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1301.0 - Year Book Australia, 2005  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 21/01/2005   
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Impact of the farm season on Australian production in 2002-03 and 2003-04

Introduction

Australia experienced a severe drought in 2002-03 that had a significant impact on the growth of the Australian economy. The purpose of this article is to briefly describe the impact of the 2002-03 drought and the improved weather conditions that followed in 2003-04 on the estimates published in the Australian System of National Accounts. Both the direct and indirect effects of the drought on gross domestic product (GDP) are discussed. In addition, the article identifies those components of GDP that have been most affected.

The direct effect of the 2002-03 drought on agricultural production is that it has had a downward impact on GDP growth of 0.9 percentage points between 2001-02 and 2002-03. More favourable weather conditions in some parts of Australia in 2003-04 led to a recovery resulting in a positive impact on GDP growth of 0.7 percentage points between 2002-03 and 2003-04.

In addition to the direct effect of the 2002-03 drought there were various indirect effects. These can be put into two categories. The first category is the effect on downstream industries, principally transport, wholesale trade and the manufacturing of products from agricultural outputs. The second category comprises the multiplier effects arising from the reduced value of production by the agriculture industry and its downstream industries. This has two elements. One arises from any reduction in the inputs of these industries which leads to a reduction in the production of other Australian industries. The other arises from any reduction in factor income of the agriculture and downstream industries that leads to a fall in final expenditures by farmers and others who draw an income from these industries.

In this article no attempt is made to quantify the magnitude of the indirect effects, although consideration is given as to how this might be done. Assessments of the impacts of the drought on the economy have been released by Australian Bureau of Agricultural and Resource Economics (ABARE), the Commonwealth Treasury and the Reserve Bank of Australia.

Direct effect of the 2002-03 drought on agricultural production

Australian Bureau of Statistics (ABS) estimates of agricultural production and costs in respect of 2002-03 are based on the latest results from the ABS Agricultural Surveys.

Table 29.4 shows, in seasonally adjusted chain volume terms, the published data for each quarter from the September quarter 2002 to the June quarter 2004. During the 2002-03 drought a much more marked decline occurred in agricultural outputs than in agricultural inputs. The difference between the outputs and inputs is gross agricultural product at market prices. The fall in the estimates of gross agricultural product at market prices between 2001-02 and 2002-03 represents the direct impact on GDP of the 2002-03 drought. The decline in chain volume terms from $25,330m in 2001-02 to $19,075m in 2002-03, a fall of $6,255m or 24.7%, representing a negative contribution of 0.9 percentage points to the growth in the volume of GDP between 2001-02 and 2002-03.

With more favourable weather conditions in the following year, the ABS estimated the impact of the recovery on the 2003-04 agricultural production based on forecasts from ABARE. Gross agricultural product at market prices increased in chain volume terms from $19,075m in 2002-03 to $24,194m in 2003-04, a rise of $5,119m or 26.8%, representing a positive contribution of 0.7 percentage points to the growth in the volume of GDP between 2002-03 and 2003-04.


29.4  AGRICULTURAL PRODUCTION, Chain volume measures(a): Seasonally adjusted

 2002-03
2003-04


Sep
Dec
Mar
 Jun
 Sep
 Dec
 Mar
 Jun
$m
$m
$m
$m
$m
$m
$m
$m

Outputs
9,546
8,801
8,311
8,340
9,568
10,805
11,244
10,478
less inputs
4,121
3,948
3,876
3,979
4,191
4,683
4,655
4,372
Gross agricultural product at market prices
5,311
4,791
4,473
4,500
5,377
6,122
6,589
6,106
GDP
187,972
188,242
189,821
190,135
193,220
195,772
196,697
197,904

(a) Reference year is 2002-03.

Source: Australian National Accounts: National Income, Expenditure and Product, June Quarter 2004 (5206.0).


Graph 29.5 shows, in seasonally adjusted chain volume terms, the outputs for five major categories of agricultural output. It is clear that the largest impact of the drought in 2002-03 was on the output of cereals and non-cereal crops. The improved performance of the farm sector in 2003-04 was driven by cropping industries, with the output of cereals more than doubling in 2003-04.

Graph 29.5: FARM OUTPUT, Chain volume measures(a): Seasonally adjusted



For a complete picture of the impact of the drought on GDP the indirect effects of the drought should also be considered.

Indirect impacts

The relationships between direct and indirect impacts of the drought on the national accounts are quite complex. For instance, the reduced volume of grain produced means that less road and rail freight were required to move the crops from the point of production to the various final users. Further, the volume of throughput for the wholesale industry was reduced, resulting in reduced volumes of production by this industry. However, these negative impacts on the transport and wholesale trade industries were possibly offset somewhat by the increase in activity required to transport stock to market as well as the possible extra transport activity associated with transporting feed for stock and stock for agistment.

The need of some farmers to divest themselves of all but the core stock of animals caused increased manufacturing activity, in the form of slaughtering, in the short term. In the medium to longer term this results in a reduction in the quantity of stock available for slaughter and thus a probable reduction in this type of activity in future periods.

While very difficult to measure, it is thought, on balance, the secondary impact of the 2002-03 drought on downstream industries, principally the transport, manufacturing and wholesale trade industries, was relatively small.

Another secondary impact of the drought was the effect on the production of other industries due to a reduction in farm inputs. As the table above shows, farm inputs fell much less significantly than farm outputs. For this reason, the impact was likely to be relatively insignificant for the economy as a whole.

There were other indirect effects of the drought. These may broadly be characterised as 'tertiary effects'. Tertiary effects denote the ensuing effects from the reduced value of production of the agriculture and downstream industries. It follows that if the secondary effect on downstream industries is small then the tertiary effect arising from any reduction in their production must be small too. That leaves the tertiary effect arising from a reduction in final expenditures by farmers, and the like, who suffer a reduction in income as a result of a fall in the value of farm production. The impact on farmers' expenditures from the fall in farmers' income may be mitigated to some degree because farmers can draw down savings from the previous run of good years. Nevertheless, the decline in farm income is highly likely to have had some impact on farmer's expenditures on final consumption goods and services and gross fixed capital formation, although the extent is unknown.

A reduction in expenditures as result of reduced production by agriculture and its downstream industries will, to the extent that such expenditures are on goods and services produced in Australia, have lead to a further reduction in Australian incomes. This in turn would have lead to a further reduction in expenditures and so on. In this way the so-called multiplier effect magnifies the effect of good or bad farm seasons.

In order to estimate the indirect impacts, Input-Output valued added multipliers can be used. These multipliers provide various measures of change that result from an initial exogenous change to final output. They are calculated based on the industrial structures published in the Input-Output tables (Australian National Accounts: Input-Output Tables (5209.0.55.001)). Care needs to be exercised in using these multipliers because they reflect average relationships. To the extent that changes at the margin are different from those on average, the results can be misleading. Further, as this approach does not capture the effects of change in structure over time that may result from these initial changes, they represent a static rather than a dynamic view of the economy.

Notwithstanding the caveats in the preceding paragraph, the Input-Output multipliers remain a potentially useful means of generating an assessment of the overall impact of the type of shock caused by an event such as the current drought. The calculation of the tertiary effect can be derived by applying the appropriate multiplier to each postulated initial impact on expenditures. An analysis of this type is described in an article appearing in the September quarter 1996 issue of Australian National Accounts: National Income, Expenditure and Product (5206.0), titled 'Impact of the 1995-96 farm season on Australian production'.

Broad impact on major national accounting aggregates

Reduced levels of agricultural production in 2002-03 were reflected in a number of national accounting aggregates. Production, expenditure and income-based estimates were all affected. For the production and income-based estimates, the most obvious impacts were seen in the level of gross value of agricultural production and the flow on impact on agricultural income - that is, the proceeds of sales net of operating costs. The downward impact of the 2002-03 drought on agricultural production, while offset somewhat by reduced farm costs, resulted in a reduction in the value added and gross mixed income/gross operating surplus of the agriculture industry. Typically, fluctuations in agricultural incomes tend to be of a much greater magnitude than the fluctuations in agricultural production.

The 2002-03 drought caused several notable direct impacts on expenditure-based estimates in the national accounts. Since the majority (around two-thirds) of farm production is either directly or indirectly exported, there was a significant impact on exports of agricultural commodities, particularly cereals. Estimates of gross fixed capital formation of livestock were also reduced. There were falls in farm inventories due to lower output and as farmers were forced to run down their stocks of fodder. In addition, wholesalers' inventories of agricultural outputs declined.

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