FEATURE ARTICLE: IMPACT OF THE DROUGHT ON AGRICULTURAL PRODUCTION IN 2006–07
This article discusses the impact of the current drought on agricultural production and agricultural income and compares these impacts to the drought in 2002-03. It also discusses the components of Gross domestic product (GDP) that are likely to be affected and the flow on effects through the economy.
The Australian Bureau of Agricultural and Resource Economics (ABARE) has identified three main winter crops that are most seriously affected by the current drought. The nation’s wheat, barley and canola production are expected to fall by over 60% in 2006-07. Livestock slaughtering is forecast to be higher in 2006-07 as farmers reduce stock because of the drought. The increase in slaughtering is expected to lead to lower livestock prices. ABS forecasts based on ABARE data suggest the drought will reduce economic growth in 2006-07 by 0.5 percentage points.
EFFECT OF THE DROUGHT ON AGRICULTURAL PRODUCTION
The main data sources for compiling national accounts agricultural production estimates in 2005-06 and forecasts for 2006-07 are the ABARE Australian crop report and the ABARE Australian commodities publication.
The table below presents estimates of agricultural production in seasonally adjusted volume terms. It provides published estimates for March quarter, June quarter and September quarter 2006 and forecasts for the next three quarters. Output is shown to decline in every quarter except March 2007 where a rise is forecast. The table also shows that output will generally decline at a faster rate than inputs leading to a fall in farm GDP. In annual terms output is forecast to fall from $46.8b in 2005-06 to $41.3b in 2006-07, a fall of $5.5b or -11.7%. Farm GDP is forecast to fall from $26.3b in 2005-06 to $21.9b in 2006-07, a fall of $4.4b or -16.7%. If this were to actually occur it will make a negative contribution of approximately 0.5 percentage points to GDP growth in 2006-07.
The Australian national accounts publish value added at basic prices which follows best practice as recommended in The System of National Accounts 1993 (SNA93). Basic prices exclude any taxes or subsidies on products and margins. Agricultural value added at basic prices is forecast to fall from $25.8b in 2005-06 to $21.4b in 2006-07, a fall of $4.4b or -16.8%.
Agricultural production, Volume measures(a): Seasonally adjusted
|Gross farm product at market price |
|Less net taxes on products |
|Gross value added at basic prices |
|Gross domestic product |
|na not available |
|(a) Reference year for volume measures is 2004-05. |
|(b) Projections are based on ABARE forecasts. |
The graph below, in seasonally adjusted chain volume terms, shows the five major categories within agricultural output. It shows that the most significant impact of the current drought will be to cereal crops.
Farm output, Volume measures(a) - Seasonally adjusted
INDIRECT EFFECTS OF THE DROUGHT
A reduction in agricultural production is also likely to reduce production in other industries through a multiplier effect. For example, if agricultural production falls then farmers will require less transport services from the transport industry and less wholesale services from the wholesale industry. Farmers would also have less agricultural produce to supply manufacturers in the making of manufactured produce. This effect continues to multiply through the economy. Less output from one industry will lead to less output for all associated industries. This article makes no attempt to quantify these multiplier effects.
For a more detailed discussion of these direct and indirect effects please see Feature Article - Impact of the drought on Australian Production in 2002-03.
EFFECT OF THE DROUGHT ON AGRICULTURAL INCOME
Agricultural income can be defined as the income that is left to farmers after all their operating costs have been met. Agricultural income tends to vary significantly from year to year. This is mainly due to variations in agricultural production and the prices farmers receive for their products. While production of specific farm crops such as wheat, barley and canola are forecast to be lower in 2006-07 it is less clear what will occur to the prices farmers will receive for these crops. ABARE forecast Australian grain prices to increase from $224 a tonne in 2005-06 to $273 a tonne in 2006-07. The forecast rise in grain prices will offset the fall in production volumes for wheat, barley and canola on agricultural income to some extent.
Livestock slaughtering is forecast to be higher in 2006-07 but ABARE have also forecast that farmers will receive lower prices for their stock. Lower prices are expected to outweigh the higher slaughtering which will lead to lower agricultural income in 2006-07.
Agricultural income is forecast to fall to $2.6b in 2006-07, a fall of 72.4% from 2005-06 levels of $9.3b. This is the lowest level of agricultural income since 1994-95. The fall in agricultural income is mainly being driven by two factors. Agricultural output is forecast to fall significantly in 2006-07 while agricultural inputs are forecast to fall only slightly in 2006-07. For some inputs such as fodder, higher costs are forecast in 2006-07 as the current drought makes it more difficult for farmers to grow their own fodder and hence they must purchase it from outside sources.
COMPARISON OF AGRICULTURAL PRODUCTION IN 2006-07 WITH 2002-03
There are some similarities between the drought in 2006-07 compared with the drought in 2002-03.
The table below compares the forecast effect of the current drought in 2006-07 against the previous drought in 2002-03 for wheat, barley and canola. While the fall in canola production forecast in 2006-07 is severe, its contribution to overall production is small. Canola is forecast to contribute 1.1% to the gross value of agricultural production in 2006-07. Wheat and barley production are more significant. They are forecast to contribute 11.4% and 3.7% respectively to the gross value of agricultural production in 2006-07. If the current drought follows the same pattern as that of 2002-03 then agricultural production would be expected to increase strongly in 2007-08.
IMPACT ON MAJOR NATIONAL ACCOUNTING AGGREGATES
Production, expenditure and income-based estimates of GDP will be affected. The production and income based measures of GDP will be reduced from lower agricultural production and agricultural income. This can be directly observed from lower levels of gross value added and gross mixed income/operating surplus in the agricultural industry.
On the expenditure side of GDP, exports, gross fixed capital formation and changes in inventories are forecast to be lower. There is a direct link between exports and agricultural production since Australia exports around two thirds of its agricultural production. Within exports, cereals are forecast to be lower. During the previous drought, exports of cereals fell by 31%. Gross fixed capital formation is forecast to be lower as farmers reduce their investment in capital assets such as livestock. Farm inventories are forecast to be lower as farmers run down their existing holdings of seed and fodder.
The impact of the current drought is forecast to reduce the volume of agriculture production by 11.7% in 2006-07. This is driven by falls of around 60% in wheat, barley and canola. The overall impact of the current drought is forecast to reduce GDP by 0.5 percentage points in 2006-07.
For further information please contact Mr Rick Brunton on 02 6252 7755 or email email@example.com.