Rural Communities and Changing Farm Business Structures

Rural Communities and Changing Farm Business Structures

An Assessment of the Socio-Economic Impacts

A report for the Rural Industries

Research and Development Corporation

by Matthew Tonts, Darren Halpin, John Collins and Alan Black

December 2003

RIRDC Publication No 03/126

RIRDC Project No ECU12A

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© 2003 Rural Industries Research and Development Corporation. All rights reserved. ISBN 0 642 58692 6 ISSN 1440-6845 Rural Communities and Changing Farm Business Structures Publication No. 03/126 Project No. ECU12A The views expressed and the conclusions reached in this publication are those of the author and not necessarily those of persons consulted. RIRDC shall not be responsible in any way whatsoever to any person who relies in whole or in part on the contents of this report. This publication is copyright. However, RIRDC encourages wide dissemination of its research, providing the Corporation is clearly acknowledged. For any other enquiries concerning reproduction, contact the Publications Manager on phone 02 6272 3186.

Principal Researchers Professor Alan Black Centre for Social Research Edith Cowan University Joondalup WA 6027 Phone: 08 96304 5844 Fax: 08 96304 5866 Email: [email protected] Website: http://www.ecu.edu.au Dr Darren Halpin Centre for Social Research Edith Cowan University Joondalup WA 6027 Phone: 08 96304 5640 Fax: 08 96304 5866 Email: [email protected]

Dr Matthew Tonts School of Earth and Geographical Sciences The University of Western Australia Crawley WA 6009 Phone: 08 9380 7392 Fax: 08 9380 1054 Email: [email protected] Mr John Collins School of Earth and Geographical Sciences The University of Western Australia Crawley WA 6009 Phone: 08 9380 2697 Fax: 08 9380 1054 Email: [email protected]

In submitting this report, the researchers have agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details Rural Industries Research and Development Corporation Level 1, AMA House 42 Macquarie Street BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: 02 6272 4539 Fax: 02 6272 5877 Email: [email protected] Website: http://www.rirdc.gov.au Published in December 2003 Printed on environmentally friendly paper by Canprint

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Foreword Rural communities are currently experiencing major economic, social and demographic change. The changes occurring in farm business structures are one element of this. While family farming is still the most common form of agriculture, vertical coordination and integration are increasing the level of direct corporate involvement in agriculture, mainly in the form of contract farming and, to a lesser extent, corporately owned farms. An increase in contract farming and corporate farms has the potential to transform the social and economic structures of rural communities.

This report examines the socio-economic impacts of changing farm business structures in five case study communities. It highlights the positive and negative impacts of changing farm business structures, and makes a number of recommendations about how to maximise the benefits and minimise the potential problems. One of the key conclusions of the report is that family farming is likely to remain the dominant form of farm business throughout most of Australia. It also points out that corporate and contract farming have very different impacts depending on the location, scale of operation, and ethics of the firms involved.

This project was funded from RIRDC Core Funds which are provided by the Australian Government.

This report is an addition to RIRDC’s diverse range of over 1000 research publications. It forms part of our Human Capital, Communications and Information Systems R&D program, which aims to enhance human capital and facilitate innovation in rural industries and communities.

Most of our publications are available for viewing, downloading or purchasing online through our website:

downloads at www.rirdc.gov.au/fullreports/index.htm

purchases at www.rirdc.gov.au/eshop

Simon Hearn Managing Director Rural Industries Research and Development Corporation

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Acknowledgments This study would not have been possible without the generous assistance of many people. The authors would particularly like to thank all of those people that participated in our survey or in the many interviews, conversations and emails that provided invaluable information for this project.

Amanda Davies (University of New England) completed the research in Queensland and collected the background demographic and economic data. Cheryl McKinnon entered the survey data into SPSS and conducted some of the preliminary analysis.

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Contents FOREWORD iii

ACKNOWLEDGEMENTS iv

EXECUTIVE SUMMARY vii

1 INTRODUCTION............................................................................................................ 1

1.1. Background to the Project .......................................................................................... 1 1.2. Objectives................................................................................................................... 2 1.3. Research Methods ...................................................................................................... 2 1.4. Structure of the Report ............................................................................................... 5

2 CHANGING FARM BUSINESS STRUCTURES: A REVIEW OF THE ISSUES... 7

2.1. Changing Farm Business Structures .......................................................................... 7 2.2. International Research on the Impacts of Changing Farm Business Structures ........ 8 2.3. Research in Australia ................................................................................................. 9 2.4. Conclusion................................................................................................................ 10

3 FARM AND COMMUNITY STRUCTURES IN THE CASE STUDY LOCALITIES ......................................................................................................................... 12

3.1. Population Changes in the Case Study Localities.................................................... 12 3.2. Structure of the Labour Force and Local Economy ................................................. 13 3.3. Farm Ownership and Operation ............................................................................... 16 3.4. Property Size and Tenure ......................................................................................... 17 3.5. Farm Production and Value of Output ..................................................................... 19 3.6. Contract Farming and Corporate Farming in the Case Study Localities ................. 24 3.7. Conclusion................................................................................................................ 25

4 THE IMPACTS OF CONTRACT FARMING ........................................................... 27

4.1. Contract Farming Arrangements.............................................................................. 27 4.2. The Issue of Subsumption and Control .................................................................... 30 4.3. Financial Benefits of Contracting for Farmers......................................................... 34 4.4. Financial Risks Associated with Contract Farming ................................................. 37 4.5. Issues for Regional Development ............................................................................ 44 4.6. Conclusion................................................................................................................ 45

5 THE IMPACTS OF CORPORATE FARMING ........................................................ 47

5.1. The Ownership and Management Structures of Corporate Farms........................... 47 5.2. Reasons for the Corporate Ownership of Farms ...................................................... 50 5.3. Employment ............................................................................................................. 50 5.4. Local Economic Linkages and Impacts ................................................................... 54 5.5. Implications for Services and Infrastructure ............................................................ 61 5.6. Social Interaction and Integration ............................................................................ 63 5.7. Conclusion................................................................................................................ 64

6 CONCLUSION............................................................................................................... 66

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6.1. The Structure of Agriculture .................................................................................... 66 6.2. The Impacts of Contract Farming ............................................................................ 67 6.3. The Impacts of Corporate Farming .......................................................................... 68 6.4. Recommendations .................................................................................................... 69

APPENDIX: SURVEY QUESTIONNAIRE……………………………………………….71

REFERENCES ....................................................................................................................... 77

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Executive Summary This report examines the socio-economic impacts of changing farm business structures on rural communities. In particular, it considers the implications of growing corporate involvement in agriculture, either through the direct ownership of properties or through contracting arrangements with family operators. Family farming is still the dominant form of business structure in the case study localities, which conforms to national farm ownership patterns. However, many farmers in these localities are engaged in contracts with other firms to deliver, process or market a commodity. The nature of these contracts vary considerably, though most of them include specifications about price and quality. Some contracts also include specifications about farm management practices. For some farmers, contracts provide a range of benefits, including security of farm income and access to technology and farm advice. For contracting firms, the benefits include control over quality, the ability to plan for farmer payments in advance, and security of supply for processing facilities.

Contracting arrangements

There are, however, cases where contracting arrangements are unsuccessful, and contribute to significant hardship for both farm families and rural communities. One of the major risks facing farmers is that a contracting firm may go out of business and be unable to meet all or part of its financial obligations under the terms of the contract. A second risk is that contracting firms may restructure their business and cease processing, packaging or marketing certain commodities. Farmers growing these commodities can face a difficult process of farm business adjustment. A third risk is that farmers in some sectors might face a degree of price manipulation by contracting firms, particularly those with monopoly or duopoly power. The findings of this research suggest that there is a need for many farmers to be made more aware of the implications of contracts for their farm business strategy, and how contracts fit into the overall planning and management of the property. This includes ensuring a clear understanding of the terms of the contract and, in particular, their obligations. There may also be scope for farmers to form organisations that negotiate with contracting firms on a collective basis to ensure outcomes that are financially and socially acceptable.

Corporate farms

This research suggests that corporate farms have the potential to deliver a range of social and economic benefits to rural communities. Corporate farms that have some form of processing co-located with the property deliver the greatest benefit in terms of economic activity and employment at the local level. By contrast, corporate farms that do not engage in such processing are likely to contribute less to local communities in terms of jobs and economic activity than do family farms of equivalent size. Many of the benefits of corporate farms are not necessarily local. Many firms purchase inputs and services from outside local economies. Furthermore, some of the larger corporate farms internalise key services (such as accounting and financial services) and do not use local businesses. If the corporate headquarters are distant from the community where the farm is located, this leakage of activity outside of local economies reduces the indirect benefits of corporate farms to rural

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communities. Nevertheless, in cases where downstream processing does occur within the locality, the net benefits to that locality are still likely to be positive.

Corporate farms often require careful local and regional planning. One of the main infrastructure needs is adequate transport infrastructure, since a number of corporate farms are associated with intense road use. Other core requirements include waste management planning, irrigation services and careful land use planning to avoid conflicts over noise and odour. The provision of housing infrastructure is an important issue for policy makers, especially in areas where corporate farms are expanding, or where they have a large casual or seasonal labour force. An expansion of the population, temporary or otherwise, as a result of increasing corporate farming activities also places demands on basic services, such as health care, education and welfare services.

In general terms, corporate farms do form an important part of the rural communities in which they are located. In addition to contributing to the local economy, they or their employees often participate in local social organisations and institutions. Many corporate farms also donate substantial sums to local schools, sporting clubs and other organisations. There are, however, a number of cases where corporate farming has had negative impacts such as those noted above.

Recommendations

This research has identified a number of issues that need to be given consideration by policy-makers and industry if the benefits of corporate and contract farming are to be maximised and the negative impacts minimised:

1. There is a need for greater information and education to be made available to farmers about contracts. This should include education and information on:

i) The full implications of contracts, including the obligations of the farmer, the contracting firm and any other parties named in the contract. ii) Strategies for negotiating the terms of a contract, particularly in relation to commodity prices. iii) Strategies for minimising the financial risks associated with contracts.

2. Contracting firms should accept an obligation to ensure that contracts are transparent. Contracts should adequately protect the interests of both parties, but be as simple as possible and written in plain English.

3. Further research should be undertaken on the organisational models farmers might establish for collectively negotiating contracts with processing or marketing organisations. This research should consider:

i) The legal and administrative structures that these organisations might take (e.g. cooperative, investor owned firm, association). ii) The advantages and disadvantages of these models. iii) The implications of such organisations for contracting firms, regional economies and farmer-industry relations.

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4. Local and State Government agencies must continue to liaise with corporate farms in order to plan effectively for the infrastructure and service needs of the farm, its employees and their families.

5. The planning undertaken by local and State governments needs to consider the flow-on economic impacts of corporate farms in order to plan for the service and infrastructure needs of the entire population of a locality or region. This will require detailed input-output analysis of the flow-on economic and employment impacts of existing or proposed firms.

6. The employment impacts of corporate farms on local labour markets need to be kept in view. Particular attention should be given to:

i) Ensuring that the labour needs of corporate farms, particularly the demand for skilled labour, can be met locally where possible. If appropriate, local employment training programs should try to address these needs. ii) Encouraging companies to hire a less transitory workforce, rather than a

casualised labour. If a casual workforce does emerge, then the impact of this on workers, families and communities should be monitored by relevant State and Commonwealth government agencies.

7. This research has focused on intensive and broadacre farming. Levels of corporate farm ownership are also high in some parts of the extensive pastoral industry. There is a need to consider the economic and social issues associated with corporate pastoralism.

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1 Introduction This report examines the impacts of changing farm business structures on rural communities in Australia. In particular, the report considers the implications of growing corporate involvement in agriculture, either through the ownership of farms or through contracting arrangements with family operators. While family farms still dominate Australian agriculture, increasing corporate involvement in farming has become an important issue in a number of sectors and regions. This report aims to provide government agencies, policy-makers, planners, industry organisations, and rural communities with insights into the issues associated with changing farm business structures. It considers the positive and negative implications of these changes for local and regional economies, labour markets, infrastructure and services, and local and regional governance. It also provides a series of recommendations that seek to maximise the positive benefits and minimise the negative socio-economic impacts associated with changing farm business structures. This chapter outlines the background to the project, the objectives of the study, and the research methods. It concludes by providing an overview of the remainder of the report.

1.1. Background to the Project

Over recent years, there has been increasing interest in Australia about the future of farming. Throughout its history, farming in Australia has been predominantly a family enterprise. Indeed, research by Wright and Kaine (1997) suggest that over 94 per cent of farms are family owned and operated. There is, however, also evidence to suggest a growing corporate involvement in Australian agriculture (Martin 1996; Burch et al. 1998; Gray and Lawrence 2001). In a number of sectors, such as beef and viticulture, corporately owned farms have become increasingly common and in some regions dominate both land use and agricultural output. There is also considerable corporate involvement in other parts of the commodity chain that has a direct impact on family farms. Many farmers now engage in production contracts with corporate processors, exporters or supermarkets to provide particular commodities, usually with clear price and quality specifications.

Despite the increasing importance of both corporate farms and contract farming in Australia, there has been very little detailed research on the economic and social impacts of either type of business structure on rural communities (Black et al. 2000). While the economic and social links between traditional family farms and rural communities are well established (see, for example, Smailes 1979), very little is known about how corporate farms and contract farming affect local economic activity, local employment patterns, service and infrastructure use, and forms of social interaction. While some commentators suggest that corporate farms and contract farming can have negative impacts on family farms and rural communities, others argue that there may be clear benefits associated with these shifts in the structure of agriculture. These debates are taken up in greater detail in Chapter 2.

The absence of Australian research on the social and economic impact of changing farm business structures makes it difficult to assess the needs of those rural communities that have already been affected or which are likely to be affected by such changes in farm business structures. Being able to assess and address these needs is important for local governments, regional development organisations, policy makers, and industry bodies. In the United

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States and Canada, research on the impacts of changing farm business structures has been used to assist these stakeholders to make informed decisions about agricultural extension and education, service provision, infrastructure development, land-use planning, regional investment and employment strategies, and agricultural policy (see, for example, Wimberley et al. 1986; Ahearn et al. 1988; Swanson 1988). A workshop conducted by the Principal Investigators with policy-makers in 2001 indicated that research on the impact of changing farm business structures in Australia will contribute to similar outcomes (Tonts and Black 2002).

1.2. Objectives

The overall aim of this research is to determine the impacts of various farm business structures on the economic and social well-being and sustainability of rural communities. The more specific objectives are:

1. To assess the relative contribution of different farm business structures to local and regional economic activity in five case study communities.

2. To assess the economic and social impacts of different farm business structures on these rural communities.

3. To determine the infrastructure and service needs associated with various farm business structures.

4. To provide a basis for informed decision-making on issues such as local and regional investment and development strategies, infrastructure and service provision, land-use planning, and agricultural policy.

1.3. Research Methods

The first stage of this research involved a detailed review of academic papers, published and unpublished reports, policy documents, and newspaper/magazine articles that were concerned with issues relating to farm business structures and rural communities. While the review concentrated on existing Australian literature, it also examined relevant material from overseas. This included literature from Europe and North America.

The empirical component of this project involved a detailed analysis of changing farm business structures in five case study localities. The case study localities were selected following a detailed analysis of ABS census and agriculture statistics, a review of relevant Commonwealth and State government documents (e.g. regional development reports, primary industries reports etc.), and discussions with government employees (including local governments), industry representatives and academic researchers. In identifying the case study areas, the following criteria were kept in mind:

• The localities had to provide insights into the changes affecting a range of agricultural sectors.

• Different farm business structures had to be present in the localities, such as a mixture of corporate and family owned farms,

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• A diverse range of agri-ecological zones and environmental conditions needed to be represented in the study.

Following the preliminary analysis, five case study areas were selected for detailed research (see Figure 1.1). These were:

Wambo and Dalby on the Darling Downs in Queensland. Dalby is a rural service centre that is surrounded by the Shire of Wambo. Farmers in the Shire of Wambo produce wheat, cotton, sunflowers, sorghum, millet, barley, sheep and pigs. There are also a number corporately owned beef feedlots and piggeries in the Shire.

Narrabri in the Namoi Valley of New South Wales. The Namoi Valley has a combination of corporate farms, contract farming and family farming in the cotton industry. The region also produces cereal crops, sheep and cattle. Narrabri has a population of around 7,300 and is the major service town in the region. Smaller settlements in the study area include Baan Baa, Wee Waa and Boggabri.

Leeton in the Riverina region of New South Wales. Leeton has a combination of corporate farms, contract farming, and traditional family farming in the crop and livestock, rice, horticulture and beef feedlotting sectors.

Circular Head in the north-west of Tasmania. The Circular Head region is a major producer of horticultural products, with many farmers involved in contracts to supply the corporately owned processing plants near the town of Smithton. The region is also a major producer of dairy products and beef cattle. In these latter two sectors, there is a combination of contract farming and traditional family farming.

Berri and Barmera in the in the Riverland region of South Australia. Agriculture in this area consists of a combination of corporate farms, contract farming and traditional family farms in the viticulture, horticulture and mixed crop and livestock sectors.

Detailed economic, demographic and social profiles of these case study localities were developed using a range of published and unpublished data. These sources included:

• Australian Bureau of Statistics Census of Population and Housing reports.

• Australian Bureau of Statistics Agricultural Census reports.

• Local government annual reports and planning strategies.

• Media reports on agriculture and rural development issues.

• Annual reports and business profiles of companies.

These data sources were used to examine the economic, social and demographic changes that have occurred within the case study localities over the past decade or so. Following an analysis of these changes, semi-structured interviews were conducted in the case study regions. These included interviews with representatives of government agencies, industry bodies, local government, small business, regional development organisations, farmers and processing firms. A total of 68 formal interviews were conducted over the course of this

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project. Most interviews lasted between 40 minutes and two hours, and attempted to elicit information on: the economic and social structure of farming; linkages within the commodity chain; the role of farming in local economies and social systems; local government issues; regional development issues; and community anxieties about changing farm business structures.

Fieldwork in the case study regions also presented opportunities to engage in numerous informal conversations with local residents on issues associated with agriculture, changing farm business structures and regional development. In addition to helping to identify some of the issues associated with changing farm business structures, these conversations provided invaluable insights into the attitudes of local residents.

The semi-structured and informal interviews were followed by a postal survey of farmers in each of the case study regions. The questionnaire aimed to elicit information on:

• The financial structure of the farm business.

• The main commodities produced and the value of production.

• The nature of links with other components of the commodity chain.

• Local economic integration, including the source of farm inputs and services, the level of local spending on services and inputs, and the use of local downstream processing industries.

• The social organisation of the farm business, including demographic structure and education.

A copy of the questionnaire is presented in Appendix A.

The questionnaire along with a reply paid envelope was sent to 300 farmers in each of the case study localities in February 2003. A follow-up reminder letter was sent four weeks later to non-respondents. Of the 1500 questionnaires sent out, 486 useable questionnaires were returned (an overall response rate of 33 per cent). Table 1.1 summarises the returns for each of the case study localities. The returned questionnaires were entered into SPSS for analysis.

Data from both the interviews and questionnaire were collected in confidence. In many cases, interviewees from private firms participated on the condition that any detailed financial or employee information provided was confidential. This means that some parts of the report are necessarily general. This is particularly the case in Chapters 4 and 5, which examine in some detail economic issues associated with contract farming and corporate farming.

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Table 1.1 Summary of the Survey Returns for the Case Study Localities

Questionnaires Sent

Undeliverable Surveys

Total Returns Response Rate (%)

Berri-Barmera 300 5 114 38.6 Circular Head 300 7 108 36.8 Leeton 300 3 84 28.3 Narrabri 300 9 80 27.5 Wambo-Dalby 300 2 100 33.6 TOTAL 1,500 26 486 33.0

Figure 1 The Case Study Localities

1.4. Structure of the Report

The remainder of this report is structured as follows:

Chapter Two provides a brief review of previous research on changing farm business structures and the implications for rural communities. It considers the nature of family, corporate and contract farming and how these interact with rural communities. Particular

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attention is given to the potential negative and positive impacts of corporate and contract farming on rural communities, and some of the related policy and planning issues.

Chapters Three, Four and Five provide an analysis of farm business structures in the case study areas, and the implications of these structures for rural communities. Chapter Three provides an overview of the economic and social characteristics of the localities, particularly in relation to agriculture. Chapter Four examines the issues associated with contract farming, and Chapter Five the issues associated with corporate farming.

Chapter Six presents a summary of the case studies, together with a series of key findings that could assist stakeholders to maximise the positive impacts and minimise the negative impacts of changing Australian farm business structures.

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2 Changing Farm Business Structures: A Review of the Issues

This chapter provides a review of key literature on the impacts of changing farm business structures on rural communities. Since much of the research on this topic has been conducted overseas, most of the material reviewed is drawn from the United States, Canada and Europe. However, changing farm business structures are becoming an increasingly important issue in Australia. This is reflected in a small but growing body of research that has considered the impacts of changing farm business structures on, inter alia, the natural environment, local and regional economies, and local social structures. The chapter begins by providing a brief summary of some of the changing characteristics of farm business structures. Following this, the chapter reviews some of the key international research on the impacts of changing farm business structures on rural areas, before considering some of the Australian research on this subject.

2.1. Changing Farm Business Structures

A growing body of literature in North America (e.g. Lobao 1990) and Australasia (e.g. Burch et al. 1998) suggests that agriculture is experiencing gradual a shift away from traditional family farming towards farm business structures that are more corporately oriented. In terms of definition, family farms are usually held to be farm businesses that are owned and operated by a family. The decisions about farm management are made within the family unit, which also provides the business with much of the necessary land, capital and labour (see Gasson and Errington 1993). This is the dominant type of farm business structure in Australia and represents about 94 per cent of all farms (Wright and Kaine 1997).

There are two main forms of corporate involvement in farming (Wallace 1985). The first, the corporate farm, is generally owned by a group of diverse shareholders, all of whom have the freedom to retain or dispose of their shares at any time. Furthermore, the resident farm manager may not necessarily be involved in strategic decision-making for the property, members of the farm workforce are employees of the corporation, and the prime concern of the farm is the generation of profits for shareholders. Corporate farms now represent about six per cent of all Australian farms (Wright and Kaine 1997). While this is a relatively low proportion, the scale of corporate farms makes them significant players in certain sectors of the Australian agricultural industry. For example, corporately owned farms constitute around 26 per cent of the total area of land devoted to broadacre or dairy farming, and account for about 19 per cent of total beef production (Martin 1996). Corporate farms have also become increasingly prominent in the cotton, viticulture, poultry and pig sectors.

The second form of corporate involvement in agriculture is contract farming. This involves contracts between (usually) family farms and other firms upstream or downstream in the food and fibre production chain. For example, farmers may contract with a processor to supply a particular quantity and quality of commodity at a specified time for a previously agreed price. The contracting company often supplies the farmer with some inputs and technical advice. This model of production is often described as ‘vertical coordination’. Contract farming is well established in the beef, fruit, vegetable, viticulture, chicken meat

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and hop industries. In the early 1990s, for example, it was estimated that around 80 per cent of hops, 85 per cent of chickens, and nearly 100 per cent of peas were grown under contract (Burch et al. 1992; Miller 1996).

Although family farming remains dominant within Australia, the Workshop on Future Farm Business Structures at the National Farm Finance Summit in 1996 suggested that the increasing application of modern industrial production, processing and marketing concepts to food and fibre commodity chains was likely to result in rising levels of direct corporate activity in the farm sector (Department of Primary Industries and Energy 1996). That Workshop predicted that direct corporate involvement in farming will gradually increase in those sectors where there are significant economies of scale in production, and where there are economic incentives to own and/or control both production and processing enterprises. This would mirror trends in the United States where both corporate farms and contract farming are already well established (Swanson 1988).

An important characteristic of both corporate farms and contract farming is that they tend to concentrate in those areas that are not only suitable for production, but also provide additional economic advantages. In the beef feedlot industry, for example, this has resulted in corporate producers concentrating their farms on the Darling Downs in Queensland and in the Riverina region of NSW where they can readily access large volumes of cattle feed, particularly sorghum, barley, oats and silage (Clark et al. 1992). In the case of contract farming, production tends to be concentrated in regions that offer a combination of suitable environmental conditions, appropriate infrastructure and services, and access to processors and/or markets. Thus, regions such as the Ord River Irrigation Area (WA), the Murrumbidgee Irrigation Area (NSW), the Riverland region in South Australia, north-west Tasmania, the Namoi Valley (NSW), and the Lockyer Valley (Qld) tend to be dominated by contract farming.

2.2. International Research on the Impacts of Changing Farm Business Structures

Despite the growth and spatial concentration of both corporate farms and contract farming, there has been very little detailed research in Australia on the economic and social impacts of growing corporate involvement in agriculture on rural communities and regions (Black et al. 2000). While the economic and social links between traditional family farms and rural communities are well established, very little is known about how corporate farms and contract farming affect local economic activity, local employment patterns, service and infrastructure use, and forms of social interaction.

These themes have been given considerable attention overseas, particularly in North America. In an influential pioneering study, Goldschmidt (1947) found significant differences in the economic and social well-being of two rural communities in the San Joaquin Valley in California. These two communities were similar in soil, climate and size of the population centre. Both produced high value crops under intensive irrigation. Dinuba, a community surrounded mainly by family farms averaging about 140 hectares in size, had more businesses, a greater volume of retail sales, a higher per capita income and a wider range of social, recreational, educational and cultural institutions than did Arvin, a community surrounded by farms that averaged more than 1200 hectares in size and were mainly owned by corporations. Broadly similar conclusions were drawn in several

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subsequent studies of corporate farming in the United States, although the literature did indicate that there were marked regional variations in the degree and form of the impact (Goldschmidt 1978; Rodefeld 1978; Lobao 1990; Barnes and Blevins 1992; Winson 1996). Some of the reasons that communities dominated by corporate farms performed worse than those surrounded by family farms include: a propensity for corporate farms to purchase farm inputs and services from outside the local community; a more seasonal, mobile and lower paid workforce on corporate farms than family farms; and a lower level of integration by corporate farms into the social life and institutions of rural communities (e.g. Davis 1980; Boehlje 1995).

While these negative impacts have received considerable attention in North America, there are a number of studies which suggest that corporate farms can bring important social and economic benefits to rural communities. These included increases in local employment, opportunities for downstream processing, the diversification of the local economic base, and a more cost-effective and competitive agricultural structure (Molnar and Beaulieu 1987). It has also been suggested that corporate farms can play an important research and development role, and can foster the rapid adoption of new technologies (Hoban et al. 1997).

There have likewise been a number of overseas studies assessing the social and economic impacts of contract farming on rural communities. Some of this research suggests that contract farming has the potential to bring significant benefits to rural regions, including greater income stability, increases in farm productivity and profitability, the establishment of downstream processing industries, and the development of new opportunities for farm service industries (Saxowsky and Saxowsky 1996). On the other hand, some commentators have suggested that contract farming can undermine the economic and social viability of rural communities (Winson 1986). For example, it has been argued that production inputs, extension services, and even financial services are often provided by the firm contracting to buy the commodity produced, rather than local businesses. This results in economic activity bypassing local communities. It has also been suggested that contracts can result in farmers receiving prices that are lower than those received through traditional markets. This has the potential to reduce both farm and community incomes.

2.3. Research in Australia

While the impact of changing farm business structures has not been given the same sort of attention in Australia as in other parts of the world, it has been considered by a small number of authors. The following provides a brief summary of the key research themes and findings in Australia:

• Considerable research has been conducted on the changing nature of the supply chains in Australia, and the growing involvement of corporate players. This research suggests that in Australia corporations have tended to avoid owning farms except in a small number of industries such as cotton and beef feedlotting (see Burch and Rickson 2001). This is largely because farming is seen as the most risky component of the supply chain (and is subject to droughts, pests, disease etc.)(Buttel 1996). By contrast, firms are increasingly engaging in direct contracts across a range of sectors. In addition, there is a growing level of vertical integration in food and fibre supply chains (Haughton and Browett 1995; Heilbron and Roberts 1995; Fraser 2003; Pritchard 1999).

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• One of the most significant issues raised in the Australian literature is the ‘subsumption’ family farms as part of the contracting process. This body of literature has noted the loss of control over management decisions by some farmers engaging in production contracts (see, for example, Rickson and Burch 1996; Fulton and Clark 1996; Lyons 1996 and Lockie 1997). According to Miller (1996), the strict terms of contracts often mean that farmers have little say in the daily operation of the farm, and can become little more than farm labour for the contracting firm.

• The environmental issues associated with corporate and contract farming have been discussed by a number of researchers. For example, Miller (1995) identifies links between contract farming and soil degradation in Tasmania. His research suggests that contract farming often leads to a short-term focus on production, rather than a longer term focus on environmental sustainability. Similar concerns have been raised by Burch et al. (1992). Other research has pointed to the environmental impacts of corporate feedlots. For example, Vanclay and Lawrence (1995) point out that a number of large corporate feedlots in New South Wales are major producers of effluent. Given the potential environmental ramifications of this, further research in this area would seem imperative.

Only a handful of Australian studies have considered the impacts of changing farm business structures on local communities (e.g. Lawrence 1987; McMichael and Lawrence 2001). However, these publications have not been based on detailed empirical investigation, and rely heavily on anecdotal evidence and speculation. While most of these papers suggest that growing corporate involvement in agriculture has a range of negative impacts (e.g. a more transient labour force; fewer jobs and less spending in rural communities; land use planning conflicts and infrastructure issues), there is a pressing need for research that provides detailed empirical evidence of the social and economic changes associated with changing farm business structures.

2.4. Conclusion

As this review illustrates, research efforts overseas, particularly in North America, point to a range of positive and negative impacts arising from changing farm business structures and the increasing incidence of contract arrangements between family farms and corporate entities further up the supply chain. Australian research has been successful in giving these concerns an Australian flavour and raising additional questions. Yet the absence of detailed empirical research has hindered the generation of authoritative findings. Perhaps even more significantly, the current Australian research provides a broad-brush approach which obscures extant divergences between localities or commodities. The current literature tends to be polarised, assessing direct corporate involvement in farming as either ‘good’ or ‘bad, which rules out more nuanced conclusions being generated. Further, this approach often precludes any discussion as to how negative trends may be managed and positive trends promoted.

Research is required which examines these overall changes as they manifest themselves in particular communities and localities. Further, research is needed that looks at variations across commodities. The research that is reported here adopts a case study approach, which includes a range of commodity areas, in order to say something more definitive about changing farm business structures and contract farming in Australia. It also provides some

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recommendations as to how the existing arrangements can be made to work better for various stakeholders.

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3 Farm and Community Structures in the Case Study Localities

This chapter provides an overview of the economic and social structure of agriculture in the case study localities. The key issues covered include the structure of the labour force, the ownership characteristics of farms, the types of commodities produced and the estimated gross value of production, and the role of corporate and contract farming in the case study localities. The data presented in this chapter are drawn from a range of sources, including the Australian Bureau of Statistics, the survey of farm businesses (see Chapter 1), interviews and previously published reports and other documents.

3.1. Population Changes in the Case Study Localities

Between the 1996 and 2001 censuses three of the case study localities experienced slow to moderate population growth (Table 3.1). The population statistics presented in that table include those people living in the major centre/town as well as surrounding agricultural areas. In Berri-Barmera (South Australia), the continuing expansion of viticulture and winemaking underpinned a 2.3 per cent increase in the population. Leeton (NSW) also experienced a steady rise in the population, linked largely to the town of Leeton’s significant role as a service centre, as well as the prosperity of the local rice, viticulture and beef feedlotting sectors. The Shire of Wambo and the town of Dalby (Queensland) experienced a small increase in population. Most of this growth was linked to Dalby’s growing role as a regional centre. Indeed, growth in Dalby masks a fall in the population of the largely agricultural Shire of Wambo. A combination of drought and poor returns, particularly in the grains and beef sectors, has contributed to the pattern of decline.

Table 3.1 Population Change in the Case Study Local Government Areas, 1996-2001

1996 2001 Absolute Change

% Change

Berri and Barmera 11,030 11,280 250 2.3 Circular Head 8,108 7,702 -406 -5.0 Leeton 11,031 11,469 438 3.9 Narrabri 14,101 13,817 -284 -2.0 Wambo and Dalby 14,722 14,833 111 0.8 (Source: ABS 2002)

Both Circular Head (Tasmania) and Narrabri (NSW) experienced population decreases between 1996 and 2001. The region around Circular Head tends to rely heavily on agriculture, particularly horticulture and beef grazing, both of which experienced relatively depressed conditions during the late 1990s. The outmigration of some farmers appears to have contributed directly to population decline. Similarly in Narrabri, depressed commodity

13

prices, drought and the withdrawal of some services contributed to a slight (2.0%) decline during the 1996-2001 intercensal period.

3.2. Structure of the Labour Force and Local Economy

The local economies of all of the case study localities are heavily dependent on the fortunes of agriculture. However, some of the towns in the area act as major service centres and have relatively diverse economic structures. Table 3.2 provides a summary of some of the key non-farming economic activities in each of the localities. The importance of agriculture is also reflected in the labour force statistics for the case study areas (Table 3.3).

Table 3.2 Key Non-Farming Economic Activities in the Case Study Localities

Locality Major Private Sector Activities Government Activities Berri-Barmera • Food packing and processing

• Transport • Beverages (inc wine & fruit

juice) • Light manufacturing • Retailing

• Health services • Primary and secondary education • Police and justice services • Miscellaneous government services

Circular Head • Retailing • Timber • Abattoir and meat processing • Food processing • Tourism

• Health services • Primary and secondary education • Miscellaneous government services

Leeton • Retailing • Abattoir and meat processing • Food packing and processing • Transport • Rice processing • Stock feeds • Light manufacturing • Irrigation and water management

• Health services • Primary and secondary education • TAFE • Miscellaneous government services • Agricultural education

Narrabri • Retailing • Cotton ginning and seed

production • Light manufacturing • Transport

• Health services • Primary and secondary education • TAFE • Research and development (cotton) • Miscellaneous government services

Wambo-Dalby • Retailing • Light manufacturing (esp.

agricultural implements) • Cotton ginning • Abattoir and meat processing

• Health services • Primary and secondary education (11

schools) • TAFE • Miscellaneous government services

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Table 3.3 Structure of the Labour Force in the Case Study Localities, 2001

Berri-

Barmera Circular

Head Leeton Narrabri Wambo-

Dalby Primary Industries 1,008 901 970 1,558 1,528 Mining 3 39 10 8 44 Manufacturing 808 718 793 420 573 Utilities 72 14 122 40 120 Construction 228 128 240 336 398 Wholesale Trade 270 209 327 348 370 Retail Trade 624 384 616 861 1,009 Hospitality Services 257 155 149 305 253 Transport & Storage 151 105 170 351 237 Communication Services 37 28 29 74 56 Finance & Insurance 84 27 73 82 115 Property & Business Services 240 119 301 466 387

Government Administration 138 67 168 173 251

Education 305 193 410 352 496 Health & Community Services 464 170 238 431 437

Cultural Services 50 18 37 40 58 Personal & Other Services 164 66 123 161 171 Non-classifiable 25 27 30 22 9 Not stated 72 32 112 116 143 TOTALS 5,000 3,400 4,918 6,144 6,655 (Source: ABS 2002)

The following provides a brief overview of the key economic and employment characteristics of the case study localities

Berri-Barmera

Berri-Barmera’s local economy is dominated by the horticulture and viticulture sectors, although mixed crop and livestock farming is an important industry in some parts of the region. The area’s total labour force was 5000 at the 2001 census, of which 1008, or 20.1 per cent were engaged in primary industries (Table 3.3). Processing agricultural commodities, particularly the production of wine and fruit products, are also important local industries. Major firms in this sector include Berri Ltd, one of Australia’s largest manufacturers of fruit juices and beverages, Berri Estates Wines, Angove’s Wines, and Angas Park (a packager and processor of dried fruits, especially apricots). Downstream processing of agricultural produce in the region is reflected in the 2001 census, with 16 per

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cent of the labour force employed in manufacturing. Other employment categories closely related to agriculture and food processing in Berri-Barmera include wholesaling (5.4%) and transport (3.0%). Other important employment sectors include retail trade (12.5%), health and community services (9.3%) and education (6.1%).

Circular Head

The Circular Head region is predominantly agricultural, with 26.5 per cent of the total labour force (3,400) employed in primary industries. The main service centre in the region is Smithton, which is the headquarters of the local government and provides a range of key State government services including health care, education, police and justice services and welfare services. Smithton is also an important retailing centre, and 11.3 per cent of the Shire’s labour force are employed in this sector.

One of the major employers in the region is the McCain Foods factory, which processes potatoes and other vegetables. There are also a number of firms producing dairy products in the Shire. The influence of food processing in the region is reflected in the Shire’s labour force, with more than 21 per cent of people employed in manufacturing, many of whom work in food processing. In the nearby town of Ulverstone, multinational food processor Simplot operates a potato processing plant that employs more than 300 people.

Leeton

The area around Leeton is dominated by irrigation agriculture, particularly in the rice and horticulture sectors. Beef cattle grazing and feedlotting are also important industries in the area. At the 2001 census, 19.7 per cent of the labour force was employed in agriculture (Table 3.3). The next most important employment sector was manufacturing, which accounted for 16.1 per cent of the labour force. Much of this manufacturing employment is in the food and agricultural commodities processing sector. Key firms include: Rice Growers Cooperative Limited (which sells rice under the Sunrice brand); Allgold/Greens Foods, producing cereals, popcorns and pasta; Berri Ltd., processing citrus juice; Coprice, which uses rice by-products to produce a variety of stock feeds and pet foods. Other firms in the region include, large abattoirs, stock feeds companies and wineries. Leeton is also an important regional service centre, with significant employment in retailing, education, health and community services and financial services.

Narrabri

Narrabri’s labour force is dominated by agriculture, with more than 25 per cent of the population employed in this sector. A total of 420 people were employed in manufacturing at the 2001 census, with many of these working in the cotton ginning industry. In addition to having many of the traditional regional centre functions, such as retailing, health care and education, Narrabri also plays an important research and development role in the cotton industry. The establishment of the Cooperative Research Centre for Sustainable Cotton Production in 1993 brought together over 50 researchers from a range of government agencies and institutions including NSW Agriculture, CSIRO, Queensland Department of Primary Industries, University of New England, Sydney University and the Cotton Research and Development Corporation. Tourism also plays a role, with Narrabri close to the Pilliga forest, Yarrie Lake and the Australia Telescope. Not included in these employment figures

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is the sizeable seasonal itinerant workforce that is involved in cotton chipping and ginning operations.

Wambo-Dalby

Dalby is a major service centre for an agricultural region based on cotton, beef grazing, feedlotting, and grain production. More than 20 per cent of the region’s labour force is employed in agriculture (see Table 3.3). Downstream processing is not as important in the region as in some of the other case study areas, although cotton ginning is a significant industry. In the late 1990s, the town lost a major employer in Connor Shea Napier, which manufactured agricultural implements and machinery. The company was purchased by John Shearer Ltd and relocated to South Australia. As in most of the other case study localities, retailing, education, and other government services are all important employment sectors.

3.3. Farm Ownership and Operation

The vast majority of surveyed farms in all of the case study localities were owned by individuals, partnerships or family companies, rather than by other forms of proprietary company. The most common form of ownership was a partnership, with more than 53 per cent of farms in all case study localities reporting this type of ownership structure. Other forms of proprietary company (including corporately owned farms) were relatively few in all of the case study areas, although there was some slight variation between places. In Berri-Barmera 6.1 per cent of farms were some form of non-family company, with five of these being corporately owned wineries. In all of the other case study localities, non-family company owned farms represented less than five per cent of all farms. This is in line with recent figures produced by the Australian Bureau of Statistics (2003) suggesting that more than 95 per cent of farms are family owned.

Table 3.4 Ownership Structures of Surveyed Farms (per cent)

Berri-Barmera

Circular Head

Leeton Narrabri Wambo-Dalby

Sole operator 26.3 23.1 13.1 13.8 15.0 Partnership 53.6 58.3 55.4 65.0 63.0 Family owned proprietary company

14.0 13.9 27.4 17.5 20.0

Other form of proprietary company

6.1 4.6 3.6 1.2 1.0

No response 0.0 0.0 1.2 2.5 1.0

TOTAL 100 100 100 100.0 100.0

N. 114 108 84 80 100

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The family based structure of farms was also reflected in the management characteristics of the surveyed farms (Table 3.5). In all of the case study areas, except Wambo-Dalby, owner-operators managed more than 80 per cent of all surveyed farms. In Wambo-Dalby, farm managers operated 20 per cent of farms. While the reason for this is not entirely clear, a representative of Meat and Livestock Australia suggested that some of the larger and more profitable beef and cotton properties in the area had employed expert managers to help maximise efficiency and output. Some of these 20 per cent included beef feedlot operations in both the family and corporate sectors. Farm managers were relatively prominent in Circular Head, particularly amongst farmers who nominated dairying as their key activity (see Table 3.5). Again, it may be that some farms have appointed managers to improve the productivity and profitability of the property. In Berri-Barmera, farm managers tended to be employed by corporately owned vineyards.

Table 3.5 Management Structures on Surveyed Farms (per cent)

Berri-Barmera

Circular Head


Owner and operator 86.0 83.3 94.0 91.2 63.0 Owner but not operator 2.6 5.6 1.2 5.0 15.0 Farm manager 8.8 11.1 4.8 1.2 20.0 Family member working on the property

2.6 0.0 0.0 1.2 1.0

No response 0.0 0.0 0.0 1.2 1.0

TOTAL 100 100 100 100 100

N. 114 108 84 80 100

3.4. Property Size and Tenure

Property sizes in the case study localities tend to reflect a combination of environmental conditions, ownership structures and the commodities under production. In the irrigation areas of Berri-Barmera and Leeton the average size of farms is smaller than in the broadacre crop and livestock areas of Wambo and Narrabri. Intensive horticulture and dairying in the Circular Head region is also reflected in relatively small farm sizes. In most of the case study localities corporately owned properties tended to be larger than family owned properties. For example, in Circular Head the corporately owned Woolnorth estate occupies 22,000 hectares1, while the average size of surveyed farms was less than 250ha. In the Berri-Barmera area, the Nanya vineyard, owned by Angove’s Pty Ltd, is 480 hectares and the Banrock Station vineyard, owned by BRL Hardy, is 600 hectares. By contrast, 79 per cent of surveyed properties in Berri-Barmera were less than 250 hectares in size. In Wambo, one of the corporately owned properties in the area controls 634,000 hectares as part of a

1 This property has been excluded from the analysis in Table 3.6 and 3.7.

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beef grazing and feedlot business. This compares with an average farm size of less than 1500 hectares2.

Table 3.7 displays the area of land use by tenure type for surveyed farms. Most properties were freehold land, although in some areas, notably in Wambo, large areas of land were leased from other landowners. There are no significant differences between corporate farms and family operations in relation to land tenure. However, it is important to recognise that some of the larger corporate properties are not included in Table 3.7, since these were not always captured in the survey. The relatively high proportion of crown land under production in Dalby and Narrabri reflects the dominant for of land tenure available to primary producers in the Western Division of NSW and South West Queensland.

Table 3.6 Property Sizes of Surveyed Farms in the Case Study Localities (per cent)

Berri-Barmera

Circular Head


0 - 250 ha 79.0 56.5 52.4 12.5 23.0 251 – 500 16.6 25.9 17.9 6.2 17.0 501 – 1500 4.4 9.3 23.8 36.2 48.0 1501 – 5000 0.0 4.6 3.6 37.5 9.0 5001+ 0.0 1.8 2.4 3.8 3.0 No response 0.0 1.8 0.0 3.8 6.0 TOTAL 100 100 100 100 100 N. 114 108 84 80 100

Table 3.7 Area of Land Use (ha) by Tenure Type

Berri-Barmera

Circular Head


Freehold 44,807 53,635 84,623 112,057 127,182 Leased from another landowner

2,339 1,225 3,662 5,561 77,825

Crown leasehold 145 0 30 5,569 20,855 Sharefarming 360 1,026 1,581 792 700 Other forms of tenure 500 1,111 3,000 2,211 1,274 TOTAL 48,151 56,997 92,896 126,190 227,836

2 This property has been excluded from the analysis in Table 3.6 and 3.7.

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3.5. Farm Production and Value of Output

Berri-Barmera

In the Berri-Barmera region, 31 (27.2%) of surveyed farmers reported that grape growing for processing was their most important activity (Table 3.8). The majority of these grapes are used in the region’s wine industry, being sold to major wineries including Berri Estates, Angove’s, Renmano and, until recently, Norman’s Wines. A number of farmers reported various horticultural activities as the most important commodity, including growing oranges for processing (20.2%), stone fruit for processing (15.8%) and oranges for fresh produce (13.2%). A similar mix of commodities was generally reported as the second most important products by dollar value. One of the most common mixes of commodities was grape growing with citrus or stone fruit production, since this provided farmers with a degree of diversity and financial stability. Of the seven corporately owned farms captured in the survey, five were in the wine sector and two in the horticulture sector. While the horticulture businesses did exhibit some diversity, growing a combination of citrus and stone fruit, the vineyards tended to rely solely on grapes for processing. However, it is important to stress that these operations usually have other diversification strategies, such as those based on tourism, accommodation, and ‘cellar door’ retailing.

Table 3.8 Most Important Commodities by Dollar Value for Farms Surveyed in Berri-Barmera

Ranked Number 1 by Farmers


N. % N. % Grape growing for processing

31 27.2 21 18.4

Orange growing for processing

23 20.2 25 21.2

Stone fruit growing for processing

18 15.8 17 14.9

Orange growing for fresh produce

15 13.2 16 14.0

Stone fruit growing for fresh produce

11 9.6 9 7.9

Vegetable growing for processing

6 5.3 4 3.5

Vegetable growing for fresh produce

4 3.5 6 5.3

Other citrus for fresh produce or processing

2 1.8 6 5.3

Beef cattle grazing 2 1.8 0 0.0 Grain growing 0 0.0 1 0.9 Kiwi fruit for processing 0 0.0 1 0.9 No response 2 0.0 8 7.0 TOTAL 114 100 114 100

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Circular Head

In the Circular Head region, the two most important activities by dollar value amongst the surveyed farmers were beef cattle grazing and diary farming (Table 3.9). However, the region also has an important horticulture sector. Major commodities include potatoes, carrots, cauliflower, onions and broccoli. The Circular Head region has also experienced considerable diversification in the farm sector over recent years, with the emergence of commodities such as poppies, deer, kiwi fruit and pyrethrum. There are also a small number of farmers engaged in sheep and grain production.

Table 3.9 Most Important Commodities by Dollar Value for Farms Surveyed in Circular Head



N. % N. % Beef cattle grazing 37 34.3 34 31.5 Dairy cattle farming 25 23.1 19 17.6 Potato growing for processing

16 14.8 13 12.0

Potato growing for fresh produce

11 10.2 10 9.3

Vegetable growing for processing

10 9.3 8 7.4

Pig farming 3 2.8 0 0.0 Sheep farming 2 1.8 2 1.8 Apiary 1 0.9 0 0.0 Agistment 1 0.9 0 0.0 Vegetable growing for fresh produce

0 0.0 6 5.6

Poppies 0 0.0 3 2.8 Grain growing 0 0.0 2 1.8 Deer farming 0 0.0 1 0.9 No response 2 1.8 10 9.3 TOTAL 108 100 108 100

Leeton

Irrigation has a direct influence on the types of commodities produced in the Leeton area (see Table 3.10). A total of 33 (39.3%) survey respondents indicated that rice production was their most important commodity by dollar value. Other key commodities in the shire include beef cattle grazing, grain production, grapes for processing and a range of

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horticultural products. Corporate involvement in agriculture in the Leeton region is also concentrated in the beef, rice and horticulture sectors. Of the three corporate farms captured in the survey, two were in the horticulture sector and one in the beef sector. Leeton is also the base for one of Australia’s largest feedlots, Rockdale Beef, which has a capacity of 53,000 head of cattle. Other significant corporate players in the area include Parle Foods in the horticulture sector and AgReserves Australia Limited, which produces corn, rice, grains and horticultural products on 46,000 hectares of land in that locality. As in other parts of Australia, Leeton’s agricultural base has begun to diversify in recent years, with a number of producers becoming involved in the production of commodities such as hybrid seeds, deer and alpacas.

Table 3.10 Most Important Commodities by Dollar Value for Farms Surveyed in Leeton



N. % N. % Rice growing 33 39.3 2 2.4 Beef cattle grazing 11 13.1 3 3.6 Oranges for processing 9 10.7 9 10.7 Grain growing 8 9.5 34 40.5 Grape growing for processing

8 9.5 0 0.0

Oranges for fresh produce

8 9.5 8 9.5

Sheep farming 5 5.6 11 13.1 Pig farming 1 1.2 0 0.0 Beef cattle feedlotting 0 0.0 3 3.6 Potato growing for fresh produce

0 0.0 2 2.4

Stone fruit growing for fresh produce

0 0.0 2 2.4

Legumes 0 0.0 1 1.2 Hybrid seed collection 0 0.0 1 1.2 No response 1 1.2 8 9.5 TOTAL 84 100 84 100

Narrabri

Access to irrigation is the principal factor shaping commodity production patterns in Narrabri. The production of agricultural crops, but mostly cotton, occurs on the irrigated areas in the Namoi Valley, within which the township of Narrabri sits. Extensive animal

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production, both cattle and sheep, takes place on the balance of the valley, albeit often in combination with some other form of dryland farming. While cotton is not the largest financial contributor to the majority of surveyed farms (it is predominantly for only 15% of the surveyed farms), it is the largest contributor on most of the farms that do produce cotton. There is corporate involvement in cotton, grain and beef sectors. There is little diversification outside of the traditional broadacre agricultural pursuits. Auscott is the only cotton producing corporate in Narrabri, but Milton Downs, a broadacre cropping property, and Boolcarrol Station, a beef property, both owned by the Twynam Pastoral Company based in Sydney, straddle the Narrbri Council border. The trend has been for some consolidation of family farms with water allocations in order to move into irrigated cotton production. However there has been no noticeable recent increase in corporate ownership of properties, just the exchange of existing corporate properties amongst corporate owners.

Table 3.11 Most Important Commodities by Dollar Value for Farms Surveyed in Narrabri



N. % N. % Beef cattle grazing 26 32.5 23 28.8 Grain growing 20 25.0 24 30.0 Sheep farming 15 18.8 7 8.8 Cotton growing 12 15.0 4 5.0 Pig farming 2 2.5 2 2.5 Stone fruit for fresh produce

2 2.5 2 2.5

Plant nurseries 1 1.2 1 1.2 Rice growing 1 1.2 0 0.0 Grape growing for processing

0 0.0 1 1.2

Horse farming 0 0.0 1 1.2 Agistment 0 0.0 1 1.2 No response 1 1.2 14 17.5 TOTAL 80 100.0 80 100.0

Wambo-Dalby

The agricultural economy of Wambo is dominated by beef cattle grazing (Table 3.12). A total of 36% of farmers indicated that this was the most important commodity in terms of value to their business, while 12% regarded it as the second most important commodity. The two next most important activities by value are grain and cotton production. A small number of farmers are involved in producing pigs, dairy cattle and cut flowers. The dominance of beef cattle grazing, grain production and cotton production is not surprising. The region is characterised by fertile volcanic soils and (generally) reliable rainfall. While drought has reduced production in recent years, the region remains one of the most important in terms of both the volume and value of production. The area also has three corporate feedlots and eight

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family owned feedlots. The location of these is linked directly not only to the availability of cattle, but also to grain produced by local farmers (especially wheat, sorghum and oats). The Aronui feedlot, for example, uses around 30,000 tonnes of grain annually.

Table 3.12 Most Important Commodities by Dollar Value in Wambo-Dalby



N. % N. % Beef cattle grazing 36 36.0 12 12.0 Grain growing 33 33.0 32 32.0 Cotton growing 20 20.0 11 11.0 Dairy cattle farming 4 4.0 1 1.0 Pig farming 3 3.0 0 0.0 Cut flowers and seeds 2 2.0 1 1.0 Sheep farming 1 1.0 0 0.0 Oranges for processing 1 1.0 0 0.0 Plant nursery 0 0.0 2 2.0 Vegetables for fresh produce

0 0.0 3 3.0

Beef cattle feedlotting 0 0.0 4 4.0 Horse farming 0 0.0 3 3.0 Legumes 0 0.0 1 1.0 No response 0 0.0 30 30.0 TOTAL 100 100.0 100 100.0

Estimated Gross Value of Agricultural Output per Farm in the Case Study Areas

Table 3.13 provides an overview of the estimated gross annual value of output per farm for the past five years in the case study localities. The value of output per farm varied both within and between localities. Proportionately more farms in Wambo than in the other localities reported an annual output exceeding $500,000 in value. Overall, farmers in the beef grazing, grains and cotton sectors tended to report higher gross incomes than those in the horticulture, dairy and grape industries. One of the most important observations was the estimated value of output for corporate farms. Of the 17 corporate operators captured in this survey, all estimated their average output per year for the past five years to be $400,000 or more, with six claiming to have output of more than $1 million per year.

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Table 3.13 Estimated Gross Value of Output Per Year for the Past Five Years ($/yr) (per cent of surveyed properties)

Berri-Barmera

Circular Head


$0 – 20,000 4.4 7.4 6.0 13.8 4.0 $20,001 – 100,000 19.3 21.3 29.8 20.0 20.0 $100,001 – 250,000 28.1 34.3 23.8 23.8 16.0 $250,001 – 500,000 21.9 9.3 13.1 11.2 14.0 $500,001 – 750,000 11.4 6.5 8.3 6.2 19.0 $750,000+ 4.4 10.2 4.8 15.0 20.0 No response 10.5 11.1 14.3 10.0 19.0 TOTAL 100 100 100 100.0 100.0 N. 114 108 84 80 100

3.6. Contract Farming and Corporate Farming in the Case Study Localities

Over recent years, contract farming has become an increasingly important component of agriculture in all of the case study areas. This study identified three key types of contracts that farmers tend to engage in:

• Contracts to deliver a particular unprocessed commodity to other people and companies. For example, grape growers may have contracts with wineries to deliver unprocessed grapes. Using another example, a potato grower may have a contract to deliver unprocessed potatoes to a firm that manufactures potato chips. Once the commodities have been delivered, the farmer has no direct downstream involvement with the contracting firm, nor does the farmer retain any ownership of the produce. Of 486 surveyed farmers, 316 (65 per cent) were engaged in this type of contract. While this is relatively high, it is largely because the case study areas were deliberately selected on the basis of contract (or corporate) farming being present.

• Contracts to process raw commodities on the behalf of farmers. For example, farmers may be involved in contracts with a cotton gin to process cotton, or with a company to extract juice from oranges. The key characteristic of this contract is that farmers retain ownership of the processed commodity and can then on-sell it in the marketplace. Of the 486 surveyed farmers, 116 (23.8 per cent) had entered into this type of contract.

• Contracts to market a particular commodity. For example, farmers may be engaged with a company to market either unprocessed or processed cotton, cattle, grain or wool. A total of 153 (31.5 per cent) were involved in these types of contracts.

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While there are many other types of contracts (and variations on the above) that farmers can enter into, these represented the most common types. Obviously, it is also possible for farmers to enter into more than one type of contract. For example, part of a crop may be sold under a marketing contract and another part under a delivery contract. Similarly, farmers may be involved in both processing and marketing contracts for the same commodity. For example, there may be a contract to extract juice from oranges and a separate contract to market the juice extract. A common example in cotton production was for a grower to enter into a contract for the supply, processing and marketing of cotton as part of the one contract arrangement. Of course, it is also possible for farmers not to engage in formal contracts at all.

Chapter 4 provides a detailed overview of the nature of contract farming and the associated issues for farmers, rural communities and regions.

While the number of corporate farms in the case study localities is relatively small, they often make a disproportionate contribution to land use, total output, value of production and employment in their respective regions. Corporate farms operate in all of the case study areas and produce a range of commodities. Virtually all of the corporate farms are linked to other components of the commodity chain, particularly processing or packaging. Key corporate farming activities include:

• Vineyards and wineries in Berri-Barmera and the Leeton areas.

• Beef-grazing properties in the Circular Head and Wambo-Dalby regions.

• Beef feedlots in Leeton and Wambo-Dalby.

• Cotton farms in the Narrabri area

• Integrated grain, rice, corn and horticulture production in Leeton

• Intensive piggeries in Wambo-Dalby.

• Horticulture production in Berri-Barmera, Leeton and Circular Head.

The structure and impacts of corporate farming are discussed in Chapter 5.

3.7. Conclusion

This chapter, utilising a combination of ABS and original survey data, has provided an overview of the economic and social structure of agriculture in the case study localities. These localities share a number of things in common. In all localities, agriculture is of central economic importance, with primary production accounting for 20% or above of local employment. Considerable employment also flowed from manufacturing activities associated with the processing of agricultural commodities. Another common feature was that corporate farms were numerically small but highly significant in terms of production levels and farm size. These findings were consistent with ABS statistics and previous Australian research.

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Partnerships were the dominant means of farm ownership in all case study localities (all exceeded 50%). Similarly, in all case study areas, over 80% of all farms were owner operated. Wambo-Dalby was the only exception, where 63% of farms were owner operated. This somewhat unexpected result may reflect the high degree of technical competence required to maximise productivity (and hence profitability) in the feedlot industry that dominates the region.

Reflecting the case study selection strategy, each locality tended to be dominated by different patterns of commodity production. This variation was reflected in estimated value of production from farms in these localities. Farmers in the beef grazing, grains and cotton sectors tended to report higher gross incomes than those in the horticulture, dairy and grape industries.

The results of the survey illustrate that most farmers in each case study locality are involved in some form of contracting or another. The vast majority is involved in contracts to supply raw commodities to processors and/or retailers. Less popular, but still used by a large minority of farmers, were contracts to process commodities and to market commodities (unprocessed or processed). The next chapter will examine precisely what impact the role of contract farming has on farms, communities and regional economies.

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4 The Impacts of Contract Farming This chapter examines the impacts of contract farming on farm families, rural communities and regions. It pays particular attention to economic and social impacts, arguing that contracts can have both positive and negative outcomes in rural areas. The chapter begins by examining the types of contracts that farmers engage in, the implications of contracts for farm management, and the financial benefits and risks associated with this type of business structure. The chapter also considers the wider impacts on contract farming on local economic and social structures.

4.1. Contract Farming Arrangements

Contracts are an important part of farming life in all of the case study localities. It is, however, important to recognise that contracts can vary significantly in style and content. In the case of delivery contracts, for example, some contracts will be very specific about the delivery time, price and quality, while others are much less specific. As pointed out in the previous chapter, most farmers in the case study localities engage in some form of contracting. This is, in part, because the case study localities were selected on the basis of there being contract or corporate farming present The most common form is the delivery contract. In all of the case study localities more than 50 per cent of farmers had contracts to deliver raw commodities to other people or companies (Table 4.1). This type of contracting was most common in Berri-Barmera, where the grape and fruit industries tend to be dominated by delivery contracts (see also Haughton and Browett 1995; Pritchard 1999; Fraser 2003). In Circular Head, Leeton and Wambo-Dalby more than 60 per cent of farmers were involved in delivery contracts. These contracts tended to be in the beef, horticulture and grains sectors. Narrrabri had the lowest proportion of farmers with delivery contracts (53%), although the area tended to have higher proportions of farmers engaged in other forms of contract (see Table 4.2 and 4.3).

Table 4.1 Percentage of Surveyed Farmers Who Enter into Contracts to Deliver Raw Commodities to Other People/Companies (per cent)

Contract No Contract

No Response

Total N.

Berri-Barmera 77.2 20.2 2.6 100 114 Circular Head 62.0 31.5 6.5 100 108 Leeton 65.1 34.9 0.0 100 84 Narrabri 53.8 43.7 2.5 100 80 Wambo-Dalby 63.0 36.0 1.0 100 100

Table 4.2 shows the number of surveyed farmers that have contracts with other companies or people to process raw commodities on their behalf. The key characteristic of this type of contract is that the farmer retains control of the commodity after processing. These types of contract are particularly common in the cotton industry, where farmers often establish an

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agreement with a cotton gin to process raw cotton. The farmer usually retains control of the ginned cotton and is then able to on-sell the commodity. Similar contracts sometimes exist in the viticulture sector, where grapes are supplied to a winery for processing, yet the farmer retains control of the wine. Other sectors where these types of contracts are sometimes used include fruit (particularly contracts for juicing), grain (contracts for seed cleaning and processing), and dairying (for the manufacture of niche dairy products, such as cheese). In the case study localities, this type of contract is most common in Narrabri where 31.2 per cent of farmers are involved in such agreements. Many of these are in the cotton industry. In Berri-Barmera, 27.2 per cent of farmers have entered into processing contracts (mainly in the wine industry). Less than 24 per cent of farmers in the other case study localities are involved in processing contracts.

Table 4.2 Percentage of Surveyed Farmers Who Enter into Contracts to Process Raw Commodities on their Behalf (per cent)


No Response

Total N.


In the localities covered by the present study, marketing contracts tend to be most common in the grain, rice, cotton and beef grazing sectors and, to a large extent, this is reflected in Table 4.3. Those localities with high production in these commodity sectors also have the highest proportion of farmers with marketing contracts. Thus, Leeton (33.3%), Narrabri (38.7%) and Wambo-Dalby (49%) have relatively large numbers of farmers with marketing contracts.

Table 4.3 Percentage of Surveyed Farmers Who Enter into Contracts to Market Raw Commodities (per cent)


No Response

Total N.


Table 4.4 illustrates the relationship between the commodity that farmers ranked as the most important by dollar value and the various types of contracts that producers have entered into.

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It is clear that certain types of contracting tend to be concentrated into particular commodity sectors. Grain growing, for example, is often linked to delivery contracts, with 63.9% of grain producers in the present study engaged in this type of agreement. Many of these growers are located in Wambo, and interviews suggest that the contracts are often with beef feedlots, piggeries or domestic processing firms. Grain for export is still generally sold through organisations such as AWB Ltd. In other sectors, delivery contracts tend to be most common in the beef, grape, orange and rice sectors. Processing contracts tend to occur in the grape and orange sectors, where the commodity is processed under contract and then the farmer often on-sells the product. For both grape growers and orange producers, this often involves having a small proportion of their product returned as wine or other beverages. Marketing contracts tend to be concentrated in the cotton, grain and rice sectors.

Table 4.4 Cross Tabulation Between Number of Farmers with Contracts and the Most Important Commodity by Dollar Value (per cent)

Commodity Ranked No. 1 by Dollar Value

Total Number of Farmers

for each commodity

Farmers with Delivery

Contracts

Farmers with Processing Contracts

Farmers with Marketing Contracts

Beef cattle grazing 112 36 8 19 Cotton growing 32 30 31 28 Cut flowers and seeds 2 2 0 0 Dairy cattle farming 29 18 9 13 Grain growing 61 39 12 38 Grape growing for processing 39 35 17 2 Orange growing for fresh produce

23 18

0 1

Orange growing for processing 33 25 12 2 Other citrus for fresh produce or processing

2 2

0 0

Pig farming 9 6 3 2 Plant nurseries 1 1 0 0 Potato growing for fresh produce 11 5 0 3 Potato growing for processing 16 16 4 12 Rice growing 34 32 9 28 Sheep farming 23 16 2 2 Stone fruit for fresh produce 13 8 3 3 Stone fruit growing for processing

18 12

4 0

Vegetable growing for fresh produce

14 10

0 0

Vegetable growing for processing 6 5 2 0 TOTAL 478 316 116 153

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4.2. The Issue of Subsumption and Control

Much of the literature of contract farming in Australia raises the issue of farm subsumption (see Chapter 2). One of the concerns of some researchers, policy-makers and industry groups is that, under contracting arrangements, farmers may cede control of the key farm management decisions to contracting firms. These include decisions about farming methods, land use, and inputs. This issue was also raised in a number of the interviews conducted as part of this study. One of the most frequently mentioned issues was that, under certain contracts, farmers might become little more than labourers on their own properties. By contrast, some contracting firms argued that by specifying how farms should be managed they are able to control quality and maintain stability of supply. In the wine industry, for example, Fraser (2003) suggests that wineries use a number of strategies to influence farmer behaviour:

1. A winery can monitor grower effort. This is usually done by visiting the vineyard and discussing issues such as sharing information about vineyard management, crop development and harvesting.

2. A winery can exert more direct influence over the vineyard by specifying input use, such as the form of rootstock used or the choice of irrigation technology. The obvious outcome here is that as the winery takes more control of production, the less responsibility the grower has for the final quality of the grapes.

3. A winery can measure the quality of the grapes supplied.

4. A winery can make payment contingent on the price of wine in the bottle.

Similar strategies are used in the potato sector. The following are a number of extracts of clauses from a contract established between a processing firm and a grower in Tasmania:

1. The grower will plant at the time specified herein with seed purchased with company approval from the seed grower to produce the following quantity, area and variety of potatoes from the specified area only…

2. The grower will grow the crop of potatoes on land approved by a representative of the Company and free from weeds or other foreign plants and where considered necessary by the Company and will spray the crop for weed, fungus and pest control.

3. The company may at any time prior to or during harvest submit samples of the Grower’s crop to an independent laboratory for chemical residue analysis.

4. The grower will permit the Company representative to inspect the land and potatoes at any reasonable time.

5. The grower will comply with directions given by the representative of the Company as to the time and manner of cultivating, sowing, weeding, spraying, irrigating, harvesting and delivery of the crops.

Other sectors also use a range of strategies for ensuring quality and maintaining stability of supply. These strategies are often seen as a mechanism for reducing farmer control over the

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property. Table 4.5 reports on the degree of control that contracts exert over farm management amongst the surveyed farmers. In all of the case study communities less than 20 per cent of farmers claimed that the contracts specify in detail how the farm is managed. Nevertheless, in some communities, particularly Circular Head, Leeton and Berri-Barmera, a number of farmers did suggest that the contracts had a direct impact on how they manage their properties. This is likely to be linked to the sectors that dominate these particular regions. Much of the recent research on farm subsumption tends to suggest that horticulture and viticulture are two of the industries in which contracts often specify in some detail how properties should be managed. These sectors are prominent in Berri-Barmera, Circular Head and Leeton. The proportion of farmers who claimed that contracts impacted directly on farm management was much lower in Narrabri and Wambo-Dalby, where cotton, beef grazing and grain production tend to be the dominant agricultural sectors.

Table 4.5 Degree of Control that Contracts Exert Over Farm Management (per cent)

Berri-Barmera

Circular Head


Contracts specify in detail how the farm is managed

16.7 19.4 17.9 5.0 8.0

Contracts do not specify in detail how the farm is managed

46.5 48.2 47.6 45.0 55.0

Not relevant 23.6 21.3 21.5 36.2 25.0 No response 13.2 11.1 13.1 13.8 12.0 TOTAL 100 100 100 100 100 N. 114 108 84 80 100

There is sometimes a suggestion in the literature on changing farming structures that contracts often specify the inputs into agriculture. Often this is linked to contracting firms’ attempts to maintain quality and uniformity in the product. However, in the case of some of the larger vertically integrated agribusiness firms it is also a mechanism to ensure that their own products are used in the production process. For example, delivery contracts for some grains specify that certain brands of fertiliser and herbicide must be used. This not only ensures a degree of standardisation in the production process but also helps to maximise profits for the firm producing the specified chemicals. Indeed, in some cases particular plant breeds can only be treated using particular herbicides and insecticides, thereby ensuring that farmers have no alternatives but to use a particular product (see Burch and Rickson 2001). According to Gray and Lawrence (2001), this ‘technological treadmill’ provides the potential for corporations to substantially influence the nature of farming.

For the farmers surveyed for this research, more than 20 per cent in Berri-Barmera, Circular Head and Leeton had contracts that specified which farm inputs should be used. As outlined above, this was most common amongst farmers in the horticulture and viticulture sectors, who often have delivery, processing or marketing contracts that specify in some detail how farms should operate. In Wambo-Dalby and Narrabri, less than 15 per cent of farmers had contracts that prescribe which inputs farmers should use.

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Table 4.6 Degree to Which Contracts Prescribe Farm Inputs (per cent)

Berri-Barmera

Circular Head


Contracts specify farm inputs 22.8 20.4 20.2 15.0 11.0

Contracts do not specify farm inputs 44.7 47.2 47.6 36.3 51.0

Not relevant 18.5 23.1 21.5 36.2 25.0 No response 14.0 9.3 10.7 12.5 13.0 TOTAL 100 100 100 100 100 N. 114 108 84 80 100

While a number of farmers indicated that contracts did specify farm inputs and how the property should be managed, very few farmers actually felt that they had experienced a loss of control over the farm as a result of contracts (Table 4.7)(see also Lockie 1997). Indeed, only 34 farmers (7 per cent) of the 486 respondents were in this position. There are a number of possible reasons for this. Firstly, ultimately farmers make decisions about whether they enter into contracts or not. This decision, and the negotiation of contracts, remains an important component of farm management. Secondly, farmers tend not to have a single contract covering all commodities on the farm. It is conceivable that farmers will have a number of different contracts (possibly with different firms), or only part of their total production under contract.

Table 4.7 Perceived Loss of Control Over Farm Management by Farmers as a Result of Contracts (per cent)

Berri-Barmera

Circular Head


Contracts reduce my control over farm management

8.8 11.1 8.3 2.5 3.0

Contracts do not reduce my control over farm management

64.9 56.5 41.7 47.5 59.0

Not relevant 18.4 23.2 21.5 36.3 23.0 No response 7.9 9.3 16.7 12.5 15.0 TOTAL 100 100 100 100.0 100.0 N. 114 108 84 80 100

Table 4.8 Perceived Loss of Control Over Farm Management as a Result of Contracts by Commodity and Place

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Berri-

Barmera Circular

Head Leeton Narrabri Wambo-

Dalby TOTAL

Beef cattle grazing 1 1 1 0 0 2

Cotton growing 0 0 0 1 0 1 Dairy farming 0 0 0 0 1 1 Grain growing 0 0 0 0 2 2 Grapes for processing 4 0 0 0 0 4

Oranges for processing 4 2 3 0 0 9

Oranges for fresh produce 1 2 0 0 0 3

Potatoes for processing 0 5 0 0 0 5

Rice 0 0 1 0 0 1 Sheep farming 0 0 0 1 0 1 Vegetables for processing

0 2 2 0 4

TOTAL 10 12 7 2 3 34

Given the small number of farmers in the total sample that do feel a loss of control over the farm as a result of contracts, it is almost impossible to determine if there is a relationship with a particular sector or region. In terms of sector, 13 farmers that produce oranges as their main commodity felt a loss of control as a result of contracts. The next most commonly reported sectors were potatoes for processing, grapes for processing, and vegetables for processing. While this is clearly too small a sample to draw definitive conclusions, it does suggest that some farmers in the horticulture and viticulture sectors might be at some risk of feeling a loss of control as a result of certain types of contract. Indeed, a vegetable farmer in Tasmania pointed out that processing firms control this type of agriculture. These firms provide farm plans that include details on the cultivar best suited to the paddock where the crop will be grown, fertiliser scheduling, weed control strategies, irrigation advice, and the temporal coordination of planting and harvesting of the crop.

There was a view amongst some farmers in Circular Head and Leeton that contracts have the potential to create over-dependency on the contracting firms. One of the main concerns was that contracts and farm plans of the type outlined above contribute to a general deskilling within the industry and an inability to manage properties without the assistance of contracting firms. Furthermore, it was suggested that, because private firms rather than government agencies are undertaking an increasing amount of research and development, the only way farmers can access new technologies is to engage in contracts. One of the perceived problems was that this dependence tends to make farmers price takers rather than price makers. A farmer in the Circular Head region described his perception of loss of control over the farm by producing a linear diagram (reproduced in Figure 4.1) illustrating the potato supply chain. He suggested that the most profitable parts of the chain were

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research and development, processing and retailing, with growing the potato probably most risky and low paying. Furthermore, encroachment by the contracting firm into farm management and planning meant that ‘the only thing left to do is drive the tractor as all other decisions are made by the company field staff’.

Figure 4.1 A Farmer’s Diagram of the Potato Commodity Chain

There is a risk that contract farming will lead to a reduction of farmers’ control over farm management and planning. However, evidence from both the survey and interviews suggests that this has not yet become a significant issue for the majority of landholders. While acknowledging that contracts have resulted in the transfer of some management decisions to contracting firms, there is a belief amongst farmers that they remain ‘their own boss’. There is also a belief amongst some farmers that contracts provided a range of financial benefits that outweigh any loss of control.

4.3. Financial Benefits of Contracting for Farmers

While much of the literature on contract farming tends to point to the financial problems that farmers face when entering into contracts, a number of growers who participated in this study stressed the financial benefits. One of the most important benefits is the capacity of contracts to provide a degree of price stability. Most delivery contracts, for example, establish a set price for the commodity prior to it being delivered. For example, in the cotton industry processors will establish one of two main types of contract: i) an Area Contract, which involves the purchase of all cotton that comes from a set area of the farm for a set price; ii) Call Pool, which is a basic price (above the United States price as Australian cotton is better quality), plus the current futures market price, and then adjusted for quality after ginning. These can be established up to 2.5 years ahead of actual production. Assuming that growers produce around 3.5 bales per acre, most growers will forward contract about 2 bales at the start of the season (contingent on price). They will then sell the balance through the year as prices become clearer. Very few growers hold on to the entire crop until the end of the year. Only a small number of farmers market the crop themselves as cotton deteriorates in storage. This means that it is unlikely to improve in value if stored for a long period of time.

Some farmers in the potato and vegetable sector in Tasmania also noted the financial stability that contracts are able to provide. One of the main advantages was that vegetable

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growing contracts provide a base price or ‘floor price’ in the market. This was regarded as particularly important in a small market, such as Tasmania’s. Contracts were also important when negotiating finance for infrastructure or land purchases. A number of farmers suggested that forward production contract is one of the supporting securities sought by financial institutions. Other benefits included:

• The reduction of boom and bust cycles in the vegetable sector.

• Payments to growers are made regularly and on time.

• No need to market commodities to mainland Australia. Producing fresh vegetables for the mainland market is considered to be difficult, largely as a result of transport costs, competition from mainland producers and changing consumer tastes.

In the case of vegetable and potato growers under contract to McCain in Smithton, farmers could sell vegetables grown in excess of the contract to the firm without any price penalty. Thus, the contract is, in effect, for a minimum quantity, although there is technically no contractual obligation for McCain to take the excess. There is, however, sometimes a penalty if farmers are not able to produce the quantity specified in the contract, although in exceptional circumstances (such as drought or disease) this penalty may be waived. Unlike McCain, the Simplot processing factory at Ulverstone would only buy excess vegetables by negotiation. Simplot provides a pre-harvest payment of about 20% to the growers in November (harvest starts late January to early February).

The financial benefits of contracts were not only raised in relation to vegetables and cotton. In a number of other sectors, similar themes emerged. These include:

• The role of contracts in providing a stable cash flow.

• The ability to forward plan activities, particularly major purchases, as a result of the regular income associated with having a contract.

• The benefit of having a contract as a form of security when applying for credit from a financial institution.

The survey of farmers suggested that, in a number of the case study localities, farmers saw contracts as an important way of managing financial risk. In Berri-Barmera, Narrabri and Wambo more than 45 per cent of farmers felt that contracts helped them to manage financial risk. Indeed, in Wambo a total of 57 per cent of farmers felt that contracts enabled them to do this. Forward contracts in the grain, beef and cotton sectors played an important role here. In Circular Head and Leeton the number of growers who believed that contracts helped them to manage risk was somewhat lower than in other localities. While the explanation for this is not entirely clear, both of these localities have a high proportion of growers in the horticulture sector. Over recent years, there have been a number of disputes about contracts in these sectors, which may have undermined confidence in contracts. These issues are given greater attention in section 4.4.

Table 4.9 Degree to Which Contracts Help Farmers to Manage Financial Risk (per cent)

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Berri-Barmera

Circular Head


Contracts help to manage financial risk 47.4 29.6 28.6 45.0 57.0

Contracts do not help to manage financial risk 20.2 38.0 39.3 10.0 12.0

Not relevant 18.4 23.2 21.4 36.2 25.0 No response 14.0 9.2 10.7 8.8 6.0 TOTAL 100 100 100 100.0 100.0 N. 114 108 84 80 100

Access to Technologies and Farm Advice

In some cases, contracts provide farmers with not only a degree of price stability but also access to technology and farm advice. While some growers have expressed a concern that this can erode farmer control of the property (see section 4.2), others believe that there are distinct financial advantages. In the potato industry, for example, farmers have access to discounted seed bred by the processing companies, as well as free agronomic advice. According to the processing companies, rather than reducing farmer control of the property, this advice is designed to improve overall yield. Providing seed stock and agronomic advice is not restricted to the potato sector, and was a key feature of the horticulture, viticulture and cotton sectors. While it is less common in the beef and dairy sectors, there were a number of cases where farmers were provided with advice on some matters, particularly in relation to farm management and planning.

One of the characteristics of the beef sector (as in most other sectors) is the emphasis on food quality. Thus, contracting firms often use their contracts as a way of maximising food quality and safety. This, in turn, helps to maximise returns to growers. A good example is the Tasmania Feedlot, which has recently obtained State Government approval to increase capacity for their Launceston operation from 9,000 to 16,000 head of cattle. The Japanese company Aeon owns both the Tasmania Feedlot and the Jusco chain of supermarkets in Japan. Tasmania’s reputation for clean green products is well known in Japan, and the absence of growth hormones in the sector assists beef sales. Jusco demands a full paddock-to-plate trace-back system that will require contracted beef producers to become involved in the National Livestock Identification System for breeder stock. From January 2004, only cattle that are tagged under this system will be accepted under contract by the feedlot. To facilitate this development, the company has paid a $3 per head premium for tagged livestock, which is expected to operate for two years. This has two potentially positive outcomes. Firstly, farmers will be able to secure contracts into the Japanese market and, secondly, there may be scope to further promote Tasmania’s image as a ‘clean and green’ producer of beef cattle. Contracts with Tasmania Feedlot that promote clean and safe foods are not restricted to cattle producers. The contracts that exist between grain growers and the Tasmania Feedlot stipulate that grain must be produced in accordance with the Cropcare quality assurance scheme. In return for complying with this scheme, the feedlot pays growers a premium price for the grain. Again, the positive benefits include increased

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earnings and the potential to market crops to other buyers as a clean, safe and high quality product. This has the potential to increase returns.

While some farmers regard access to new technologies and farm services as an important benefit of contract farming, some commentators argue that this actually constitutes a form of subsumption. Indeed, there is some evidence to suggest that access to these resources can very easily lead to a ‘technological dependence’ that erodes farmer autonomy (Gray and Lawrence, 2001). Some types of contracts do carry the risk of a loss of farmer autonomy and create a dependency relationship between farmer and corporation. Such hazards are discussed in more detail in the next section of this chapter. Hence, farmers need to be clear about the full, long-term implications of the contracts they enter into, while there is an overall responsibility for companies to present contracting and associated arrangements with a high degree of transparency.

4.4. Financial Risks Associated with Contract Farming

While contract farming has the potential to provide farmers with a number of financial benefits, there are also a number of risks. These include:

• The collapse of the firm issuing the contract.

• The restructuring of firms issuing contracts.

• Price manipulation by the contracting firm.

• Forward contracts that are lower than the eventual open market price.

• Reductions in demand for particular commodities.

Collapse of Contracting Firms

In a number of cases, farmers have been negatively affected by the financial collapse of contracting firms. This has the potential to leave farmers without an income for periods as long as 12 months or more. This in turn can have negative impacts on local businesses, services and labour markets.

In the Riverland of South Australia, the demise of Normans Wines in 2001 provides a good example of the financial impacts of the collapse of a company issuing contracts to growers. Normans Wines was a major producer of wine in South Australia and owned two wineries, one at Monash (near Berri) in the Riverland and one at Clarendon. The Monash winery processed around 22,000 tonnes of grapes annually and had contracts with 120 growers. Increasing competition in the wine industry contributed to falling profits (the company recorded a $10 million loss for the 1999/2000 financial year) and increasing debts, which were estimated to be around $20 million in 2000.

In June of 2001, Normans informed growers that it could not meet contracted payments. It offered most growers 20% of their contracted payments and claimed that the funds owed would be paid ‘in due course’. This raised widespread community concern, with 90 of the

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contracted growers holding a meeting in Berri to discuss the problems associated with the winery. The local newspaper, The Murray Pioneer, even questioned the point of having contracts, asking ‘is the supply contract for future vintages worth the paper it is written on’ (6/6/2001: 3). The newspaper pointed out that a failure by growers to meet the terms of contracts generally resulted in some sort of penalty, but when a company fails to meet the terms farmers generally have to accept the outcome.

While a number of other firms were interested in purchasing the company, most buyers demanded significant changes to the contracts Normans had established with growers. The growers, however, wanted the contracts to remain in place, since they had already commitment themselves to fulfilling the terms of these. Most of the potential buyers wanted to reduce the amount of contracted red wine grapes and increase white varieties. In addition, they wished to abolish the minimum floor prices established by Normans. Normans finally went into receivership in August 2001, with growers still owed amounts of between $20,000 and $400,000. Collectively growers were owned a total of $11 million. Despite having contracts with Normans these growers were unsecured creditors. As a result, proceeds from the sale of the winery (or its assets) would go first to secured creditors, such as the ANZ Bank, which was owed $34 million.

The collapse of Normans Wines had an immediate impact on local growers. With contracts to produce more than 20,000 tonnes of grapes, Normans’ growers had lost their market. Very few of these growers were given contracts by other wineries in the area, since these were already operating to maximum capacity. For most farmers this meant that they did not receive an income for the 2001 crop.

The stories of two farmers provide some insights into the hardship that can result from the collapse of contracting firms. Farmer A invested around $100,000 into his 13 acre property near Berri to improve productivity and meet the terms of the Normans contract. He was owed $30,000 from Normans. As a result of the lost income, he was forced to place his farm on the market. However, the problem facing this grower was that most vineyards are sold with the contracts as an essential component of the sale. Without a contract, vineyards can be quite difficult to sell. Consequently, the farmer had to negotiate an extension of his mortgage to enable him to deal with the financial circumstances created as a result of the collapse of Normans. Farmer B has a 20 acre property. Until 1999 he had four acres of apricots and the remainder planted to vines. In early 2001, this farmer was encouraged by Normans to remove the apricots and plant more vines, which he did. The apricots had given him a return of around $20,000 annually. 100% of his grape crop was contracted to Normans and, following the collapse of the company, he lost all sources of income. Furthermore, he had borrowed money to clear the apricots and establish new vines. In both of these cases, the contract with Normans wines had become a financial liability.

Agribusiness firm Tandou Ltd finally purchased the Normans winery in 2002. Tandou offered initial contracts to 28 growers, and did not expect the winery to be back to full production until 2006. Tandou also has its own vineyards, producing 1500 tonnes grapes annually. The former Normans winery thus offers Tandou an opportunity to vertically integrate its production and avoid contracting with other wineries.

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Corporate bankruptcies have also affected a number of other sectors in the Riverland of South Australia. In the fruit sector at least three firms have collapsed in recent years as a result of either increasing competition, rising debts or mismanagement.

• Simpson Packing, a major fruit processor in the Riverland was placed in administration in mid 2001 with debts of around $5 million. The company, which packages oranges and stone fruit owed contracted growers $500,000.

• The Riverland Fruit Cooperative (RFC) went into receivership in 2001 following a failed joint venture with a private firm to establish Sunnyland Fruit – a processing plant near Berri. The establishment of Sunnyland involved RFC building up a substantial debt and eventually this began to affect cash reserves. The company was placed in receivership in early 2001, with debts totalling $5.8 million. Growers were owed a total of $1.1 million (for fruit deliveries and in trading accounts). RFC assets were sold off and, again, unsecured creditors were still owed substantial sums.

• In 2002, Waikerie Products (also a processor of oranges and other fruits) went into receivership with unsecured creditors (mainly farmers) owed $2 million.

In response to the uncertainties created by the failure of contracting firms, a number of farmers have begun to examine cooperatives as an alternative model, largely as a means of marketing commodities. A number of marketing cooperatives already exist and there is a general belief that these help to increase farmers’ bargaining power and can protect growers from the vagaries of individual contracts. Under proposed cooperative arrangements in the horticulture sector, the contracts would be established between processing/packing firms and cooperatives, rather than individual growers. However, the extent to which this would minimise risk is not clear. Company failures will still affect contracted suppliers no matter how big or small.

There are a number of key conclusions that can be drawn from this study in relation to contracting firms:

• Farmers need to be aware not only of the benefits but also of the financial risks associated with entering into a contract with a processing or marketing firm. If the firm goes bankrupt, farmers may lose some or all of the payments owed to them, and may have difficulty finding an alternative outlet for their produce. If possible, farmers might consider adopting a hedging strategy that involves establishing contracts with more than one firm.

• The failure of major contracting firms has the potential to create significant financial hardship and turmoil in rural communities. In cases where large numbers of farmers and residents are affected by a collapse, it may be appropriate for governments to consider ‘exceptional circumstances’ funding for growers and, possibly, some form of assistance to rural communities. However, governments are generally unwilling to underwrite the consequences of corporate failure.

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Industry Restructuring

One of the issues that can affect contracted growers is the restructuring that occurs from time to time within contracting firms. Restructuring can result in the closure of factories, changes in the commodities being processed, a reduction in the total number of contracts on offer, or some other major change. Often restructuring is in response to changing market conditions, falling profitability, or changes in ownership. There are a number of cases of industry restructuring affecting contracted farmers. For example, in response to changing market demand and the need to maximise efficiency, Berri Ltd closed one of its factories in the Riverland. The factory had previously produced a range of fruit products, but in order to improve profits Berri decided to specialise in fruit juice operations. Contracts with growers in a number of sectors, such as apricots were not renewed. While the other processor of apricots in the region (Angas Park) thereafter took some of the fruit, it could not take all of the apricots that were being grown. However, even more serious than the problems facing apricot growers was the hardship facing peach farmers. Berri’s decision to move away from processing stone fruit left fifty peach growers without contracts. The problem facing these growers was the absence of another peach processing facility in the region.

The dilemma facing peach and apricot growers in the Riverland is one that frequently arises when companies restructure their operations. Farmers who had become accustomed to growing stone fruit under contract were forced to consider alternative commodities if they were to remain in the industry. In the case of the Riverland, many growers considered shifting from stone fruit into wine grapes. While wine grapes might have given the appearance of higher incomes per hectare, there was already excess capacity in this market as a result of the collapse of Normans Wines and the expansion of viticulture in the region. In cases where industrial restructuring changes the nature of the local agricultural economy, it is imperative that farmers consider carefully future production options. Indeed, there may even be a case for providing some farmers with assistance (either financial or in-kind) to adjust their operations to suit new regional economic realities. It should also be recognised that the restructuring of firms as a means of enhancing efficiency, productivity and profits is not unusual, and companies doing so are not usually engaging in a deliberate attempt to undermine local farming systems. In some cases, despite initial travail, restructuring may bring significant long-term benefits for local agriculture, including the emergence of new industries that are more profitable and socially sustainable in the long term. Like agricultural adjustment in general, this transition process needs to be monitored to ensure that any farm welfare issues are addressed if and when they emerge.

The literature on contract farming emphasises the risks to farmers and their lack of power vis-à-vis business. However, risk is also shared, in some instances, by ‘big’ business. A fall in cotton production as a result of the recent drought has contributed to excess capacity in a number of cotton gins in the Narrabri region. Proposed reductions in water allocations for cotton growers also have the potential to further reduce production. In sum, this has the potential to threaten the viability of the cotton gins in the immediate region. This illustrates the risks to capital of investment in infrastructure that relies on the supply from growers. It is for this reason that businesses, like Auscott are engaged in both cotton growing and processing. It is interesting that the ginning companies are integrated into cotton farming and processing - which may commentators such as Lawrence (1987) would argue is the most risky part - but not vertically into the mills in Asia that produce garments with the cotton.

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Price Manipulation

One of the most widely reported trends in the literature on contract farming is the way in which contracting firms can, in some cases, manipulate the prices received by growers (Burch et al. 1996; Welsh 1997). This tends to happen in regions where processing and other upstream industries are concentrated (usually a monopoly, duopoly or oligopoly). As part of this research, there were a number of cases where farmers claimed that processing firms deliberately suppressed prices in order to maximise profits. However, it is important to point out that, in a number of cases these firms were themselves the ‘victims’ of price pressures from further along the commodity chain. Indeed, a number of interviewees suggested that supermarket chains and other large corporate retailers were the key contributors to this price pressure.

Some of the best examples of farmers claiming that companies were attempting to hold back prices are in the wine industry in South Australia’s Riverland region. In this region there are three very large wineries: BRL Hardy, Simeon Wines and Angoves. The fourth, Normans wines, went out of business in 2001. Farmers claim that one of the strategies being used by these wineries to reduce the prices paid to growers is to introduce quality assurance tests. BRL Hardy, for example, now requires all of its 1600 contracted growers to meet very stringent quality standards. These include standards for colour, chemical balance, food safety etc. Growers not meeting these standards may be paid lower prices or even have their produce rejected.

Another company to introduce quality assurance measures is Simeon wines. This company has recently rejected the grapes grown by some contracted vignerons. Growers claim this has been for two reasons. Firstly, as a result of good seasonal conditions, grape production by contracted growers was higher than expected and created a problem of oversupply for Simeon. More importantly, farmers see it as a means of offering lower prices. In 2002, growers claimed that some red varieties would receive 40% less if quality standards were not met. They claimed that BRL Hardy was paying $750 per tonne for some red varieties, while Simeon was paying only $450. However, Simeon maintains that in order to remain competitive in a market in which wine production is increasing it needs to have some mechanism to ensure quality. In early 2002, 11 growers threatened to take Simeon to court over its decision to impose new quality standards. These growers were arguing that unreasonably high standards had been set as a way of minimising payment and, possibly, as a means of reducing the amount delivered to the winery. The 11 growers supply 10,000 tonnes collectively to Simeon and claimed that $6 million per annum was at stake.

A similar dispute over pricing also emerged at BRL Hardy’s Riverland operations in 2002. As with Simeon, excellent growing conditions in 2002 meant that farmers contracted to BRL Hardy produced 60,000 tonnes more than anticipated or specified in the contracts. Initially (in March 2002), the company suggested that if might not take all of the excess grapes – perhaps only 75 per cent. Following a grower backlash, the company agreed to accept 85% of excess fruit, but also stated that it hoped to take all of it. However, the marketing cooperative that organises supply to BRL (the CCW cooperative) claimed that BRL was obligated under the terms of the contracts to take all of the fruit produced. In June 2002, BRL Hardy announced that it would cut prices to growers who produce more than they had estimated (a crop estimate needs to be provided during the season). Instead of receiving around $1,100 per tonne, growers would receive between $250 and $450 per tonne for

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production over the estimate. These types of issues are not restricted to BRL Hardy and Simeon Wines. Others include:

• Kingston Wines, who cut their contract grape prices by 50% as a result of oversupply. Kingston had the option to reduce prices written into their contract. Kingston would pay $300 per tonne for shiraz compared to BRL Hardy who agreed to pay their growers $724.

• Angove’s Wines cut their forward contract price for grapes in 2002, arguing that a good season and an excess of red wine grape varieties had driven prices down. Angove’s also introduced new quality assurance measures, which was seen by some farmers as a way of reducing the amount of grapes in the ‘premium’ category and therefore reducing the expenses of the winery. Angoves made the same claims as Simeon and BRL Hardy; that the market was competitive and they needed to ensure quality to remain profitable.

Obviously the issue for growers is that there was an expectation that excess production would be taken at the agreed price. This being the case, it is not unreasonable for growers to produce as much of a particular commodity as possible to maximise known returns. However, this generates significant risks for the processing firm. An obligation to take all of a particular commodity has the potential to place considerable financial pressure on a firm, particularly if the processed commodity is being sold into a difficult or highly competitive market. While growers often blame processors for lower or stagnant grape prices, a number of representatives of wineries pointed out that the wine industry was becoming increasingly competitive, and that they could not increase prices paid to growers without reducing their own profits. This raises a number of questions about where power is held within the commodity chain. Some farmers point to processing firms although, in reality, much of the financial power would appear to rest with supermarkets and retailers, who are able to place considerable pressure on processors in relation to price and quality.

In terms of contracts, one of the obvious implications of disputes in the Riverland area is that there needs to be transparency (for all parties) when contracts are established. Thus, there needs to be a clear understanding about:

• How much of a particular commodity is to be produced by growers in a given time period.

• The commodity pricing arrangements.

• The implications of excess or under production for all parties.

• The quality specifications for contracted commodities.

The potato sector in Tasmania provides a somewhat different example of the pricing issues associated with contract. The majority of potato farmers in the Circular Head region (and Tasmania as a whole) grow under contract to either McCain Food’s or Simplot. These multinationals operate a number of processing plants in Tasmania and sell potato products to fast food companies (e.g. McDonalds and KFC), supermarkets and other retailers. The most common potato grown in the region is the Russet Burbank, which is favoured by fast food

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companies for French fries, mainly because of its length and cooking qualities. The contracts established between the processing companies are characterised by the following:

• A set price for the potatoes, which need to be delivered to the factory within a specified time frame.

• Detailed quality specifications for the potatoes. Potatoes that do not meet these specifications can be rejected or paid a lower price.

• Detailed specifications about how the potato should be grown, including insecticide and fertiliser application.

• A financial bonus system designed to improve the quantity and quality of the contracted crops.

• Farm inspections by the contracting firm.

During the 1990s, both Simplot and McCain held prices at around $200 per tonne for good quality potatoes. One recent estimate suggested that by the time this reaches the customer in a fast food chain, the potatoes fetch around $9,000 per tonne (Durnford 2002). At the same time, farmers claimed that stagnant potato prices and increases in farm costs, particularly for fuel and fertiliser, had contributed to a cost-price squeeze that had eroded profits to the point where some growers were experiencing negative incomes. However, because there are only two main contracting firms, farmers generally had little choice but to accept the prices on offer, or shift into new commodities. This second option was simply unrealistic for many growers who had already invested considerable capital in potato production.

In 2001, a number of farmers under contract to McCain Foods began to agitate for a $30 per tonne increase in the contract price for potatoes. Similar pressure was placed on Simplot. Both companies initially refused the increase, claiming that potato growers were paid more in Australia than in the United States and New Zealand. In response to the inaction by the multinationals, around 500 farmers blockaded McCain’s Smithton factory in August 2001. The most common banners at the blockade summed up the extent of farmer anger: ‘Ah McCain, you’ve done us again’ and simply ‘Simplot sucks’. The blockade was followed by a series of meetings at which farmers agreed to continue their push for higher prices.

Following considerable negotiation and widespread national media attention, McCain Food’s agreed to pay an extra $22 a tonne in 2001 and a further $9 a tonne in 2002. Growers under contract to Simplot later accepted an increase of $36 per tonne (they had earlier declined an increase of $30 per tonne over three years). However, it was pointed out by some farmers that, if they were to keep pace with the rate of inflation for the past decade, then an increase of $60 per tonne would have been appropriate. Importantly, the benefits were not restricted to growers in Tasmania, with McCain and Simplot increasing potato prices across Australia following threats of further blockades and disturbances elsewhere in the country

The controversy over potato prices raises a number of important issues associated with contract farming. Firstly, in cases where monopolies or duopolies exist there is often scope for contracting firms to suppress prices in their favour. Secondly, when faced with this

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monopoly or duopoly situation, individual farmers have very little negotiating power. Thirdly, without any form of collective or cooperative bargaining power, substantial increases in prices are unlikely to occur. In this particular case, it was not until farmers formed a united front that they were able to secure an increase in prices. Thus, it is not surprising that in a number of the case study regions, farmers were considering marketing cooperatives as a possible alternative to individual contracts between growers and processors. The potential of cooperatives is currently being explored in the wine grape and fruit sectors of the Berri-Barmera region, the horticulture sector in the Circular Head and Leeton regions, and the grains sector of the Darling Downs. Furthermore, some marketing and processing cooperatives already exist in these regions. While cooperatives do have a number of significant limitations (see Fulton 1990; Todd 1994; Cronin 1995; Moran et al. 1996), there may be some scope for various forms of cooperative to provide farmers greater bargaining power and business skill than would generally be available to them if they were negotiating contracts individually. It is, however, important to stress that the formation of a cooperative in itself is no guarantee that farmers will achieve a better overall outcome.

Forward Contracting and Missed Market Opportunities

A number of farmers who were interviewed as part of this project stated that one of the risks associated with entering into contracts was the potential for missed market opportunities if the market price of a commodity rises above that specified in the contract. This was particularly important in sectors where large spot markets exist or where marketing authorities are still important. In the Wambo-Dalby region this was occasionally raised in relation to beef and cattle. Farmers that held contracts with feedlots to supply either grain or cattle pointed out that forward contracting was associated with a risk that the market price for these commodities might rise. However, contracting was generally seen as part of a hedging strategy, where the contract also offered some protection against a fall in the price of a particular commodity. The implication here is that farmers need to carefully examine the price implications of contracting vis-à-vis selling on the open market.

It is also important to recognise that forward contracts also carry risks for the contracting firm. The most obvious risk is that the contracted price will fall, leaving the contracting firm paying a higher price than in the open market. The financial implications of this have the potential to be quite serious. While not located in one of the case study areas, a good example of the risks taken by companies was the decision by Coles supermarkets to end its forward contracts for grain-fed cattle in Western Australia in early 2003 and buy on the spot market. Falling beef prices meant that the company increasingly saw forward contracts as a financial risk, since the prices being paid by it were above the market average. However, some farmers were disappointed by Coles’ decision not to offer contracts. The chairman of the WA Lot Feeders Association argued ‘it’s not a good thing as a lot of farmers want to supply at a going rate’ (Henderson 2003: 26). Some farmers prefer contracts because these provide them with price stability and a greater capacity to plan their production than of they are selling on the open market (see section 4.3).

4.5. Issues for Regional Development

It is extremely difficult to generalise about the impacts of contract farming on rural communities and regional development. When the relationship between contractors and farmers is fruitful, the outcome in rural communities is generally positive, while the opposite

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is generally the case if the relationship is difficult. The following provides an overview of the key issues and findings with regard to contract farming and rural communities.

• A number of interviewees suggested that, if forward contracts provide a degree of income stability for farmers, the outcome is generally positive for country towns. In both Leeton and Wambo-Dalby, for example, there was a view amongst representatives of the local government and business sector that contracts contribute to more predictable and stable spending patterns amongst farmers. Furthermore, the contracts offered a degree of financial security, enabling producers to purchase major capital items, such as farm machinery which, in turn, benefited local businesses.

• While contracts are regarded as an important part of the agricultural economy in Berri-Barmera, a number of interviewees suggested that recent price disputes between large wineries and growers had created a sense of distrust between local residents and processing firms. This sense of distrust has the capacity to undermine social capital and community cohesion in rural areas. Similar problems exist in Tasmania, where the dispute between growers and processing firms McCain Foods and Simplot undermined community cohesion. It is important to remember that firms (and their employees) are a part of rural communities, and that tensions between companies and residents can manifest themselves as serious community tensions.

• The collapse of major processing firms in the Berri-Barmera region left a number of farmers without income for as long as 12 months. This had a direct impact on farmer spending and, hence, the health of the local economy. It also undermined the confidence of farmers in contracts and processing firms in general.

• In Narrabri, contracts help to ensure that ginning mills in the cotton industry operate as close to maximum capacity as possible. Without contracts, the gins cannot guarantee certainty of supply. The likely outcome would be the closure of some gins and the concomitant loss of employment and economic activity. A similar situation exists in Wambo, where abattoirs and beef feedlots use contracts as a means of ensuring supply.

While contract farming does have the capacity to impact on the health of local economies and labour markets, this study found little or no evidence that contracting arrangements had a direct impact on the provision of essential services or infrastructure. In terms of regional economic development, the impacts tend to be highly contingent on local factors. In a number of cases, such as in Berri-Barmera and Circular Head, contracts had caused considerable upheaval. At the same time, however, there was an acknowledgment amongst interviewees that contracts, when administered fairly, could provide a degree of economic stability and certainty. This tended to be more evident in Leeton, Narrabri and Wambo. It should also be pointed out that the business structures in these areas tend to be more diverse, with a greater mix of sectors, contract types and ownership types. There is little doubt that this diversity helps to contribute to more resilient regional economies and social systems.

4.6. Conclusion

In all of the case study localities, contract farming was a common form of business arrangement. Most surveyed farmers engaged in some form of contract, with delivery contracts the most prevalent. This reflects the types of regions and agricultural sectors

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targeted in the study. One of the main concerns raised in the literature on contract farming is the loss of control over farm management by farmers. A small number of farmers did indicate that this was a problem and that contracting firms were making many of the key management decisions. This group was a minority, and farmers generally felt that they had retained a high degree of control over the property when growing under contract. For many farmers, contracts provided a range of benefits, including security of farm income and access to technology and farm advice. For contracting firms, the benefits included control over quality, the ability to plan for farmer payments in advance, and security of supply for processing facilities. There are, however, cases where contracting arrangements are unsuccessful, and contribute to significant hardship for both farm families and rural communities. This research revealed that one of the major risks facing farmers is that a contracting firm may go out of business and be unable to meet all or part of its financial obligations under the terms of the contract. A second risk is that contracting firms may restructure their business and no longer process, package or market particular commodities. Farmers growing these commodities can face a difficult process of farm business adjustment. A third risk, was that farmers in some sectors might face a degree of price manipulation by contracting forms, particularly those with monopoly or duopoly power. The findings of this chapter suggest that there is a need for many farmers to be made more aware of the implications of contracts for their farm business strategy, and how contracts fit in the overall planning and management of the property. This includes ensuring a clear understanding of the terms of the contract and, in particular, their obligations. There may also be scope for farmers to form organisations to facilitate negotiations with contracting firms on a collective basis to ensure outcomes that are financially and socially reasonable.

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5 The Impacts of Corporate Farming This chapter examines the impacts of corporate farming in rural communities. While it focuses on corporate farms in the case study localities, where appropriate a number of examples are drawn from nearby communities. In some cases, corporate farms agreed to participate in this research provided that certain financial and other details remained confidential. Accordingly, some parts of the chapter are necessarily general. The chapter begins by examining the ownership and management structures of corporate farms, before considering economic, employment and social issues.

5.1. The Ownership and Management Structures of Corporate Farms

There is considerable diversity in the ownership patterns and management structures of corporate farms in the case study areas. The following provides a brief overview of the ownership, management and economic structures of some of the larger corporate players in the case study localities:

Aronui Feedlots: Aronui feedlot and abattoir complex commenced operations in 1964 as a family company. By the late 1990s it was one of the largest beef feedlots on the Darling Downs, with capacity of 15,000 head of cattle and annual throughput of over 35,000 (representing slightly more than 4 per cent of national feedlot production). Aronui Feedlots Pty Ltd had a partner company, Kobe Cuisine, which marketed premium beef direct to retail customers in Korea, Japan, Hong Kong, Singapore and Malaysia. In 2002, the Australian Agricultural Company purchased both companies. The Australian Agricultural Company was established in 1824 as a land developer in New South Wales. Elders and the Futuris Corporation Ltd formerly owned it until a demerger in 2001 and a separate listing on the Australian Stock Exchange. A farm management team runs the Aronui property, although some of the strategic decision-making has been transferred to the Australian Agricultural Company’s head office in Sydney.

Auscott Limited: Auscott, founded in 1963, is a subsidiary of the American based J G Boswell Company. It is a vertically integrated company with cotton growing, ginning and marketing activities. It also grows wheat and other crops in rotation with cotton. It operates in the Gwydir, Macquarie and Namoi Valleys in NSW. Auscott is the biggest grower, ginner and marketer of cotton in Australia. According to the Australian Securities and Investments Commission (ASIC), it is an Australian public company limited by shares, although its shares are not traded publicly on the stock exchange. Auscott is administered from its headquarters in Sydney, NSW. The Narrabri property, which includes a farming, ginning and marketing operation, was the first for the company in Australia and pioneered cotton production in the Namoi Valley. The operations of the property, including farming, ginning and marketing, are run from the property. Some head office staff are also located on the property, which suggests that operational issues are delegated to managers in the field who are connected with the larger corporate structure by on site corporate staff. However, some tasks such as international marketing, logistics and some procurement are undertaken largely from the Sydney head office.

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Dunavant Cotton: Dunavant is an American Company, based on Mississippi and Tennessee. According to Forbes Magazine it is one of the best small companies in America, and has been listed in the Forbes 400 largest private companies in America since 1989. In Australia, the majority of Dunavant’s operations are based in the region around Dalby. While it remains a family owned company, its foreign ownership, scale and the vertical integration of growing, processing and marketing make it a very good example of corporate farming. In Australia, Dunavant derives most of its income from processing cotton grown under contract, but to ensure constant supply to the cotton gins (and to ensure quality) it also grows its own cotton on a number of properties in the Dalby region. Other grain crops are grown as part of a rotation system. Dunavant was one of the first companies to into ‘forward contracting’, whereby a farmer agrees to a price before planting.

BRL Hardy: BRL Hardy’s operates a number of wineries in the Riverland of South Australia, sourcing most of its grapes from contract growers. However, the company also operates some of its own vineyards, such as the 240 hectares of vines at Banrock Station near Berri (purchased in 1995). The company was formed in 1992 following the merger of Berri Renmano Limited (formerly a cooperative) with the family owned company Thomas Hardy and Sons Pty Ltd. The company has interests in 3,000 hectares of vineyards in Australia, New Zealand and France. Until 2003, the company was listed on the Australian Stock Exchange, and had a board of nine directors. In early 2003, BRL Hardy merged with Constellation Brands Inc., a US based food and beverage company. The Banrock Station vineyard near Berri is run by a farm manager and has a number of professional vignerons assisting in the decision-making. The vineyard is vertically integrated into BRL Hardy’s wineries near Berri.

Kooba Station: Kooba Station (near Leeton and Griffith, NSW) is part of an international network of farms owned by the Church of Jesus Christ of Latter-Day Saints. In addition to Kooba, the Church owns three other properties in the region, incorporating at total of 46,558 hectares. AgReserves is the formal company name, and the farms are run purely as commercial operations. A management team runs the farm, although some of the core strategic decisions about the properties are made in the United States.

Parle Foods: Parle Foods is a grower, processor and distributor of fruits and vegetables and is based in the Riverina of New South Wales. While it is not located in one of the case study localities, it nevertheless provides useful insights into the role of corporate structures in rural communities. Originally a family owned company producing and processing vegetables (particularly gherkins) for McDonalds, the company had difficulty maintaining supply from contract growers. In addition, the prices being charged by small contract growers made it cheaper for the Parle family to grow its own gherkins in a vertically integrated operation. During the 1990s, the company continued to expand with the Parle family owning 43%, the Food and Agriculture Investment Fund (a joint venture between Rabobank and Australian investment house Gresham Partners) owning 32%, and AgReserves Limited (an agribusiness firm owned by the Church of Jesus Christ of Latter Day Saints) 25%. The company now owns 1,800 hectares, consisting of 450 hectares of gherkins, 200 hectares of peaches and the remainder mixed vegetable and other crops. The company is managed by a one of the 43% stakeholders. While not strictly a corporation, this firm does have many of the characteristics of a corporate farming, particularly with regard to both the scale of the operation and the vertical integration of production, processing and packaging.

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Rockdale Beef: Rockdale Beef is one of Australia’s largest integrated farm, feedlot and abattoir complexes in Australia. Located near Leeton, it has a total capacity of 45,000 head of cattle and covers 2,000 hectares. The main markets for Rockdale’s beef are in Japan and South-East Asia. The Itoham Foods Group, a Japanese conglomerate, owns the property. A General Manager and four other farm managers run Rockdale Beef, each responsible for one component of the property (e.g. finance, engineering, feedlot etc.).

Simeon Wines: In addition to sourcing grapes from contracted growers, Simeon Wines has two vineyards totalling 720 hectares in the Riverland region of South Australia. Simeon is listed on the Australian Stock Exchange and recently merged with Brian McGuigan Wines. The company is based in Adelaide, with managers running each of the properties. The company is not dissimilar to other corporate winemakers in that the growing, processing and packaging of the product is vertically integrated. According to a representative of Simeon, growing its own grapes enables the company to have more direct control over quality, respond quickly to changing market demands, and ensure constant throughput in the wineries.

Woolnorth: Woolnorth is a 22,000-hectare beef, sheep and dairy property and forms part of the Van Diemens Land Company, which is the only company (worldwide) operating under a Royal Charter, dating back to 1825. The major shareholder is a New Zealand public company, Tasman Farms Limited, which owns more than 20 dairy farms in Tasmania. The on-farm management team makes most of the day-to-day decisions about farm management and production, although some decision-making tends to be concentrated in the headquarters of Tasman Farms in Timaru, New Zealand.

Tasmania Feedlot: The Tasmania Feedlot is not in any of the case study localities, but is a good example of the structure of a corporate farm. It is located near Launceston in Tasmania and commenced operations in the early 1970s with a combination of Japanese and local capital. The feedlot is now fully owned by Aeon, which also owns the Jusco chain of supermarkets in Japan. The feedlot has a capacity of 16,000 head of cattle and is supported by a grazing property of 5,000 hectares. A farm management team operates the feedlot, with most of the key strategic decisions being made by the Aeon Corporation in Japan.

While there are a number of other corporate farms in the case study localities, the above provide a good profile of the different ownership and management structures that these organisations adopt. One of the key observations is that the business structures of corporate farms are extremely diverse. There are, however, a number of key characteristics:

• Corporate farms usually have a diverse group of shareholders/owners.

• Day-to-day management tends to occur at the property level, with the strategic decisions usually made elsewhere (e.g. at a corporation’s headquarters).

• Farm production and processing are often vertically integrated.

• The scale of the properties, in terms of either land occupied or total production, tends to be high (and usually bigger than family owned operations in the same region).

• There is often a mixture of foreign and Australian ownership of corporate farms.

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5.2. Reasons for the Corporate Ownership of Farms

Some of the literature on corporate involvement in agriculture suggests that corporations tend to be reluctant to become involved in farming because of the associated risk. Farming is not only subject to seasonal conditions, but also to crop and livestock pests and disease and, in some areas, significant land degradation, all of which have the capacity to undermine productivity. Accordingly, corporations tend to have avoided the most risky component of the commodity chain. This, in part, helps to explain why corporations tend to engage in contracting relationships with farmers, rather than direct farm ownership. This raises the question of why some corporations are willing to become directly involved in operating farms. Interviews conducted with the managers and directors of corporate farms suggest that there are a number of reasons for corporate ownership of agricultural properties:

• For companies involved in processing agricultural commodities, farm ownership can help to ensure that the processing operations are maintained at maximum capacity. This is important in sectors where family farms might reduce production of a particular commodity in response to falling prices. A number of interviewees in the wine, beef feedlot and cotton sectors suggested that maintaining throughput was one of the main reasons for corporations owning farms (see also Scales et al. 1995).

• In sectors where prices of a processed product are particularly sensitive to quality, corporations will sometimes become involved in processing. In the wine industry, for example, the ownership of vineyards by companies such as BRL Hardy and Simeon Wines in the Riverland of South Australia was, in part, linked to the need to ensure uniformity in quality (see also Pritchard 1999). This trend was also evident in the beef feedlot sector, where concerns about the safety of food (particularly following the BSE and Foot and Mouth scares in Europe) made quality a key issue.

• In some sectors, the economies of scale that can be generated by corporate farms can result in considerable improvements in efficiency and profit. For example, Parle Foods in NSW expanded the farming operation in order to reduce the need to rely on contract farmers (thereby ensuring steady supply and quality) and to increase productivity. The manager of this company claimed that the closer the links in the commodity chain, the more scope there was for reducing costs.

• Corporate farms are often able to respond quickly to changing consumer tastes. With much larger capital reserves, corporations are able to invest in both the research and infrastructure/skills needed to grow new commodities. By contrast, smaller family farms rarely have these resources available and can find themselves locked into producing commodities that are no longer represent the most profitable use of land and resources. This was particularly evident in the wine industry, where a number of interviewees suggested that larger companies are able to respond to changing consumer tastes more quickly and efficiently than can family operations.

5.3. Employment

This section provides an overview of the employment impacts of corporate farms in rural communities. It draws on a number of data sources, including the survey of farm businesses, interviews, and other documentary sources (e.g. company annual reports and business

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profiles). Table 5.1 shows that the family farms surveyed in most of the case study areas tended to have lower levels of full time labour than did corporate farms. This was particularly evident in Leeton and Berri-Barmera where corporate operations usually have some form of packaging or processing operation incorporated into the property (e.g. a winery or vegetable processor). However, it should be remembered that the sample of corporate farms in Table 5.1 is very small, with only 17 such farms in the total sample. Nevertheless, given that the total number of corporate farms in the case study localities (and Australia as a whole) is very small, Table 5.1 does provide some insight into the level of employment offered by corporate operations.

Table 5.1 Equivalent Full Time Permanent Employment on Family and Corporate Farms in the Case Study Localities (Average per Farm)

Equivalent Full Time

Employment per Family Farm

Equivalent Full Time Family Labour (paid

and unpaid) per Family Farm

Equivalent Full Time Paid Employees per Corporate Farm

Berri-Barmera 2.3 1.4 9.0 Circular Head 2.4 1.7 5.1 Leeton 2.2 1.6 15.7 Narrabri 1.5 1.3 4.0 Wambo-Dalby 3.7 1.6 6.0 AVERAGE 2.4 2.1 8.0 (Source: Farm Survey)

Table 5.2 displays the number of hectares farmed per employee for the different types of farms. In two of the case study localities (Berri-Barmera and Leeton), corporate farms have more hectares farmed per employee than do family owned operations. This is largely because of the processing and packaging operations that are attached to corporate farms in these areas. In the regions where broad-acre production is dominant, family farms tend to have higher rates of hectares farmed per employee than do corporate farms. Obviously, there are two ways to interpret the figures in Table 5.2. One is to suggest that the less hectares farmed per employee, the more likely there are to be benefits for the local economy, especially as this is related to service patronage and overall population levels. The other is to suggest that the more hectares farmed per employee the more efficient the farm businesses in a particular region. The main difficulty with Table 5.2 is that it is impossible to separate employment in downstream processing activities with employment that is restricted to on-farm activities. However, it is clear from the statistics in both Tables 5.1 and 5.2 that corporate farms do have the potential to make a significant contribution to local and regional employment.

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Table 5.2 Hectares Farmed per Equivalent Full Time Permanent Employee on Family and Corporate Farms

Hectares Farmed per Equivalent Full Time Employee on Family

Farms3

Hectares Farmed per Full Time Paid

Employee on Corporate Farms

Berri-Barmera 111.1 65.9 Circular Head 106.2 128.9 Leeton 287.6 92.1 Narrabri 549.3 800.0 Wambo-Dalby 425.3 830.3

This contribution is also borne out by the more qualitative data. Indeed, evidence collected during interviews and documentary analysis suggests that a number of the corporate farms discussed in section 5.1 have a significant impact on local employment. The following provides an indication of this contribution:

• Aronui’s feedlot and farm complex of 800 hectares near Dalby provides employment for 30 people. According to the farm manager, most of these employees have been long-term local residents, although a number of tertiary qualified staff have migrated into the region. A focus on research and development within the business means that the employment profile is relatively diverse. The majority of employees are full-time permanent, with contractors and part time employment a minor component of total employment.

• Auscott’s cotton farm and ginning operation near Narrabri is a large employer. It has 34 local full-time staff on the farm, 14 in the gin and seven in the office. There are eight management staff located on the property. The contractors used by Auscott are also local people. The farm hands are not employed simply as unskilled labour; they are trained and given experience on some of the most expensive and sophisticated machinery and equipment in farming. They receive trade qualifications in cotton production offered at the local TAFE.

Auscott uses a large number of seasonal employees. For irrigation it employs 10 people for a four-month period each year. For chipping, which may last a three-month period contingent on weed breakouts, 400 people are employed through chipping contractors. Each person would be hired for a 20-day period which adds up to 400 person month’s worth of work. Contrary to the popular picture sometimes painted of itinerant seasonal workers, Auscott maintains that the many of the workers are local farmers, their partners and their children during school holidays. Another typical pattern is for the partners of full-time farmers to work 3-4 months chipping and 3-4 months in the gin as a way of supplementing farm income.

3 This includes full time, part time and family labour.

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• AgReserves’ Kooba Station, near Leeton and Griffith, operates 46,000 hectares with 56 employees (821ha/employee). Almost all of these are permanent residents of the local community. While the Church of Jesus Christ of Latter-Day Saints owns the property, only 10 of the staff are members of the Church. The scale of the property means that the business is able to internalise a number of functions, such as agronomic management, farm planning, some processing and transport services. A number of the staff hold tertiary qualifications in agriculture and related disciplines, while the manager holds a Bachelor of Science degree and a Masters degree in Business Administration.

• Parle Foods in the Riverina of NSW employs 50 people on a permanent basis and a further 90 during peak season on its 1,800-hectare property. The property incorporates both farming and processing in the horticulture sector. The company employs mainly longer-term local residents, although a number of the seasonal staff are itinerant.

• Woolnorth near Smithton in Tasmania has a total staff of around 60 on the 22,000-hectare property. These staff work in a range of agricultural activities associated with the property’s beef grazing, prime lamb, dairy, cropping, plantation timber and tourism activities.

• Tasmania Feedlot has a total of 30 permanent staff on its 5,000 hectare farm and feedlot complex. The company attempts to internalise a number of key activities, including maintenance, agronomic operations, animal husbandry, and farm planning and management. This means that it has a relatively skilled and educated workforce.

• Rockdale Beef has a total labour force of around 400. However, unlike the other corporate farms reviewed in this study, the majority of these people are not direct employees of the company; they are engaged as independent contractors. These people are usually employed through a major contracting firm. According to Rockdale, this increases labour-force flexibility and reduces costs associated with managing superannuation, various employee taxes and government charges and leave entitlements. These responsibilities are transferred to the contractors. This also means that Rockdale has the capacity to scale up or scale down employment very easily depending on market conditions and the level of production on the farm and feedlot. There is, however, no evidence to suggest that these contracting arrangements have resulted in a high rate of turnover amongst the people involved, or rapid increases or decreases in employment.

In all of the examples above, corporate farms have made significant contributions to local and regional employment. One of the features of corporate farms is that they often incorporate downstream processing and other activities as part of a vertically integrated system. These additional activities generate employment that may otherwise not exist in those localities. However, in some cases, the economies of scale and level of capitalisation associated with corporate farms may mean that, per hectare, they employ fewer people than family farms. One of the other concerns raised in the Leeton case study was the risk of labour-force casualisation (through the contracts system) at Rockdale Beef. While Rockdale itself regards these contractors as a fairly stable labour-force is hired using non-conventional employment arrangements, there is a risk that corporate farms might use such arrangements to establish a more casual labour force. In many respects, this is not unusual, since the labour-force in rural Australia has always involved a relatively high proportion of casual and

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seasonal labour. There are, however, a number of risks associated with further increasing the proportion of casual labour in rural communities:

• Evidence from the United States suggests that rural casual labour (particularly that associated with corporate farms) is likely to be highly transient, and does not necessarily make a significant contribution to rural economic and social activity (Broadway 2000).

• As casual and seasonal workers often experience periods of unemployment and low overall incomes, they are at risk of experiencing poverty or disadvantage.

• Casual and seasonal workers can find it difficult to secure rental housing, or finance to purchase their own homes. In some parts of the United States, this has resulted in the proliferation of low cost semi-permanent housing in caravan parks on the fringes of towns (Broadway 2000).

• Employees may not be covered for sickness or long-term injury, particularly if they act as a contactor (rather than and employee) for a corporate (or any other) farm.

5.4. Local Economic Linkages and Impacts

The extent to which corporate farms are integrated into local economies has significant implications for economic development and planning. The scale of many corporate farms potentially makes them key propulsive industries in local and regional economies. However, one of the criticisms often made of corporate farms in North America is that they tend to bypass local economies in order to keep costs to a minimum (Weida 2001). One of the main criticisms of vertically integrated firms is that they tend to source inputs and services from other parts of the company, which may mean that they bypass businesses that could otherwise supply such goods and services. Whilst this bypassing may sometimes occur, there is also considerable research to suggest that family farms often purchase major capital items or expensive services from outside of local economies in order to minimise costs (McSwan 1983; Hudson 1986; Tonts 1998).

Table 5.3 shows the purchasing patterns for farm machinery and automobiles used on the surveyed family and corporate farms in the five case study localities. These major capital items (sometimes referred to as ‘higher order goods’) generally involve farmers seeking the lowest price, rather than employing a strict ‘buy local’ policy. There are, however, major differences between the behaviour of corporate farms and family farms. Corporate properties favour seeking the lowest cost, regardless of whether the product is purchased locally or not. Indeed, about 70 per cent of corporate farms favoured purchasing farm machinery and automobiles by competitive tender or always seeking the lowest price. By contrast, only 9 per cent of family farms favoured these strategies. Most were inclined to purchase locally regardless of price (25.6 per cent) or had a preference for buying locally if the price was competitive (63.3 per cent). A total of 23.5 per cent of corporate farms favoured this latter strategy. The findings suggest that corporate farms are more price sensitive than local family farms. However, given that many corporations operate in multiple regions at the same time, defining ‘local’ is difficult. It is likely that the purchasing and procurement dollars of the corporations do come to at least one region in which it

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operates, even if that is contingent on price competitiveness. In the case of family farms, there may be a much stronger sense of attachment to local communities and, therefore, a sense of responsibility to purchase large capital items locally, particularly if the price is competitive. Undoubtedly, the family, friendship and other local networks that operate in rural communities play an important role here.

Table 5.3 Purchasing Patterns for Farm Machinery and Automobiles by Farm Structure (per cent)

Purchasing strategy for farm machinery and automobiles

Family Farms

Corporate Farms

Put to tender and take the most competitive bid 4.9 41.2 Employ a policy of buying locally 25.6 5.9 Have a preference for local if competitive pricing 63.3 23.5 Always Choose the Cheapest Option 4.1 29.4 No response 2.1 0.0 Total 100 100 N. 469 17

Similar purchasing patterns emerged in relation to the purchasing of chemicals and farm supplies (Table 5.4). Corporate farms tended to seek out the lowest price, although were slightly more willing to consider purchasing locally if the price was competitive. Family farmers were more likely to employ a policy of purchasing locally for chemicals (47.1%) and farm supplies than for farm machinery and automobiles (25.6%). This is most likely because the cost of farm chemicals and supplies is generally much lower than farm machinery and automobiles, therefore resulting in a lower level of price sensitivity. It is interesting to note that in both Table 5.3 and 5.4 only 4.1 per cent of family farms chose the lowest price option. This is rather surprising given the cost-price pressures facing farmers and the negative impact that farm costs can have on final profits.

Table 5.4 Purchasing Patterns for Chemicals and Farm Supplies by Farm Structure (per cent)

Purchasing strategy for chemicals and farm supplies

Family Farms

Corporate Farms

Put to tender and take the most competitive bid 3.6 23.5 Employ a policy of buying locally 47.1 5.9 Have a preference for local if competitive pricing 43.1 29.4 Always choose the cheapest option 4.1 41.2 No response 2.1 0.0 Total 100 100 N. 469 17

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Table 5.5 shows the purchasing patterns for farm business services for corporate farms and family farms. As with Tables 5.3 and 5.4, it shows that family farms tend to be more willing to purchase locally, particularly if there is a cost advantage. By contrast, nearly 59 per cent of corporate farms preferred seeking the cheapest option in relation to farm business services. Another important feature of Table 5.5 is the number of corporate farms (17.6 per cent) that did not respond to this particular survey question. A number of follow-up telephone calls, as well as interviews with farm managers, revealed that many corporate farms tend to internalise these particular functions. Accounting and financial services, for example, are done either in-house on the farm, or are undertaken at the particular company’s headquarters. As such, there is no need for corporate farms to utilise local services such as accountants, insurance agents, or auctioneers.

Table 5.5 Purchasing Patterns for Farm Business Services by Farm Structure (per cent)

Purchasing strategy for farm business services Family Farms

Corporate Farms

Put to tender and take the most competitive bid 3.4 5.9 Employ a policy of buying locally 51.4 5.9 Have a preference for local if competitive pricing 38.2 11.8 Always choose the cheapest option 4.9 58.8 No response 2.1 17.6 Total 100 100 N. 469 17

The propensity for corporate farms to purchase farm inputs and services at the lowest cost was also a common theme in a number of the interviews with the managers of these operations. Indeed, a number of corporate farms make clear that their main objective was to maximise profits, which meant seeking the lowest cost option in terms of farm inputs and services. While it is not appropriate to document the proportion of local versus non-local expenditure for individual firms, it was clear from the interviews that, in some industries, as much as 80 per cent of inputs were purchased from outside of the local economy (i.e. more than 50km away from the farm itself). It also appeared that the larger and more vertically integrated the particular firm, the lower the level of local spending on farm inputs. Of course, this does not mean that corporate farms do not contribute significantly to local economic activity. The scale of the operations, the employment that these organisations create and, in some cases, the additional benefits of downstream processing mean that they still have a direct impact on local economic activity. In addition, the economic leakage associated with corporate farms needs to be weighed against the actual spending patterns of family farmers. As pointed out above, there is considerable evidence to suggest that many family farms are spending increasingly less on services and farm inputs provided locally. Indeed, a recent study by Levantis (2001) suggests that the majority of farm spending is concentrated in larger towns and regional centres, rather than in smaller towns. This suggests that farmers (regardless of their business structure) are increasingly by-passing local economies in favour of more competitive prices and greater choice (see also Smailes 2000).

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Indirect Economic Impacts of Corporate Farms

In addition to direct economic impact (expenditures on inputs, services etc.) corporate farms have important indirect economic impacts. The direct impact occurs when a farm, in the course of its operation, purchases inputs and services. These purchases could, for example, include feedstuffs, fuel, fertiliser, accounting services, and permanent of casual labour. This is a simple expenditure flow from the farm to other sectors in the economy. Upon receiving such expenditure, the other sectors in the economy engage in their own expenditures. For example, as a result of selling a tractor to a farm, a machinery dealership might purchase additional accounting services or employ a new staff member.

It is possible to estimate these indirect impacts using economic multipliers (see Armstrong and Taylor 1993). These are variously expressed in output, employment and income terms. This is done through the construction of input-output tables, which trace expenditure flows through an economy. These tables may be constructed using two methods: i) non-survey methods, such as estimates based on national input-output tables; ii) survey and interview methods that attempt to quantify expenditure patters within a particular economy. Usually, a combination of both approaches is used. Once the input-output table has been constructed, it is possible to determine the flow-on effects (or multiplier) associated with a particular industry or firm. For a number of regions and industry sectors in Australia, detailed input-output tables and multipliers exist. However, not all of the regions covered by this study have such data readily available. Consequently, the multipliers used to estimate the impacts of corporate farms have been derived from a number of sources:

• The Australian National Accounts Input-Output Tables (ABS 1999)

• Input-Output tables and multipliers constructed for regions and/or sectors that are similar to those in this research. These include: Clarke et al. (1994), Centre for Economic Policy Modelling (2001), Centre for International Economics (1995), Islam and Johnson (2002; 2003) and Powell et al. (1993).

• Raw data on employment and expenditure patterns provided by interviewees representing corporate farms and other firms.

While input-output analysis can provide useful insights into the indirect benefits of an industry within a region, there are a number of limitations:

• The linkages between sectors are a ‘snapshot’ in time and may change considerably. As such, the method has little capacity to predict change because of the complexity of expenditure patterns within an economy.

• The method ignores supply constraints that undermine its predictive capacity.

• The data are usually based on modified national tables and, at best, can be regarded as an estimate of the flow-on benefits.

Table 5.6 provides a summary of the estimated multipliers for selected corporate farms in the case study localities. These firms have been included in the analysis because sufficient baseline data or existing multipliers were available. The multipliers are based on the sources outlined above, including the expenditure patterns of the firms involved. The results of

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Table 5.6 are interpreted as showing, for example, that for each dollar spent by Auscott, an additional 69 cents worth of value is created. This value added multiplier is higher for those firms engaged in downstream processing, since this is generally more labour and input intensive than purely agricultural enterprises. The larger the scale of processing undertaken, generally the higher the value added multiplier. Employment multipliers tend to be relatively consistent in all of the firms, although Kooba Station is somewhat lower than the others because it is not engaged in any downstream processing. However, some care is needed in interpreting employment multipliers, as they are, strictly speaking, ratios not indicators of direct causation. Thus, employment in a particular firm does not in itself generate additional employment; rather it is the demand for the products produced by the firm that ultimately generates employment in the economy. The Household Expenditure multiplier is based on the wages and salaries earned by employees in the firm. These multipliers tend to be higher than value added multipliers because household spending is often directed into relatively labour intensive or high value activities, such as personal services, recreation, food and beverages, and personal transport. Again, the household income multipliers tend to be reasonably consistent across the different forms.

Figure 5.6 Estimated Multipliers for Selected Corporate Farms in the Case Study Localities

Value Added Multipler

Employment Multipler

Household Expenditure Multiplier

Auscott 1.69 2.6 3.2 Kooba Station n.a. 1.9 2.9 Aronui 1.47 2.4 3.2 Parle Foods n.a. 2.5 n.a Rockdale Beef 1.79 2.5 3.4 Tasmania Feedlot 1.47 2.5 3.4 * These figures include the impact of both the farm enterprise and any associated on-farm processing activities, such as an abattoir, cotton gin or food packaging facility.

The flow-on impacts of the different corporate farms are shown in Table 5.7. It is important to stress that these are in addition to the direct impacts of the individual firms. The direct impact is restricted to the farm enterprise itself, and includes expenditure, employment and wages. Table 5.7 attempts to measure the impact in other parts of the economy. It shows that corporate farms have the capacity to generate significant flow-on effects, in terms of value added expenditure, employment and household income. For example, the Rockdale Beef Feedlot generates an additional $92 million of expenditure, 675 jobs and $48 million in additional household expenditure. This suggests that a corporate farm of the scale of Rockdale makes a substantial impact on local economies. The impact of Rockdale is linked not only to the feedlot, but also to its abattoir and processing facilities. By contrast, Kooba Station, which does not include downstream processing has a smaller economic impact, contributing to some 50 jobs and $3.8 million in expenditure.

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Table 5.7 Estimated Indirect Economic Impacts of Selected Corporate Farms*

Value Added ($) Employment

(additional jobs) Household

Expenditure ($) Auscott 9,100,000 77 4,600,000 Kooba Station n.a. 50 3,800,000 Aronui 2,600,000 49 1,200,000 Parle Foods n.a. 112 n.a. Rockdale Beef 92,900,000 675 48,000,000 Tasmania Feedlot 2,200,000 45 2,600,000 * These figures include the impact of both the farm enterprise and any associated on-farm processing activities, such as an abattoir, cotton gin or food packaging facility.

While the corporate farms listed in Table 5.7 clearly make an important economic contribution, it is important to remember that the estimates of value added expenditure, employment and household expenditure are not necessarily an addition to economic activity. If the land occupied by these firms were in the hands of family farms they too would make an important economic contribution. A comparison of the two types of farming would require the construction of very detailed input-output tables that are beyond the scope and resources of this study. Nevertheless, it is possible to make some crude generalisations about the different economic impact of corporate and family owned farms:

• The downstream processing often associated with corporate farms is likely to result in higher multipliers than for family farms that do not engage in processing.

• In cases where a corporate farm does not engage in downstream processing the multipliers are likely to be lower than for family farms. This is because corporate farms are more likely to seek efficiencies that reduce the level of per hectare spending on farm inputs, employees and services.

Thus, it is likely that, if downstream processing were not part of the farm business, a family farm would generate higher multipliers than corporate farms on a per hectare basis. This is confirmed by research conducted in the United States, which has also found that corporate farms that do not engage in processing activities will tend to produce fewer economic benefits (at least at the regional level) than farms owned by families (Green 1985; Leistritz and Ekstrom 1986; MacCannell 1988). More detailed, farm-level research is required on this issue in Australia.

The flow-on impacts of corporate farms (and family farms) are not restricted to local or regional economies. Indeed, Tables 5.3, 5.4 and 5.5 suggest that there may be a considerable amount of leakage from local and regional economies as farmers (corporate and family) seek the most competitive prices for farm inputs and services. Furthermore, if corporate farms internalise parts of the production process (e.g. provide their own chemicals) or the use of services (e.g. use accounting services in capital city headquarters) then the local economic impacts are likely to be reduced. Based on the analysis presented in Table 5.7, the figures in 5.8 consider the impacts of corporate farms on local economies with different levels of economic leakage (the loss of 30%, 50% or 70% of the flow-on effects). Tables 5.3 to 5.5,

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together with information collected during the interviews, suggests that the level of economic leakage associated with corporate farms is often quite high. If 70 per cent of the economic impact of a corporate farm is outside of the local economy, the impact of a firm such as Rockdale Beef on the Leeton economy is probably around $27.9 million in value added expenditure, $14 million in household expenditure and a 202 jobs. Thus, the economic impact on a local government area with a population of 11,500 and with a labour force of 5,000 is still quite significant. Again, the downstream processing activities make a substantial difference to the magnitude of the contribution. Assuming a leakage of 70%, the much smaller farm and feedlot complex of Aronui, near Dalby, contributes some $800,000 in value added expenditure, 400,000 in household expenditure, and 15 additional jobs to a town and shire with a population of 14,800 and a labour force of 6,655. It needs to be remembered that this is in addition to the initial or direct impact.

Table 5.8 Estimated Impact on Local Economies of Selected Corporate Farms at Different Levels of Economic Leakage

Value Added ($m) Employment (additional jobs)

Household Expenditure ($m)

30% loss

50% loss

70% loss

30% loss

50% loss

70% loss

30% loss

50% loss

70% loss

Auscott 6.4 4.5 2.7 54 38 23 3.2 2.3 1.4 Kooba Station na na na 35 25 15 1.1 0.8 0.5 Aronui 1.8 1.3 0.8 35 25 15 0.8 0.6 0.4 Parle Foods na na na 78 56 34 na na na Rockdale Beef 65.0 46.4 27.9 472 338 202 34 24 14 Tasmania Feedlot 1.5 1.1 0.6 32 22 14 1.8 1.3 0.8 * These figures include the impact of both the farm enterprise and any associated on-farm processing activities, such as an abattoir, cotton gin or food packaging facility.

There are a number of general themes that emerge from the analysis of the impact of corporate farms on local and regional economies. These are:

• If downstream processing or other additional activities (such as research and development) are associated with the corporate farm then the net economic gain to local communities is generally positive.

• Corporate farms without these additional activities are likely to make a smaller economic contribution to local communities than would family farms occupying an equivalent area.

• There is a high level of economic leakage associated with corporate farms, though this may be only marginally higher than the leakage associated with family owned farms.

• Internalising key services and inputs within a corporation (particularly if these are not co-located) tends to reduce positive local economic impacts.

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• The local economic impact of corporate farms is extremely diverse, and depends largely on the specific characteristics of each farm.

5.5. Implications for Services and Infrastructure The implications of corporate farms for services and infrastructure are dependent largely on the type, location and scale of the operation. For example, the infrastructure and service needs of a corporate vineyard are quite different from the needs of a beef feedlot. A corporate feedlot with a capacity of 50,000 head of cattle and an abattoir complex, such as Rockdale Beef near Leeton, may have needs that are different from those of a 15,000 head feedlot, such as Aronui near Dalby. Thus, local governments, State government planning authorities and other government agencies need to adopt a case-by-case approach to evaluating the service and infrastructure needs of corporate farms.

The field research conducted for this project revealed a number of infrastructure and service issues and needs associated with specific industries. These are presented in Table 5.9. Some of the core infrastructure and service needs include adequate transport infrastructure, housing (particularly for seasonal workers), and the provision of basic services in fields such as health, education and recreation. A number of environmental issues were also raised that have direct implications for infrastructure and services. Two of the most significant issues were the management of water for irrigation, and the safe disposal or management of effluent and waste from both farming and processing. The management of conflicts associated with noise and odour, especially on feedlots, is an important planning consideration.

It is important to note that the infrastructure and service requirements are not necessarily all that different from those required for family farms. Many of the issues are identical regardless of the business structure of the operation. For example, in the viticulture sector, corporate farms and family farms of a similar size are likely to have similar impacts on roads, place similar demands on housing (particular during the peak picking season), and be required to comply with identical environmental and other planning regulations. Where there is likely to be a different impact is when processing operations are co-located on a property. This is more likely to be the case on a corporate viticulture operation than a family property. Processing contributes greater demands on core infrastructure and services. At the same time, however, the managers of corporate farms involved in processing argue that the employment that this creates, and the additional revenue generated, means that, even after key services are provided, there is likely to be a net gain. The analysis provided in section 5.4.1 suggests that this may indeed be the case if the level of economic leakage from the local economy is not excessively high.

The demands of corporate farms on services and infrastructure is likely to be most evident when the corporate operation is either a new industry to a particular region, or at a much larger scale than the family farms in the area. Rockdale Beef (Leeton), for example, places considerable demands on transport, housing and other services in the region. However, its economic contribution to the region is likely to far outweigh the costs associated with service and infrastructure provision.

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Table 5.9 Infrastructure and Services Issues in Different Industry Sectors Industry Infrastructure and Service Issues and Needs Corporate Feedlots

• There is a need for careful transport planning. Feedlots require good road access for inputs (e.g. feedstuffs) and outputs (livestock/meat). The high volume of traffic associated with feedlots can have direct impacts on road maintenance and safety (Clarke et al. 1994).

• Feedlots produce large amounts of effluent. While the treatment of this is normally the responsibility of the feedlot, local and State governments need to monitor ecological impacts and ensure compliance with regulations.

• The intensity of employment sometimes associated with feedlots (particularly those that include processing) can have implications for local housing stock. In some cases, the existing housing market is unable to cope with the increase in demand. Housing planning should be a key consideration when large-scale feedlots are established or expanding.

• The potential increase in employment associated with large-scale feedlot-abattoir complexes has direct implications for the provision of basic services, such as education and health care facilities.

Corporate Vineyards and Horticulture Farms

• Corporate vineyards are often associated with heavy road use by trucks at certain times of the year, which can have a direct impact on road maintenance and safety. However, in most of the areas were corporate vineyards currently operate, transport infrastructure has already been adapted to the needs of the viticulture/wine sector.

• The large seasonal labour force associated with grape picking has direct impacts on the availability of housing, basic health care and other services and, in some cases, welfare services. Ongoing monitoring of the needs of the seasonal labour force is a key planning issue for local government and State government agencies. A recent Senate Inquiry has documented some of these issues (see Commonwealth of Australia 2000).

• Water rights (security of access) and irrigation issues are particularly important for these industries.

• There is a need for management of waste, particularly when downstream processing (e.g. a winery) is co-located with the farm. The development of environmental management systems at the farm and catchment levels are sometimes seen as an important means of minimising the ecological impact of (corporate and family) farms in this sector.

Corporate Dairy Farms

• Key infrastructure and service issues for firms include the provision of adequate transport services, housing infrastructure and basic services.

• Managing the environmental impacts of large-scale corporate dairy farms is an important consideration of local and State governments.

Corporate Cotton Farms

• The provision of adequate transport infrastructure is of critical importance to large-scale cotton farms, since the volume of heavy traffic associated with these properties can be high.

• Water rights and irrigation issues are particularly important for large-scale corporate farms. One of the main issues is ensuring security of access to water while, at the same time, minimising ecological impacts.

• The availability of housing for seasonal workers is an important issue for large-scale cotton producers.

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The results of this research suggest that:

• Local governments and relevant State government agencies need to consult closely with proposed and existing corporate farms about infrastructure and services needs.

• Corporate farms do not necessarily have a greater negative impact on services and infrastructure than family farms. While they may generate costs in some areas (e.g. roads) they may pay for these (and other services) indirectly through local and regional expenditure, employment and government taxes and charges.

5.6. Social Interaction and Integration

Much of the literature from the United States suggests that areas dominated by corporate farms tend to exhibit lower levels of social amenity than areas where family farms are more prevalent (Goldschmidt 1947; Rodefeld 1978; Lobao 1990; Barnes and Blevins 1992; Winson 1996). This represents a context quite different from what pertains in Australia, where corporate farms tend to be small in number and surrounded by smaller family farms. Corporate farms did not dominate any of the case studies’ localities examined as part of this research. Nevertheless, it was evident that corporate farms had a range of social impacts on rural communities. One of the most obvious positive impacts is the injection of funds for local clubs and organisations. Examples include:

• The sponsorship of local events and organisations. Parle Foods in the Riverina of NSW, for example, donates funds for local charities and non-sporting organisation. Rockdale Beef (Leeton) supports local sporting clubs and provide funds for local events.

• The provision of funding for education. Rockdale Beef fund an annual student exchange between Japan and Australia, while Auscott (Narrabri) has had a scholarship scheme since 1965 which enables one local child to go to a university fully paid for the length of their education.

The employees associated with corporate farms also tend to contribute to local social institutions and organisations. In all of the corporate farms investigated, permanent employees were generally residents of the local communities. Only seasonal workers in a number of farms had their permanent addresses outside of the local area. In some cases, these transient workers were associated with a number of social problems. In the case of the cotton industry, for example, seasonal workers associated with picking, ginning and irrigating placed considerable pressure on services and infrastructure and were sometimes associated with a range of social problem. According to a social worker in Narrabri, transient cotton chippers bring money into the town but also increase problems of drugs, teenage pregnancy, alcohol abuse and accommodation shortages. In terms of accommodation, there is often demand for 1500 places and only 150 are available. Consequently many individuals sleep in cars or in tents. Often people arrive in town with little or no money, no accommodation, and lacking essential items, such as footwear, required for work. In some cases local charities use up most of their annual budget on providing assistance to seasonal workers, which leaves little for the actual communities in which they are located. One informant estimated that 20% of seasonal workers are locals and

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the rest made up of itinerant worker, long term unemployed or those on the ‘harvest trail’. When seasonal work dries up this has an impact on the budgets of local families.

These issues are not restricted to cotton and were also noted in the Berri-Barmera case study, where an influx of grape pickers during the harvest contributed to a set of social problems very similar to those in Narrabri. For a detailed national review of the issues associated with transient workers in rural areas see the Commonwealth Government publication Harvesting Australia: Report of the National Harvest Trail Working Group (2000). However, it should be stressed that these issues are not necessarily the result of corporate farming. They affect areas with both corporate and family farms. It is simply that the scale of some corporate farms may appear to magnify the problem.

Overall, there is little evidence to suggest that corporate farms undermine social cohesion and interaction within country towns. Indeed, a number of interviewees suggested that large corporate farms actually contributed positive outcomes to rural communities in the form of greater employment, rising or stable populations and a more prosperous economic base. These economic and demographic impacts were seen as contributing to positive social outcomes. A number of the corporate farms, including Aronui (Dalby), Rockdale Beef (Leeton), Dunavant Cotton (Dalby), Auscott (Narrabri) and Banrock Station (Berri-Barmera) actually contribute to more diverse and educated regional communities through their employment of people working in research and development, financial services and marketing. During a number of interviews it was pointed out that these firms often employ younger people who are willing to move from urban areas to regional areas in order to improve their career prospects. These ‘spiralists’ can contribute not only to the local economy but also to local organisations (e.g. sporting clubs), and can bring fresh ideas and leadership to rural communities.

Despite these apparent benefits, there is a need for some caution. There is a relatively high level of staff turnover at some of the corporate farms. One of the risks is that parts of this transient population do not engage with the local community, and might contribute to a degree of demographic and social instability. Furthermore, more flexible approaches to labour relations in some corporations (particularly the casualisation of some parts of the workforce) could exacerbate this instability. In this regard, the research conducted in the United States on corporate farming is instructive. Regions or communities dominated by corporate farms often have high levels of staff turnover, casualised labour forces and a degree of social and demographic instability (see, for example, Lobao and Schulman 1991). While there is little evidence of this in Australia, it is important to recognise that there is a potential risk of these problems arising.

5.7. Conclusion

The evidence presented in this chapter suggests that corporate farms have the potential to deliver a range of social and economic benefits to rural communities. Corporate farms that have some form of processing co-located with the property deliver the greatest benefit in terms of economic activity and employment. By contrast, farms that do not engage in processing are likely to contribute less to local communities in terms of jobs and economic activity than a family farm of equivalent size. It is also important to recognise that many of the benefits of corporate farms are not necessarily local. Many firms purchase inputs and services from outside local economies. Furthermore, some of the larger corporate farms

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internalise key services (such as accounting and financial services) and do not use local businesses. This leakage of activity outside of local economies reduces the indirect benefits of corporate farms to rural communities. Nevertheless, in cases where downstream processing does occur, the net benefits are still likely to be positive.

Corporate farms often require careful local and regional planning. One of the main infrastructure needs is adequate transport infrastructure, since a number of corporate farms are associated with intense road use. Other core requirements may include waste management planning, irrigation services and careful land use planning to avoid conflicts over noise and odour. The provision of housing infrastructure is an important issue for policy makers, especially in areas where corporate farms are expanding or have a large casual or seasonal labour force. An expansion of the population as a result of increasing corporate farming activities also places demands on basic services, such as health care, education and welfare services.

This research found that, in general terms, corporate farms did form an important part of the rural communities in which they were located. The evidence suggests that, in addition to contributing to the local economy, the employees often participate in local social organisations and institutions. Many corporate farms also donated substantial sums to local schools, sporting clubs and other organisations. There were, however, a number of cases where corporate farming had negative impacts. In some cases, large seasonal and transient labour forces associated with harvesting and processing place considerable pressure on local services.

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6 Conclusion The primary objective of this research was to investigate the impacts of changing farm business structures on rural communities. Of particular interest were the impacts of contract farming arrangements and corporate farms in five case study localities in different parts of Australia. These case study localities represented different agricultural sectors and agro-ecological zones, and contained a mixture of farm business types. This chapter provides a summary of the key findings of this project and presents a series of recommendations.

6.1. The Structure of Agriculture

Agriculture dominated the economic base of all of the case study localities, with primary production accounting for more than 20% of employment. There was also considerable employment in sectors closely associated with agriculture, such as food processing, light manufacturing, transport, and public and private services. The overwhelming majority of farms were family owned, which is consistent with national farm ownership trends (ABS 2003). There were, however, a number of corporately owned farms in the case study localities. These were most common in the beef, viticulture, cotton and horticulture sectors. While numerically small, they tended to be quite significant in terms of land use, volume of output, value of output, downstream processing and employment. Corporate farms generally operated in sectors where there were opportunities to directly link downstream processing with farm production (e.g. cotton farming and ginning, viticulture and winemaking, beef grazing, feedlots and abattoirs). Corporations generally became engaged in farming when the opportunities for profits were high, there was a need to maintain close control over product quality, or there was a need to ensure security of throughput for a processing facility.

While corporate farms are an important component of agriculture in the case study localities, of more significance are contract farming arrangements. Often referred to as vertical coordination, contract farming involves agreements between farmers and other companies or people for the delivery, processing or marketing of commodities. Most surveyed farmers engaged in some form of contracting, with delivery contracts the most prevalent. These were particularly common in the horticulture, viticulture, cotton, beef and grains sectors. Marketing contracts were common in the grain, rice and beef sectors, while processing contracts were most prevalent in the horticulture and viticulture sectors.

The nature of the contracts varied considerably from region-to-region, sector-to-sector and firm-to-firm. Some contracts contained detailed specifications about quantity, quality, delivery time, price and farm management practices, while others were little more than verbal agreements between the involved parties. This latter form of contract was relatively rare, and most contracts did contain considerable detail about the relationship between the farmer and the contracting firm. Most farmers accepted that contracts were now an established part of agriculture and had the potential to have both positive and negative impacts.

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6.2. The Impacts of Contract Farming

The economic and social impacts of contract farming have been the subject of considerable debate in the literature on Australian agriculture over the past two decades. That body of literature points to issues associated with farm management decision-making, the financial implications of contracts for farm families, and the role of contracting firms in the commodity chain. Much of the literature has tended to highlight the negative impacts of contracts on farmers and communities. By contrast, the research reported here suggests that it is extremely difficult to generalise about the impacts of contracts. For many farmers, contracts can provide a range of benefits, including security of income, access to technology, farm management advice, and marketing assistance. This can, in turn, contribute to a degree of community prosperity and stability.

While contracts have the potential to contribute a number of economic benefits, there are cases where they have been less than successful and have caused significant economic and social hardship in rural communities. This study revealed that there are a number of risks associated with contract farming that have the potential to have direct impacts on the welfare of farm families and the economic and social structures of rural communities. These include:

• The collapse of contracting firms can leave farmers without a market for their produce and without income, often for extended periods of time. This has the potential to contribute to farmer bankruptcies, farm sales, outmigration, depopulation, and a contraction of economic activity and service provision.

• The restructuring of contracting firms can mean that they no longer process or market commodities produced by some local farmers. In the Riverland of South Australia, for example, the reorganisation of one of the major fruit processors left many farmers without a market for their stone-fruit. While this can cause considerable upheaval, it should be remembered that companies often restructure in order to improve profits and avoid closure. In some cases, the associated adjustment pressures facing farmers may ultimately lead to a more economically and socially sustainable agriculture.

• Sometimes there may be price manipulation by large processing firms, particularly those that hold monopoly or duopoly power within a regional or sector. This can result in the prices received by growers being depressed by the contracting firm. While this has the potential to increase profits for the contracting firm, it can cause considerable economic hardship for farmers and communities.

• Farmers may lose some degree of control over farm management and decision-making. A small number of farmers in this research indicated that this was a problem and that contracting firms were making many of the key decisions about farm management. Some contracting farmers felt that they had become little more than labourers on their own properties. This group was a minority, and farmers generally felt that they had retained a high degree of control over the property when growing under contract.

The findings of this research suggest that there is a need for many farmers to be made more aware of the implications of contracts for their farm business strategy. Farmers need to understand the benefits and risks of contracts, particularly as they relate to production

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requirements (quantity, quality and timing), farm inputs and methods, the prices paid for commodities, and the implications of a failure to produce the contracted quantity or quality of farm output (e.g. as a result of disease, climatic conditions etc.). In addition to this, there is an overall responsibility for contracting companies to develop contracts and associated arrangements that have a high degree of transparency. There may also be scope for farmers to form organisations that negotiate with contracting firms on a collective basis to ensure outcomes that are financially and socially acceptable.

6.3. The Impacts of Corporate Farming

This research suggests that the impact of corporate farms in rural communities is linked to a number of factors, including the scale of the operation (in terms of number of employees and value of output), spending patterns (particularly on inputs), the presence or otherwise of downstream processing, and the indirect and direct demand for services and infrastructure. One of the main findings was that corporate farms have the potential to make a significant contribution to local and regional employment and economic activity if they are engaged in some form of local downstream processing. Corporate farms that do not engage in local processing are likely to contribute less to local communities in terms of jobs and economic activity than family farms of an equivalent size. While corporate farms do have the potential to boost employment and economic activity, the benefits are not always localised. Many firms tended to purchase inputs and services from outside local economies. Furthermore, some of the larger corporate farms internalise key services (such as accounting and financial services) rather than using local firms for this purpose. This leakage of activity outside of local economies reduces the indirect benefits of corporate farms to rural communities. Nevertheless, in cases where downstream processing does occur, the net benefits are still likely to be positive.

Corporate farms often contribute to a more diverse demographic structure in rural communities through the employment of young people, particularly people with higher education. This is most common in firms that engage in some form of research and development. This younger population not only contributes to local spending, but can also play a key role in bringing new ideas and energy to rural communities and invigorating local social institutions. There is, however, a risk that corporate farms will adopt more flexible labour practices that have the potential to undermine local social and economic stability. At least one company has already effectively casualised its labour force by employing individual ‘contractors’ rather than permanent employees. While there is no evidence that this has had a negative impact on the local community, it is a situation that may have the potential to do so.

The infrastructure and service requirements of corporate farms are largely dependent on the nature of the individual operation. Some of main areas in need of careful attention include road infrastructure, waste management facilities or regulation, water rights and irrigation issues. The provision of housing infrastructure is an important issue for policy makers, especially in areas where corporate farms are expanding or have a large casual or seasonal labour force. An expansion of the population as a result of increasing corporate farming activities also places demands on basic services, such as health care, education and welfare services. Planning for services and infrastructure needs to be conducted on a case-by-case basis. It requires close liaison between larger corporate farms, local governments and relevant State government agencies.

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One of the ongoing debates in the literature about corporate farms concerns their contribution to local social interaction. Our research found that, in general terms, corporate farms did form an important part of the rural communities in which they were located. The evidence suggests that, in addition to contributing to the local economy, the employees often participate in local social organisations and institutions. Many corporate farms also donated substantial sums to local schools, sporting clubs and other organisations. There were, however, a number of cases where corporate farming had negative impacts. In some cases, large seasonal and transient labour forces associated with harvesting and processing commodities placed considerable pressure on local services.

A number of the findings of this report contrast with some of the findings from research conducted in the United States. According to some studies in the US, corporate farms have had a somewhat negative impact on rural communities. In Australia, the impacts appear to be more benign. There are a number of possible explanations for this. Firstly, there are very few regions in Australia where there are a large number of corporate farms. In most regions and localities, family farms are still the dominant form of farm business structure. This has helped to counterbalance the potential negative impacts of larger scale farming and processing enterprises. Secondly, the corporate farms in Australia have tended to integrate themselves into local economic and social systems. Thirdly, a number of the larger corporate farms in Australia have evolved relatively recently from family owned operations. These properties have longstanding local social and economic ties that do not appear to have been broken with the shift to corporate ownership.

6.4. Recommendations

This research has identified a number of issues that need to be given consideration by policy-makers and industry if the benefits of corporate and contract farming are to be maximised and the negative impacts minimised:

1. There is a need for greater information and education to be made available to farmers about contracts. This should include education and information on:

i) The full implications of contracts, including the obligations of the farmer, the contracting firm and any other parties named in the contract. ii) Strategies for negotiating the terms of a contract, particularly in relation to commodity prices. iii) Strategies for minimising the financial risks associated with contracts.

2. Contracting firms should accept an obligation to ensure that contracts are transparent. Contracts should adequately protect the interests of both parties, but be as simple as possible and written in plain English.

3. Further research should be undertaken on the organisational models farmers might establish for collectively negotiating contracts with processing or marketing organisations. This research should consider:

i) The legal and administrative structures that these organisations might take (e.g. cooperative, investor owned firm, association). ii) The advantages and disadvantages of these models. iii) The implications of such organisations for contracting firms, regional economies and farmer-industry relations.

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4. Local and State Government agencies must continue to liaise with corporate farms in order to plan effectively for the infrastructure and service needs of the farm, its employees and their families.

5. The planning undertaken by local and State governments needs to consider the flow-on economic impacts of corporate farms in order to plan for the service and infrastructure needs of the entire population of a locality or region. This will require detailed input-output analysis of the flow-on economic and employment impacts of existing or proposed firms.

6. The employment impacts of corporate farms on local labour markets need to be kept in view. Particular attention should be given to:

i) Ensuring that the labour needs of corporate farms, particularly the demand for skilled labour, can be met locally where possible. If appropriate, local employment training programs should try to address these needs. ii) Encouraging companies to hire permanent labour, rather than a casualised workforce. If a casual workforce does emerge, then the impact of this on workers, families and communities should be monitored by relevant State and Commonwealth government agencies.

7. This research has focused on intensive and broadacre farming. Levels of corporate farm ownership are also high in some parts of the extensive pastoral industry. There is a need to consider the economic and social issues associated with corporate pastoralism.

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Appendix: Survey Questionnaire "FARM BUSINESSES AND RURAL COMMUNITIES"

The responses to this survey are confidential.

Respondents will not be identified in the analysis and reporting of results. _____________________________________________________________________

Please check the questions below. They will tell you whether the survey would be best filled in by you or someone else in your household or company.

Question A: Does anyone in your household or does your company receive income from a farming, grazing or horticulture business? (Please tick appropriate) Yes Please continue to Question B No There is no need to continue filling in any more. Please return the survey form in the reply-paid

envelope. Thank you for your co-operation. Question B: Which of the following best describes your involvement in the farm business?

(Please tick one box) I am directly involved in the

farm business

Although not directly

involved in the farm business, I am the spouse of a person who is directly involved

Neither of the above

Please continue to Part 1 and fill out the rest of the survey form and return it in the reply-paid envelope.

If you ticked this box, please ask for the rest of the survey to be filled in by another person in your household who is directly involved in the farm business. If there is no one like this in your household, please return the survey form in the reply-paid envelope.

If you ticked this box, please ask for the rest of the survey to be filled in by another person in your household who is directly involved in the farm business.

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Part 1. PROPERTY DETAILS: 1A)- In the table below please indicate the approximate area of the property/ies operated

by your farm business under each form of tenure. Hectares OR Acres Freehold in your name or that of your

partnership/company Crown leasehold in your name or that of your

partnership/company Leased from another landowner (including

agistment) Under share farming arrangements and owned by

someone else Some other form of tenure (Please specify)

TOTAL AREA OF PROPERTY/IES 1B)- In the table below please indicate up to four agricultural activities that are undertaken

on your property/ies in order of $ value of production in a typical year (where 1 has the highest $ value of production in a typical year). (Please rank from 1 to 4)

Plant nurseries Beef cattle grazing Cut flowers and flower seed growing Beef cattle feed lotting Potato growing (for fresh produce) Dairy cattle farming Potato growing (for processing) Poultry farming (meat) Vegetable growing (for fresh produce) Poultry farming (eggs) Vegetable growing (for processing) Pig farming Grape growing (for fresh produce) Horse farming Grape growing (for processing) Deer farming Apple & pear growing (fresh fruit) Sugar cane growing Apple & pear growing (for processing)

Sheep farming

Stone fruit growing (fresh fruit) Grain growing Stone fruit growing (for processing) Cotton growing Kiwi fruit growing (fresh fruit) Broad acre hybrid seed production Kiwi fruit growing (for processing) Rice growing Orange growing (fresh fruit) Other (Please specify) Orange growing (for processing) 1C)- If you have an additional business enterprise on the property/ies then please describe

the activity below (e.g. cotton ginning, farm tourism, secondary processing, wine production, aquaculture, etc).

______________________________________________________________________________________________________________________________________________________________________________________________________________________________

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1D)- In the table below please indicate your relationship to the property/ies: (Please tick appropriate box)

I own and operate the property/ies I own but not operate the property/ies I do not own but manage the property/ies (i.e. a manager, lessee or sharefarmer)

I do not own but am a family member working on the property/ies Other (Please specify)

1E)- In the table below please indicate the business structure that best describes your situation? (Please tick appropriate box)

A sole operator A partnership Family owned Proprietary Company (i.e. all shares owned by family members)

Other form of Propriety Company (i.e. shareholders are not limited to family members)

1F)- In the two columns in the table below please:

(a) indicate the labour you employ on the farm other than your own (Circle more than one if required) (b) estimate for each labour type the number of person work weeks utilised by your property/ies. [N.B. one work week equals 40 hours per week] (e.g. if you employ 3 full time staff this equates with 156 work weeks per annum).

Labour types (a)

(b) Estimated number of

work weeks (per annum) Full-time paid employee (family and non-family)

Yes / No

Seasonal staff (local) Yes / No Seasonal staff (itinerant) Yes / No Paid casual family labour Yes / No Unpaid casual family labour Yes / No Seasonal contract labour Yes / No IG)- Do you provide housing for seasonal staff? (Please tick) Yes No If Yes, what type of employee housing is provided? (Tick more than one if required) Permanent On-Farm Staff Quarters Temporary On-Farm Staff Accommodation (i.e. Caravan etc.) Other (Please Specify)

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1H)- What is the average estimated dollar value of agricultural output over the past five years? [This is simply the market value of the agricultural outputs of the farm in an average year]

$___________________ 1I)- In the table below please indicate which of the following statements reflects your

purchasing of the following four types of goods and services (Please circle an appropriate answer for each statement and type of good and service) Farm

machinery and automobiles

Chemical and farm supplies

Farm contractors (spraying, harvesting, etc.)

Business services (accountant, solicitor, etc)

Put to tender and take most competitive bid

Yes No Yes No Yes No Yes No

Employ a policy of buying locally


Have a preference for local but only if competitive in pricing


Always choose the cheapest option


IJ)- Please answer each of the following three questions regarding the way you organise

the delivery, processing or marketing of the agricultural products you produce on your property/ies.

a) Do you enter into contracts with other people/companies for either on or off farm

delivery of the unprocessed commodities you produce on your property/ies? (e.g. delivery of grain to a silo, delivery of grapes to a winemaker, delivery of oranges to a juicer). (Please tick appropriate box)

Yes No

b) Do you enter into contracts with other people/companies for the processing of the

commodities you produce on your property/ies? (e.g. grapes processed under contract by a winemaker, oranges juiced under contract, cotton processed under contract by cotton gin). (Please tick appropriate box)

Yes No

c) Do you enter into contracts with other people/companies for the marketing of the

commodities you produce on your property/ies? (e.g. grain marketed under forward selling contracts). (Please tick appropriate box)

Yes No

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1K)- If you answered ‘yes’ to any of the answers in 1J please indicate whether you agree or disagree with each of the following statements in the table below about this contract arrangement (Please circle appropriate answer for each statement)

The contracts I enter into prescribe in detail the way in which I must manage by farm Yes No The contracts I enter into increase my ability to manage the financial risk associated with my farm business

Yes No

The contracts I enter into prescribe the farm inputs I must use in my farming activities

Yes No

The contracts I enter into take away the level of control I have over the way I manage my farm

Yes No

Other (please specify) 1L)- In the table below please indicate the plans you have for your property/ies in the next

5 years? (Tick more than one if required) Expand the farm business Sell the farm business Inter generational transfer of the farm business Continue the farm business largely unchanged Diversify into different agricultural enterprises Diversify into non farm-based enterprises Other (Please specify): 1M)- What would you consider the biggest concern regarding the future of the farm? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 1N)- What action can you take to meet and deal with this challenge? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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Part 2 PERSONAL CHARACTERISTICS 2A) In what year were you born?. _________________ 2B) Please indicate your gender. (Tick appropriate box) Male Female 2C) In the table below please indicate your occupation.

(Tick appropriate response) Full Time Farmer Part Time Farmer (Employed in second job elsewhere) Towns person Other (Please Specify):

2D)- In the table below please indicate your highest level of formal education (Tick appropriate response)

No Formal Education Primary school Part of secondary school All of secondary school (equivalent to year 12) Trade or certificate course at a TAFE college, technical college or agricultural college

Diploma or associate diploma course at a technical college, CAE, or agricultural college

Part of a degree course at a university, technical college, CAE, or agricultural college

All of a degree course at a university, technical college, CAE, or agricultural college

Higher Degree (postgraduate diploma, masters, PhD) 2E) What is the name of the local government area/shire you live in? Part 3) ADDITIONAL COMMENTS If you feel there is something we have overlooked, or something that you would like to add then please use this space. ____________________________________________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________________________________________________________________________________________________________________ Thank you for your time and co-operation.

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Documents

Rural Communities and Changing Farm Business Structures