The discussion of Australian agriculture presented here is, in large measure, an update of the ‘stocktake’ of the sector published in early 2005 (Department of Agriculture, Fisheries and Forestry 2005). The material that follows is in two main parts. The first contains a discussion of the nature of agriculture in Australia and the key issues that are likely to be important in the sector’s future development. The second is a more comprehensive examination of each of the major industries.
Agriculture represents a vital part of the Australian economy and is significant in world trade for several commodities. In 2004-05 there were an estimated 366 000 people employed in agriculture. There were around 130 000 commercial farms spread across the continent, some 25 per cent fewer than in 1984-85.
geographic diversity
Around 60 per cent of the Australian land mass is devoted to agriculture in one form or another, with the types of agricultural pursuit being dictated largely by climate, soil types and water availability. As indicated in the map, there are three broad zones in which agricultural activity occurs. These are commonly referred to as the pastoral, wheat–sheep and high rainfall zones. Within these areas there is also some irrigation based farming, drawing on stored surface water (much of it from dams on major rivers and streams) and underground sources.
Much of the pastoral zone is characterised by low rainfall, less fertile soils, and large area farming activities involving the grazing of beef cattle and sheep for wool and mutton.
As the name implies, the principal farming activities in the wheat–sheep zone are cropping (principally winter crops), and the grazing of sheep (for wool, lamb and mutton) and beef cattle.
Prime lamb, beef and wool production are undertaken in the high rainfall zone. The coastal part of the high rainfall zone is also where much of Australia’s dairy industry is based (along with some dairying in inland irrigation areas).
Figures from the five yearly Australian Bureau of Statistics’ Agricultural Census in 2001 (ABS census) indicate that there were approximately 5400 farms located in the pastoral zone, 54 300 farms in the wheat–sheep zone and 57 800 farms in the high rainfall zone. These figures will be updated in the 2006 agricultural census, due for release in 2007. Following the trend in many areas of the agriculture sector, it is expected that the new figures will be below those reported in 2001.
There has been a steady rise in the average size of farming operations and the amount of capital invested in those operations over time. For example, in the cropping industry (including specialist cropping and mixed cropping–livestock producers) the number of farm businesses fell by 22 per cent over the period 1985-86 to 2005-06, from around 39 000 to 30 500. Over the same period, the average area cropped per farm rose by 58 per cent, from 450 hectares to 710 hectares, while capital invested (in 2005-06 Australian dollar terms) doubled from an average of A$1.4 million to A$2.8 million. As can be seen in the industry reports later, similar trends are evident for most major agricultural industries.
economic contribution
Australian agriculture contributes a small but important part of the national economy. The contribution of agriculture to gross domestic product (GDP) and the relative shares of the other sectors of the economy are fairly typical of a mature economy, with the services sector now accounting for around three quarters of output.
Although the Australian economy has almost doubled in size in real terms (net of inflation) since the early to mid-1980s, the value of farm output has risen by only a little more than 50 per cent. Consequently, agriculture’s share of GDP has declined — from around 3.6 per cent in the early 1980s to 2.7 per cent in the three years to 2004-05. This decline in relative importance reflects the growth in the services, mining and manufacturing sectors.
The interdependence of agriculture and other parts of the Australian economy was highlighted in the 2002-03 drought. Although accounting for a comparatively small proportion of GDP, the drought demonstrated the importance of agriculture to overall economic importance — the fall in the gross value of agricultural production of 19 per cent (to approximately $32 billion) in the 2002-03 drought led to a decline in Australian GDP of around 1 per cent (Lu and Hedley 2004).
industry size
Within Australian farming there is a wide diversity of both industry size and products. A ranking of the major industries according to their gross values of production (in real terms) is shown in the figure opposite. The figure also illustrates how the relative magnitude of each industry has changed in the two decades since 1985-86.
Particularly noteworthy in the increases in gross value of farm output are: a 52 per cent rise for beef and veal (partly because of more cattle being finished in feedlots) since 1985-86; a 60 per cent increase in the value of horticultural products (in part representing industry responses to increases in the volume and variety of consumer demand for fresh fruit and vegetables); and a 410 per cent rise in the value of wine grape production.
In contrast to the growth in these industries, the value of wheat and sugar crops produced fell by 23 per cent and 13 per cent respectively since the early 1980s (reflecting declining prices). There was also a 55 per cent fall in the value of wool produced (because of lower wool prices and markedly lower sheep numbers).
natural resources
Land is the main basic resource used in agriculture, but water and its availability for agriculture are becoming critically important for the maintenance and further development of agriculture in many areas. Australian land tenure is mostly under freehold title or some form of long term lease from the Crown, with freehold being predominant in the more productive and closely settled regions.
Access to irrigation water from bores or river systems is licensed by the states, which also own major storages on rivers. Distribution of irrigation water from state owned facilities is mainly by private irrigation companies to which users pay fees for delivery. Increased trading of water (usually on a temporary basis and mainly within the same river valleys at this stage) is contributing to a more economically efficient allocation of the resource between competing users. Such trade proved to be particularly useful in ensuring that scarce water was available to higher value end uses in the 2002-03 drought.
Around 75 per cent of the water used in Australia is in irrigated agriculture, with the output from irrigated land accounting for a substantial proportion of the gross value of agricultural production. Commodity production that is wholly or partly dependent on irrigation includes rice, cotton, grapes, fruit and vegetables, sugar and dairying.
In common with other types of agricultural pursuits, irrigated agriculture has incurred significant environmental costs in some areas. Land and water degradation in Australia, excluding weeds and pests, has been estimated to cost up to A$3.5 billion a year (COAG 2000, p. 5). A third of Australia’s rivers are in a degraded condition as a result of high water extraction rates and high nutrient runoff from surrounding land. At least 2.5 million hectares, or 5 per cent of cultivated land, is affected by dryland salinity.
The situation can be expected to improve, however, as users of land and water resources become more conscious of the adverse effects of environmental degradation on agricultural sustainability. For example, increased efficiencies in water use achieved through the adoption of newer technologies and better on-farm water management, as the allocation of water becomes increasingly market determined, will help reduce some of the degradation stemming from previous irrigation practices.
trade
Australia’s agriculture sector is strongly export oriented. In contrast to its relatively small contribution to the broader economy, agriculture accounted for around a quarter of Australia’s merchandise exports in 2004-05 (at A$30.4 billion). Imports of food and food products in 2004-05 were valued at around A$6.5 billion, roughly a fifth of the value exported.
The dependence of Australian farming on exports varies among different industries. It is estimated that for the period 2002-03 to 2004-05 around 64 per cent of the commodities produced on farms each year were exported. Among the larger industries, the average proportion of production exported ranged from 98 per cent for wool to 57 per cent for milk (principally in the form of manufactured products such as cheese, milk powders and butter) and only 9 per cent for pig and poultry meat.
In addition to the direct contribution of exports to farm earnings, changes in world prices and currency movements also have a bearing on producer returns. For commodities that are exported or that face competition from imports or that are domestically produced substitutes traded globally, domestic prices are generally relatively closely correlated with those in international markets.
The relative importance of different export markets for Australian agricultural products has been changing over time. There has been a shift in emphasis from European to Asian markets between the early 1990s and the present. The figures do not include exports of wheat, barley, oats and rice as these data are confidential. Growth in the share of exports to other Asian and Middle Eastern destinations in particular is therefore likely to be underestimated.
Australia’s main agricultural exports ranked according to value for two three-year periods (ended 1985-86 and 2005-06) are shown below. Standout export performers have been beef, wine and dairy, as these industries have responded to growing overseas demand for higher value products in these categories.
One notable feature of the export situation has been the major decline in the importance of wool, as growers have cut output in response to reduced profitability. The decline in value of wheat exports is a reflection of lower prices and much greater amounts of these grains being fed to domestic livestock (especially beef and dairy).
Reflecting Australia’s relatively high per person incomes by world standards and the comparatively small population that is growing only slowly, most of the future growth in Australian agriculture will depend on exports.
farm business performance
The volatility of income from year to year and the long term downward trend in farmers’ terms of trade (the ratio of prices received to prices paid) are long standing characteristics of Australian farming.
Declining terms of trade are a reflection of the fact that, for agriculture (both domestically and globally), prices of inputs used in the production of farm commodities have generally been rising faster than the prices received for those commodities. This is happening because global production is growing at a greater rate than global demand, causing commodity prices in real terms (net of inflation) to fall.
In addition to relative prices, the influence of weather and climate, policy and market changes can have a substantial effect on farm sector earnings. Of the years noted along the bottom axis of the figure above, 1982-83, 1994-95 and 2002-03 were years of substantial drought and low farm sector incomes (as represented here by the net value of farm production). In 1985-86, the introduction of the US Export Enhancement Program of subsidies for grain and dairy products — in competition with those of the European Union — resulted in depressed grain prices and hence lower farm returns. The collapse of the wool reserve price in Australia was the major factor contributing to low incomes in 1990-91.
At the individual farm level, economic performance has been highly variable across the major industries for which data are available over an extended period. ABARE surveys of broadacre farms (grains, sheep and beef) and dairy farms highlight the disparity in performance between grains and livestock (sheep and beef) farm businesses since the collapse of the wool reserve price scheme in 1990-91. Consistently higher returns from cropping over the past decade have encouraged the movement of resources invested from sheep to grains production.
In the face of declining terms of trade, Australian farmers have been able to remain internationally competitive and sustain their businesses and incomes largely through productivity growth. Total factor productivity on Australian farms (essentially the value of output relative to the value of inputs used) has risen strongly for the grains and cropping industry — averaging 2.7 per cent a year from 1977-78 to 2003-04 — but significantly less for sheep, beef and dairy.
A significant part of the differences in relative performance between the grains and livestock industries reflects the gains to the cropping sector from increased mechanisation, improved herbicides and pesticides, better rotations, higher yielding varieties, and better farm management and marketing strategies. The lift in grains industry productivity is likely to have been significantly aided by substantial investment in research and development — through both the private sector and organisations such as the Grains Research and Development Corporation (funded by grower levies and matching government grants up to a ceiling of 0.5 per cent of grains industry gross value of production), which invested $120 million in research in 2004-05 (GRDC Annual Report 2004-05).
A feature of the farms included in ABARE’s farm survey program is that a relatively small percentage of farms produce the majority of industry output. For example, in 2005-06 the top 30 per cent of farms in the grains industry (in terms of value of output) accounted for more than 70 per cent of industry production. Although data are not yet available for 2005-06, in 2004-05 these top 30 per cent of farms achieved a return on capital invested that was 30 per cent higher than that for the grains industry as a whole.
In 2005-06, the top 30 per cent of farms in the beef industry produced an estimated 93 per cent of industry output and for dairy they produced 56 per cent. In broad terms, the top performing farms have on average more capital invested and operate on larger land areas. Selected features of higher and lower performing farms as well as industry averages can be found in the industry profiles.
agriculture and regional australia
The agriculture sector’s economic importance in rural and regional Australia is particularly significant because of the income it brings into communities in the form of direct spending on goods and services and on employment (both direct and in service industries).
Across the economy as a whole, the agriculture sector provides only around 3.5 per cent of employment but the dependence on agriculture for jobs is significantly higher in inland and remote Australia than for the nation as a whole. At the time of the five yearly census (in 2001), around 13 per cent of those employed in remote areas were engaged in agriculture, and about 14 per cent of those employed in the rest of inland Australia were in agriculture. Within these broad regions there is also considerable variation.
Meat processing, wine manufacturing, dairy product processing and fruit and vegetable processing employ significant numbers of people in inland areas. Out of a total of 39 100 persons employed in food processing in inland (nonremote) regions in 2001, around 20 per cent were in meat processing, 19 per cent in wine production, 12 per cent in dairy product manufacturing and 10 per cent in fruit and vegetable processing.
In nonmetropolitan coastal areas, sugar, meat and dairy products predominate. Of the 22 000 persons employed in these areas at the time of the 2001 census, 23 per cent were in sugar manufacturing (milling and refining), 19 per cent in meat processing and 15 per cent in manufacturing dairy products.
