CHAPTER 10
ECONOMIC CONSIDERATIONS

· Introduction

· Industry context

· Estimates of the economic impacts of OJD

· Economic impacts of OJD at the farm scale

· Economic impacts of OJD at the industry scale

· Factors generally excluded from costs and benefits estimates

· Summary of cost/benefit studies

· Funding

INTRODUCTION

10.1 Sheep farmers face many economic challenges. These include, but extend well beyond, considerations of animal health. The broader economic circumstances of the sheep industry influence the relative importance of OJD to Victoria and resources that farmers are able and willing to allocate to management of the disease. Because of this, the Committee will initially consider the circumstances of wool and sheep-meat production in Victoria.

10.2 The Committee will then focus on economic aspects of the impacts and management of OJD. This is a complex matter with several dimensions. In the first place there is the scale at which economic issues may be considered - from the individual farm to the State. Then there are the broad causes of these impacts - the disease itself or various approaches to its control at either the property or a broader scale. These various dimensions of the economic aspects of OJD are summarised in Table 10.1.

INDUSTRY CONTEXT

10.3 During the 1980s and 1990s there was a major restructuring of the Australian economy.¹ People living in rural areas have not been exempt from these changes which have reinforced agricultural adjustment and rural restructuring begun decades earlier. Rapid change introduces an element of financial risk into any operation.² As a result, primary production is being carried out in circumstances that place constraints on options and demand high levels of managerial skill.

Table 10.1: Dimensions of economic impacts

* Impacts may be at the farm, industry or society scale. Impacts at one scale may differ from impacts at another scale. ** The costs and benefits listed in this table are a representative selection of those identified in submissions.

10.4 The overwhelming majority of farms in Australia are owned and operated as family partnerships or sole proprietorships rather than being owned by corporations.³ Consequently the private economy of the family and the business economy are inextricably linked. This adds to the personal financial risk faced by members of farming communities.

10.5 Several points raised by the Committee in Chapter 2 are relevant to the economic context of OJD. In summary these are as follows:

a) there is a potential for Victoria's OJD status to be used by other States or countries as a trade barrier to sales of live sheep and sheep meat;

b) options for diversification on properties running sheep vary from property to property;

c) there is also a large variation in the size and physical conditions of sheep farms;

d) there has been a general decline in the land values of sheep farms recently;

e) the timing of sheep sales and many other aspects of farm management is important to profitability; and

f) sheep commonly experience nutrient stress as the summer progresses and feed quality declines.

Financial Returns to Victorian Sheep Farmers

10.6 Consultants, Professor A. Egan and Associate Professor W. Malcolm of the Institute of Food and Land Resources, University of Melbourne, prepared the following summary of the economic circumstances of the Victorian sheep industry for the Committee.⁴Like all agricultural industries in Australia, the sheep and wool industry has been subject to some well-defined long-term trends. For agriculture in general these trends have been:

a) a long-term decline in real prices received, accompanied by increases in real prices paid (called the cost-price squeeze), as the rest of the economy grows more rapidly and competes for resources;

b) consistent increases in productivity from new technology and adjustment of farmers out of agriculture;

c) reductions in direct government intervention in price formation for agricultural production; and

d) the risk associated with agricultural production being borne increasingly by the producers.

10.7 In Australia's agricultural sector the income-depressing impact of the cost-price squeeze has been offset to a considerable degree by productivity gains. Such gains have been relatively lower for sheep and wool producers than for other rural industries. Consequently, sheep producers have tended to endure a downward trend in farm profits since the 1970s.

10.8 An artificially high price for wool in the late 1980s, which was a result of the operation of the Reserve Price Scheme for wool, caused a massive build-up in the national sheep flock. Subsequent free-market prices for wool were markedly lower than had been paid by the Reserve Scheme during the late 1980s and wool-growers' incomes declined significantly in 1990-91. Wool prices showed minor but transient recovery in 1994, fell again in 1995-96, and remained weak throughout the rest of the decade. Most recently, fine-wool prices have improved. In Victoria these trends have been made worse by the relatively small size of many of the farms that make up the wool and sheep-meat sectors.

10.9 Farm cash income is defined by the Australian Bureau of Agriculture and Resource Economics as being total cash receipts and total cash costs (this is not a measure of profit but of liquidity). For specialist sheep -producers, annual farm cash incomes have fluctuated from less than $10,000 to around $40,000 (Figure 10.1).

Figure 10.1: Farm cash income in dollars for average sheep farm types in Victoria, 1990-98

Sources: Australian Bureau of Agriculture and Resource Economics (1990 to 1998), Farm Surveys Reports, ABARE, Canberra.

10.10 Mixed livestock-cropping farmers, sheep-beef farmers and wheat-sheep farmers have generally had higher farm cash incomes than the specialist sheep producers throughout the decade.

10.11 Operating profit for the average of each of the types of farm is defined as gross income minus variable and overhead costs (Figure 10.2). Operating profit represents the income available after paying an operator's allowance and an allowance for family farm labour. This indicates the efficiency of the use of the capital invested in the business without actually determining the percentage return on capital. It can be seen from Figure 10.2 that, in recent years, enterprises that include cropping have been making reasonably good operating profits, but those with sheep only have been averaging a loss after account is taken of labour costs.

Figure 10.2: Average sheep farms operating profit - 1990-98

Sources: Australian Bureau of Agriculture and Resource Economics (1990 to 1998), Farm Surveys Reports, ABARE, Canberra.

10.12 Returns to capital for all of these average farms have generally been low by standards of other investments in the economy, ranging from good average returns of 5 per cent in the wheat-sheep industry to less than 1 per cent and negative returns to capital for the average specialist sheep business (Figure 10.3).

10.13 Gross margin from a sheep activity is the activity gross income minus the variable costs. This provides day-to-day income, but does not allow for a return on capital or depreciation of the resource. Typically, over the past decade, in sheep-production systems, gross margins per Dry Sheep Equivalent (DSE)⁵have ranged from $10 per DSE, or less for wethers when wool prices were at their lowest, to $25 per DSE from prime lambs when lamb prices were high, with $15-20 per DSE being common in many sheep systems. These figures indicate that:

a) the returns to individual sheep (apart from elite breeding animals) are insufficient to permit management systems that are expensive on a per animal basis; and

b) there is little room for a decrease in the price paid per animal if profits are to be maintained.

Figure 10.3: Returns to total capital of average sheep farm businesses in Victoria, 1990-98

Sources: Australian Bureau of Agriculture and Resource Economics (1990 to 1998), Farm Surveys Reports, ABARE, Canberra.

10.14 The Consultants emphasised that there is a distribution of returns around each of the average returns indicated by the data shown in the Figures, with a proportion of businesses doing better than the average and a proportion doing worse. It is evident that, for much of the 1990s, many sheep producers have been living off their depreciation and off-farm income sources.

Value of the Victorian Sheep Industry

10.15 The Australian Bureau of Statistics put the number of sheep in Victoria at 21.122 million on 13,682 properties (1996-97 figures), producing a gross annual value of products (meat and wool) of $860 million.⁶ The live-sheep trade from Australia returns $21 million per year, with a substantial proportion coming from Victoria.⁷

10.16 The operating profit for the total Victorian flock has been calculated by the Consultants to be of the order of $100m-200 million per year.

Financial Risk in Wool and Sheep-meat Production Systems

10.17 The owners and operators of wool and sheep-meat production systems face two broad types of risk: business risk and financial risk. Business risk refers to risks that derive from the operational aspects of the various sheep and other farm activities, and includes risks from uncertain seasonal weather conditions causing unexpected deficiencies of pasture production, volatile market prices, exchange rates and interest rates, animal disease outbreaks and such like. Financial risk refers specifically to the amount of funds required for debt servicing the farm business. Financial risk exacerbates any existing level of business risk.

10.18 Wool-growers and sheep-meat producers normally have many means of managing their risks. Business risks are tackled by, among other things, achieving high technical standards of operations, using mixes of activities that complement each other in terms of overall farm risk, having strategic sources of cash or fodder or saleable stock for the dry periods, timing events in an activity to coincide with the most favourable times in terms of production and marketing and using proceeds from the good times to set their business up, reorganise and grow to survive the hard times. Any factors that reduce options also reduce the farmer's capacity to manage business risk.

10.19 Financial risk is managed most commonly by ensuring that the debt to capital ratio is not too high. Any factor that reduces the value of the farm's capital assets, particularly the value of the property and livestock, increases financial risk.

Some Final Points on the Victorian Sheep Industry

10.20 Farmers involved in sheep and wool production in Victoria have endured hard times financially through the 1990s - with the extent of the financial struggle corresponding directly to the degree to which these farmers relied solely on wool for their income. Those running mixed farming operations were in a somewhat better position to cope with economic and management challenges during that decade.

10.21 The majority of sheep-meat and wool farmers in Victoria run a mix of farming activities. While wool income has been fairly consistently poor until recently, income from the other farm activities in mixed farming operations has generally been better and has at times been good. Off-farm income has also helped many farmers.

10.22 Regardless of how well or poorly average farmers may be doing, there are always some farm businesses that are unable to generate an adequate net income, simply because gross income is too small relative to the running costs and overheads. Small sheep-meat and wool farm businesses are prone to financial trouble because of problems of size, even when prices for wool and sheep-meat are reasonably good. Traditionally, the pattern has been that, when good times do return, businesses that suffer the small-farm problem will be sold to neighbours who need to expand in order to assure their own future in the industry.

10.23 The ups and downs of Victoria's sheep industries, as described by Egan and Malcolm, have been compounded in East Gippsland, and also in south Gippsland, by a series of adverse seasons. Several years of drought were followed by severe floods at the very time when farmers first had to come to grips with the impacts of OJD.⁸Finding 10.1

Sheep farmers, particularly specialist wool-growers, have been facing financially difficult times for a decade or more. This limits their capacity to manage additional demands on their resources.

ESTIMATES OF THE ECONOMIC IMPACTS OF OJD

10.24 Costs of OJD and both costs and the effectiveness of various approaches to control of the disease will determine the benefits of the control options. The Committee examined a number of existing studies as well as the evidence provided by submissions. In all of these there are a number of assumptions that influence the estimated costs and benefits. In no study are all costs included, as some could not be quantified. In some studies samples of farmers have been surveyed to obtain detailed information on farm incomes and expenses, as these are affected by OJD. In these studies some bias in results could be introduced because it was generally not possible to obtain information from random samples of farmers in all types of circumstances.

10.25 These factors are responsible for considerable variation in estimates made in various economic studies. The Committee considers that it is important, in evaluating these studies, to take various assumptions and sources of bias into account. Consequently it has provided a brief description of the methodologies used in each case in endnotes to this chapter.

10.26 Quite different perspectives were taken by individual studies. Some considered the economic impacts of OJD at the individual farm scale while others looked at impacts from the industry scale. The latter considered impacts from a national, rather than a State point of view.

ECONOMIC IMPACTS OF OJD AT THE FARM SCALE

10.27 The Committee learnt of some farmers who profited as a result of their flocks' being found to be infected, but these appeared to be very much in the minority. Circumstances that led to this situation included:

a) compensation found to be adequate;

b) destocked and receiving compensation prior to a drought, which would have caused substantial losses;⁹improved farm management resulting from the review of practices necessitated by the discovery of OJD¹⁰- but as Prof. A Vizard has pointed out, such review need not await the diagnosis of disease¹¹ or

c) moving to an enterprise that, in some circumstances, proved more profitable. ¹²Almost inevitably OJD causes farms to lose income. This is for a number of reasons, including the direct effects of the disease.

10.28 As the Committee indicated in Chapter 7, production losses apart from mortality have yet to be quantified. Economists who have attempted to determine direct costs of OJD have concentrated on mortalities and the economic impact these have on sheep available for sale, because more sheep must be retained as replacements.¹³Most estimates of the costs of OJD have not separated the direct cost due to the disease from those costs that result from restrictions on trading. In Australia, as in most sheep-producing countries, there are restrictions on the sale of sheep from OJD-infected flocks. Australian regulations generally restrict sale of such sheep to sale for slaughter although, within the `residual' zone (for example parts of NSW) sale from an infected flock to another infected flock may be permitted.¹⁴ The Committee assumes that, even if there were no such regulation, market forces would place considerable restriction on the sale of sheep from OJD-infected flocks. This is the principle behind vendor declaration as a way to encourage efforts to control Johne's disease and restrict its spread.¹⁵Other factors associated with OJD that could lead to economic loss to individual farmers have been described to the Committee. Many of these are the result of control measures rather than the disease itself. They are listed in Table 10.2.

Table 10.2: Sources of costs associated with OJD infection of flocks

 

Source of costs	Reference
Directly from the disease
Increased mortalities. Above 10 per cent these are unsustainable under Victorian circumstances. Under some circumstances lower mortalities are not sustainable.	ABARE, etc.16Pemberton17 Douglas and Tehan18Testing - for Market Assurance Program, purchase of stock, etc.
Direct costs of testing
19202122232425ncreased labour demands	McMichael26Lost market opportunities and production during destocked period
2728293031323334nadequate time to shear
35363738nfavourable price changes	Strong39Restructuring and retraining   McMichael40Facilities for alternative enterprise or management - fencing, watering,
4142ncertain or restricted management options - due to quarantine, surveillance or suspended compensation
Restrictions on where sheep can be grazed under quarantine causing fodder shortage and inability to plan management	Bowmen43Uncertainty leading to poor planning
44ropping unsaleable hay	Richardson45Poor and uncertain planning
Diminished co-operation between neighbours	Missen46 Armit47Loss of sales due to stigma attached to district (especially in East Gippsland) - irrespective of whether flocks are OJD infected   Hammond 48 Reed49

Estimates Made of the Costs of OJD and Control Options.

10.29 One point that has been evident to the Committee is that costs of OJD and control actions vary greatly from farm to farm. This results from many factors, sometimes outside the control of the individual farmer. Some cost estimates provide an average only. This gives some indication of the impacts of the disease, but the large range in costs (indicated by some estimates) is just as important. Witnesses to the Inquiry emphasised that it is the costs experienced by individual farm families that determine what happens financially to those families. Furthermore, overall profitability, as indicated by costs and benefits, is not farmers' only concern. For a farming family, cash flow can be as important in the short term as profits.

10.30 Table 10.3 summarises estimated costs due directly to the disease (that is, mortalities) or from the disease and restrictions that limit sale of stock to slaughter.

Table 10.3: Estimated annual costs at the farm scale of OJD due to lost production and restrictions on trading

 

Study (key assumption)	Type of enterprise*
	Studs	Wool	Meat	Commercial breeder
ABARE 199750 (4% mortalities alone - based on modelling rather than actual income data)	$4,330	$1,519	$1743
ABARE 199751 (4% mortalities and restrictions on sales - based on modelling rather than actual income data)	$105,996 $17.74 per head (96% from sales restrictions)	$2,806 $1.26 per head (39% from sales restrictions)	$1,743 $0.78 per head (0% from sales restrictions)
Yass and District (1999)52(a small number of case studies - disease plus regulation and mitigation measures)	$65,000	$23,600		$46,000
Hassell (2000)53(reports by various NSW producer groups - costs of disease plus regulation)	$152,724 - $174,862	$17,625 (up to $59,323)
Hassell (2000)54(used pre-OJD cash income minus post-OJD cash income of sample of NSW properties, i.e. costs of disease plus regs)	$92,110	$1,071	$8,845	$13,774
Hassell (2000)55(proportion of cost due to 4% mortalities)	4.7%	100%	7%
	10%
Webster and Hall (2000)56(disease plus changes to enterprise)	$24,000 $8:00 per head*

* Computed assuming a flock size of 3,000.

10.31 The most recent estimate is that of Hassell and Associates on costs of OJD in NSW. In this study the method of computing costs of OJD was to compare returns after OJD was identified on the property with returns before OJD was identified.⁵⁷ This estimate incorporates real, rather than estimated, costs of lost production, trading options and other impacts of regulations aimed at containing the disease. Hassell and Associates also used a number of methods to gather data. This is one approach used to try to minimise bias that arises when economic estimates are based on data provided by self-selected volunteers. It is of particular interest that this study, which used real-life data rather than modelling to determine costs of OJD, showed meat-producing enterprises to be worse affected than wool producers. The reasons for this were not given, but may have been a result of poorer prices received for animals that had to be sold direct to abattoirs rather than through saleyards.

10.32 Another recent NSW study, by Webster and Hall, made a particular effort to avoid bias in the data by using a fairly large sample of affected producers who represented a wide range of circumstances and attitudes to the disease and regulations in NSW.⁵⁸

10.33 These two studies had the benefit of information recently obtained through the National OJD Program. Consequently, the estimates of impacts of OJD made in these two studies may be more accurate than some in the earlier studies listed.

10.34 Both these studies look only at the farm scale. They do not provide economic assessments or predictions at the industry scale and their findings relate specifically to NSW. However, they can still be used as a basis for assessing economic impacts of OJD on individual farmers in Victoria.

10.35 An aspect of the results provided by Webster and Hall that the Committee found to be of particular interest was the comparison between the pre-OJD income from properties that became infected and the State average income of sheep properties. The immediate post-diagnosis average cash farm income for infected commercial flocks was around $9,000 higher than income from the average flocks in NSW. This suggests that the farms that became infected with OJD were better managed than the average. Certainly the results counter assertions that the Committee has heard, that OJD is the result of bad management.

10.36 Property values can also be affected adversely by OJD. Sackett and Holmes, in their study of impacts of OJD on NSW farmers, found that prices were not always depressed. This depended on the range of potential enterprises available on the property. They found that the average amount by which OJD reduced property values was $163,000, with the range from $0 to $346,000. One witness to this inquiry estimated that the value of his property had fallen by $100,000.⁵⁹ Others indicated that property values would fall and that there was a risk that properties would be unsaleable.⁶⁰ Effects on property values may not be confined to infected properties, but influence other properties in a district where OJD is known to occur.⁶¹The main implications that the Committee saw as indicated by the information contained in Tables 10.2 and 10.3 and examination of methodologies used to make these estimates are that:

a) some costs result from OJD itself if there are increased mortalities, but that these are commonly considerably less than costs resulting from restrictions on trading;

b) the economic impacts of restricted trading, that is, the requirement that stock be sold for slaughter, falls very much more heavily on stud producers than on owners of commercial flocks;

c) for commercial flocks, trading restrictions and the `stigma' or fear of OJD lead to serious losses for breeders of store sheep and this affects uninfected flocks in a district where OJD has been identified, as well as infected flocks;

d) it is unclear whether the losses are generally greatest for wool or meat flocks. There is sufficient variation in the ways that various enterprises are organised to account for inconsistencies between the estimated costs of OJD to these two broad types of enterprises; and

e) there are many sources of costs that flow from OJD infection. Significant numbers of these are difficult to quantify and have not been incorporated into estimates of the costs of the disease to sheep producers.

Finding 10.2

Financial costs of OJD and associated trading restrictions impact on all types of enterprise but are particularly high for producers of breeding animals - stud and commercial sheep producers.

Minimising Impacts of Restrictions Aimed at Containment

10.37 As the preceding section indicates, much of the cost caused to individual farmers by OJD results from restrictions on trading. These are aimed at containing the disease. At the same time, the Committee recognises that, even without regulatory restrictions on trading, market forces would be likely to depress the value of sheep from OJD-infected flocks.

10.38 Various approaches have been suggested to minimise the adverse financial effects of such restrictions. They include permitting trade between infected properties, methods to minimise the time that the property is held under surveillance or quarantine and providing a more competitive marketing situation for sheep that must be sold for slaughter.

10.39 NSW Ovine Johne's Disease Advisory Committee made a number of suggestions concerning mechanisms to ease these costs on producers of breeding stock, particularly stud breeders.⁶² These involve permitting of trade between properties that have equal infection status, that is, actually identified as infected or suspect, particularly if both properties are within a Residual zone. The benefits, according to the Advisory Committee would be that:

Affected producers are able to trade in a controlled manner with a minimal risk of further spreading the disease.⁶³The Committee found no economic assessments of the usefulness of such approaches. Within Victoria, the benefits of permitting trade between infected properties do not appear likely to be great, as the number of properties is small. If infected flocks in other States were included in the potential trading pool there might be more potential for benefit. This would need to be balanced against greater transport costs and the need for strict hygiene during transport.

10.40 Reducing the length of time that properties are placed under trading restrictions would undoubtedly reduce costs. This has been the reason for recent reductions in testing requirements for release from surveillance.⁶⁴ Gains for individual farmers will need to be balanced against any increased risk of disease spread and consequent costs to the wider industry.

10.41 The Committee has examined the potential to improve marketing opportunities. The NSW Ovine Johne's Disease Advisory Committee described the current practice of some saleyards of operating `slaughter only yards' for sale of stock that are considered to be infected with disease such as footrot.⁶⁵ A similar approach might provide greater competition, and consequently better prices, for OJD-infected flocks than is presently offered by the single choice of sale direct to the abattoir. The option presents some problems, including those of hygiene and how to handle unsold stock. These problems do not appear to the Committee to be insurmountable. However, a substantial volume of infected animals would probably need to pass through saleyards to make the approach economic.

10.42 The International Wool Secretariat, in 1996, commented that the costs of having separate marketing arrangements at saleyards might not be worth while.⁶⁶ However, Mr F. J. White, Executive Officer, Livestock Saleyards Association of Victoria, considers that sale through saleyards would be likely to improve prices.⁶⁷ According to Mr White, there is potential to reopen disused saleyards for this purpose. This might reduce costs, if animal husbandry standards could be met without undue additional cost.

10.43 The Committee found that there is a lack of solid information detailing costs to individual producers of restrictions on trading from OJD-infected flocks, as a result of either regulations or market forces. It is difficult to assess the likely costs and benefits of changed regulations and marketing opportunities without better information. It is desirable that research be undertaken to obtain this information.

Destocking for Two Summers

10.44 Table 10.4 provides estimates made in several studies and by individual producers of costs incurred as a result of the two-year destocking strategy to eradicate OJD. Compensation was not incorporated into the estimated losses except for estimates made by Prowse and several Victorian producers for specific properties. With regard to the latter estimates, the commercial wool-producing properties that provided data have large flocks producing fine wool and so may have experienced above-average losses.

Table 10.4: Estimated annual losses at the farm scale due to two-year destocking

 

Study*	Type of enterprise**
	Stud	Self-replacing wool	Meat
1. ABARE (1999).68	$321,923 $53.89 per head**;	$31,887 $14.39 per head**;	$37,749 $12.58 per head**;
2. Identified losses on specific Victorian properties after receiving compensation.69	$289,250 ($138,000 to $578,500) $39 per head Compensation only 10% of stock value	$121,667 ($55,000 to $250,000) Approx. $20 per head
3. International Wool Secretariat (1996).70	-$6,160 -$2.78 per head
4. Sackett and Holmes (1997)71- determined using modelling.	-$35,921 to $22,182 $9.89 per head ( $27.65 to $29) - bought cattle as intermediate enterprise $2.65 per head ( $1.59 to $6.89) - agisted cattle -$10.01 per head (-$19.60 to $5.30) - increased area cropped $10.54 per head ($2.94 to $18.13) - made permanent change to cattle
5. Patterson (1998)72- determined using case studies and modelling of likely future incomes.	$141,000*** $47 ($22 to $85)
6. Prowse (2000)73- projection loss after receipt of compensation; based on published economic analyses prior to 2000.	$720

* Estimates of losses do not take account of compensation payments except for that of Prowse (Study 6) and those contained in submissions to the Inquiry (Study 2).

** Negative values indicate gains; range in brackets.

*** Calculated from flock size - assumed to be 3,000 in Victoria.

10.45 Compensation payments available under the Victorian OJD Program were $180 for a ram, $45 for a ewe, $32 for a lamb too light to slaughter and $27 for a lamb fit for sale and a wether. There have been discussions concerning an appeals process for compensation to allow consideration of higher payments for more valuable animals. These discussions have been suspended pending the outcome of this Inquiry.⁷⁴The appeals process is seen as particularly important for stud producers. As Mr G. Oliver, National President Pole Dorset Association, told the Committee, a commercial producer with 5,000 sheep would have similar annual income to a stud breeder with 500 sheep, yet under the compensation package, a commercial producer would receive ten times as much compensation as the stud producer. In addition, commercial producers whose stock is infected with OJD can continue to sell meat and wool, whereas a stud breeder is no longer able to trade and does not have any income except the meat value of the sheep sold for slaughter.⁷⁵The oldest study, that of the International Wool Secretariat, produced estimates so divergent from those in other studies, that it is of interest mainly as a demonstration of the unrealistic results that can be produced when data is lacking - as it was at the date of the study.

10.46 Table 10.4 confirms the impression that the Committee had gained from various witnesses that:

a) the costs of destocking for individual farm enterprises generally appear to be higher than OJD itself, or even OJD with restrictions on trade, at least in the short term;

b) if there were no relief from restrictions on trading (i.e. quarantine), particularly for studs and commercial producers of breeding sheep, costs of these restrictions could soon overtake the costs of destocking;

c) the costs of destocking vary greatly from property to property, depending on many factors. There is even a possibility that destocking will prove to be a benefit if an alternative enterprise proves to be more profitable, but this is unusual; and

d) compensation for animals slaughtered may balance losses caused by destocking in some cases, but generally does not do so, at least in the short term.

10.47 Loss of the genetic resource - the blood line - in the destocked flock is one cost of destocking that has not been incorporated in any study that the Committee examined. Several witnesses emphasised the significance of this loss.⁷⁶ Blood lines that have been developed over decades cannot quickly be restored. Where they represent a rare breed, or a major stud, regaining them may be virtually impossible, at least within the lifetime of the farmer.⁷⁷ Costs resulting from loss of high-quality genetics have not been quantified. With the trend for premium prices to be paid for super-fine and ultra-fine wool, the Committee believes that the cumulative cost could be substantial for some flocks.

10.48 Other costs that are not included in most estimates of the costs of destocking, but which the Committee has identified, are listed in Table 10.2. They include:

a) sale of stock unready for market;

b) facilities required for an intermediate enterprise, such as cattle-proof fences, altered watering facilities and yards;

c) consequences of poor or misleading information leading to costly decisions - an example provided to the Committee was of a farmer advised to make hay as an alternative enterprise, only to be told later that it could only be sold with notification that it was OJD-affected;⁷⁸fluctuating markets that make a short-term enterprise financially risky;

d) delay in return to the main enterprise caused by difficulties finding a source of suitable sheep; and

e) fencing to exclude damp areas prior to restocking - estimated for one property to be $10,000 -$15,000.⁷⁹Some of these costs may be produced by the circumstances of the property, others by seasonal variations in markets, while still others have to do with poor information or the farmer's lack of experience with a new enterprise.

10.49 The Committee identified that where destocking was undertaken in haste, the costs were particularly high.

10.50 Several witnesses, including staff of Melbourne University's Mackinnon Project, provided evidence of the importance of having time to prepare and implement destocking in an orderly and planned manner.⁸⁰

10.51 Among options of less-hasty destocking is the possibility of destocking sections of the property in sequence. This method was used by Mrs B. Vickers in NSW.⁸¹ She destocked her property in two stages, with new sheep used to restock the first section after it was decontaminated. She was then able to use artificial insemination with the new sheep to preserve genetic material from the old flock. Progressive destocking, as well as allowing for genetic preservation, can also improve cash flow during the eradication program.

10.52 Table 10.5 provides examples of estimated benefits that can result from avoiding hasty implementation of destocking.

Table 10.5: Estimated costs at the farm scale of hasty destocking over and above those from planned destocking

 

Study	Cost difference per flock
Counsell (1999)82$51,240* ($17.08 per head)
Tobin (2000)83$60,000
Smith (2000)84$7,500* ($2-3 per head or 20-30% for identical quality animals at saleyard)

* Calculated for a flock of 3,000 sheep.

10.53 The Committee identified a number of reasons why time is needed to avoid excessive losses when destocking. These include opportunities to:

a) gather information, seek advice and assess options;

b) determine ways to maintain the genetic resource in the flock if this is considered desirable;

c) grow lambs on to the optimal size and condition for sale;

d) undertake timely shearing and improve condition of older sheep;

e) make the best use of market fluctuations to sell sheep and enter alternative enterprise;

f) spread labour demands and cash flow; and

g) undertake planning after an adequate period to adjust changed circumstances - that is, in a calm frame of mind.

10.54 In summary, factors that the Committee found to be important in determining the financial impact of destocking over two summers on many farmers were:

a) compensation;

b) the circumstances of the property, such as climate, topography, available labour, fencing and facilities;

c) current and available alternative enterprises;

d) whether the property was a stud enterprise - that is, where its key resource is the genetics of the flock;

e) opportunity to retain or restore the genetic resource of the flock;

f) access to good information and farm-management advice; and

g) time and flexibility to proceed through the destocking program in an orderly manner that suits the property and the farmer.

Finding 10.3

Costs of destocking to achieve property decontamination result from many factors, of which the loss of the flock's production is only one. These vary greatly with farm circumstance.

Finding 10.4

For individual farmers, the economic costs of destocking usually exceed benefits, at least in the short term, even when compensation is received. Loss of the genetic resource can be a substantial added cost, particularly for stud producers.

Management for Minimisation of the Disease

10.55 The Committee has been told by a number of witnesses that losses from OJD can be minimised to a level where their costs are minimal.⁸⁵ At the same time, some change in the enterprise is needed. One farmer used stronger-wool sheep to improve returns from lambs sold for slaughter.⁸⁶ Such changes would have economic consequences.

10.56 The Committee only obtained one economic analysis of the consequences of management changes aimed at minimising the disease impacts of OJD. This assessed effects of changes to the age structure of the flock to minimise disease.⁸⁷ There was an average loss from the changes of $6.32 per head, with a range $44.60 to -$11.40 (a profit) depending on property circumstances. Options considered to minimise the expression of disease were very limited in this study, and it does not appear to have taken account of the added costs that could result if disease prevalence increased under a `do nothing' program.

10.57 Dr S. Webster, Economist with NSW Agriculture, told the Committee that costs of minimisation are highest in the first two to three years after diagnosis, after which they decline. It appears likely that minimisation will often pay. None the less, it cannot be guaranteed to prevent increasing prevalence of OJD and so does not remove financial risk caused by the disease.

10.58 It would be useful if more work could be done to quantify the benefits of various minimisation options. This would provide a sounder basis on which farmers could be advised when confronted by the need to manage OJD.

Alternative Approaches

10.59 A number of approaches to the control of OJD have been attempted in localities outside Victoria or suggested as options for the control of OJD. These include vaccination, gradual eradication through progressive contamination of pastures and test-and-cull. Information on the economic viability of these options is patchy. It is summarised below.

Vaccination

10.60 The cost of the vaccine being tested in NSW is $2 per head.⁸⁸ Several studies concluded that vaccination is a cost-effective way to minimise, and potentially eradicate, OJD.⁸⁹ In New Zealand vaccination of infected flocks proved economic where 1-3 per cent of clinical cases of OJD per year were evident. If a proportion of carcasses is downgraded due to the vaccination, a prevalence of 2 per cent was determined to be the threshold for economic vaccination. Three years of vaccination reduced the prevalence of OJD noticeably, and five years reduced evidence of the disease to almost zero.⁹⁰Mr I. Wood, Secretary of the Victorian OJD Action Group, told the Committee that $2 per head is a negligible expense.⁹¹ As a means of reducing financial risk, vaccination may be considered at lower prevalence. However, as current vaccines do not prevent infection, they would not overcome the costs experienced by farms due to current trade restrictions on infected properties. Until a way of showing that a flock that has been infected is free of infection, these restrictions will not be lifted, even if vaccination can lead to eradication. The Committee can only see economic value for vaccination where it is profitable for a farmer to continue in production under trading restrictions or a satisfactory way to clear properties of these restrictions is established.

Eradication Through Gradual Decontamination

10.61 No economic studies have been undertaken on costs and benefits of managing a property to progressively eliminate OJD contamination from the pasture. This is, in effect, an extension of the minimisation approach, with the possible use of vaccination as well for an extended period. Benefits would be the retention of the genetic resource and cash flow as well as reduced cost and risks associated with destocking. If freedom from disease could eventually be established, the ultimate benefit would be a return to normal trading.

10.62 The costs would be a prolonged period of restricted trading with the risk of never achieving eradication.

Test-and-cull

10.63 Test-and-cull is a specific approach that can achieve reduction in pasture contamination by reducing the number of animals shedding bacteria. It might increase the rate of pasture decontamination over that which can be achieved by other management, and so hasten the return to normal trading. However, it would incur the cost of testing as well as restricted trade until freedom from infection could be established, and loss of the test-positive animals.

10.64 Spanish workers Juste and Casal simulated the potential of a test-and-cull approach using tests available in 1993. They found that test-and-cull could be effective at removing, after six years, sheep that showed evidence of infection. However, the method incurred higher costs than the `no intervention' options.⁹²A New Zealand study obtained similar results.⁹³ Even if a program could be developed, this study found that it would be too expensive for most infected flocks unless it were based on a more reliable test. Level of infection in the flock falls too slowly and clinical cases appear even after several years of testing and culling using currently available tests.

Finding 10.5

There are a number of alternatives for managing, and possibly eradicating, OJD at the farm level. Their economic benefits under Victorian conditions have yet to be assessed.

ECONOMIC IMPACTS OF OJD AT THE INDUSTRY SCALE

10.65 The main study on impacts of OJD at the industry level is one undertaken in 1997 by the Australian Bureau of Agricultural and Resource Economics (ABARE). This is a preliminary cost/benefit analysis, which examined control and eradication strategies for OJD in Australia.

10.66 The Bureau itself warned that the results should be treated with caution. They should not be quoted out of a context in which the underlying assumptions are taken into account. In its words:

The estimates of the impacts of Johne's disease presented in this report are based on the available information on the impacts of the disease and the options for control and eradication. However information is sparse on many of the key factors which influence the economics of control and eradication. In particular there is uncertainty about the current prevalence of the disease, its rate of spread on a farm, its likely rate of spread among farms and the cost and effectiveness of the monitoring and trace back procedures put in place to identify infected farms.⁹⁴These uncertainties are being addressed by current research. As the Committee indicated in the preceding chapter, information on the distribution and prevalence of OJD generally confirms the picture built up by trace-forward and trace-back procedures. Ongoing testing in Victoria suggests that the prediction, made by Prowse, of the number of infected flocks yet to be discovered may be a little low, but not greatly in error. Results from abattoir surveillance in NSW also indicates that the potential for spread of the disease is considerably understated in both the International Wool Secretariat and the Australian Bureau of Agricultural and Resource Economics report.⁹⁵ A new cost/benefit analysis by Australian Bureau of Agricultural and Resource Economics should be released late in 2000.

Do Nothing

10.67 The costs to industry of a `do-nothing' strategy would result from mortalities, lost productivity and market-controlled barriers to sales. They would increase as the infection spread at a rate determined only by the epidemiology of the disease and its increasing prevalence in some flocks over time.

National Scale

10.68 Estimates of these costs are contained in Table 10.6. They are based on mortalities only. As the Committee notes below the table, these estimates are understated.

Table 10.6: Estimated cost at the industry scale attributed to the disease - national

 

Study	Cost - present value
	High spread rate*	Low spread rate
ABARE (1997)96$117 million - 20 years $344million - 40 years	$13 million - 20 years $43 million - 40 years
International Wool Secretariat (1996)97 **	$212 million for 1,000 farms by 2010, present-value cost Much more by 2036, due to 8,000 infected flocks by that date

* This is based on estimated costs per producer that are low compared with those actually measured by Hassell and Associates and so may substantially understate costs of uncontrolled spread of OJD - see earlier section on farm-scale costs.

** As the Committee commented in relation to impacts at the farm scale, the International Wool Secretariat's estimates of the costs of OJD are much lower than any other estimates. Consequently, the Committee believes that this group has also probably underestimated the costs of a `do-nothing' approach to industry.

Victorian Scale

10.69 For Victoria, an estimate of a `do-nothing' approach was made using data provided by Hassell and Associates and an assumption that, if there were no regulations to control the spread of OJD, 50 per cent of the State's flocks would become infected.⁹⁸ It was also assumed, based on results of the study by Hassell and Associates, that the cost of losses directly attributable to OJD (mortalities and possible reduced production) would be only 10 per cent of the losses caused by OJD where trading restrictions apply.

10.70 With these assumptions, the annual loss to the Victorian sheep industry from a `do-nothing' approach would be $23.3 million.

10.71 None of these estimates of the costs of a `do-nothing' take account of the costs of lost genetic resources or of market restrictions caused by purchasers choosing to avoid buying sheep from infected flocks. Presumably the latter would be balanced, at least in part at the industry scale, by improved purchase prices for sheep from uninfected flocks.

Cost of the Disease Plus Trading Restrictions

National Scale

10.72 According to a Dr Denholm, a researcher working for the NSW Department of Agriculture, the costs of restricted trading will eventually force a choice between eradication and deregulation, even if containment is effective:

Ultimately the choice for the sheep industry is one between total eradication and accepting spread of the disease throughout the industry. On-going control of sheep movement without eradication will be intolerable for affected farmers, increasing pressure to remove all regulatory controls on the disease, as proposed in New Zealand, to remove the economic burden on affected farmers from trading restrictions which are seen as disproportionate and unjustifiable in the absence of a program for eradication.⁹⁹Results of two studies on the national costs of containing OJD are given in Table 10.7

Table 10.7: Estimated annual cost at the industry scale of containment of OJD using restrictions on trading - national

 

Study	Cost
International Wool Secretariat100$21 million
ABARE*, 101$27 million - indefinite containment program $11 million - 10 years containment program

* These are considerable under estimates, as they are bases on an assumption of only 140 infected properties.

10.73 From its estimates, the Australian Bureau of Agriculture and Resource Economics (ABARE) concluded that quarantine would only be cost effective in the long term if OJD has the potential to spread at the more rapid exponential rate. In the light of the higher number of infected properties now discovered and the evidence reproduced in Table 10.8 below, the Committee is forced to question this conclusion. The Committee notes that the Bureau is continuing its work

10.74 In the shorter term, restrictions aimed at containment are providing financial benefit to those properties that are protected from being infected by the restrictions. The Committee has identified a serious market failure as a result of the present situation - that is, the costs of the actions fall on one group of individuals, those whose trade is restricted by quarantine while the benefits flow to another group. The restrictions impose a considerable cost on those farmers who are under quarantine or surveillance, while the primary beneficiaries are the large numbers of other farmers whose flocks are, as a consequence, not infected.

Victorian Scale

10.75 The Committee used estimates made by Hassell of costs of OJD in NSW to compute the potential cost of OJD under trading restrictions required by the National OJD Program.¹⁰² In making these calculations the Committee assumed that OJD would spread to more flocks, as predicted by Hassell and Associates, if there are no more vigorous control efforts than currently in place in NSW. These assumptions are supported by the recent finding that OJD is present in 7 per cent of lines inspected in the NSW abattoir surveillance program and by estimated prevalence in the New Zealand flock.¹⁰³The resulting estimates for the annual cost of OJD are given in Table 10.8. These estimates are indicative only, but provide a fair estimate of likely costs of OJD if spread is not fully contained.

Table 10.8: Estimated annual cost, at the industry scale of containment of OJD using restrictions on trading, assuming various rates of spread - Victoria

 

	Rate of Spread
	Low spread rate	Moderate spread rate	High spread rate
Proportion of flocks infected	6%	17%	26%
Annual cost	$26.4 million	$79.2 million	$121.4 million

Source: derived from data quoted in Hassell and Associates Pty. Ltd. (2000).

Eradication by Destocking

10.76 The Australian Bureau of Agricultural and Resource Economics calculated the costs of eradication by destocking of 390 properties as $19 million.¹⁰⁴ Based on this estimate, the Bureau concluded that an eradication strategy would be cost effective (if it proves feasible) if a high rate of spread of the disease will occur in the absence of eradication. However, the Bureau cautioned that it had doubts about the feasibility of total national eradication without prolonged monitoring, testing and programs to ensure that OJD is not reintroduced into Australia. These activities would add to the cost of eradication.

10.77 In light of the Victorian experience, the estimate made by the Bureau is an underestimate. The Victorian industry has incurred a debt of $15.9 million for compensation alone, to less than half the number of properties used in the Bureau's calculations.¹⁰⁵Based on assessments of the costs of infection to stud producers made by Hassell,¹⁰⁶costs of destocking made by Patterson for the Department of Natural Resources and Environment¹⁰⁷ compensation expenses, and an assumption of a further 100 infected properties, the cost of eradication of OJD from Victoria would be a further $21.4 million.

10.78 In this assessment it is assumed that five of the infected flocks yet to be identified are studs, the gross annual cost to a stud producer for lost trading as a stud due to OJD is $152,724 (Hassell and Associates, 2000) and it will take 5 years to get back to normal stud production (with artificial breeding) after destocking;

10.79 As with the estimation of the annual cost of the disease to Victoria under restrictions aimed at containment (Table 10.8), this is an indicative figure only. However, when compared with the potential annual cost of more than $23 million under any scenario apart from eradication, from the industry point of view, eradication is almost certainly going to be cost effective.

Flexible Property Management with Zoning and Other Options

10.80 Information on the costs and benefits to the sheep industry of alternative eradication strategies such as gradual reduction of pasture contamination and vaccination is not available for Victoria.

Finding 10.6

Destocking involves substantial market failures. These are of two types:

a) costs born mainly by the few owners of infected flocks while benefits accrue to the large number of owners of `clean' flocks who are protected from the risk of infection by the actions of the few who destock. This was largely true even under the compensation arrangements; and

b) among those who do destock, costs and benefits are very unevenly spread, and a simple compensation package does not address this problem.

Finding 10.7

At the industry scale, given the small number of flocks that appear likely to be infected in Victoria, from evidence received by the Committee, the economic costs of OJD outweigh the costs of eradicating the disease..

FACTORS GENERALLY EXCLUDED FROM COSTS AND BENEFITS ESTIMATES

Potential Overseas Trade Benefits

10.81 One benefit to either containment or eradication of OJD that has not been factored into any of the above assessments is the possible effects of OJD on overseas trade.

10.82 Several witnesses have commented on the potential for trade restrictions by other countries on Victorian sheep meats.¹⁰⁸ The other alternative could be a trade advantage if OJD can be contained or eliminated. According to the Australian Animal Health Council:

For many years Australia has enjoyed a reputation for clean, healthy and disease-free agricultural production systems through our natural advantages of geographical isolation. This gave Australian products an edge in a very competitive international environment.¹⁰⁹Only Jordan and Indonesia currently restrict trade of sheep for slaughter on the basis of OJD infection. The live trade of sheep from Victoria and NSW is worth about $21 million per year, largely to these countries. Australian Bureau of Agriculture and Resource Economics concluded that OJD is not likely to have any significant impacts on trade of sheep meat, but others are less confident of this.¹¹⁰

Economic Costs of Associated Programs

10.83 The Committee, when it examined several economic studies, was struck by the fact that costs associated with delivering a control program, such as surveillance and testing, are generally not included in the calculations. These costs are not insignificant.¹¹¹ They will, of necessity be incurred if the benefits of a successful control program are to be realised.

Communication, Consultation, Education and Administration

10.84 Under the National OJD Program, $0.6 million has been committed for a communication program over the six years of the Program.¹¹² The communication program is provided primarily for the partners in the National Program - government agencies, research institutions and industry peak bodies - rather than for farmers.

10.85 The Committee identified earlier - in Chapter 3 - that resources to provide effective consultation, communication and social support are generally recognised as important to the success of a livestock disease program. As is discussed in Chapter 6, it was not able to find evidence that adequate resources, either in funds or appropriately trained staff, were available to deal with the social or communication needs that became evident during the Victorian OJD Control Program.

10.86 NSW Ovine Johne's Disease Advisory Committee's Business Plan emphasises the need to fund communication and education.¹¹³ Actual funds required have not been identified. Communication and education include such activities as providing accurate information, assisting with business plans and giving information on available support services. The Advisory Committee sees the benefit of such a program as:

10.87 The culture of suspicion and fear that surrounds the disease will be broken down and producers will be able to identify their peers who are similarly affected with a view to establishing trade and support networks.¹¹⁴Income and Other Support

10.88 Costs associated with a control program could include compensation, social support costs and subsidies on low interest loans to provide income or other support. Benefits flowing from such support could include a more rapid return of affected farmers to full production and those that flow from more widespread support for the control program.

10.89 The contracting of the services of Community Connections in February 2000 to provide a network of social support and the earlier contracting of Mr L. Hiscock by the Victorian Farmers Federation to assess the needs of OJD-affected farmers have incurred monetary costs to the Victorian community, albeit small relative to other financial costs. There have been calls for greater and more-effective support in these areas.¹¹⁵

Research

10.90 Research underpins any progress in the control of OJD and has the potential to produce considerable benefits, though inevitable these benefits are difficult to quantify before the results of the research is known. Because of this it is easy for research to be under funded so that net benefits are not realised.

10.91 Dr D. Pemberton, former research veterinarian with the DNRE, considers that the allocation of funds for research to resolve problems with OJD is less than desirable.¹¹⁶ The NSW Ovine Johne's Disease Advisory Committee's Business Plan (1999-2003) also identifies the need for more resources to support research and development.¹¹⁷A large part of the budget of the National OJD Program is committed to research and surveillance. The Program has a budget of $40 million for six years, with $10.5 million of this being for research and development. Victoria's contribution to the Program is $5 million. That is, approximately $1 million a year.

Testing and Surveillance

10.92 Prowse calculated that the cost of using pooled faecal culture of blood tests to determine the level of OJD infection in Victoria would be between $0.78 million and $1.8 million, depending on the testing approach used (see Table 10.9).¹¹⁸Table 10.9: Estimated costs of testing to assess level of infection in Victoria

 

	Cost
	Blood test	Pooled faecal culture
Cost per test	$6 per sheep plus labour	$2 per sheep (in groups of 50 sheep) plus labour
Cost per flock test (assuming 2,000 sheep)	$3,000 including labour	$1,300 including labour
Total cost of statistical sample of the State's flocks.*	$1.8 million	$780,000**

Source: Calculated from data in Prowse (2000), p. 35 and Prowse, S. (2000), Program Manager, Infectious Diseases and Food Safety, Animal Health Laboratories, CSIRO, personal communication, 12 July 2000.

* Three hundred flocks will need to be tested twice in two years to determine the proportion of flocks with prevalence of OJD >1% prevalence, and there are 2,000 sheep per flock.

** Costs of pooled faecal culture are approximate as the procedure has only recently been adopted and there is a lack of field information on costs of sampling.

10.93 By comparison, he estimated the cost of abattoir surveillance, which can assess presence of OJD in all lines of sheep presented to the abattoir, as $62,377.¹¹⁹ This provides a relative benefit compared with other methods of determining the distribution and prevalence of OJD.

Market Assurance and Vendor Declaration

10.94 The costs of entry into the Market Assurance Program are high for the individual producer, particularly in terms of the risk of having OJD identified in the flock. The direct cost is $1,000-$4,000 for initial testing plus regular testing. For the farmer buying sheep the Program offers the benefit of significantly reduced risk.

10.95 The Committee received some anecdotal evidence that a benefit to individual producers is starting to be received from entry into the Market Assurance Program. There has been no rigorous confirmation of this yet, however. Mr J Smith of the Victorian Stock Agents Association believes that an additional $20 per head could be paid for tested, fine-wool sheep.¹²⁰ If annual sales from a flock of 3,000 sheep were 500 sheep, that would give an added return of $10,000, which would more than cover recurrent costs of testing. Given this, the disincentive for farmers entering the program that may be greater than cost is the risk of having the flock identified as OJD-positive.

10.96 Costs and benefits to the industry have yet to be assessed, but the program could be expected to be economically positive, as it is needed to reduce spread of the disease.

SUMMARY OF COST / BENEFIT STUDIES

10.97 The Committee has summarised in Table 10.10 the broad generalisations that can be drawn about economic impacts of different approaches to the management of OJD in Victoria.

10.98 Several qualifications need to be made about the broad generalisations in this table. These are that:

a) assumptions and `soft data' incorporated into all the economic studies used make assessed costs and benefits indicative only;

b) there is a general failure to include costs of delivery, research, surveillance and administration in costings;

c) costs and benefits for individual properties vary greatly from mean values and it is the individual farmers who must survive economically;

d) the mode of delivery of a program can greatly alter costs and benefits of any control program;

e) cash flow, financial risk and future options, as well as profit, are important to the economic wellbeing of farmers and the industry;

f) many sheep farmers are experiencing difficult times when any added financial burden will be difficult to manage; and

g) factors such as maintenance of the genetic resource and neighbourhood co-operation are difficult to quantify, but none the less important.

Table 10.10: Summary of implications of cost / benefit studies for a range of OJD management options

 

Option (not all options meet technical and social requirements)	Scale
	Property	Industry
Do nothing	+/-	-
Market forces with vendor declaration	?	+/-
Containment	-	+/-
Minimisation	+	?
Market Assurance Program	+?	+?
Orderly destocking rather than hasty destocking	+	+
Eradication by destocking	- (in most cases)	+
Eradication by gradual reduction of pasture contamination	?	?
Test-and-cull	-	-
Vaccination	?	?
District-based flexible property management	+?	+?
Planning support	+	+
Research	+	+
Communication and education	+	+

Legend + = benefits outweigh costs, - = benefits are less than costs, +/- = benefit/cost ratio varies with circumstances; ? = more information needed.

FUNDING

10.99 The view has been put by the NSW Ovine Johne's Disease Advisory Committee, that, where actions are seen as being of national benefit, funding should be "drawn from sources that reflect the project's national application".¹²¹ In effect, the Advisory Committee has espoused the concept of `beneficiary pays'. This concept is commonly seen as appropriate where there is no evidence to indicate that any individual or group has deliberately imposed costs on others and where one person experiences substantial costs to provide benefits to someone else.

The Advisory Committee is of the opinion that producers who suffer a capital loss by way of devaluation in the value of their flock [from trade restrictions and the disease itself] should not shoulder the burden alone.¹²²That leaves the question of whether the beneficiary, the wider industry, has the capacity to pay.

10.100 According to Mr R. Black  of the Sheep and Goat Compensation Advisory Committee, the stamp duty collected on sheep sales to fund compensation amounted to $1.28 million in the year 1999-2000. To date the fund's main income is Treasury advances - currently the Fund's "borrowings from the government are $15.9 million."¹²³ Mr Black stated that "The borrowings from Treasury by the Fund have been amortised over 10 years."¹²⁴The Committee has not been able to establish the details of agreement made to recoup this advance or future compensation costs. The sustainability of the fund is related to interest rates charged on outstanding debts. The Committee understands that interest is to be paid on the advance from Government,¹²⁵but it was unable to obtain documentation that prescribed the interest rate. If no interest were paid on the current debt, the present rate of collecting revenue would see the debt repaid in a little over 12 years (Table 10.11)

10.101 To examine the implications of various rates of interest being charged if the current or a higher income were obtained from the transaction levy, a number of scenarios have been simulated (Table 10.11). For simplicity, the debt at October 2000 has been taken to be $16 million, and interest rates were taken to be 0 per cent (no interest charged), 4.75 per cent or 6.5 per cent (approximate rate for Treasury Bonds at October 2000)

10.102 The effects on time to repay the compensation debt if compensation continues to be paid have also been simulated (Table 10.12). Calculations are based on assumptions of 4.75 per cent interest paid and annual revenue from the transaction levy remaining at $1.28 million or doubling. Scenarios from no further compensation paid on a varying number of infected flocks are also shown.

10.103 Figures in Table 10.11 indicate that it will take a considerable number of years to recoup the debt incurred as a result of compensation if interest is factored into calculations. This will particularly be the case if compensation is paid on flocks that are destocked in the future and significant new clusters of infection are found. However, a higher collection of revenue through stamp duty would reduce the length of time involved.

Table 10.11: Number of years for full repayment of present $16 million compensation debt under several scenarios

 

Assumed interest rate charged	Annual revenue raised by transaction levy
	Scenario 1 - current levy *	Scenario 2 - 50 per cent increase of current levy **
0%	13 yrs	9 yrs
4.75%	20 yrs	11 yrs
6.5%	27 yrs	13 yrs

* Current yearly income from the transaction levy is $1.28 million.

** A 50 per cent increase in the income from the transaction levy would raise $1.92 million per annum. This might be achieved by effort to ensure that the stamp tax is collected on all transactions and/or through a small increase in the levy.

Table 10.12: Number of years for payment of existing debt of $16 million plus compensation for future destocking

 

Scenario	Annual revenue raised by transaction levy*
	Scenario 1 - current levy	Scenario 2 - doubling of levy
1. Status quo - no new compensation. Payments.	20 yrs	8 yrs
2. Low prevalence - compensation paid on a further 65 flocks plus 2 flocks well into the future.	45 yrs	13 yrs
3. Moderate prevalence - compensation paid on a further 100 flocks, including an additional 31 from a new cluster found in 2004.	89 yrs	15 yrs
4. High prevalence - compensation paid on an additional 100 flocks plus additional clusters of 36 infected flocks found every 6 years indefinitely.	Debt continues to rise indefinitely	21 yrs**

* Assumptions are that either $1.28 million will be raised from the transaction levy every year as at present (middle column) or, scenario 2, that there will be a doubling of revenue raises (right hand column). Flock size is taken to be 3,000 with an average $40 paid per head, giving payment per flock destocked of $120,000.

** By this time the original debt has been paid off and income from the transaction levy is able cover recurrent costs of compensation.

Finding 10.8

An OJD control program incurs many costs other than those directly related to production. These are commonly not identified, nor are adequate resources provided for them. Under-resourcing certainly appears to have been the case with the Victorian OJD Program.

Finding 10.9

The compensation fund at best will take around 8 years to repay and, depending on the rate of interest charged on Treasury advances, the level of the levy set and the amount of call on the fund if compensation payments were continued, may take 45 or more years to reach a self-sustaining level. If no changes were made to the current basis of funding and/or there were significant increase in the number of infected flocks meeting the guidelines for compensation, the compensation fund would be unsustainable.

Assistance to Farmers in Difficult Financial Circumstances

10.104 The NSW Ovine Johne's Disease Advisory Committee also identified the need for income and social support for families involved in enterprises adversely affected by OJD.¹²⁶ The Advisory Committee is still exploring options. The reference to `enterprises adversely affected' suggests that the Advisory Committee is extending its focus to all persons affected, whether or not they are farmers.

10.105 A number of farmers described difficulties that they faced in finding money for day-to-day expenses when they destocked their properties.¹²⁷ Compensation money was often used to finance alternative ventures, leaving no income, either from sheep because of destocking or from the alternative venture in the short term. Others were faced with mortgage repayments and other charges that used the bulk of their available money.¹²⁸ In one case at least, a bank increased the interest rate on a farmer's loan because the property was seen as a reduced security.¹²⁹Loss of income has not been confined to those who have destocked, but has affected those who have lost employment and those under trading restrictions.¹³⁰ The assessed value of the property prevents most farmers from being eligible for income support under Newstart, while the property may be providing an inadequate income to meet regular living expenses.

Finding 10.10

Cash flow can be as important as profit to farmers and other rural workers who do not have large financial reserves to tide them over periods of reduced income.

Rural Finance Corporation Loans

10.106 The Rural Finance Corporation has provided a low-interest loan for farmers who have destocked to eradicate OJD.¹³¹ These loans are not limited by the capital value of the property. During the two years of destocking only the interest, at a rate of 4 per cent, must be repaid. After restocking, the full loan can be repaid within five years at the same interest rate. After this period any outstanding debt must be repaid at a commercial interest rate.

10.107 The loan scheme started on 7 September 1998.¹³² In the financial year 1998-99 ten loans were approved and payments totaling $454,000 were made. In 1999-2000 three more loans were approved, totaling $98,000.

10.108 It is not clear to the Committee why there has been so little use of these loans.

Financial Counselling and Assistance with Business Planning

10.109 Financial counselling and assistance with business planning is provided for farmers. There has not been an increase in the resources provided for rural financial counselling or Farm$smart programs but, in the last twelve months, fees for the latter have been waived for OJD-affected producers.¹³³ This is relatively a very small expense to the Victorian Government.

Potential Federal Government Assistance

10.110 During the Senate Inquiry it was put to the Commonwealth Department of Primary Industries and Energy that OJD-affected farmers might be considered for Exceptional Circumstances Assistance, and a response was sought from the Department to the proposal.¹³⁴

10.111 An `exceptional circumstance' which could attract such support from the federal Government is:

a) an event not within the risk-management capacity, or control, of the producer;

b) an event confined to a district;

c) a rare and severe event such as a drought; and

d) an event of a temporary nature which is going to end at some foreseeable time in the future.¹³⁵An Exceptional Circumstances Relief Payment may be paid to a person identified as being in Exceptional Circumstances.¹³⁶ This is a fortnightly payment at a rate equivalent to the Newstart Allowance and with similar associated benefits, such as a Health Care Card. It is subject to a means test on income, but not on farm assets. The last provision allows many farmers who would otherwise be excluded to receive this form of income support.

10.112 In 1998 the Commonwealth Department of Primary Industries and Energy indicated that it considered farmers affected by OJD would be unlikely to meet the criteria to gain exceptional circumstances status because the impacts of OJD are not short term.¹³⁷Other Support for Agricultural Industries

10.113 Recent support to Queensland sugar-cane growers has gone beyond the idea that financial assistance from the federal Government should only be given to farmers who are facing short-term and uncontrollable circumstances such as those caused by floods, drought and fire.¹³⁸ A package of assistance worth $300-400 million is being provided by the federal Government to assist cane growers adversely affected by a fall in sugar prices and increasing crop disease. The State Government has already contributed $10 million in loans.

10.114 Federal funds will be used to provide low-interest loans and financial counselling and training for farmers.¹³⁹ The commitment by the federal Government was conditional on the sugar industry undertaking restructuring of the industry.

10.115 Table 10.13 summarises sources of funding that have contributed to OJD control in Victoria.

Table 10.13: Sources of funding that have contributed to OJD control in Victoria.

 

Cost	Source of Funds
	Federal Gov't. -recurrent	Federal Gov't. -special funds	Federal Gov't. - one-off payments	National OJD Program	Sheep and Goat Comp. Fund	DNRE Recurrent Budget	Industry groups	Affected farmers (and local community)
Program Administration				_		_
Marker Assurance Program								_
Communication, consultation and education				_ (minor)		_ (minor)	_
Income Support	_ (Centrelink - assets tested							_
Compensation (for destocked sheep)					_
Social support						_ (minor)	_	_
Financial counselling	_					_		_
Maintaining blood lines								_
Research	_			_		_		_
Testing / surveillance				_		_

¹ Black, Duff, Saggers, Baines, Jennings and Bowen (2000), p. 35.

² Webb Ware, J. (2000), personal communication, 13 June 2000.

³ Black, Duff, Saggers, Baines, Jennings and Bowen (2000), p. 37.

⁴ Egan and Malcolm (2000).

⁵ As indicated in Chapter 2, a dry sheep equivalent is calculated on the amount of feed various types of animals require. The `dry sheep' is a wether. The `dry sheep equivalent' or DSE for a ewe in late pregnancy is 1.7+. For a lactating ewe it is 1.8-2.5.

⁶ Australian Bureau of Statistics (1996-97), p. 13.

⁷ Australian Bureau of Agriculture and Resource Economics (1997).

⁸ Martin, H. (2000), Director, East Gippsland Shire Council, briefing, 17 July 2000.

⁹ McPhan, B. (2000), Rural Counselling Service, personal communication, 17 May 2000.

¹⁰ Prowse (2000), p. 38; and also Surviving Ovine Johne's Disease, a video produced by NSW Agriculture, March 1999.

¹¹ Visard A. (2000), Mackinnon Project, University of Melbourne, personal communication, 15 March 2000.

¹² Sackett and Holmes (1997).

¹³ Australian Bureau of Agriculture and Resource Economics (1997).

¹⁴ NSW Agriculture (1999a).

¹⁵ For example, the BJD vendor declaration system in Wisconsin; Division of Animal Health (2000).

¹⁶ Australian Bureau of Agriculture and Resource Economics (1997); and also Bray, W. S. (2000), President, Pastoral Group,Victorian Farmers Federation, Minutes of Evidence, 24 July 2000, Newcomen, E. and D. (2000), Written Submissions, OJD 058 and Vickers, B. (2000), farmer, Carcoar, NSW, personal communication, 3 July 2000.

¹⁷ Pemberton, D. H. (2000), Written Submissions, OJD 042.

¹⁸ Douglas, K., Mayor, North Grampians Shire, and Tehan, R., Stawell/Glenorchy Branch, Victorian Farmers Federation (2000), Written Submissions, OJD 072.

¹⁹ McMichael, I. V. (2000) Written Submissions, OJD 051.

²⁰ Veterinary Committee (1998).

²¹ For example, Ahsam, B., Written Submissions, OJD, OJD 004, Bowman, H. (2000) Written Submissions OJD 032 and Lade, A.(2000), Written Submissions, OJD 093.

²² Gooding, P. (2000), Written Submissions, OJD 015.

²³ McMichael, I. V. (2000) Written Submissions, OJD 051.

²⁴ McMichael, I. V. (2000) Written Submissions, OJD 051.

²⁵ McMichael, I. V. (2000) Written Submissions, OJD 051.

²⁶ McMichael, I. V. (2000) Written Submissions, OJD 051.

²⁷ Murphy, R. (2000), Written Submissions, OJD 007.

²⁸ McMichael, I. V. (2000) Written Submissions, OJD 051.

²⁹ McMichael, I. V. (2000) Written Submissions, OJD 051.

³⁰ McPhan. B. (2000), Rural Counselling Service, personal communication, 17 May 2000.

³¹ Strong, R. (2000), Written Submissions, OJD 039.

³² Counsell (1999).

³³ Bowman, H. (2000) Written Submissions OJD 032.

³⁴ Webb Ware, D. (2000), Written Submissions, OJD 052.

³⁵ Martin, H. (2000), Director, East Gippsland Shire Council, Written Submissions, OJD 006.

³⁶ Murphy, R. (2000), Written Submissions, OJD 007.

³⁷ Martin, H. (2000), Director, East Gippsland Shire Council, Written Submissions, OJD 006.

³⁸ Eppelstun, P. (2000), Written Submissions, OJD 014.

³⁹ Strong, R. (2000), Written Submissions, OJD 039.

⁴⁰ McMichael, I. V. (2000), Written Submissions, OJD 051.

⁴¹ Eppelstun, P. (2000), Written Submissions, OJD 014.

⁴² Richardson, J. and J. (2000), Written Submissions, OJD 102 and Eppelstun, P. (2000), Written Submissions, OJD 014.

⁴³ Bowman, H. (2000), Written Submissions OJD 032.

⁴⁴ McMichael, I. V. (2000), Written Submissions, OJD 051.

⁴⁵ Richardson, J. and J. (2000), Written Submissions, OJD 102.

⁴⁶ Missen, T. G. and J. (2000), Written Submissions, OJD 050.

⁴⁷ Armit, L. (2000), Written Submissions, OJD 003; and NSW Agriculture (1999b).

⁴⁸ Hammond, G. (2000), Written Submissions, OJD 047, Reid, R. (2000), Written Submissions.

⁴⁹ Reid, R. (2000), Written Submissions, OJD 062 and Armit, L. (2000), Written Submissions, OJD 003.

⁵⁰ This study uses national data and the following methodology - a limited cost/benefit analysis focused on cost and benefits to industry. Costs associated with genetic loss, delivery, diagnosis, research, support services, market assurance and trade implications are excluded. Assumptions relate to rate of spread of the disease if not controlled, price of animals at sale and mortality rate (4%).

Australian Bureau of Agriculture and Resource Economics (1997).

⁵¹ Australian Bureau of Agriculture and Resource Economics (1997).

⁵² Yass and District Ovine and Bovine Action Group (1999).

⁵³ This study used NSW data and the following methodology:

Financial information was obtained from farmers selected to represent a cross-section of circumstances, by interview and collection of actual incomes and expenses before and following the discovery of OJD in their flocks. Comparisons were made with data supplied by the Australian Bureau of Statistics on farm incomes and expenses for the regions in which the sample farms were located. Predictions of future incomes under a range of circumstances were made on the basis of whole-farm analyses and projections into the future under specified conditions.

A number of costs were not included in calculations even though they were recognised. These included costs associated with social stress, dismissal of staff, run-down of farm improvements due to lack of cash flow, lost business opportunities and difficulties in selling properties even at reduced valuation; Hassell and Associates Pty. Ltd. (2000).

⁵⁴ Hassell and Associates Pty. Ltd. (2000).

⁵⁵ Hassell and Associates Pty. Ltd. (2000).

⁵⁶ This study used NSW data and the following methodology:

Production and financial information for OJD-affected properties and averages for the whole region were compared; and property types were identified, particularly studs and `non-studs'. Results were influenced by seasonal and commodity prices, specifically a major fall in wool prices, low beef prices, increasing prime-lamb prices and relatively stable grain prices during 1995-96; Webster and Hall (2000).

⁵⁷ Hassell and Associates Pty. Ltd. (2000).

⁵⁸ Webster and Hall (2000).

⁵⁹ Anderson, B. (2000), Minutes of Evidence, 21 June 2000.

⁶⁰ Livingston, H. (2000), Minutes of Evidence, 18 May 2000; and also Clark, A. and I. (2000), Written Submissions, OJD 040; Shea, R. (2000), Minutes of Evidence, 14 June 2000 and Lawson, D. (2000), Gippsland Director, Australian Beef Association, Minutes of Evidence, 7 August 2000.

⁶¹ Balderstone, E. (2000), Minutes of Evidence, 17 May 2000.

⁶² NSW Ovine Johne's Disease Advisory Committee (2000), p. B10.

NSW Ovine Johne's Disease Advisory Committee (2000), p. B18.

⁶³ NSW Ovine Johne's Disease Advisory Committee (2000), p. B10.

NSW Ovine Johne's Disease Advisory Committee (2000), p. B18.

⁶⁴ Millar, H. (2000), Acting Chief Veterinary Officer, Department of Natural Resources and Environment, personal communication, 11 August 2000.

⁶⁵ NSW Ovine Johne's Disease Advisory Committee (2000), p. B16.

⁶⁶ International Wool Secretariat (1996), p. 12.

⁶⁷ White, F. J. (2000), Executive Officer, Livestock Saleyards Association of Victoria, Minutes of Evidence, 24 July 2000.

⁶⁸ Australian Bureau of Agriculture and Resource Economics (1997).

⁶⁹ Various submissions and personal communications identified specific losses - for example, Murphy, R. (2000), Written Submissions, OJD 007, Lade, A. (2000), Written Submissions, OJD 093 and Freeman, D. (2000), farm manager, personal communication, 13 June 2000.

⁷⁰ This study used data from NSW. Assumptions used in the study are:

2% mortalities giving cost of $59 per 100 sheep with higher losses in more severely impacted flocks;

losses in sale price of $2.75 per sheep from infected property, with higher amounts allowed for studs; and

rate of spread leading to 8,000 infected flocks by 2036, based on New Zealand rate and limited to temperate areas - this is critical to calculations and also unknown.

A slow rate of spread compared with that which is now known to have occurred; International Wool Secretariat (1996).

⁷¹ This study used NSW data and the following methodology - case studies of properties with infected flocks using farm financial records, interview and researchers' assessment of a range of farm enterprises to make projections of the reduction in income from several approaches to management of OJD compared with `do nothing'; Sackett and Holmes (1997).

⁷² This study used data from Victoria and the following assumption - costs were taken to be:

cost of purchase of interim stock net of sale price;

estimated cost of purchasing replacement sheep;

income forgone in wool and sheep sales net of sale price of infected flock;

facilities to handle replacement enterprise net of salvage value; and

cost of running replacement enterprise net of income from replacement enterprise; Patterson (1998).

⁷³ Prowse (2000), p. 38.

⁷⁴ Black, R. P. R. (2000), Sheep and Goat Compensation Advisory Committee, Minutes of Evidence, 7 August 2000.

⁷⁵ Oliver, G. (2000), National President Pole Dorset Association, personal communication, 20 July 2000.

⁷⁶ Lade, A. (2000), Written Submissions, OJD 093.

⁷⁷ For example, Lade, A. (2000), Written Submissions, OJD 093 and Fisher, P. (2000), Written Submissions, OJD 049.

⁷⁸ Richardson, J. and J. (2000), Written Submissions, OJD 102.

⁷⁹ Bowman, P. and H. (2000) Written Submissions, OJD 010.

⁸⁰ Counsell (1999); and also Visard, A. (2000), Mackinnon Project, University of Melbourne, Minutes of Evidence, 24 July 2000.

⁸¹ Vickers, b. (2000), farmer, Carcoar, NSW, personal communication, 3 July 2000.

⁸² Counsell (1999).

⁸³ Tobin, R. and F. (2000), Written Submissions, OJD 063.

⁸⁴ Smith, J. (2000), Victorian Stock Agents Association, Minutes of Evidence, 10 July 2000.

⁸⁵ For example, Webb Ware, J. (2000), personal communication, 13 June 2000 and Morrison, A. (2000), farmer, personal communication, 4 July 2000.

⁸⁶ Morrison, A. (2000), farmer, personal communication, 4 July 2000.

⁸⁷ Sackett and Holmes (1997).

⁸⁸ Wood, P. (2000), Research and Development Manager, CSL Ltd, Minutes of Evidence, 24 July 2000.

⁸⁹ For example, Juste (1997).

⁹⁰ Brett (1998), p. x.

⁹¹ Wood, I. (2000), Secretary OJD Action Group, Minutes of Evidence, 24 July 2000.

⁹² Juste and Casel (1993).

⁹³ Brett (1998), p. 22.

⁹⁴ Australian Bureau of Agriculture and Resource Economics (1997), p. 30.

⁹⁵ For example, National Ovine Johne's Disease Control and Evaluation Program (2000); and also Allworth, A. (2000), National OJD Operations Co-ordinator, personal communication, 7 June 2000.

⁹⁶ Australian Bureau of Agriculture and Resource Economics (1997).

⁹⁷ International Wool Secretariat (1996).

⁹⁸ This assumes that spread of OJD will be no more extensive than in the region where OJD is endemic in NSW and will not occur in driest areas.

⁹⁹ Denholm, Ottaway, Cornish and Merton (1997), p. 177.

¹⁰⁰ International Wool Secretariat (1996).

¹⁰¹ Australian Bureau of Agriculture and Resource Economics (1997).

¹⁰² Hassell and Associates Pty Ltd (2000).

¹⁰³ Clancy (2000).

¹⁰⁴ Australian Bureau of Agriculture and Resource Economics (1997).

¹⁰⁵ Black, R. P. R. (2000), Sheep and Goat Compensation Advisory Committee, Minutes of Evidence, 7 August 2000.

¹⁰⁶ Hassell and Associates Pty Ltd (2000).

¹⁰⁷ Patterson (1998).

¹⁰⁸ For example, Egan and Malcolm (2000).

¹⁰⁹ Australian Animal Health Council Ltd (2000a)

¹¹⁰ Australian Bureau of Agriculture and Resource Economics (1997); Egan and Malcolm (2000).

¹¹¹ Schnurrenberger, Sharman and Wise (1987). p. 15.

¹¹² Australian Animal Health Council Ltd (2000b).

¹¹³ NSW Ovine Johne's Disease Advisory Committee (2000), p. B5.

¹¹⁴ NSW Ovine Johne's Disease Advisory Committee (2000), p. B14.

¹¹⁵ Martin, H. (2000), Minutes of Evidence, 18 May 2000; and also Marriott, J. (2000), Rural Financial Consultant, Minutes of Evidence, 7 August 2000.

¹¹⁶ Pemberton, D. (2000), Veterinarian, Minutes of Evidence, 24 July 2000.

¹¹⁷ NSW Ovine Johne's Disease Advisory Committee (2000), p. B3.

¹¹⁸ Prowse (2000), p. 35.

¹¹⁹ Prowse (2000), p. 35.

¹²⁰ Smith, J. (2000), Victorian Stock Agents Association, Minutes of Evidence, 10 July 2000.

¹²¹ NSW Ovine Johne's Disease Advisory Committee (2000), p. B10.

¹²² NSW Ovine Johne's Disease Advisory Committee (2000), p. B18.

¹²³ Black, R. P. R. (2000), Minutes of Evidence, 7 August 2000, p. 435.

¹²⁴ Black, R. P. R. (2000), Minutes of Evidence, 7 August 2000, p. 431.

¹²⁵ "The Treasure's advances ... are in fact loans ... which incur interest and have to be paid back."; Hamilton, K. G. (2000), Minutes of Evidence, 5 April 2000, p2.

¹²⁶ NSW Ovine Johne's Disease Advisory Committee (2000), p. B 5-6, B34.

¹²⁷ For example, Murphy, R. (2000), Minutes of Evidence,17 May 2000.

¹²⁸ Livingston, H. (2000), Minutes of Evidence, 18 May 2000.

¹²⁹ For example, Livingston, H. (2000), Minutes of Evidence, 18 May 2000.

¹³⁰ Lloyd, C. R. (2000), Minutes of Evidence, 17 May 2000; and also Reid, B. (2000), Minutes of Evidence, 17 May 2000.

¹³¹ Fox, J. (2000), General Manager, Rural Finance Corporation, personal communication, 20 October 2000.

¹³² Fox, J. (2000), General Manager, Rural Finance Corporation, personal communication, 20 October 2000.

¹³³ Department of Natural Resources and Environment (2000).

¹³⁴ Senate Regional and Rural Affairs Reference Committee (1998), p. 44.

¹³⁵ Senate Regional and Rural Affairs Reference Committee (1998), p. 44.

¹³⁶ Centrelink (2000).

¹³⁷ Senate Regional and Rural Affairs Reference Committee (1998), p. 44.

¹³⁸ Robbins (2000), p. 7.

¹³⁹ Robbins, (2000), p. 7.