BILLIONS of dollars in drought assistance to farmers and rural businesses has been inequitable, ineffective and divisive, and encouraged poor farming practices, the Productivity Commission says.

In a draft report requested by the Federal Government and released yesterday, the commission recommends most forms of drought assistance be scrapped by 2009-10 and replaced by spending on things such as climate research and business training that help farmers better manage risk so they can survive drought without taxpayer assistance.

Struggling farmers everywhere - not just in drought-declared areas - should get temporary income assistance, but with much tighter eligibility criteria.

The report also recommends scrapping $150,000 exit grants - designed to get unviable farmers off the land - because they have attracted only 550 applications.

The commission said: "Most farmers are sufficiently self-reliant to manage climate variability. In 2007-08, 20 per cent of Australia's 150,000 farms received drought assistance, totalling over $1 billion, with some on income support continuously since 2002. Even in drought-declared areas, most farmers manage without assistance."

The report is scathing of subsidies from the Federal Government for interest rates and from the State Government for the transport of livestock, water and fodder because they "can perversely encourage poor management practices. In marked contrast to the policy objectives, current drought assistance programs are not focused on helping farmers improve self-reliance, preparedness and climate-change management."

Interest rate assistance was directed to those "more heavily in debt, farmers who have strong balance sheets are ineligible".

Transport subsidies pushed up the price of fodder for other farmers and exacerbated environmental damage because farmers retained excessive stock for the prevailing conditions.

Exceptional Circumstances assistance is supposed to go to needy farmers in areas that are suffering droughts that come along only every 20 to 25 years, but "it has been common for 30 per cent or more of Australia to be [drought] declared. Indeed, as at June 2008, more than half of the country was declared and some areas had been declared for 13 of the past 16 years. When compared with rainfall records, it would appear that a generous interpretation of the criteria, rather than protracted low rainfall, is mainly responsible for such widespread declarations.

"More enduring regional development initiatives" would be appropriate, rather than drought assistance to prop up ailing rural communities.

The National Farmers Federation wants changes to drought assistance, but said the short time-frame recommended by the commission was "not prudent". It urged the commission to look at HECS-style loans to farmers.

The Opposition's agriculture spokesman, John Cobb, labelled the report ridiculous. The current drought was the worst he had experienced, and "not even the best farmers could have prepared for this".

The Federal Government renewed its commitment that the rules would not change for anyone currently receiving drought assistance.