HI5003 Economics for Business: Drought Impact on Agriculture Report

This report examines the Australian agriculture industry, focusing on the economic impacts of the 2019 drought. It begins with an introduction and background of the industry, highlighting its contribution to the Australian GDP and its export-oriented approach. The report then analyzes the market structure, identifying it as primarily monopolistic competition. The core of the report addresses the issues caused by the drought, detailing its impact on agricultural production, livestock management, and the increased risk of bushfires. The analysis extends to the economic and industrial impacts, including reduced GDP growth, losses in foreign reserves, and challenges for related sectors like hydropower and agricultural component manufacturing. The report concludes by evaluating the government's policies aimed at supporting the agriculture sector, such as rebates for on-farm water infrastructure expenses, to mitigate the adverse effects of the drought. The study provides a comprehensive overview of the challenges and responses within the Australian agricultural sector.

Running head: BUSINESS ECONOMICS
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Introduction
Irrespective of the business challenges being faced by the contemporary business entities,
there are few natural incidents also affecting the industry. Moreover, the impact of the natural
events is more for the agribusiness industry as they are directly associated with the agricultural
productions. Thus, the more will be the emergence of the natural events and calamities, the more
challenges will be faced by the agricultural sector. In this case, it should be noted that natural
events cannot be mitigated only by the business strategies but also with the assistances of the
government (Cai et al. 2014). The policy and initiatives of the government are important in this
case to manage the natural events and elements. In terms of the Australian business context,
recent drought caused havoc on the domestic agriculture sector. In this case also, the Australian
government initiated a few policies and practices in mitigating the challenge.
This report will discuss about the background of the agriculture industry of Australia on
the basis of the empirical evidence along with discussing the market structure of this industry.
The issues being faced by the Australian agricultural sector due to the emergence of drought will
also be identified and the extent to which they are influencing. The impacts of these issues on the
Australian economy will be evaluated and what the government has initiated to deal with these
issues.
Industry background
It is reported that Australian agricultural sector contributes for about 3 percent of the
gross domestic product of the country. As of 2016-2017, the gross value of the Australian
agriculture production stands at $600 billion. The major characteristic of this industry is the
export oriented approach. This is due to the reason that more than 77 percent of the total

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agricultural produce in the country are being exported and the rest are getting marketed in
domestic regions (nff.org.au 2019). Thus, it can be concluded that agriculture sector is one of the
major sources of gaining foreign reserves for Australia. It is also reported that agriculture sector
of Australia currently employs more than 300000 people and thus are termed as one of the
biggest employers in the world. One of most positive elements of the Australian agriculture
sector is the active involvement of the farmers in the conservation process of the natural
resources as it is reported that more than 94 percent of the Australian farmers are undertaking the
management process of natural resources (nff.org.au 2019).
Market structure
Determination of the market structure of the Australian agriculture sector is difficult due
to the reason that different structural characteristics are relevant. For instance, from the farmers
or the growers perspective, this sector can be termed as the perfectly competitive market due to
the reason that each of the competing players same product varieties and selling in market
oriented price. On the other hand, this sector can also be termed as the monopolistic competitive
market because different growers and entities are offering different agricultural products inferior
and superior to each other (Vance et al. 2015). Furthermore, the same product varieties are
getting sold in different price levels. Thus, it can be concluded that different characteristics of
various market structures are evident in the Australian agriculture sector. To some extent, the
term oligopoly can also be suitable for this sector. This is due to the reason that there are few
large scale business entities operating in this sector and they are having monopoly powers over
others. This is mainly evident in the case of the Australian agriculture exporters where the few
large scale business entities are dominating. However, it should be noted that monopolistic
competition is the most suitable market structure for the agriculture sector of Australia. This is

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due to the reason that agricultural products include beef, dairy, cotton; grains, rice and sugar are
produced in Australia. Thus, different entities are operating in different segments and in different
price levels based on the quality and other factors. Thus, differentiation is very much evident in
this sector with each of entities competing for more market revenues.
In terms of the customer base also, different characteristics of the monopolistic
competition are getting matched with the Australian agriculture sector. For example, large
numbers of customers are present in the sector including both the domestic and export
customers. The next element is the presence of large number of firms, which is evident in the
case of Australian agriculture sector. There are numbers of small, medium and large scale
entities operating in the sector and enhancing the competitive rivalry. The entry and exit is also
free and having no barriers for the entities. Similar to the approach of the monopolistic
competition, entities operating in the Australian agriculture sector are having some control over
their pricing by the government. This is due to the reason that price of agricultural products will
include the price of the food products. On the basis of these similarities, it can be concluded that
monopolistic competition is the market structure of the agricultural sector of Australia.
Determination of the issues
In the recent time, one of the major issues being faced by the Australian agriculture sector
is the drought between 2018 and 2019. It is reported that this drought is the biggest in the
Australian region in the last 120 years and is termed as super drought. In the last few years,
Australia is experiencing the record temperatures, which are making the soil dry and hot. Thus,
the higher will be the temperature, the more is the rate of water evaporation. The required water
level for the agricultural activities is getting reduced. Moreover, the current situation is further

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challenging now because farming activities are getting affected due to the extreme hot climate
conditions and low soil water level. It is forecasted that record level of rainfall over the next
three months will only be able to overcome this situation (foodprocessing.com.au 2019). The
impact and intensity of the drought is the most in New South Wales followed by Queensland and
Victoria. It is reported that Murray-Darling Basin is the most extensive river system of Australia
and the major rainfall deficiencies are identified (Mosley et al. 2014). Thus, the agriculture
sector of Australia is getting affected by the shortage of water for the longer period of time.
The impacts are not only relevant in the case of agricultural production but also for the
livestock management. This is due to the reason that with the emergence of extreme weather
conditions, the supply of the stock feed is getting reduced. Thus, the agribusiness of Australia
operating in the meat processing and dairy processing sector is also facing the challenge of
dealing with the drought conditions. The probability and risks of fire including bushfire are
getting increased due to the drought conditions and there are already several incidents recorded
where the cultivation areas are getting reduced. Hence, the drought conditions in Australia are
having number of implications for the agriculture sector.
Analysis of the impacts
The 2019 Australian drought is having number of implications on both the national
economy and the industry. The major economical impacts will be discussed in the following
sections.
Economical impacts of the drought
It is reported that the Australian economy will suffer a loss of more than $12.5 billion due
to the emergence of the drought. It is also reported that the average growth rate of gross domestic

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production of Australia will also get reduced by about 0.75 percent due to this. This is due to the
reason that according to the golden rule of demand and supply, the more will be the demand over
supply, the more will be the cost of the products and this same concept is applied in the
Australian scenario as well (sbs.com.au 2019). With the reduction in the food production due to
the emergence of drought, the supply got limited in the market and with the demand soaring, the
difference between the supply and demand got increased and price got higher. Hence, the more
will be the price of the food products, the more will be the expense of the economy towards the
necessity items. This will reduce the real income of the population and affect the GDP rate.
This should also be noted that Australian economy will also suffer in terms of foreign
reserves due to the reason that more than 77 percent of the food products are exported to the
foreign countries. Thus, the lower will be the production of the agricultural products; the lower
will be the surplus to meet the international market demand after meeting the domestic demand.
Hence, the Australian economy is also suffering in terms of the foreign reserves. The revenue for
the farmers will also get reduced because they have to pay more for sourcing water through
irrigation. In addition, the irrigated water irrespective of their sources is not effective as much as
the rainfall. Thus, with the increase in the cost of agriculture, the farmers and growers will have
negative economic implications and this in turn affect the contribution of agriculture sector on
the GDP of Australia. Apart from the agriculture sector, emergence of drought will also pose
challenges for Australian economy in terms of other factors also. For example, the hydropower
projects will get affected due to the inadequate supply of water. With the impact on the power
production, the national economy will further get affected. In the current business scenario, there
are number of others business sectors associated with the agriculture industry and these sectors
will also get affected. For example, companies manufacturing agricultural components such as

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tractors and other machineries will get affected due to the reduction in demand from the growers.
The transportation sector is also getting impacted because of lack of to and fro journey. Hence, it
can be concluded that due to the emergence of drought, the Australian economy is facing a
number of issues.
Industrial impacts of the drought
Apart from the economy, the entire agriculture industry is getting affected due to the
emergence of drought. One of the major impacts is the decline in the farm production by about 4
percent in the period of 2018 and 2019. Thus, the lower will be the production in the agriculture
sector, the lower will be the inflow of the investment in the sector and in line to this concept, and
the contribution of the agriculture sector in the Australian economy is getting reduced. The
viability of the entire agribusiness is getting affected. However, it is reported that the negative
implications would have been more if the record production was not set in the Western
Australian region. This acted as the buffer for the low production due to drought. Furthermore,
the Australian agriculture industry is also getting deprived of improved and new innovation. This
is due to the reason that innovation will be more when the industry will have long term viability,
which is not in the case of the Australian agriculture sector in its current state. The revenue of the
large scale farms helps in bringing the stability in the Australian agriculture sector but according
to the reports, the average income of the large scale Australian farms is projected to get reduced
by about 18 percent during the period of 2018 and 2019 (abc.net.au 2019). Thus, with the
continuous onslaught of drought, the long term viability of the Australian agriculture sector is
getting reduced.
Determination of the government policy

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There are number of benefitting policies being initiated by the Australian government in
assisting the agriculture sector. One of the major policies taken is offering rebates for the on-
farm water infrastructure expenses. This refers to the fact that majority of the farmers are unable
to develop their irritation infrastructure due to the cost involved and thus are getting more
exposed to the droughts (Agriculture.gov.au 2019). Thus, with the providence of the rebates,
these farmers will get discount of $50 million over the next three years in the drought affected
areas. Hence, the farmers will have higher access to the water resources and will be able to
ensure the water supply in the agricultural activities even during the drought. In addition of these
initiatives, government of Australia has also allocated relief funds for the drought affected areas.
These funds are being as compensation for the loss due to drought. For instance, the federal
government of Australia allocated funds of $ 1 billion for low interest loans for five years
(abc.net.au 2019). This will help the entities involved in the agriculture sector to have the flow of
funding for dealing with drought. $72 billion of fund is allocated for national water infrastructure
development fund. Thus, it can be concluded that there are different long term and short term
policies being initiated by the Australian government.
Evaluation of the government policy
In the above section, it is identified that there are different initiatives taken by the
Australian government in countering the drought problems. The major advantages or merits
identified from these policies are the consideration of both long term and short term factors. This
is due to the reason that in majority of the cases, only the short term factors are considered and
long term factors are skipped. This caused in lasting of the issues. However, in the case of
Australian government, they allocated fund for national water infrastructure development project
for the long term sources of water round the year. Thus, completion of these projects will ensure

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the lower impacts of drought on the agriculture sector. However, on the other hand, it should also
be noted that there are no preventive measures are evident in the government policy. Preventive
policies should also be initiated to avoid the repetition of the drought in the coming years.
However, only the mitigation techniques are initiated. It is important for the authority to identify
the key reasons behind the frequent emergence of drought by the root cause analysis and initiate
the policy accordingly. Thus, as per the policy initiated by the government of Australia, drought
will be inevitable and there will be infrastructure to counter that. This is one of the major
limitations identified from the government policy.
Conclusion
This report concludes that drought is one of the major challenges being faced by the
Australian agriculture sector in the recent time. In addition, it is also identified that impacts of
the drought conditions are not only limited to the agriculture sector but also affecting the entire
economy. There are different major impacts on both the Australian economy and the agriculture
identified and discussed in details. It is evaluated that monopolistic competitive market structure
is being followed in the Australian agriculture sector due to the presence of various value
propositions by different sellers and large number of buyers. The government policy in
countering the drought condition in the country is discussed. It is further evaluated for
determining the merits and demerits. There are number of advantages identified such as the long
term consideration. On the other hand, the major limitation is the lack of preventive measures.

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Reference
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[online] ABC News. Available at: https://www.abc.net.au/news/2018-10-16/where-has-drought-
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Agriculture.gov.au (2019). On-farm emergency water infrastructure rebate scheme. [online]
Agriculture.gov.au. Available at: http://www.agriculture.gov.au/water/national/on-farm-
infrastructure-rebate [Accessed 25 Aug. 2019].
Cai, W., Purich, A., Cowan, T., van Rensch, P. and Weller, E., 2014. Did climate change–
induced rainfall trends contribute to the Australian millennium drought?. Journal of
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foodprocessing.com.au (2019). Drought impacts Australia's farm production. [online]
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Mosley, L.M., Zammit, B., Jolley, A.M. and Barnett, L., 2014. Acidification of lake water due to
drought. Journal of Hydrology, 511, pp.484-493.
nff.org.au (2019). Farm Facts | National Farmers' Federation. [online] Nff.org.au. Available at:
https://www.nff.org.au/farm-facts.html [Accessed 25 Aug. 2019].
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