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Impact of the farm season on Australian production in 2002-03 and 2003-04
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.
For a complete picture of the impact of the drought on GDP the indirect effects of the drought should also be considered.
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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