Economics for Business: Australian Drought and Agricultural Production

This report examines the impact of drought on Australian agriculture, focusing on the economic consequences of the recent drought. It begins with an overview of the agricultural sector's importance to the Australian economy, including its market structure, and then analyzes the impact of the drought on agricultural production. The report highlights the vulnerability of agricultural production to climatic conditions, particularly drought, and discusses the decline in farmers' income. The analysis covers the impact on the overall economy and suggests government policy measures to reduce the severity of the drought's impact. The report also includes an executive summary, table of contents, introduction, background of the industry, market structure analysis, and conclusions, providing a comprehensive understanding of the subject.

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Executive Summary
The report primarily aims to discuss agricultural production in Australia with special
reference to the impact of recent drought. Agriculture is one of three main sectors of the
economy. Production of agricultural commodities is largely dependent on climatic
condition. Agricultural production is largely vulnerable to extreme climatic condition.
Drought defines a natural calamity when a region suffers from lack of rainfall. Hot dry
summer in Australia has wiped away moisture of soil in almost every state and union
territory. Water storage has declined to an extremely low level. The impact of current
drought is more severe in some states compared to others. Continuous lack of rainfall
hampers agricultural production resulting in a decline in farmers’ income which in turn
adversely affects overall health of the economy. Analysis has found that production of
agricultural commodities has increased significantly in the last 20 years. The marker
structure of agricultural commodities is close to perfectly competitive market. The drought
has a severe impact on agricultural production as well as the economy as a whole. In
order to reduce severity of the impact government should take necessary policy measures.

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Table of Contents
Introduction............................................................................................................................4
Background of the industry....................................................................................................4
Market structure of agriculture...............................................................................................6
Recent drought in Australia...................................................................................................6
Analysis of the impact of drought...........................................................................................7
Impact of drought on agricultural production......................................................................7
Impact on Australian economy...........................................................................................8
Government Policy.................................................................................................................9
Conclusion...........................................................................................................................10
References...........................................................................................................................11

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Introduction
Agriculture plays an important role in Australia’s economic development. At
present, agriculture has become more and more diversified (Paull and Hennig 2018). The
significant expansion of arable land has made Australia a leading exporter different grains,
wool and meats in the world. Australia’s export of grains, meat and wool hold a dominant
position in the world market. Production of sheep and wheat continues to grow even in the
21st century the world. The cattle market in Australia though is more of regional but it has
recently gained importance globally due to growing health concern related to produce beef
in Europe. Only 6 percent of available land in Australia is suitable for producing pasture
and crops while almost 60 percent of the land is suitable for cattle grazing (Anderson,
Stephens and Siddique 2016).
Production of agricultural commodities is largely dependent on climatic condition.
Agricultural production is largely vulnerable to extreme climatic condition. Drought defines
a natural calamity when a region suffers from lack of rainfall. During drought due to
insufficient water supply, agricultural production hampered largely. The report discusses
agricultural production in Australia with special attention given on recent drought in
Australia and its impact on agricultural production and on the economy as a whole. Hot dry
summer in Australia has wiped away moisture of soil in almost every state and union
territory. Water storage has declined to an extremely low level. The impact of current
drought is more severe in some states compared to others. Continuous lack of rainfall
hampers agricultural production resulting in a decline in farmers’ income which in turn
adversely affects overall health of the economy.
Background of the industry
Agriculture is one vital sector of the Australian economy. Approximately 58 percent
of total land and 59 percent of extracted water is used for agriculture. Agricultural not only
plays an important role in feeding Australian people but also contribute to export earnings
of the nation (Sarker, Bornman and Marinova 2019). Agriculture accounts 14 percent of
total goods and service export of Australia. In Gross Domestic Product of Australia,
agriculture contributes 2.7 percent. The sector accounts 2.5 percent to total employment in
Australia. The product mix of agricultural commodities in Australia is determined by the
climatic condition, availability of water, type of soil and condition of market. Livestock
grazing in Australia spread almost all over the nation. Horticulture and cropping however
are mostly concentrated in coastal areas.

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Figure 1: Selected contribution of agriculture
(Source: Agriculture.gov.au. 2019)
There is an overtime increasing trend in the value of agriculture, fisheries and
forestry. In the last 20 years the value of farms’ product increased by almost 34 percent in
real terms. The value has approximately increased to $66 billion in 2017-18 from its value
of $49 billion in 1998-99 (Conyers et al. 2019). The main drivers to output growth varies in
different sectors. In case of cropping, a decline in real price have been offset by the
volume growth. The main reason for increase in growth volume is the adaption of new
technologies to improve productivity. Along with this, there is a considerable expansion of
sown area to agricultural crops. In case of livestock, the main driver of growth was
increase in real price. The higher price was the result of increasing demand for protein
from the emerging countries (Hine, Ingersent and Rayner 2016). The pattern and drivers of
growth however vary within livestock and crop industries. For example, the beef and dairy
sectors have grown in a different rates and following a different way. There is also
variation in the pattern of growth for horticulture and grain sectors.

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Figure 2: Value of production in agriculture, fisheries and forestry by
commodity during 2017-18s
(Source: Agriculture.gov.au. 2019)
Market structure of agriculture
Depending on some basic characteristics, markets are classified into several types.
The four common types of market are perfect competition, monopoly, monopolistic
competition and oligopoly. So far as market structure of agriculture is concerned, it is
similar to perfectly competitive market. The perfectly competitive market is defined as a
market where numerous buyers and sellers operate in the market and exchange a
homogenous product (Cowell 2018). The agricultural firm is characterized as a perfectly
competitive market as there are large number of firms operate in the industry. As the
industry serves one of the most basic needs of people, there is a significantly large
number of buyers in the industry. Because of a considerably large group of buyers and
sellers, each controls only a small share in the market. As a result, firms are price taker in
the market. Another similarity of agricultural market to that of a perfectly competitive
market is the nature of product. Like perfectly competitive market, agricultural products are
homogenous or standardized (Farooq and Siddique 2014). That means for agricultural
product there is not much scope for differentiating the product in terms of packaging,
quality or labelling. Sellers therefore cannot charge a different price for the same product.
Recent drought in Australia
The hot climatic condition in summer in Australia has eroded moisture from the soil.
Many of the Australian states especially New South Wales is growing down in dust. The
recent drought occurred in 2018 though is short but has severe impact on the agricultural
production. Last year though farm production has decline slightly after experience of
bumper success in 2016, however overall it was a good year with a decent price. The
extreme heat however has made the weather condition worse (Theconversation.com.
2019). New South Wales, some parts of Northern Territory, eastern part of South Australia
and northern part of Western Australia are suffering from terrible dry condition. Despite

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sufficient rainfall in northern state, Queensland has failed to escape from dry condition. As
stated by a climatologist, the current dry state of Australia is the result of huge pressure
over the nation which results in weak and less frequent frontal system than the usual one.
The nation has just come over a recorded warm summer and the extreme heat that is
experienced especially during December and January has added to the drought condition
and intensified the impact of drought. There is no hope for improvement in climatic
condition in the coming months. Instead, there is possibility that in the coming autumn
eastern Australia will experience a below average rainfall (Doyle 2019). The dry and wet
season in north and dismal rainfall in southern states has led to depletion of water
storages in most state and territory in 2019 compared to that in 2018.
Figure 3: water storage in states and territories of Australia
(Source: Doyle 2019)
As shown in the above figure there is a severe decline in water storage in all the
state and territories compared to last year. This has caused a severe and wide spread
problem for the economy. Agricultural production in the state has hampered seriously.
Given the dry condition the production if winter crops have forecasted to be lowered by 23
percent in 2018-19. In the eastern coast of the country, the current drought has impacted
49% of grassy agriculture of the region and has increased cattle slaughter by 17 percent.
Farmers engaged in grassy agriculture or in cattle farming are likely to lose money for
agricultural disruption caused due to drought.
Analysis of the impact of drought
Impact of drought on agricultural production
The dry condition due to drought hampers the agricultural production. The
production in the wheat-sheep zone of eastern Australia is likely to be decline by 53
percent. This is below the average of last 20 years ranged from 1998-99 to 2017-18. The
primary source of decline in aggregate production is New South Wales (bbc.com 2019). In
NSW, production of winter crops is forecasted to be declined by around 65 percent. The
above average production in Western Australia though is expected to offset some of the
decline in production in Eastern Australia however there remain an overall shortage of
production at the national level. Production at the national level is expected to decline by
23 percent which is below the 20-year average. The markets of livestock continue to
operate within the historical variation. Slaughter of sheep and cattle remain within the
observed range in last 20 years. Price of livestock however is recorded to be higher than
historical standard. As a result of current drought, number of sheep and overall cattle are
likely to decline (Bedo 2019). Like previous drought, the decline in number of livestock is
likely to be temporary and is expected to increase shortly.

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The drought has impacted overall agricultural production adversely. There is a
decline in value of overall farm product in Australia to $58 billion. The value was recorded
to be $63.8 billion two years back (Sullivan 2019). Drought in the eastern state of Australia
has significantly lowered the production of winter crops in 2018-19. Overall production of
livestock has declined by nearly 2% this year. Production of milk and wool have
particularly been affected due to drought. Decline in production of agricultural commodities
likely to affect income of farmers. It has been observed that farmers outside the drought
affected region earn an above average income compared to farmers in drought affected
areas. A considerably low production of winter crops has increases the demand for
substitute products such as fodder and gains. Higher demand for these products in in turn
increased price opening opportunity of a higher money income for those engage in
producing these crops. Income of dairy farm has recorded a decline in average income by
more than $67000.The water shortage due to drought has increases the water prices. With
increase in price of water and feed to cattle, dairy farmers face a higher cost of production
lowering income of farmers. At the national level there is a decrease in cash income of
farmers to $93,000 in 2018 -19 compared to $160,900 in 2017-18.
Figure 4: Demand and supply analysis of agricultural market
The figure above summarizes economic impact of drought on agricultural industry
using supply and demand dynamics. The unfavorable weather condition due to drought
has significantly lowered agricultural production. Decline in production reduces available
supply of agricultural commodities as shown by a leftward shift of the supply curve from
SS to S1S1 (Baumol and Blinder 2015). As a result of a fall in supply, equilibrium price of
such commodities increases to P1 and equilibrium quantity in the market decreases to Q1.
Impact on Australian economy
Agriculture being one of the important sectors of the economy contraction of
agricultural production adversely affects the overall economy. Apart from serving domestic
customers, agriculture plays an important role in export earnings of the nation. The overall
farm production after drought is expected to decline by 3 percent which will cause export
earnings to decline by around 4.5 percent. The resulted decline in agricultural export is
mainly due to contraction in export volume of beef, lamb, wool and cotton. The value of
exported livestock will decrease by 11 percent (Sullivan 2019). At the end of this year
cattle herd were counted as 25 million head which is the lowest ever since early 1990s.
The drought has also increases the demand of fodder needed for livestock which in turn

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resulted in a significant increase in import of processed stock feed. Australia is usually
counted as one of the leading exporters of grain. Crop production usually accounts 25
percent total farm produce in Australia. Because of drought Australia has now been forced
to import grain first time since 2007. The 2018-19 drought has resulted in a depreciation of
Australian dollar (Jasper and Sullivan 2019). This is in contrast to the previous droughts of
2002-03 and that in 2006-07 which caused an appreciation of dollar. The depreciated
dollar further increases cost of import. Decline in export and increase in import has an
adverse effect on trade balance of Australia.
The worsening state of trade balance could lower the GDP of Australia by $12
billion as estimated in published report of Commonwealth Bank. Almost the entire area of
New South Wales and more than fifty percent area in Queensland are drought declared.
The drought could reduce the growth of GDP by 0.5 percent to 0.75 percent over the year
2018-19 (Reuters.com 2019). The recent drought in 2018-19 expected to edge off
Australia’s growth.
Figure 5: Impact of drought on overall economy
Figure 3 analyzes the overall impact of drought on Australian economy. The main
channel through which the incidence can affect Australia’s economy is trade balance. Fall
in export and increase in import worsens the trade balance of Australia. As net export falls,
there is a decline in aggregate demand shifting the aggregate demand curve leftward to
AD1 (Goodwin et al. 2015). The contraction of aggregate demand lowers GDP to Y1.
Because of the fall in aggregate demand, aggregate price level in the economy declines to
P1.
Government Policy
The recent drought that the economy of Australia has experienced is much severe
than those experienced previously. The drought has adversely affected both farmers and
economy as a whole. Drought reform policies need to be taken to counter the impact of
drought. Measures should be taken to help the farmers escape the crisis (Stein et al.
2016). In such circumstances government intervention is highly recommended.
Government should make commitment towards path of a long term reform having the
primary responsibilities of risk management such as variability in climatic condition and
unanticipated change in climate (Estrela and Sancho 2016). Government should convey
appropriate information about the climatic risk to farmers which would help them in making
decision related to farming. In order to design such a policy proper research and

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development is needed. The appropriate risk management strategy would help farmers to
ensure a stable income and reduce vulnerability of the economy towards such shocks
(Tanago et al. 2016).
Conclusion
The research on agricultural sector of Australia has revealed that the this is one
important sector of Australian economy making significant contribution to aggregate output
and employment. Apart from supply food to Australians, the sector plays a dominant role in
export earnings of the nation. In the past 20 years, the total value of production in
agriculture, fisheries and forestry increases significantly. Growth has been observed for
both crops and livestock production. The market structure of agriculture mostly follows a
perfectly competitive market structure. The growing agricultural sector of Australia
however is facing trouble due to the recent drought. The drought has lowered the water
level to such a low level that different states are facing severe water shortage. Lack of
water hamper the agricultural production leading to a lower income for farmers. There is
also possibility of a nationwide shortage for agricultural commodities due to decline in
production of winter crops. In addition to severe impact on the industry, there is a decline
in Australia’s GDP due to lost export share. The worsening trade balance lowers both GDP
and aggregate price level. In order to protect the farmers and the economy, appropriate
policy measures should be taken. Some of the recommended policies include income
support program to farmers, risk management strategy, increasing adaptability of farm
sector and such others.

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