A Revenue Contingent Loan Instrument for Agricultural Credit with Particular Reference to Drought Relief

Australia’s National Drought Policy is in need of significant reform. The following analysis considers the potential role to be played by loans provided by the government to farm businesses in periods of adversity, to be repaid depending on future revenue streams. While the economic case for taxpayer subsidies for drought relief is contestable, our approach sits comfortably in the literature with the general promotion of income stabilisation instruments for agricultural credit. The paper develops earlier work on the introduction of an income (revenue) contingent loan for drought relief and promotes for consideration a specific linkage between this policy instrument and Farm Management Deposits in a single credit risk minimisation program for farmers. It is argued that policy reform along these lines would allow farm businesses the important opportunity for income smoothing and, because of the nature of the collection mechanism through the tax system, a scheme of this genre would curtail the prospects for moral hazard.