by Professor Ross Kingwell – AEGIC Chief Economist.
Key message: Australia’s climate remains highly variable, challenging agricultural production and its related sectors. Yet despite Australia being a global leader in volatility of agricultural production, farmers and scientists are consistently delivering improvements to ensure farming remains profitable.
Dorothea Mackellar’s famous poem, My Country, written over a century ago, summed up Australia as a land “of droughts and flooding rains”. She knew those extremes in Australia’s climate. Even now, droughts, floods and fires remain a feature of Australia’s climate, creating marked volatility in Australian agricultural production.
What is under-appreciated by some is just how volatile, by international comparison, Australian agricultural production is. This chart from The Economist shows Australia’s global uniqueness. It has the second highest volatility of agricultural production and is among a handful of countries with highly volatile agricultural production.
Chart 1: Volatility of agricultural production (all scores are normalised to a 0-100 score). Source: The Economist
Production volatility has many implications. Farm businesses cannot take on too much debt. A run of poor seasons can be ruinous, leaving a farm business with no capacity to adequately service its burden of debt. A string of poor years can stretch a farm family, affecting its ability to pay for education, family expenses and repairs and maintenance. Major investments such as farm expansion become especially risky. Forward selling large quantities of grain and other farm products becomes problematic because the farmer is rarely assured of being able to grow the required volumes.
Businesses dependent on local grain supplies can face hefty grain price spikes whenever persistent drought runs down grain stocks and expensive grain then needs to be imported from interstate. Production volatility forces farmers to retain sufficient reserves of grain and fodder to preserve the welfare of their farm animals during prolonged drought and farmers must quickly adjust their stocking rates to changeable grazing conditions.
Logistic infrastructure needs to be constructed to flex up and down in response to changeable grain volumes and animal numbers. Some infrastructure, such as grain export terminals in eastern Australia, need to be constructed in the knowledge that in the poorest of years those terminals will throughput little grain. Commercial returns to such fixed assets are made more volatile due to the changing volumes of grain produced and exported.
The revenue and profit volatility that result from production volatility have consequences for businesses that serve agriculture. Periods of belt-tightening by farmers reduce sales of farm inputs and capital items like farm machinery. Conversely, less frequent periods of high profits are commercial windows of opportunity for input suppliers. Servicing the fluctuating demand for goods and services from farmers creates its own set of logistic and purchasing problems for farming’s ancillary industries.
Yet despite all the afore-mentioned challenges of a volatile climate, production on Australian grain farms continues to steadily increase (Chart 2). Crop breeders are delivering ever higher-yielding varieties. Agricultural scientists and farmers together are finding better ways to manage soils, weeds and crops. Farmers are drawing on all these improvements and in addition are further increasing their grain production by capturing economies of size (i.e. larger farms).
Chart 2: Crop production on NSW and WA grain farms: 1990 to 2020
In summary, Dorothy McKellar is still right! Climate volatility continues to characterise Australian agriculture, testing the talents of farmers and businesses that serve or depend on Australian farmers. So far, Australian scientists and farmers have been up to the challenge of embracing climate volatility.
Dorothea Mackellar Silo Art in Gunnedah. Source: visitnsw.com
HORIZONS: the AEGIC Economics and Market Insights blog
Expert grains industry analysis and commentary from AEGIC’s Economics and Market Insight Team on a range of big-picture topics that affect Australia’s export grains sector.