In a speech to the Pathways to Growth conference held by the Melbourne Institute of Applied Economic and Social Research yesterday and today, Australian Farm Institute executive director Mick Keogh explains that Australian agriculture faces enormous and growing opportunities but will have to fight hard on a very uneven international playing field and to work with Governments to capture them.
Depending on who you believe, the Australian agriculture sector is about to experience a sustained repeat of the Korean War boom, or a continuing slide into economic obscurity and a future when Australia’s food will increasingly be imported.
Those who believe that Australia will transition from the mining boom to the dining boom include a range of investment promoters, commodity traders, politicians, northern development enthusiasts and land salesmen.
Those in the ‘Hanrahan’ camp include quite a few farmers, some economists, a few policymakers, some former food processors and a large number of anti-farming activists.
Trying to inject some realism into this debate is fraught with risk. On the one hand history shows that real agricultural commodity prices inexorably decline over the longer term, as accelerated agricultural productivity growth is triggered by and dampens any sustained increase in agricultural commodity prices.
On the other hand, global agricultural commodity prices broke out of their long-term downward trend in the early 2000s, and an upward price trend has persisted since that time, albeit moderated in Australian terms by the persistently high Australian dollar. This suggests a fundamental change has occurred in global agricultural markets, with the timing of that change coinciding with China’s emergence as a major agricultural importer, post it’s entry to the World Trade Organisation in 2001. If sustained, this could trigger a period of accelerated real growth for the Australian agricultural sector.
However, rather than indulging in too much crystal ball gazing about future agricultural supply and demand imbalances, a safer option in thinking about the future of Australian agriculture is to have a good hard look at the comparative advantages of the sector. It is those advantages that will dictate the sector’s future, irrespective of whether that future involves endless growth opportunities, or a continuation of the highly competitive global agricultural markets of the past.
Evidence of comparative advantage
Comparative advantages arises from a range of different factors, and often combinations of these. In agriculture, significant factors can include natural resources, climate, human resources, market proximity, institutional settings and policy frameworks. It is difficult to objectively compare these factors internationally, but success in export markets provides strong evidence of where Australian agriculture’s comparative advantages lie.
More than two thirds of all Australian agricultural production is exported, although for wool, cotton, sugar, beef and grains, exports account for more than 90pc of production. Other strong export sectors include dairy, sheepmeats and wine, for all of which exports account for more than 50pc of production.
The successful export sectors generally involve extensive, rather than intensive production systems. This suggests that Australia’s ‘sunlit plains extended’ may confer a major advantage for Australian farmers relative to those overseas, and in particular those in the crowded landscapes of Asia and Europe.
This is only partially correct. While raw statistics give the impression that the nation has plenty of agricultural land, the quality of that land and its coincidence with adequate and reliable rainfall is relatively limited. Only approximately 6% of Australia’s 400 million hectares of agricultural land is good enough and has sufficient rainfall to be used for cropping each year. Most Australian soils are geologically very old and lack organic matter and critical nutrients, and hence are relatively unproductive. The area cropped has not increased over the last decade, and expansion possibilities appear limited. While there is some potential in northern Australia, the additional land there will only add marginally to the total area available.
Water availability is also a major limiting factor. Australia has some of the lowest and most variable rainfall of any of the major agricultural nations, and limited water for irrigation. As a consequence, average Australian rain-fed crop yields are some of the lowest of any developed nation on earth, and only approximately one third of the crop yields achieved in Europe and North America.
This, though, has turned Australian crop farmers into absolute misers in the use of inputs like pesticides and fertilisers, because potential yields are insufficient to justify high levels of expenditure on crop inputs. It has also resulted in the highest adoption levels of minimum tillage in the world, because of the cost savings associated with this practice.
This lack of advantage in agricultural land and water resources has resulted in Australia’s comparative advantage in low input, rain-fed cropping systems. Australian broadacre crop farmers are world leaders in grain yield per millimetre of growing season rainfall or unit of fertiliser. This means that Australian grain producers are extremely cost competitive in global markets, which is a major comparative advantage.
A further consequence of the low average quality of Australia’s agricultural land is the large areas of land available for grazing livestock. Australia’s climate means that livestock can be grazed on pasture year-round, rather than having to be fed and sheltered over winter, as is the case for much of Europe and North America. Australian sheep and cattle farmers have also introduced improved pastures, rotational grazing and grain finishing to improve livestock productivity, while remaining highly cost competitive in international markets. The wool industry has also developed due to the extensive availability of grazing land, and despite having declined from its previous importance, is still a very significant source of export income.
The ability to efficiently produce pasture-fed beef, sheepmeats and wool is a significant comparative advantage for Australian agriculture, especially given the growth in demand for these products emanating from middle-class Asian consumers. Australia is also a very competitive exporter of livestock, being a world leader in live sheep exports and one of the largest exporters of beef, dairy cattle and goats. The quality of Australian livestock, in combination with world-leading standards of biosecurity, welfare and animal health makes Australia very competitive in global livestock export markets.
The scarcity and tradability of irrigation water in Australia has encouraged farmers to be very efficient at growing irrigated crops such as cotton, rice and sugar. For each of these, productivity levels on a per-hectare or per-litre of water basis are either very close to, or equal to the best in the world. And despite popular opinion, high-value annual crops like cotton and rice are ideally suited to Australia’s variable climate, enabling farmers to maximise production when water is available, and to avoid planting crops in dry years. The strong productivity performance of these irrigated cropping sectors means they have important comparative advantages in global markets.
There are other sub-sectors of Australian agriculture that are successful in domestic markets, and which are becoming more competitive in global markets. The dairy sector, for example, has gone through a difficult restructure post its deregulation in 2000, and is now experiencing sustained export growth, despite low domestic milk prices. The horticulture sectors have struggled to compete against imports over recent years. Many Australian food processors have closed down, resulting in the demise of the domestic fruit and vegetable processing industry. As a result, fruit and vegetable producers have been increasingly restricted to the domestic fresh market, although some have managed to increase exports.
It is perhaps worth noting that in the case of the dairy and horticulture sectors, the market power exercised by Australia’s two dominant supermarket chains has had a very significant negative impact on profitability.
Optimising comparative advantages.
To grow, Australian agriculture needs to optimise the factors contributing to its existing success, and to implement changes that will help develop new success factors.
The previous discussion identified that it is not just Australia’s land and water resources that are critical to the success of sector, which is fortunate, because any future expansion in the availability of either of these is likely to be limited. A major success factor, especially for broadacre farmers, is the flexibility of the Australian farm business operating environment. Farmers are free to adjust enterprises and management systems in response to market signals, and are not influenced by either direct or indirect government intervention in agricultural markets or farm management decisions.
Australian governments have removed almost all the statutory marketing arrangements that characterised the sector prior to the 1990s, and farmers have no desire to return to a more regulated market environment.
Australian taxpayers also pay the lowest level of subsidies (as a proportion of GDP) of any taxpayers worldwide to their agriculture sector. This means the ‘indirect’ influences on farm decision-making that exist in heavily subsidised national agricultural sectors are not present in Australia. While the lack of subsidies is sometimes bemoaned by farmers experiencing severe droughts or floods, this spartan business environment has resulted in a highly competitive and innovative industry.
A second major success factor, related to the above, is the technical and business management skills of the operators of farm businesses in Australia. There is plenty of evidence to indicate that not only are Australian farmers highly skilled producers of food and fibre, but they are also exceptionally good business managers.
The evidence for this claim arises from some research the Australian Farm Institute carried out recently. It identified that Australian farm businesses experience the highest annual revenue volatility of any sector of the Australian economy, and the second-highest revenue volatility of any international agriculture sector.
Running a successful business in such a volatile environment is no easy feat, as many corporate investors in Australian agriculture have discovered. Yet the average returns of the top 25pc of Australian farm businesses have easily outperformed the returns achieved by Australia’s highly paid superannuation fund managers over the past fifteen years, confirming farmers’ business management skills.
A third major success factor – related to the first two – is the innovativeness of Australian farmers. According to the Productivity Commission, the average annual rate of productivity growth achieved by the farm sector over the last thirty years has been the second-highest of any sector of the Australian economy – in fact second only to the telecommunications sector. A key factor in achieving these high rates of productivity growth has been the relatively rapid rate of adoption of new innovations by farmers.
These have included minimum tillage, genetically modified crops, digital farming technologies, advanced livestock breeding and genetics, precision irrigation systems, electronic livestock identification, remote sensing systems, and the growing use of computerised decision support tools. The high rate of adoption of these innovations is testament to the past success of the Australian agricultural innovation system. This system consists of Australian and state government research and extension agencies, rural research and development corporations, universities, private sector agrichemical, seed and machinery companies, and private sector farm advisors.
What actions by either government or industry are likely to enhance or add to these success factors in the future?
The most critical from a whole range of perspectives is obviously the need for continued investment in agricultural research and development, and to ensure the agricultural innovation system is as effective as possible.
Real public funding of agricultural R&D has declined over most of the past decade. Australian and in particular state governments have been shrinking their investment in this area for some time, and show little signs of making serious efforts to address declining agricultural R&D capacity.
Compounding this, as the Chief Scientist has noted, current government policies for universities have discouraged the teaching of the sciences and agriculture in particular, contributing to the demise of agricultural faculties at major universities. This is because unlike arts or business courses, agricultural courses are expensive to run and do not attract full-fee paying overseas undergraduate students. They are therefore less profitable for university businesses to run.
The Australian Research Council system for allocating research funding also discourages agricultural research in universities. Under the ARC system, university researchers are rewarded more for targeting obscure topics in collaboration with international researchers than they are for actually engaging with Australian industry and tackling local industry challenges. While successive governments have proposed stronger incentives for research with industry impact, these changes are yet to be made.
There is also a need for better co-ordination of the scarce resources that are available for agricultural research. Recent efforts to develop national rural R&D strategies are a good start, but state governments have a tendency to sign up to these, then promptly cut their rural R&D capacity. Until these strategies have guaranteed resource commitments from state governments, they will remain little more than aspirational wish-lists.
A second important issue for the future of agriculture is access to reliable and cost-efficient transport and telecommunications infrastructure. Recent research by the Australian Farm Institute identified that, for some Australian agricultural commodities, the cost of transport from farmgate to overseas destination can exceed 40% of the farmgate value of the product.
Australian farmers are price takers in global markets, and every cent that can be taken out of transport costs is an extra cent of farm profit, and therefore critically important. Investment in regional transport infrastructure is a proven way to do this, and it also brings important additional regional benefits.
Access to reliable internet services is equally important. Increasingly, the technologies and equipment utilised in modern agriculture rely on the use of digital information and internet-based decision-support systems. These hold the promise of major productivity gains through optimisation at the square metre rather than the paddock level. It goes without saying, however, that snail-pace internet speeds and limited coverage means that these technologies are virtually useless in many areas.
If it comes to a decision between providing super-fast internet speeds for metropolitan movie downloaders, or a moderate upgrade in rural internet coverage and speed so that productivity-enhancing agricultural innovations can be adopted, then it is pretty obvious to me that the latter will produce the best long-term national economic gains.
A third issue in need of serious consideration in order to reduce some of the disadvantages faced by the food processing industry and related farm sectors is competition policy, especially as it relates to Australia’s major supermarkets. With the most concentrated supermarket sector in the world, it is not surprising that Australian food processors and some farmers have struggled to achieve profits over the last decade, while supermarket profit margins have continued to grow. Some might argue that this is just the market working, and that Australia’s high wages and exchange rate are the real reasons the food processing sector has declined.
There is no doubt these are contributing factors, but food processing sectors in other nations that have similar challenges but less dominant supermarket sectors – such as Canada, Italy, France, Denmark, Spain and New Zealand – have managed to expand and capture increased market share in Asia, while Australia’s food processing sector has lost export markets.
Successful food exporting nations have strong domestic food processing industries that are profitable at home and can use that profitability to fund the risky and long-term effort required to develop export markets. In Australia’s highly concentrated food and grocery market, the chances of food processors achieving sustained profits are extremely limited.
Australia’s major supermarket chains claim that any toughening of competition laws will result in higher costs for consumers. This is a highly simplistic argument, and ignores the longer-term implications of food processing and farm sectors experiencing limited profitability, and being subject to unfair competitive behaviour from dominant market participants.
At a very minimum, Australian competition law needs to be strengthened so that unconscionable conduct is defined by the effect of actions, rather than the purpose. Australia also needs a mandatory Supermarket Code of Conduct to impose clear parameters on commercial relations between supermarkets and their suppliers. Existing price surveillance powers should also be utilised in sectors that are considered ‘vulnerable’ to unfair competition. This would have the added benefit of fixing some of the gaps in Australia’s agricultural statistics system.
A final issue that needs urgent attention is one that the industry itself needs to address, and that is industry unity. The way that the farm sector in Australia is represented is highly fragmented, with almost 100 different industry organisations purporting to represent farmers at either a state or national level. It is not surprising that, as a consequence, most of these organisations have limited and declining resources, are struggling to attract members, and also struggle to have their voice heard in national political discussions.
What is even worse is that too often the voices of the agriculture sector are in conflict, or emphasise industry problems, and add to negative perceptions of agriculture in the wider community. Unless agricultural organisations either consolidate or work together much more cooperatively, Australian agriculture will remain subject to the whims of governments, activists and large corporations, and will never realise its full potential.
In conclusion, Australian agriculture faces a future that is full of enormous and growing opportunities, but those opportunities are not simply there for the taking. The Australian agriculture sector will have to fight hard on a very uneven international playing field to capture those opportunities, and will need to work with governments to optimise all of its comparative advantages in order to be successful.