No rain, no gain

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By Jack Mullumby – Senior Analyst, Deloitte Access Economics

How is Australian agricultural production tracking?

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In 2017 the National Farmers Federation (NFF) announced an industry-wide target to grow the value of Australian agricultural production to $100 billion by 2030. Given we’re about to close out 2019, now is a good time to take stock and assess how the country is tracking.

At 30 June this year, Australia’s agriculture industry was valued at $62.2 billion (Chart 1). This was up 4.4% on the previous year, but less than 1% above that ($61.6 billion) in 2016-17 when the target was announced. An average growth rate of 4% per annum is required (between 2017 and 2030) to reach the NFF target. This puts us currently $4.2 billion or 6.3% below trend growth, although the gap narrowed from 6.9% last year.

Chart 1: Value of agricultural production, target and required trend growth

Source: ABARES

 Note: target growth assumes 4% compound average annual growth between 2016-17 and 2029-30

No rain, no gain on growth targets

Since June 30, it won’t be news to anyone that seasonal conditions have been incredibly challenging. Much of New South Wales, and considerable parts of Queensland, have been classified by the Bureau of Meteorology as experiencing severe rainfall deficiencies. This has added insult to injury with many of these regions now registering lowest rainfall volumes on record since 2017 (Figure 1).

And, regrettably, there looks to be no immediate relief in sight for Australian farmers. The Bureau’s three-month outlook suggests most of eastern Australia has a reduced chance of achieving average rainfall – and which, even if it did arrive, would likely be too late given harvesting is already underway in parts of eastern Australia.

Figure 1: Rainfall deficiency maps

 November 2017 to November 2019                 12 Months to November 2019

Source: Bureau of Meteorology1

Early indications suggest Australia’s winter grain crop may be the smallest in more than a decade. And when combined with grain prices that are currently lower year-on-year (around 5% across the board), this suggests that the value of Australian broadacre cropping could be around 10% lower in 2019-20.

Some of the decline in cropping may be offset by an increase in livestock production. Although this is likely to be marginal with the value of output only expected to rise in the beef cattle industry where drought induced turnoff has coincided with a (recent) spike in export prices. Higher prices in most other livestock sectors (namely the dairy and sheep industries) are expected to be balanced by lower output.

Drought masking impacts of favourable global market conditions

The full effects of these drought conditions will not be known for some time. All-in-all however, Australian agriculture, at 30 June 2020, is likely to be a considerable way from the trend needed to achieve the $100 billion target.

This begs the question; how might Australian agriculture be faring in the without such poor seasonal conditions?

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Tasmania offers some insight. As one of the few regions where severe drought conditions have not set in, and in the absence of drought induced turn-off or supressed crop yields, Tasmanian agriculture has grown strongly.

In 2017-18, the value of the state’s production increased 9%, driven by the livestock industry (Chart 2), due primarily to favourable export prices, with Tasmanian milk and beef production volumes around 1% and 2% higher respectively.2

Chart 2: Value of Tasmanian agricultural production, 2017-18 and 2018-19

Source: ABS3

Tasmania’s performance suggests that Australian agriculture, in the absence of drought conditions, might not be off-target in its attempts grow the value of industry production to meet the NFF’s $100 billion ambition. Indeed, favourable global prices, particularly for our livestock industries, continues to provide some optimism for Australian farmers.

Our capacity to rebound from 2019-20 will depend to a large extent on an improvement in seasonal conditions. However even if conditions do improve, continued strength of global prices will likely be needed to make up any lost ground. Importantly though, any growth in the value of production will occur in the context of the legacy effects of this drought – and impacts which are still unfolding today.

Reduced livestock numbers another challenge

Achieving the target is also likely to be challenged without a strong contribution from the livestock sector. Since 2007, the Australian cattle industry has accounted for around 20% of all growth in the value of agricultural output. While grain output may recover relatively quickly from current poor conditions, the drought has left Australia’s livestock population severely diminished.

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At 11.5 million head, the opening breeding beef cattle inventory is currently estimated at its lowest in more than two decades, and around 15% below the recent 2012-13 peak of 13.7 million head (Chart 3). The number of cows and heifers is likely to fall significantly again this year, with female cattle turnoff currently at record levels. In the September quarter, 56.4% of cattle slaughter was either cows or heifers, contrasted with a long-term average (since 1976) of 45%.4

Chart 3: Beef breeding herd, and cow and heifer slaughter

Source: Meat and Livestock Australia

Even if seasonal conditions do rebound, we can probably expect output in the beef sector to be supressed for at least two years – and in the context of that $100 billion target, this will likely prove crippling. Lower livestock output appears a formality, with future beef production constrained either by the small inventory or the decision by producers to retain cows for expansion.

Other legacy effects make climate resilience critical

Drought’s legacy impacts on agriculture are not just limited to livestock numbers, with the resulting variability in production continually undermining the long-term competitiveness of Australian agriculture. This includes for example, by exposing farmers to further debt that may put off productivity enhancing capital investment. Or through the mothballing and closures of infrastructure and freight networks, which imposes costs on the supply chain and undermines Australia’s position as a consistent and low-cost supplier in overseas markets.

Drought can also have an obvious, and significant, long-term effect on the environment. Previous droughts in Australia have been linked to declines in, and even the extinction of, wildlife species, through reductions in native habitats and providing favourable conditions for pests and diseases.5,6 Widespread and irreparable land degradation is also common, particularly in already marginal areas, and this includes losses in top soil, lower carbon content and broader reductions in soil health.7 The current drought is also providing an apt reminder that sustained hot and dry conditions compounds the impacts of other destructive events such as dust storms and bushfires.

Importantly too, there is a growing body of evidence on the social impact of drought, which has been shown to reduce rural incomes and increase poverty. Access to education and other services is also a demonstrated impact, along with higher unemployment, increased social isolation and reduced community health and well-being.8

Becoming more resilient to an increasingly variable climate is important in growing Australian agriculture to the $100 billion industry we’d all love to see. However, our need to improve in this area goes beyond achieving a nominal target. It is critical that agriculture, and Australia more broadly, improves its resilience to drought and other climate variability. Without this, the long-term health of rural and regional Australia is likely to suffer irreparable damage.

https://www2.deloitte.com/au/en.html