, Australia is more richly endowed with sun and wind than any other developed country – or our Asian neighbours.

So zero-emissions electricity will be cheaper to produce (though we may have to pay more in transmission costs). More significantly, our carbon-free power will be much cheaper than other countries’.

Carbon-free electricity is the key to our efforts to achieve zero net emissions overall, and to our various opportunities to profit from the world’s move away from fossil fuels. Our transport emissions will be slashed by moving to electric vehicles and increased use of public transport.

The scope for exporting our electricity through submarine cables – or via tankers of electrolysis-produced hydrogen – is limited. But this will now make it economic to further process alumina, iron ore, silicon and ammonia before we export them. That processing is best done adjacent to the mine site.

At present, plastics and many chemicals used in manufacturing are produced from fossil fuels. But we will have more plentiful supplies of (renewable) biomass – plant material – than many other countries, which we can use to produce plastics and chemicals for ourselves and for export.

The "net" in zero net emissions implies that the world will still be emitting some carbon dioxide, but these emissions will be offset by "negative emissions" as atmospheric carbon is captured and sequestered in soil, pastures, woodlands, forests and plantations.

Guess what? Few countries have more scope for "natural climate solutions" such as carbon farming than we do. We need research to improve the measurement of carbon capture, but we have so much scope that, after meeting our own needs, we could sell carbon credits to the rest of the world. This could be a new rural industry, much bigger than wool.

To maximise our chances of benefiting from the move to a low-carbon world, however, we have to get to zero net emissions sooner than the other rich countries, not later.

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Insincere, misguided displays of concern make the drought worse

Sometimes I think our politics has got into a vicious circle: the worse our politicians behave, the more of us give up and tune out. But the less we monitor their behaviour, the worse and more lackadaisical the politicians become.

Take the drought. Good politicians would see it as a recurring problem and try to find substantive ways of helping farmers cope with droughts in general; weak politicians settle for giving the impression of being very busy caring and helping – especially when the TV cameras are rolling – while they kick the problem down a country track.

Scott Morrison and his ministers keep announcing (or re-announcing) new measures to help, but the experts – including the National Farmers' Federation - keep lamenting that we don’t have a National Drought Policy and haven’t had one for years. We just keep knee-jerking and ad hocking every time another drought comes along.

So what would a decent national drought policy look like? It would start by reverting to an understanding the Hawke-Keating government established years ago, but has since been blurred: droughts aren’t a “natural disaster” in the way floods, cyclones and bushfires are. For a start, those others are sudden and short-lived, whereas droughts develop gradually, spread over huge areas and can last for years.

As Dorothea Mackellar realised more than a century ago, if you want to be an Australian, regular droughts are part of the deal. Always have been but, thanks to the two C-words we’re not supposed to say, are now likely to become more severe and more frequent. The day may come when not being in drought is the exception.

According to former top econocrat Dr Mike Keating, “the possibility of recurring droughts must therefore be planned for and not just treated as bad luck, for which farmers themselves bear no responsibility”.

The national drought policy of 1992 required farmers to be more self-reliant and absorb the impact of droughts as something to be expected. Many, many farmers have long been doing just that. Some haven’t bothered and they’re the ones getting most care and concern from fly-by-night journalists and politicians.

Everyone wants to “help those poor farmers”, but how should governments do it? John Freebairn, an economics professor at the University of Melbourne, says you can divide government drought support into three categories: subsidies for farm businesses, income supplements for low-income farm families, and support for better decision-making.

His message is that the main thing we should be doing is supporting programs to help farmers better manage the risk of drought and make their farms sustainable. Such support needs to come mainly between droughts – precisely when media and political interest in the topic evaporates.

Although income supplements for drought-stricken farmers raise questions about why they should get help other small-business people don’t, they’re a much more effective way of alleviating poverty than subsidising farmers’ loans, freight and fodder – which is just what federal and state politicians (and volunteer organisations) have been heaping on this time as the ad hockery has mounted.

As Professor Bruce Chapman, of the Australian National University, said this week, “the politics of drought is not only about helping farmers, [it’s] about showing the world – including city dwellers – that the government cares. It does that by giving money away and having lots of announcements.”

But here’s the less-obvious truth recognised by a considered drought policy: the too-ready availability of drought assistance helps create droughts.

How? By reducing “the risks associated with a bad year, and thus encouraging over-cropping and over-grazing. If farmers know that their mistakes will be bailed out, then they have an additional incentive to maintain their herds even when the risk of not having enough feed is quite high. They anticipate that the taxpayer will bail them out if it doesn’t rain, and that they will be able to buy in the additional (subsidised) fodder when they might need it,” Keating says.

Now get this: according to Lin Crase, an economics professor at the University of South Australia, “there is mounting evidence that farm businesses can actually benefit from drought in the longer term. This seems to occur because businesses that go through a drought develop coping strategies that, when invoked in good years, produce much greater profits.”

This doesn’t mean droughts are a good thing, of course, but it does mean that shielding farm businesses from drought runs the risk that they won’t adapt, Crase says. Changing climate suggests that a lot more adaptation – including bigger, more mechanised farms and many more farmers leaving the land – lies ahead.

Sensible drought policy long ago recognised that more dams don’t help, which is why so few have been built in recent decades. That politicians are popping up with plans for new dams is another sign they’re making it up as they go.

John Kerin, a minister for primary industry in the Hawke government, says that while you can fill new dams when you’ve eventually built them, “you can’t keep them full waiting for a drought, or empty waiting for a flood”. Increased stored water will be used to increase irrigation. And increased irrigation in a time of climate change means greater shortages of water in the next drought.

The expertise to respond to drought more sensibly is there. It’s just that our politicians find it easier pretending to fix the problem.

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Sidney Kidman: how to make a buck out of a terrible climate

You may not have heard of Sir Sidney Kidman, once known as Australia’s Cattle King. He died in 1935. But when it comes to using “innovation” to get rich, he was tops – certainly, the most amazing. And he’s about to become our patron saint of climate change adaptation.

He chose to farm in the most arid, unpredictable and unforgiving part of Australia, and he made his pile. His company, S. Kidman & Co, exists to this day, and in 2016 was acquired by Hancock Prospecting, owned by Gina Rinehart, with Shanghai CRED as junior partner.

There are two ways to respond to climate change. Plan A is mitigation: do things to stop it happening. Plan B is adaptation: learn to live with a much hotter world where, apart from the rising sea level, extreme weather events are more frequent and bigger.

Since we’re making such a hash of Plan A – not just us, but the world in general – it may not be long before we have no choice but to get on with Plan B. Innovation – finding new ways to do things – will be king and Kidman will be recognised as the forerunner he was.

As any climate-change denier will tell you, there’s nothing new about drought. These days, all our good farmers have learnt that, though you can never tell when, another drought is always coming, so you have to be ready for it.

But Kidman was on quite another level: he found a way to make money out of drought. Dr Leo Dobes, an economist from the Crawford School of Public Policy at the Australian National University, has written a paper attempting to uncover the secret of what Kidman would never have called his “business model”.

From the turn of the previous century, Kidman, born in modest circumstances, built up a collection of cattle properties in the most marginal country in Australia’s Dead Heart – the area around the Simpson Desert, to the north of Lake Eyre – and in the “corner country” where the borders of the Northern Territory, Queensland, South Australia and NSW meet.

In this arid core of Australia, rain was very irregular and occurred mainly through thunderstorms after very hot weather. Kidman said his South Australian properties generally got less than 100 to 200 millimetres a year.

Kidman was always buying and selling properties, ending up with properties extending across the whole continent.

There was an underlying rationale to his acquisitions, however. He had several breeding properties in the north, including Newcastle Waters in the NT and Augustus Downs and Fiery Downs in Queensland, which had a tropical climate with a short rainy season.

Further north in the Gulf country, the summer rainfall seasons were more prolonged, and Kidman also used his properties there to source cattle for southern markets. Properties in the Channel country of south-western Queensland, where the grasses where softer, were used to fatten cattle for market.

A second characteristic of his holdings was the concentration of adjoining properties, running from west of the Darling River to the SA border, along the Diamantina and Georgina rivers and Cooper’s Creek in the Channel country, and along the stock route to the west of Lake Eyre via Charlotte Waters to Marree and Farina. This amounted to two major chains of properties.

“Because the holdings were on, or in close proximity to, major stock routes (and associated watercourses), they afforded easy access to rail heads connected to southern markets” in Sydney, Melbourne and Adelaide, Dobes says.

So, what was the business model that allowed Kidman to succeed where so many others failed? You can see signs of a supply-chain model – a vertically integrated business, from properties that bred cattle, to fattening properties and final sale in capital city markets.

Also signs of spatial diversification. Lack of rain or feed on one property could be compensated by moving cattle to a property with sufficient feed.

“Kidman’s drovers were shifting, shifting, shifting all the time. There was no such thing as starving or dying stock on Kidman’s stations. They just shifted them.”

But Dobes sees Kidman’s business model as captured by his creation of three “real options”. In financial markets, buying an “option” gives you the right, but not the obligation, to buy (or, in other cases, sell) a parcel of shares at a set price at a specified date in the future. It’s a way of trying to protect yourself from uncertain future developments.

In Kidman’s case, however, the options weren’t financial, they were real – physical. Kidman could easily move his stock to better conditions because his properties were adjacent and because he kept those properties understocked. The opportunity cost of understocking was the price of the option.

Second, because his properties followed stock routes and waterways, Kidman could move his stock towards better conditions – and towards the market – in a way that gave his cattle priority over other people’s herds on the route. Again, understocking was the price of this option.

Third, Kidman’s practice of holding properties near rail heads, plus his maintenance of a network of drovers, camel drivers, Aborigines, dingo trappers and friendly telegraph operators, who provided information about the movement of competing herds being driven to various markets, allowed him to direct his cattle to the city market where prices were likely to be highest.

Kidman’s modern relevance is not just in overcoming a harsh and unpredictable climate, but in coping with unexpected changes – in his case, rabbit infestation, erosion, the rapid spread of cattle ticks in northern Australia and the results of overstocking by earlier pastoralists.

Kidman’s “real options” were innovative ways of coping with, reducing and even profiting from uncertainty – which Dobes concludes is the hallmark of climate change. Australia’s farmers and others can adapt to climate change by finding their own real options.

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Services are taking over the economy – despite the politicians

One test of whether our political leaders are looking to the economy’s future or clinging to its past is whether they show an understanding that most of our future lies in the services economy.

Whether they hanker for an economy where most people earn their living by growing things, digging things out of the ground or making things.

Probably only the dearly departed Malcolm Turnbull passes this test, with his early enthusiasm for innovation and agility. Kevin Rudd said he didn’t want to be the leader of a country that didn’t make things. Scott Morrison took a lump of coal into the Parliament to show where his allegiances lay.

But as the Organisation for Economic Co-operation and Development reminds us in its latest report, the shift from producing goods to performing services is fundamental to the process of economic development.

Every country’s economy starts on the economic development journey with most people working on the land, and others in mines. That’s where we were in the 19th century. About a hundred years ago, the great migration from the country began, with more and more people moving to the city to work in factories.

By 1971, employment in manufacturing had reached 1.4 million workers. Manufacturing’s share of total employment in Australia reached 25.5 per cent a little earlier in 1966.

But from that period on, employment in manufacturing began to decline, both in absolute numbers and as a share of the total.

It – and employment in the other goods industries: agriculture and mining – declined as a share of the total simply because employment in the services sector grew much faster.

So, for at least for the past 50 years, it’s services that have been going up while goods industries have been going down. That’s true whether you look at shares of total employment or shares of total production (gross domestic product).

When you turn to the absolute numbers of workers, they’ve been declining in agriculture for more than a century. Today, just 325,000 people work on the land.

In manufacturing, they’ve been falling since 1971, to be down to 980,000 today.

Mining employment got a fillip from the resources boom, but even its job numbers have resumed their decline since 2013, and are now down to 245,000 – or just 2 per cent of our total employment of 12.6 million.

There’s nothing peculiarly Australian about this move from farming to manufacturing to services. You can see just the same progression in other rich economies and in “emerging” (that is, rapidly developing) economies.

It’s been unfolding before our eyes in China since it began opening its economy to the world in the late 1970s. It was all the people leaving its farms to work in city factories that, a few years ago, took the proportion of the world’s population living in urban areas to more than half.

Returning to Oz, don’t get me wrong. Some of us will always be working in the goods part of the economy. That’s particularly true of Australia because, though we’ve never been great shakes at manufacturing, we have had, and will continue to have, a comparative advantage in agriculture and mining, relative to other countries.

Note this: though the number of people working in the three parts of the goods sector has been falling, that doesn’t mean we’re growing less food or digging fewer minerals. Our annual production of food and minerals and energy is greater than ever. Even in manufacturing, our annual production has been falling only since 2008.

How can production go up while employment goes down? Easy. Increased productivity of labour caused by automation – technological advance. The use of more and better machines has made farming, mining and manufacturing more “capital-intensive” and so less “labour-intensive”.

That’s the thing about the goods side of the economy: it’s relatively easy to use machines to replace men (and women). And this isn’t bad, it’s good – for two reasons. First, it’s helped make goods cheaper, thus making us more prosperous.

Second, it’s much harder to use machines to replace workers delivering services. Robots will change this to an extent, but by not nearly as much as the alarmists claim.

And it’s not hard to think of more services we’d like other people to do for us. That’s why total employment is higher than it’s ever been. And why further growth in services’ share of total employment and production is inevitable and inexorable.

Where will the new jobs be coming from? That's where.

The OECD report tells us that, in 2014, the goods sector’s share of production was down to 17 per cent (agriculture 3 per cent, mining 6 per cent, manufacturing 8 per cent), with the services sector’s share up to 83 per cent – about average for the OECD.

Within services, the biggest industries are: business services, 14 per cent of GDP; wholesale and retail trade, 10 per cent; financial services, 9 per cent; construction, 8 per cent; health and aged care, 7 per cent; education 5 per cent and defence and public administration, 5 per cent.

A favourite argument the goods industries use to exaggerate their importance to the economy is to point to their higher share of exports (a widget sold to a foreigner is more virtuous than one sold to a local, they claim).

A third of all our agricultural production is exported. For manufacturing it’s more than a quarter (bet you didn’t know that) and for mining it’s more than 90 per cent. For services it’s a mere 11 per cent.

This means that, as usually measured, agriculture contributes 8 per cent of total exports; mining, 40 per cent, manufacturing 26 per cent, and services, 26 per cent.

Education of overseas students is now our third biggest export, after iron ore and coal. Tourism is the other big one.

But the OECD points out that the goods we export have inputs of services embedded within them. Allow for this and agriculture’s share of total export “value-added” drops to 5 per cent, mining’s to 30 per cent and manufacturing’s to 13 per cent, while services’ share rises to an amazing 52 per cent.

Services are taking over the economy. Live with it.

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Drought: a choice between sympathy or lasting help

What a good thing elections are. Were it not for the looming federal election – not forgetting those in Victoria and NSW – we city slickers might by now have forgotten the drought that continues to damage much of eastern Australia. Collections taken, donations given, end of.

Not so our tireless Prime Minister. Scott Morrison’s put the drought at the top of his to-do list of problems to be sorted before the election. And having fixed high electricity prices earlier in the week, on Friday he held a national drought summit, announcing a $5 billion Drought Future Fund.

From July 2020, the fund will provide grants worth up to $100 million a year for community services and research, and to assist the adoption of technology to support long-term sustainability in periods of drought.

Details yet to be decided. What it amounts to is anybody’s guess. It could be something that really would improve our farmers’ resilience to future droughts, or it could be just another slush fund for spending in National Party electorates.

The thing about droughts is that when the media eventually find out about them and start making a fuss, there’s an outpouring of concern and everyone wants to help. Individuals reach for their purse; governments want to be seen taking charge and doing the right thing by our poor stricken farmers, the salt of the earth (to quote a red-headed prince).

It’s always assumed that farmers have been hit by some unpredictable natural disaster beyond their control, the worst in years. They’ve all been hit hard, and so are desperately in need of our sympathy and support.

The trouble with this familiar, feel-good ritual is that it isn’t true. There’s nothing more predictable than that this drought will soon enough be followed by another, and one after that.

What’s more, though the Nats deny its existence, climate change means droughts are becoming more frequent and more severe, thanks to higher average temperatures – up about 1 degree since 1950 – and higher rates of evaporation.

It is possible for farmers to prepare for drought. And the truth is, most – yes, most – farmers have prepared, and as a consequence aren’t doing as badly as some. In their efforts to whip up our sympathy, the media give us an exaggerated impression of the drought’s severity, showing us the least-prepared farms rather than the best.

This matters because, as two economists from the Australian Bureau of Agricultural and Resource Economics and Sciences have written recently, “in our rush to help, we need to make sure well-meaning responses don’t do more harm than good”.

“Drought support could undermine farmer preparedness for future droughts and longer-term adaptation to climate change,” they say.

They argue that, to remain internationally competitive, our farmers need to increase their productivity, both by adopting improved technologies and management practices, and by shifting resources towards the most productive activities and the most efficient (that is, bigger) farmers.

“Supporting drought-affected farms has the potential to slow both these processes, weakening productivity growth,” they say.

Professor John Freebairn, of the University of Melbourne, notes that government drought assistance usually falls into three categories: income support for low-income farm families, subsidies for farm businesses and support for better decision-making.

The existing policy of making the equivalent of means-tested dole payments available to farmers is justified on social grounds.

But farm subsidies on loans, freight and fodder – all of which we’ve seen this time – can have unintended side effects. “Knowing that subsidies will be provided during drought . . . reduces the incentives for some farmers to adopt appropriate drought preparation and mitigation strategies,” Freebairn says.

By contrast, providing meteorological information on seasonal conditions, or hands-on education and support to individual farmers in developing more appropriate decision-making strategies, actually makes farming more robust and self-sufficient.

Suspending justified scepticism, at its best Morrison’s proposed drought future fund could go a step further and finance water infrastructure and drought resilience projects.

So, what can farmers do to make their farms more resilient to drought? Professor David Lindenmayer and Michelle Young, of the Fenner school of environment and society at the Australian National University, have plenty of ideas.

They say a key approach is to invest in improving the condition of natural assets on farms, such as shelter belts (tree lanes planted alongside paddocks), patches of remnant vegetation, farm dams and watercourses.

This increases the land’s resilience to drought, with collateral benefit to the health and wellbeing of farmers.

“When done well, active land management can help slow down or even reverse land degradation, improve biodiversity, and increase profitability,” they say.

Restored riverbank vegetation can improve dry matter production in nearby paddocks, leading to greater milk production in dairy herds and boosting farm income by up to 5 per cent.

Shelter belts can lower wind speeds and wind chill, boosting pasture production for livestock by up to 8 per cent, at the same time as providing habitat for animals and birds.

Their work with farmers in NSW who invested in their natural assets before or during the Millennium drought suggests these farmers are faring better in the present drought, they say.

“The need to invest in maintaining and improving our vegetation, water and soil has never been more apparent than it is now. We have a chance to determine the long-term future of much of Australia’s agricultural land.”

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Our concern about the drought isn’t fair dinkum

It’s taken him too long, but public concern and the looming election have finally obliged Malcolm Turnbull to do the right thing by our farmers struggling with severe drought.

In Forbes on Sunday, Turnbull announced a further $250 million in assistance to farmers and communities, including initial grants of $1 million each to 60 drought-affected councils in NSW, Queensland and Victoria, bringing Canberra’s direct handouts to $826 million.

Add a further $1 billion in concessional loans and the total outlay comes to $1.8 billion.

Well, about time.

Is that what you think? I don’t.

I think most of it will be a waste of taxpayers’ money. You’ve heard of being cruel to be kind, but the way we carry on every time there’s a drought is being kind to be cruel. Our sympathy, donations and taxpayer assistance just prolong the agony of farmers unable or unwilling to face the harsh reality of farming in a country with one of the most variable climates in the world.

We may not be able to predict their timing or their length, but we can be certain that, before too long, this drought will be followed by another. And the scientists tell us climate change is making it worse.

And yet we keep pretending no one could have predicted or prepared for the next drought. Nonsense.

Our attitude to drought is all soft heart and soft head. I have two objections. The first is the way our collective concern about drought and its consequences is always media-driven.

When I visited the country in mid-May, my host complained that no one in the city seemed to know or care about the drought that was ravaging the countryside.

But when, a few months later, the first media outlet got the message, it started the usual flood of heart-rending drought stories.

The media love drought stories because they know how much they stir their customers’ emotions. Most people like having the media give their heart-strings a regular workout. I don’t.

And the trouble is, our concern about the drought – or the tsunami or earthquake or bushfire – lasts only as long as it takes the media’s attention to shift to some newer source of concern.

It’s already happening. Turnbull’s big announcement in Forbes got little media coverage because the threat to his leadership was far more exciting.

My more substantial objection to the recurring carry-on about drought is that it makes the problem worse rather than better. We give the bush a fish to feed it for a day when we should be helping it learn better fishing techniques.

In their efforts to tug our emotions, the media invariably leave us with an exaggerated impression of the severity of the drought and the proportion of farmers who are suffering badly. They show us the very worst farms and the worst-off farmers.

To be blunt, they show us the bad managers, not the good ones. I can’t remember ever seeing a story where someone whose farm was in much better shape than his neighbours’ was asked how he did it.

The exception that proves the rule? Don’t be so sure. On average over the six years to 2007-08 – the Millennium drought – nearly 70 per cent of Australia’s broadacre and dairy farms in drought-declared areas managed without government assistance.

Many, maybe most, farmers prepare for drought. Some don’t. They’re the ones the media want us to feel sorry for. The ones who’ve overstocked their now badly degraded properties hoping it will rain before long or, failing that, the government and guilt-ridden city-slickers will give them a handout.

The trouble with our emergency assistance approach to drought is that it encourages farmers not to bother preparing for the inevitable. It encourages farmers whose farms are too small, or who lack the skills or spare capital to survive, to keep struggling on when they should give up.

And it does all that to the chagrin of the wise and careful farmers who’ve made expensive preparation for the next drought with little help from other taxpayers.

Australians have been leaving the farm and moving to the city for more than a century. They’ve done so because continuous advances in labour-saving technology have made small farms uneconomic and decimated the demand for rural labour. All while the nation’s agricultural production keeps growing.

This is my own family’s story. I was raised mainly in cities, but my father grew up on a dairy farm near Toowoomba and my mother on a cane farm in North Queensland.

Meaning that, were it not for my brush with economics, I too would share the city-slickers’ sense of guilt at having deserted the true Australian’s post on the land for a cushy life in the city. Would $50 be enough, do you think?

We are perpetrators of what Americans have dubbed the “hydro-illogical cycle”. As Dr Jacki Schirmer and others at the University of Canberra describe it, this occurs when “a severe drought triggers short-term concern and assistance, followed by a return to apathy and complacency once the rains return.

“When drought drops off the public and media radar, communities are often left with little or no support to invest in preparing for the next inevitable drought.”

Every government report on drought concludes the best response is for farmers to improve their self-reliance, preparedness and climate-change management. We could help them with their preparations, but we get a bigger emotional kick from giving them handouts when droughts are at their worst.

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Don't worry, climate change is just imaginary

As we've sweltered through this terrible summer – and lately, as bushfires have raged – what a comfort it's been to know that climate change doesn't exist and isn't happening.

Or, if it does exist, it's not caused by anything humans have done, so there's nothing we can do about it.

Or, if it is caused by humans burning fossil fuels for the past 200 years, let's say we've got a policy to deal with it, go to international conferences and make pledges to act, then come home and not do much about it.

That way, we'll have all bases covered: something to calm the consciences of those still silly enough to believe climate change is real, but not enough to annoy the party's many climate change deniers, nor our generous donors in the coal industry.

And, just to make you feel better, let me remind you of the big win the deniers have had. The Coalition's leading, longest-standing and most articulate supporter of action on climate change has changed sides.

Malcolm Turnbull, the man who lost his job as party leader because was so keen to see action he supported the Labor government's emissions trading scheme, is now keen to ensure it never happens again.

The squeakiest wheels in the party want him to demonise renewable energy, blaming it for all the blackouts and price rises?  Introduce new government subsidies for coal while making the future for power generation so uncertain no one's game to invest in anything?

Sure. Whatever it takes.

(Don't worry, Malcolm, I'm sure all the people inside and outside the Liberal fold who were so pleased when you became Prime Minister – me included – will learn to accept your need to abandon everything we know you believe and start doing Tony Abbott impressions.)

It's the easiest thing in the world for people to imagine that whatever's been happening lately is much bigger and more terrible than ever before.

Trouble is, the scientists keep confirming our casual impressions.  A report this month prepared by top climate scientists for the independent Climate Council, is all bad news.

They say all extreme weather events in Australia are now occurring in an atmosphere that's warmer and wetter than it was in the 1950s.

"Heatwaves are becoming hotter, lasting longer and occurring more often," they say.

"Extreme fire weather and the length of the fire season is increasing, leading to an increase in bushfire risk."

This fits with the findings of the latest biennial CSIRO and Bureau of Meteorology State of the Climate report.

According to the bureau's Dr Karl Braganza, Australia is already experiencing the effects of climate change, with record-breaking heat now becoming commonplace across the country.

"Australia experienced its three warmest springs on record in 2013, 2014 and 2015," he says. "Temperature and rainfall during this period is critical to southern Australia's fire season.

"We've already seen an increase in fire weather and a longer fire season across southern and eastern Australia since the 1970s.

"In these regions the number of days with weather conducive to fire is likely to increase.

"Whilst the observations show us increased rainfall in some parts of Australia, we have also seen significant seasonal decline, such as in the April-October growing season, where an 11 per cent decline in rainfall has been experienced in the continental southeast since the mid-1990s.

"The changing climate significantly affects all Australians through increased heatwaves, more significant wet weather events and more severe fire weather conditions.

"Some of the record-breaking extreme heat we have been seeing recently will be considered normal in 30 years' time."

Oh, good.

Of course, none of this is having any effect on agriculture. It must be a great comfort to our farmers to know that, by order of Barnaby Joyce and the National Party, climate change is a figment of the climate scientists' imagination.

This is good news, since I read that reliable rainfall and predictable temperature ranges are critical to agricultural production, and these are the very factors affected by a changing climate – if it was changing, which it isn't.

A new CSIRO study, led by Dr Zvi Hochman, has found that Australia's average yields from wheat-growing more than tripled between 1900 and 1990 thanks to advances in technology, but have stalled in the years since then.

The study found that, since 1990, our wheat-growing zone had experienced an average rainfall decline of 2.8 millimetres, or 28 per cent per cropping season, and a maximum daily temperature increase of about 1 degree.

Australia's "yield potential" – determined by climate and soil type – which is always much higher than farmers' actual yields, has fallen by 27 per cent since 1990.

So all the efforts farmers have made to improve their yields with better technology and methods have served only to offset the effects of climate change, leaving them no better off.

"Assuming the climate trends we have observed over the past 26 years continue at the same rate, even if farmers continue to improve their practices, it is likely that the national wheat yield will fall," Hochman says.

He says these findings would be broadly applicable to other cereal grains, pulses and oilseed crops, which grow in the same regions and season.

But not to worry. They're only scientists. What would they know that our pollies didn't want to know?

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We can grow GDP if we stop growing natural resource use

Some things are more important even than the fate of the goods and services tax. A question I regard as just a tiny bit more significant to our future is whether we can continue increasing our population and material standard of living without doing irreparable damage to the natural environment.

Few of us noticed in all the excitement over tax reform, but last week we made a big step forward in answering this question. The CSIRO unveiled the results of a ground-breaking, two-year project – the Australian National Outlook report – in which it integrated a model of the economy with no less than eight models of different aspects of the global and domestic natural environment in which the economy exists.

So, is ecologically sustainable growth possible? Is it possible to "decouple" continuing economic growth from continuing environmental vandalism?

It depends on what you mean by "growth". There's enormous confusion on this point because what economists take the word to mean is not what scientists take it to mean.

What scientists mean by growth is growth in the "throughput" of natural materials and energy – using those resources to generate economic activity and, in the process, turning them into various forms of pollution and other waste.

They point out that such growth simply cannot continue indefinitely because the natural world – the global ecosystem – is of fixed size. And they have to be right because they're merely stating the first law of thermodynamics.

But that's not what economists mean by growth. They mean an increase in gross domestic product, most of which is cause by increased productivity (efficiency). It may or may not involve an increase in the economy's throughput of natural resources.

So what does the CSIRO's modelling say about whether we can continue to grow without inflicting further damage on the environment?

It says GDP can continue growing strongly, but throughput of natural resources can't. So the people who want continued growth in GDP win, but so do those saying ever-increasing use of natural resources must stop.

Since no one knows the future, CSIRO's economists and scientists ran through their super model 18 different scenarios covering different rates of growth in the global population, different degrees of global action to restrain climate change and a range of differing development in Australia and its economy.

All 18 scenarios project continuing strong growth in Australia's population and GDP out to 2050. But get this: only three of those scenarios also saw improvement or no further deterioration on the model's three key indicators of environmental health: emissions of greenhouse gases, water stress, and loss of native habitat.

As well, two of the three scenarios see no increase in the economy's annual throughput of natural resources, while the third projects a fall in material throughput of 38 per cent.

All this says ecologically sustainable growth and decoupling do seem to be possible, provided the world gets its act together.

The good news is that the model's results don't rely on "technological optimism" (don't worry, market forces will call forth a technological solution to every problem before the proverbial hits the fan) but nor do they require that we renounce our materialist ways and become greenie vegan mud-brick makers.

We don't need to do anything we don't already know how to do and, in many cases, have already begun doing. We just need to do a mighty lot more of it.

The bad news is that we can't do it on our own. To achieve improvement in the key environmental indicators and a fall in material throughput we need effective international action to limit the world's population to 8 billion in 2050 and limit global warming to 2 degrees in 2100.

This would require "very strong" global and Australian effort to reduce greenhouse emissions.

The two other environmentally not-so-bad scenarios – involving world population growing well beyond 8 billion and global warming limited to 3 degrees – would require "strong" global and Australian effort to reduce emissions.

Strong translates as a worldwide price per tonne of carbon dioxide emissions of $US30 ($42) in today's dollars; very strong translates as $US50 a tonne.

These world prices would be applied in Australia. But we'd have a comparative advantage over many countries that would reduce the carbon price's adverse effects on our economy: we could achieve up to half our required reduction in net emissions by "carbon sequestration" – reforestation of cleared land, either with one species of eucalypt (to maximise sequestration) or a range of eucalypts (to also restore native habitat).

At these carbon prices, our farmers could earn up to five times what they make from using the land to produce beef.

Our greenhouse emissions per person would fall from five times the global average in 1990 to below average by 2050.

Our biggest problem would be avoiding water stress, particularly because reforestation would add to the problem. The price of water for agriculture would be a lot higher and, in the cities, we'd have to do a lot more desalination and water recycling for industrial use.

I don't regard this as the last word on the subject. All modelling is far from infallible and this exercise is no different. The good thing is that a last we've made a start at reconciling our materialist ambitions with the constraints imposed by the natural environment we hope to continue living in.

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Why the Trans-Pacific Partnership is no game-changer

Think you know a bit about economics? Try this quick quiz: what's your impression of the Trans-Pacific Partnership Agreement reached between the United States and 11 other Pacific Rim countries, including Australia, this week?

Would you say it is: a) a gigantic foundation stone for our future prosperity that will boost growth, create jobs, raise living standards and increase productivity; b) a terrible deal that advantages big American multinationals at our expense, or c) not a big deal either way?

Malcolm Turnbull and his ministers' exaggerated claims about the benefits likely to flow from the agreement rest on the expectation that it will allow our farmers to sell more sugar, beef, cheese, wool and rice to the other economies, at higher prices.

Since these gains have been achieved at little cost in terms of increased access to our market for the other countries' exports, we're surely well ahead on the deal.

Does that make sense? Only if you don't know much economics.

As for the claim that it's a terrible deal, it has some truth to it, but is itself exaggerated. It's true that part of the deal involves our acceptance of "investor-state dispute settlement" arrangements, which allow foreign companies – but not local businesses – to take actions for damages against governments that make decisions which adversely affect their profits.

This is an unwarranted imposition on democratic governments' sovereignty which, at best, will involve them in significant legal costs in fending off vexatious claims.

It's true, too, that trade deals with the US have involved attempts to advantage American companies holding intellectual property – patents, copyright and trademarks – at the expense of local consumers.

And the intense secrecy in which the TPPA has been negotiated – we still don't know the details of the agreement and won't for some months – raises justified suspicion in many people's minds. What is it that big companies and lobby groups may know, but the public may not?

Even so, it does seem that Trade Minister Andrew Robb has fended off American attempts to further advantage foreign pharmaceutical companies at the expense of Australian patients and taxpayers.

In the old days trade agreements were about increasing trade between countries. These days, they're at least as much about imposing restrictions on governments' freedom to legislate as they see fit.

But to assess the likely effects on the economy – on growth, incomes, jobs and productivity – we need to set this legislative aspect to one side and focus more directly on trade and investment.

Be clear on this: there's no doubt that reducing barriers to trade between countries increases the material prosperity of the countries involved. Reduced protection and increased trade have played a significant part in the greater prosperity enjoyed first by the developed economies and then the "emerging" economies since World War II.

Most of those gains were achieved by successive rounds of multilateral reductions in import tariffs and quotas. That is, the reductions applied to all of a country's trading partners, not just some.

But the World Trade Organisation has been trying unsuccessfully since 2000 to organise another multilateral agreement. In the meantime, countries have taken to making bilateral trade deals, where the concessions made to the other country aren't available to any other economy.

This makes them preferential trade agreements, not the free trade agreements they are known as.

They're greatly inferior to multilateral agreements because they tend to divert trade from more efficient to less efficient supplier countries, simply because the less efficient suppliers happen to be subject to lower import duties.

And the picking and choosing between which countries get preferential treatment and which don't creates a need for complex "country of origin" rules that add much red tape to international trade.

This week's regional preferential trade agreement between 12 countries representing 40 per cent of world gross domestic product will still be trade-diverting to some degree, particularly since it excludes such significant trading partners as China, India and Indonesia.

But it could lessen the burden of red tape if, as mooted, it involves uniform country-of-origin rules.

The other weakness of trade deals is their encouragement of mercantilist thinking – the notion that countries get rich by exporting as much as they can and importing as little as they can – a fallacy economists have been fighting since the days of Adam Smith.

The nature of bargaining is to gain as many concessions as you can while making as few of your own as you can. But this is the exact opposite of the way you maximise the economic gains from trade.

You gain most not by inducing trading partners to reduce their barriers to your exports, but by reducing your own barriers to their exports. You gain when you shift productive resources from things you aren't very good at doing to things you are.

That's the first reason for believing a modest increase in sales for our farmers and little change for our import-competing industries won't do much to increase growth, jobs and productivity.

The second reason – and another reason mercantilism is fallacious – is that if we did get a lot higher prices for our agricultural exports without much change in import prices, this improvement in our terms of trade could be expected to lead to a rise in the value of our dollar.

If so, our farmers might be better off but this would be at the expense of our manufacturers, tourist industry and other exporters of services.

As yet we've done no modelling of the likely economic benefits of the TPPA. But various American modelling exercises – and our officially commissioned modelling of our recent bilateral deals with South Korea, Japan and China – all suggest the gains will be small – say, a level of GDP that's just 0.5 per cent higher than otherwise after 10 years. No big deal.

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We can't divorce the economy from the environment

In case you haven't noticed, a lot of economists are very concerned about Tony Abbott's choice of target for the reduction in greenhouse gas emissions by 2030, to be taken to the international climate change conference at Paris in December.

But if you think that means they believe Abbott's target is too tough and will do too much damage to the economy, you've got the wrong end of the stick.

Most would be likely to believe the target should be more ambitious, and few would be concerned that such a target would do significant economic harm. Conventional economic modelling almost invariably shows the loss of economic growth would be surprisingly small, almost trivial.

They'd be more concerned to ensure the instruments used to achieve the target were those likely to do so at the lowest cost in terms of economic growth forgone. That's why few would have approved of Abbott's decision to abandon Julia Gillard's hybrid carbon tax/emissions trading scheme and replace it with "direct action" payments from the budget.

I'm not claiming every economist thinks this way, of course; just the great majority. There are a few exceptions, naturally, just as you can find the odd scientist who disagrees with the overwhelming majority view that global warming is real and caused by humans.

If you hadn't noticed, consider the leading part played by economists in urging that Australia be at the forefront of international efforts to reduce emissions. First, the various reports by Professor Ross Garnaut​, then the chairman of the independent Climate Change Authority, Bernie Fraser – former Reserve Bank governor and former secretary of the Treasury – then leading non-government experts such as Professor Frank Jotzo​ and Professor Warwick McKibbin, both of the Australian National University.

Note, too, the role of Dr Martin Parkinson, who worked first on John Howard's emissions trading scheme, then on Labor's as the first head of the Department of Climate Change. When Parkinson moved on to become head of Treasury, he was succeeded by another Treasury chap, Blair Comley​.

In fact, there were so many senior Treasury people at the top of the Climate Change department, it was a virtual outpost of Treasury. Both Parkinson and Comley were sacked as one of Abbott's first acts on becoming Prime Minister. Presumably, they were punished for caring too much about global warming.

Remember too that, internationally, both the emissions trading scheme and the carbon and other pollution taxes are inventions of economists. A trading scheme was used with great effect by the Americans in their efforts to reduce acid rain.

Two characteristics of economists stand out when it comes to climate change. First, they accept what the scientists are telling us without argument. Unlike some, they're not disposed to explain to the experts where they're getting it wrong.

Second, they don't believe we can go on thinking "the economy" can be kept in a separate box to "the environment". There are major interactions between the two that can't be ignored.

But, as a journalist, I'm not a member of the economists' union, so to speak, so let me stop describing their majority views and give you mine. My thinking has been influenced by the more radical opinions of yet another economist, Professor Herman Daly, of the University of Maryland.

In defending his latest target, Abbott pledged he'd never put the environment ahead of the economy and jobs. This separate-box thinking is like saying you'd never put staying alive ahead of going to work. Lose your life and whether you get to work or not hardly matters.

Daly says the economy is a "wholly owned subsidiary of the environment". Whether at a national or global level, the economy exists inside the environment – the ecosystem. It's a box inside a circle, if you like.

The point is, all human activity – all our producing and consuming – depends directly on the natural environment. The air we breathe, the water we drink, the food we eat, the clothes we wear, the shelters we build and the energy we use all come from the ecosystem that surrounds us.

Much of our economic activity involves misusing, overusing and abusing the natural environment. We've done great damage to our soil, rivers and aquifers, we've destroyed much habitat and many species, and now the world's overuse of fossil fuels is playing havoc with the climate.

We can be divided into those who want to do what we can to stop the destruction and start on the clean-up, and those who want to put it out of mind and keep on as we are, leaving the bill to be picked up by the next generation.

The latter group will always justify their insouciance by claiming to be putting jobs first. Yeah, sure. For the next few years, at least.

Let me be honest with you. I don't believe those modelling exercises seeming to prove that the economic costs of acting to reduce greenhouse gas emissions will be minor. Such results are a product of the assumptions built into all conventional economic models that, whatever shock the economy is hit by, after 20 years or so, everything will be back to where it would have been.

So, the cost in terms of growth and jobs forgone might be greater than we're being told. But of one thing I'm sure: the longer we leave it, the higher those costs will be.

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