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Revisiting revenue contingent loans for drought relief: government as risk manager

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  • Linda Courtenay Botterill
  • Bruce Chapman
  • Simon Kelly

Abstract

It is clear that Australian governments will provide assistance to farmers in drought, which is a rational political judgement supported by recent survey work suggesting strongly the pervasive existence among voters of agrarian sentiment. In this context, a reasonable question relates to what forms of assistance are most equitable for taxpayers and also have desirable properties for farm businesses. In this study it is argued that traditional and current approaches to drought assistance are not equitable and do not provide sufficient protection to farmers from default and thus insolvency risk. But there is an instrument available to government which can be designed to minimise taxpayer subsidies while at the same time delivering insurance for farmers against default: a Revenue Contingent Loan (RCL). Following the principles inherent in the Higher Education Contribution Scheme, a RCL is financial assistance repaid contingent on a farm’s capacity to pay, meaning that loan defaults can be avoided. We model the revenue streams associated with a hypothetical loan of this type and illustrate the advantages for a farm business of these kinds of debt.
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Suggested Citation

  • Linda Courtenay Botterill & Bruce Chapman & Simon Kelly, 2017. "Revisiting revenue contingent loans for drought relief: government as risk manager," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 61(3), pages 367-384, July.
    • Handle: RePEc:bla:ajarec:v:61:y:2017:i:3:p:367-384
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    File URL: http://hdl.handle.net/10.1111/1467-8489.12213
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    References listed on IDEAS

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    1. Bruce Chapman, 2014. "Income Contingent Loans: Background," International Economic Association Series, in: Bruce Chapman & Timothy Higgins & Joseph E. Stiglitz (ed.), Income Contingent Loans, chapter 1, pages 12-28, Palgrave Macmillan.
    2. Helen Louise Berry & Linda Courtenay Botterill & Geoff Cockfield & Ning Ding, 2016. "Identifying and measuring agrarian sentiment in regional Australia," Agriculture and Human Values, Springer;The Agriculture, Food, & Human Values Society (AFHVS), vol. 33(4), pages 929-941, December.
    3. Bruce Chapman & Timothy Higgins & Joseph E. Stiglitz (ed.), 2014. "Income Contingent Loans," International Economic Association Series, Palgrave Macmillan, number 978-1-137-41320-8, June.
    4. Bruce Chapman & Linda Botterill & Michael Egan, 2004. "Income Related Loans for Drought Relief," CEPR Discussion Papers 472, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    5. Productivity Commission, 2009. "Government Drought Support," Inquiry Reports, Productivity Commission, Government of Australia, number 46, July.
    6. Bruce Chapman & Linda Courtenay Botterill, 2009. "A Revenue Contingent Loan Instrument for Agricultural Credit with Particular Reference to Drought Relief," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 12(2), pages 181-196.
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    Cited by:

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    2. Lin Crase, 2021. "Lessons in Policy Incoherence: A Review of Recent Water Policies, Water Planning and Drought Policy in Australia," Economic Papers, The Economic Society of Australia, vol. 40(4), pages 313-330, December.
    3. Sahar Daghagh Yazd & Sarah Ann Wheeler & Alec Zuo, 2019. "Exploring the Drivers of Irrigator Mental Health in the Murray–Darling Basin, Australia," Sustainability, MDPI, vol. 11(21), pages 1-15, November.
    4. Steele C. West & Amin W. Mugera & Ross S. Kingwell, 2021. "Drivers of farm business capital structure and its speed of adjustment: evidence from Western Australia’s Wheatbelt," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 65(2), pages 391-412, April.

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