The agriculture sector operates in a dynamic and complex environment. Some of the major issues that are likely to influence the future direction of the sector are addressed here, with a view to identifying the principal factors at play in determining future competitiveness and sustainability. These issues include both domestic and international influences.

Prices received for agricultural outputs as well as the amounts of product entering markets are largely determined by global demand and supply as well as by multilateral and bilateral trade arrangements. Prices and access are also affected by national specifications on pest and disease risks and other matters such as food safety and labeling.

Within Australia, commercial interactions along the supply chain are central to competitiveness, as are the innovative capacity of technology, impact of skills and expertise and management of the natural resource base. In addition, Australian farmers are operating in a dynamic environment of community expectations about animal production practices, production inputs and protection of the nation’s flora and fauna.

marketing challenges and consumer tastes
Globally, consumers are becoming more affluent, sophisticated and discerning. Tastes are changing and converging across national and cultural borders. Meeting consumer preferences for product range, quality and food safety is driving change throughout the food production chain and can be expected to do so in the future.

In developing countries where incomes are rising rapidly, consumer preferences typically trend toward higher quality in foods, with more value added services in what they purchase, and more livestock products (such as meat and dairy) in their diets.

In developed countries, changing consumer preferences and aging populations are presenting suppliers of food with another set of challenges. The proportion of the population no longer in paid employment is growing quickly as the ‘baby boomer’ generation moves into retirement, leading to expenditure on food by this segment of the population declining. At the same time, as the proportion of household members in employment (and household disposable incomes) in the broader community rise, there is a trend toward eating ready prepared food, either at home or elsewhere.

Greater awareness in some sections of the community of the value of more fruit and vegetables in diets is being reflected in increasing demand for fresh produce.

The growth in niche markets catering to tastes and preferences outside the mainstream will continue to provide important opportunities for some farmers and manufacturers. For example, ‘organically certified’ food grown and prepared under specified conditions represents a relatively small segment of the market that has developed and grown in response to expanding consumer demand for ‘natural’ foods.

With consumers globally taking more interest in the origins of their food and the processes underpinning its production, participants in the supply chain, from farmers to retailers, are positioning themselves to provide greater assurances about the health and safety of the products they offer. One manifestation of the response to consumer demands in this area is the action of food processors and packagers to provide more information on product labels.

An important element of the relationship between the food producer and consumer is the need for good communication up and down the supply chain. Although better labeling can help with such things as product differentiation, there is still potential for consumers to be confused about the particular attributes of various foods and alternative approaches to food preparation. The long running debate about the relative health merits of red versus white meats is one example of how consumers can be given conflicting messages by different elements of the agriculture and food industries.

international trading environment
Future growth in Australian agriculture is likely to depend more on export markets than on the comparatively small domestic market. Important trade related factors likely to affect the agriculture sector include world market conditions, barriers to trade (such as tariffs and import quotas), quarantine and technical barriers (such as labeling requirements), maintenance of global competitiveness and market image, and management of biosecurity issues affecting imports and the disease status of exports.

nature of world markets

Australian farmers, like other exporters of agricultural products, operate in an environment of steadily declining terms of trade for their output. In real terms, the prices for farm goods are falling or steady, while input costs continue to rise. This trend is expected to continue and represents a major challenge to Australian farmers.

The other major factor affecting export prospects is progress in efforts to remove policy induced distortions to world agricultural production and trade that adversely affect prices to producers, consumers and traders. Such distortions result in inappropriate investment and consumption decisions and reduced global economic welfare.

Despite major efforts over many years and considerable success in some areas, agricultural tariffs are still much higher than tariffs on other merchandise trade. Also, agriculture is the only sector for which export subsidies are still permitted under global trade rules.
Direct government payments to agriculture (including market price support) account for a large proportion of farm incomes in many industrialised countries. These countries account for most of the direct government payments to farmers. The European Union, the United States, Japan and the Republic of Korea accounted for over 83 per cent of all domestic support notified to the World Trade Organisation from 1995 to 1999.

The OECD has estimated that, in 2005, the monetary value of transfers from consumers and taxpayers to support EU farmers as a result of policy measures was equivalent to 32 per cent of farmers’ gross incomes (OECD 2006). For US producers the figure was 16 per cent, for Japanese producers it was 56 per cent, and for Korean producers it was 63 per cent. Australian producers received assistance equivalent to an estimated 5 per cent of their gross incomes in 2005, and New Zealand producers received 3 per cent.

The Uruguay Round of multilateral trade negotiations achieved an important result through, for the first time, bringing agriculture comprehensively into the multilateral trading system by placing legally binding ceilings (commitments) on agricultural export subsidies (that were previously uncapped), disciplines on domestic support, eliminating nontariff barriers and binding all agricultural tariffs. Australia and New Zealand’s agriculture sectors would benefit if these reforms to world agricultural trade could be consolidated and enforced through the current Doha Development Round of WTO negotiations.

It is increasingly the case that complex, nontransparent technical barriers, particularly sanitary and phytosanitary (SPS) measures (including food standards), are affecting market access for agricultural products. Although the WTO SPS agreement has placed greater disciplines on the use of such measures, they are generally time consuming, resource intensive and difficult to address. Technical barriers are not covered by the Doha Round negotiating mandate and generally require a unique bilateral approach to resolve.

reforming agricultural markets

Australia can be expected to continue to pursue an agenda of mutually reinforcing multilateral and bilateral trade reform over the longer term.

Within the WTO context, major opportunities exist for advancing international trade reform, but the situation is not straightforward and there are significant obstacles. Support in the major economies and in the developing world for global trade liberalisation has diminished since the 1990s, despite compelling evidence linking trade reform with economic growth. Bringing the Doha Round of multilateral trade negotiations to a successful conclusion will require a sustained commitment from members of the World Trade Organisation.

Australia is committed to the principles and effectiveness of the WTO and continues to promote the need for further reform. As a relatively small economy, Australia has a strong interest in the maintenance of an effective rules based trading system as well as in the liberalisation of trade in agriculture, goods and services. Reflecting this interest, Australia has taken a lead role in the agriculture negotiations and is chair of the Cairns Group coalition of WTO members that advocates outcomes for agriculture that would substantially improve market access, reduce trade distorting domestic supports, and eliminate export subsidies.

Bilateral and regional trade agreements can be valuable tools for the liberalisation of market access restrictions on agricultural and processed food products in ways that complement WTO outcomes. In recent years, Australia has shown an active interest in the negotiation of free trade agreements where substantial gains in market access cannot be achieved elsewhere in a similar timeframe.

From the perspective of the agriculture sector, determining factors for prospective free trade agreements are likely to include that the negotiations should be capable of delivering real trade and commercial benefits to Australian exporters; that the agreements must be comprehensive in scope, in particular that they include agriculture; and that they should cover substantially all trade between the parties so as to ensure consistency with WTO principles.

As well as the two decade old Closer Economic Relations (CER) agreement with New Zealand, access improvements secured through free trade agreements with Thailand and the United States are providing greater export opportunities for Australian farmers. Potential free trade agreements are currently being discussed with China, Malaysia and the United Arab Emirates, and have commenced with the Association of South East Asian Nations (ASEAN).

biosecurity
With the agriculture and food sector becoming more globalised, there is heightened risk to Australia’s favorable pest and disease status. Factors contributing to this increased risk include growing volumes of trade, a significant rise in international travel, demographic and environmental changes, intensification of agricultural production and the threat of bioterrorism.

Australia’s relative freedom from many of the debilitating pests and diseases of animals and plants that affect other countries is of considerable benefit to its competitive position in areas such as agricultural production and trade. This disease and pest status has been maintained over the years through the country’s relative isolation as an island continent and through significant investment in quarantine activities to protect against incursions of exotic pests and diseases.

Risks to Australia’s biosecurity status in plants and animals are increasing with the emergence and re-emergence of a number of serious diseases and increased potential for the spread of a range of these as well as plant and animal pests. For example, major problems continue to occur overseas with bovine spongiform encephalopathy (BSE, or ‘mad cow’ disease), avian influenza and foot and mouth disease. Within Australia, diseases such as Japanese encephalitis, citrus canker, sugar smut and Australian bat lyssa virus have emerged.

Australia’s biosecurity risk management systems will need to be well adapted to meet the various challenges that emerge, while at the same time ensuring that the measures employed are proportionate to the risks involved. Import policies and procedures will need to be underpinned by rigorous scientific assessments as part of a range of consultative and transparent import risk analyses. Biosecurity risks will continue to require management based on sound science and the development of appropriate import protocols.

With its agriculture and food sector substantially export oriented, it will remain critical that Australia continues to work with other countries to reduce and manage biosecurity risks to human, plant and animal health. Efforts are likely to stay focused on the management of major pests and diseases, on the improvement of international sanitary and phytosanitary (SPS) standards that apply to international trade, and on maintaining intelligence and surveillance to help identify new and emerging diseases.

Australia’s reputation as a producer of food products manufactured from agricultural commodities produced in an environment free from some of the major diseases occurring elsewhere, together with its rigorous food safety standards, will continue to be an important marketing tool in both domestic and export markets.

Food traceability requirements and systems are likely to be increasingly mandated in response to demands from consumers and governments in Australia and overseas. The expansion of such systems will mean that when food safety incidents occur, products can be traced back to their source, remedial action taken, and regulations changed to minimise the likelihood of future occurrences. These processes will be important for addressing disease incidents (such as BSE), as well as concerns about potential bioterrorism. Product traceability mechanisms, such as the National Livestock Identification System, will become more widespread and impose particular management requirements through the supply chain from the retail level to farm business.

infrastructure
The future ability of the agriculture sector to service existing markets and exploit new market opportunities will depend critically on the capacity of Australia’s infrastructure to handle future volume growth. Infrastructure of key importance includes transport, ports, telecommunications, energy and irrigation facilities.

It will be important that roads, railways and ports have efficient facilities that are well linked and that investments occur where the potential economic benefits to the community are greatest. With competing demands for public funds, the private sector is likely to play a more significant role in infrastructure investment.

Transport infrastructure has always been important to the performance of the agriculture sector. The total freight task in Australia is forecast to almost double in the next twenty years (Auslink White Paper 2004). Such growth, together with increases in other traffic will add considerably to the pressure on the national road and rail network. The operation of ports will also be important to the economic performance of agricultural exporters as well as importers of key inputs such as fertilisers.

Reliable and affordable communications infrastructure is important for Australian farming to remain competitive in the global market. Rapid development in communications technologies means that there will be a requirement for ongoing investment in related infrastructure. Technologies such as the internet allow farmers to buy inputs, sell outputs and seek out more information. Mobile phone technology can allow speedier communication with suppliers than by using land lines.

Investment in irrigation infrastructure is particularly important to agriculture. There has been considerable investment in irrigation infrastructure by governments over the past century and the continued maintenance of irrigation infrastructure and economically efficient use of irrigation water is vital to maintaining the contribution of irrigated agriculture to the Australian economy. Reforms over the past decade have meant that local irrigation infrastructure is now often controlled by private water supply authorities.

Much of the irrigation infrastructure in Australia is aging and will need to be replaced or significantly refurbished over the coming decades. Very few new water storages have been constructed over the past decade as increasing public opposition, driven by environmental concerns and costs, have prevented many projects. For much of Australia, new irrigation opportunities are likely to be restricted largely to water derived from savings and recycling projects.

management skills and labor supply
With increasing requirements for business planning, enhanced market awareness, the use of modern technology such as computers and global positioning systems and better agronomic management, modern farm managers will need to become increasingly skilled. As business managers, farmers will need appropriate modern business and technical skills. Higher levels of formal education will increasingly be a feature of farm managers, particularly for new entrants, as will increased use of information technology on farms.

Access to suitably skilled supplies of labor will be important for the success of farming, food and beverage manufacturing, food retailing and associated industries such as banking and farm input suppliers. Immigration and education and training policy will play a role in ensuring the supply of labor in an environment of an aging population in rural and regional Australia. Continued efforts to increase workforce participation, particularly among groups not currently fully participating in the labor market, is also likely to be a key element of industry and government strategies to address labor supply and skills shortages in the agriculture and food sector in the future.

Labor supply constraints are likely to be felt most heavily in industries where significant levels of mechanisation are difficult to achieve. Common examples are sheep shearing and fruit picking, where there is evidence of difficulties in securing sufficient labor in recent years. Immigration policy (including working visa arrangements), training of skilled workers, the development of labor hire systems that provide continuity of work in industries with strong seasonal peaks, and industrial relations reforms are becoming increasingly important where other sectors of the economy provide strong competition for workers.

Superior management skills and practices are a common feature of the better performing farm businesses in Australia. To a significant degree, better performing farmers appear to make greater use of modern communication tools and are more adept than the average at investigating market opportunities, at researching customer requirements, at business planning including financial management, and at researching the latest farming techniques.

Risk management skills in particular are an important element of modern farm management. Farmers manage a number of different risks such as climate, financial, price and safety. A number of risk management practices have become popular, including the use of climate and farm management software packages, futures trading, using consultants, and enterprise diversification.

Adoption of risk management practices by Australian farmers is highly variable. Although the cost of services may be a factor in restricting the use of consultants and other professional advisers, attitudes to risk taking activities (including uncertainty about the results from employing new practices) are also likely to be important.

innovation and R&D
A key driver in improving farm performance is the provision and adoption of new technologies. For this reason, the systems in place to develop innovative new technologies and the conduct of research and development are important.

coordination and funding

Because of the diversity of activities being undertaken at any one time in a large number of organisations around the country, it is difficult to obtain a comprehensive picture of total agricultural research and development expenditures. Nevertheless, in 2004-05 through the rural research and development corporations and companies, over $510 million was contributed to agricultural research and development, using a combination of industry levies and matching funding by the Australian Government for eligible research and development activities.

In the research and development context, there is likely to be a range of important issues that can be addressed in the interests of increasing national competitiveness and sustainability of Australian agriculture. These include: a more consistent national strategic agenda for agricultural research and development; more active involvement of research investors in collaboration with research providers developing programs of work; greater coordination of research activities across industries, research organisations and issues; and investment in human capital to ensure a skilled pool of research personnel in the future.

technology adoption

Technology development and adoption
is vital to the success of agricultural industries. However, as noted previously, performance is not consistent between industries, with the cropping industries achieving higher productivity growth than livestock industries.

Effective dissemination of research and development outcomes to facilitate adoption of innovations by industry is important in maintaining productivity. Government and industry will have a vital role in promoting the adoption of new research findings that have the greatest potential benefits at regional and local levels. It will be important to the future development of agriculture that the reasons for differences in productivity growth between agricultural industries be better understood, with a view to identifying areas where the returns to future research — including factors in technology adoption — are likely to be the greatest.

takeup of biotechnology

Biotechnology offers potentially significant benefits for productivity improvements in agriculture and natural resource management. Some of Australia’s major competitors, such as the United States, Canada, Argentina and Brazil, already make substantial use of genetically modified (GM) crops, and China is making large investments in technology. In 2004, around 8 million farmers in seventeen countries were growing GM crops (James 2004). Australia could be placed at a competitive disadvantage if it does not manage the adoption of GM crops appropriately.

A major issue, both for consumers and industry, is community acceptance of GM technology. In the past, new technology has often faced community resistance, but when the benefits become obvious and if concerns about new technology are addressed, acceptance generally follows. The development of GM products with direct benefits to consumers will assist in this.

Partly as a result of community pressures, policies in most Australian states currently do not allow the commercial release of genetically modified crops other than cotton and carnations. Issues such as cross pollination with non-GM crops, segregation of supply chains and legal liability will also need to be addressed in order to gain wider acceptance of GM crops among Australian farmers.

sustainable management of resources
Over the past twenty years, public policy discussion of natural resource management has focused largely on emerging physical land and water degradation problems and constraints affecting the productivity of agricultural and food industries. Resource management issues are likely to be pre-eminent among the various domestic policy challenges ahead of government and Australian agriculture over the next few decades.

In recent times, public policy concerns have extended beyond these matters to embrace future management arrangements for land, water and the diversity of native flora and fauna. The underlying issues are complex and relate to matters of resource access, sovereign risk affecting investment prospects and costs of capital, resource pricing, trade in water and other resources, alternative means of managing public and private interests and the respective roles of regulation and community based catchment planning in achieving local, regional and broader social goals.

taking water reform forward

In 2004 the Council of Australian Governments (COAG) agreed on the National Water Initiative to take forward a comprehensive range of water reforms, including defining access rights, fostering water trade, providing water for environmental outcomes, transparent assignment of risk in response to reallocation of water from consumptive to environmental use, clearer accounting for the sourcing and allocation of water and the establishment of a National Water Commission to assess progress with the initiative and to administer programs to assist with its implementation.

While the agriculture sector has much to gain from any improvements to water use efficiency stemming from the National Water Initiative, there will be continuing challenges in its implementation and development. The most challenging areas for government, water users and the broad community are likely to be in further improving the operation of water markets, implementing a risk assignment regime associated with water property rights, and progressing transparent and effective processes for water resource planning with a view to determining allocations for consumptive and environmental purposes.

resource access issues

In the area of land management, there is much debate around the management of native vegetation and the protection and enhancement of biodiversity, flora and fauna.

The impact of different land management regimes on the sustainability of productive agricultural resources and biodiversity is an important consideration, and where landholder responsibilities begin and end for publicly sought outcomes is a key issue. Who should be accountable for those outcomes and the role that farmers should play in funding their delivery are likely to remain the subject of debate.

A range of different policy approaches, such as regulation, community/catchment based solutions and other market based instruments, have been proposed to tackle the policy challenges. Regulations have been used by governments to pursue land management and environmental objectives but can be costly in terms of forgone production and missed development opportunities.

The National Action Plan for Salinity and Water Quality and the Natural Heritage Trust rely on catchment management and regional authorities (often having their role reflected in state legislation) and have a role as an alternative approach for achieving environmental outcomes.

There are 56 natural resource management regions across Australia, reflecting an assumption that plans that are owned by regional communities have a greater chance of achieving good natural resource management outcomes than a ‘top down’ approach that attempts to impose external solutions. The challenge in this regional approach will be to improve coordination between different levels of government and regions to ensure that appropriate mechanisms are in place to deal with production and conservation tradeoffs without resorting to regulation.

adapting to climate change

An issue of potential significance for the future of rural and regional Australia is that of climate change. The extent of likely climate change and its implications for the level and pattern of agricultural activity in Australia and other major agriculture producing nations is highly uncertain. There is now broad acceptance, however, of the need to have strategies available for managing the risks of climate change.

The risk of climate changes and therefore the need to adapt to these changes potentially presents a major challenge to a sector — agriculture — that is dependent on the climate. Key issues that need to be worked through by government, industry and the wider community include decisions on what management support tools and training are required for farmers and rural communities to improve their use of climate information in planning decisions.

Work will be needed on developing appropriate planning and strategies for the future. Dealing with such issues will most likely require a partnership of industry, government and research specialists to come up with good outcomes for the agriculture sector and for the community at large.

industry profiles
The following section of the report provides a sectoral analysis of the largest twelve agricultural industries — beef, broadacre crops, cotton, dairy, horticulture, pig meat, poultry, rice, sheep meat, sugar, wine grapes and wine, and wool. It has been prepared with a view to identifying the major characteristics and the domestic and international influences affecting the future of key industries. It also provides an overview of a number of smaller agricultural industries that play an important part in the sector.

A common approach is taken to the information presented for each of the key industries. Industry features such as location, size, output, market orientation and position in the global market are covered. The maps showing the location of principal areas of production for each industry are based on data from the five yearly ABS Agricultural Census 2001, presented at a statistical local area level (ABS 2001c). A number of economic measures of performance are included to allow comparison across some major sectors.