The challenges associated with accelerating agricultural productivity in Australia

Mick Keogh, Australian Farm Institute

The situation that the Australian agriculture sector faces at the moment is a bit like the position of a shopkeeper who owns a small corner store, and who suddenly finds a major new high-rise residential development with thousands of potential customers is being built all around the 'shop'. The shopkeeper can’t expand the shelf space or the size of the shop, so despite the potential extra customers, needs to think about how to maximise the profits available from the existing store.

Australian agriculture faces a similar dilemma with the size of it’s shop. The area of arable land cropped each year has been relatively static over the last decade at around 25 million hectares. The amount of irrigation water used each year by agriculture peaked at 10.4 million megalitres in 2002–03 and has declined by more than 15% since that time.

There is certainly some potential to develop new areas of land in northern Australia, and some additional irrigation capacity in northern Australia and Tasmania. However, in the overall scheme of things, these developments are unlikely to increase the existing land and water resources available to the agriculture sector by more than a couple of percent.

So despite the huge growth in food demand that is already being generated by the growing Asian middle classes, and the fact that this growth is likely to continue for a long time into the future, the potential for the Australian food ‘shop’ to expand and take advantage of that additional demand is pretty limited.

This is highlighted in Figure 1, which shows the total value of Australian agricultural exports annually (expressed in $US terms) compared to the total value of Chinese agricultural imports over the last 50 years. Even if Australian agricultural exports went exclusively to China, Australia has gone from being able to supply more than 100% of Chinese import demand, to less than 25% over the period.

 

Figure 1:  Value of Australian agricultural exports and Chinese agricultural imports.
Sources:    FAO, AFI analysis.

While this is an overly simplistic comparison, it provides some idea of the relative scale of the supply available from Australia and the demand from China, recognising that China is just one of the potential markets in Asia.

The dilemma that the Australian agriculture sector faces is a bit like the dilemma faced by the allegorical shopkeeper, with one important exception. In the case of Australian agriculture, there are plenty of alternative ‘shops’ internationally that are ready and willing to sell their food to these new customers.

Of course Australian agriculture is not a single entity, as the sector consists of a large number of different businesses, growing and processing a multitude of different food and fibre products that are exported to a huge number of international destinations, many of which are not even in Asia. Each of these businesses has different options available to respond to the surging Asian demand for food and fibre.

There is, however, a common challenge for virtually every business and every sub-sector of agriculture, and that is the challenge of finding ways to increase productivity. Irrespective of whether a product is destined for top end luxury uses or the cheapest bulk commodity market, the need to increase productivity and keep a step ahead of existing or potential competition is absolutely critical.

Agricultural productivity

The concept of ‘productivity’ is often misunderstood, and is sometimes regarded negatively in agriculture, for somewhat misguided reasons.

At its simplest, ‘productivity’ is the ratio of the volume of outputs from a system (be it an industry, a business or a national economy), compared to the volume of inputs. Productivity growth refers to the rate of change of this ratio, over time.

Calculating rates of productivity growth can be a complicated procedure, especially in the case of something like the agriculture sector which involves the use of multiple inputs to produce multiple outputs, and which also involves the use of difficult to measure and cost variables like land, rainfall and seasonal climatic conditions and management skills.

These qualifications noted, ABARES has recently prepared a report examining what is known about productivity growth in Australian agriculture, and the factors that may impact on future rates of productivity growth. One of the clear conclusions arising from that research is that the rate of productivity growth has slowed considerably since about 2000, especially in the grains sub-sector but also more generally across broadacre agriculture (see Figure 2).

Figure 2:   Broadacre farm total factor productivity.
Source:      Dahl et al. (2013). 

The declining rate of agricultural productivity growth has important implications for Australian agriculture’s international competitiveness, given the emergence of major new competition from South America and Eastern Europe in global agricultural markets over the past decade. If Australian agricultural productivity growth is not matching the productivity performance of competitor exporters, then many of the potential new customers in the neighbourhood will increasingly decide to ‘shop elsewhere’.

Internationally comparable agricultural productivity data has been compiled by the United States Department of Agriculture (USDA) using slightly different methodologies to the ABARES data above, but which enables international comparisons to be made of rates of agricultural productivity growth. The USDA data includes all sub-sectors of agriculture, not just the broadacre and dairy sectors. The result of that analysis is summarised in
Figure 3.

 

Figure 3:   Comparison of rates of national agricultural productivity growth.
Sources:     USDA (2014), accessible at: http://ers.usda.gov/data-products/international-agricultural-productivity.aspx#.U089bfmSzkd; AFI analysis.

It highlights that Australian agriculture’s productivity performance has been relatively lacklustre compared to that of some of the major competitors in international agricultural markets. Data for eastern European nations such as the Ukraine are not readily available for an extended period, but what data is available indicates that even those nations, despite their political and economic uncertainty, have experienced considerable agricultural productivity growth over recent years.

Some caution is required in international comparisons, because a nation that starts with a very low level of agricultural productivity and which then successfully implements some reforms will experience a much faster apparent rate of productivity growth than a nation that starts with a highly productive agricultural sector. There is also a need for some caution in the case of a nation like New Zealand, where the apparent productivity performance has been affected by a significant conversion of areas of forest to dairy farms. Those qualifications noted, the above data still provides reasonably strong evidence that there are serious concerns about the current rate of productivity growth of Australian agriculture.

Factors contributing to Australian agricultural productivity growth

The ABARES analysis identifies that Australian agriculture has a productivity ‘problem’, but provides little in the way of guidance about how the problem can be fixed.

One way of starting to think about possible responses is to examine what is known about the factors that have contributed to agricultural productivity growth in the past. Unfortunately, data to enable analysis of the factors contributing to past productivity growth in Australian agriculture are somewhat problematical, due to the incomplete coverage of ABARES data, and the lack of coverage and questionable categorisations utilised by the Australian Bureau of Statistics in compiling agricultural sector statistics.

That qualification noted, ABARES has compiled annual survey data for broadacre farm businesses (excluding horticulture, specialist crops like cotton and sugar, and intensive livestock), and has used that data to produce some estimates of the relative importance of different factors in the past productivity performance of broadacre agriculture in Australia.

Figure 4 shows ABARES’ estimates of the contribution of a range of different factors to average broadacre agricultural productivity growth (equal to approximately 2% per annum) over the past 30 years.


Figure 4:   Relative contributions of factors to annual broadacre farm productivity growth in Australia.
Source:     Sheng et al. (2011).

The ‘Other factors’ in Figure 4 include climate, and changes in input costs and output prices. The latter incorporates changes in the Australian economy, such as improvements in transport and telecommunications, which improve national productivity and from which agricultural businesses gain benefits.

The graph identifies that about one-third of agricultural productivity gains are from international research outcomes that ‘spill’ into Australia, and that approximately one-third of productivity growth is generated from Australian public research, development and extension (R,D&E).

This could lead to the conclusion that ‘extension’ is relatively unimportant, but there are a number of qualifications that need to be considered.

First, data used to generate the above results only included estimates of ‘public’ extension expenditure over the period from 1955 to 2007 (equal to approximately $200 million per annum in 2007). Because actual data were not available, the estimates used were derived from data on total public R&D expenditure, and some sporadic survey data of the proportion of researchers' time spent on extension activities (and hence the proportion of public R&D expenditure that could be considered ‘extension’).

Second, towards the latter part of this period (and especially from the mid-1990s onwards), there was a marked decline in the relative importance of public agricultural extension agencies in Australia, and a dramatic increase in the use of private extension or advisory services in sub-sectors such as cropping and intensive livestock. This means that total extension expenditure (public and private sector) is considerably under-estimated in the analysis.

Evidence of the increase in the use of private advisory services is available from the annual broadacre farm survey data compiled by ABARES. Figure 5 shows average real advisory and veterinary costs (not including accountancy services) per farm in 2012 dollars over the period from 1990 to 2012. The data include all farms including sub-commercial or lifestyle farms. While the growth in average farm size would account for some of this growth in per-farm expenditure, the graph confirms the increasing importance of private-sector advisory (extension) services to Australian farm businesses. This amount does not include bundled advisory services provided at no direct cost to farmers by input suppliers.


Figure 5:    Average per-farm expenditure on private-sector advisory and veterinary services by broadacre farm businesses.
Sources:     ABARES Agsurf database, AFI analysis.

Interestingly, while the common perception is that Australian crop farmers have adopted the use of private-sector advisory services to a greater degree than livestock farmers, available ABARES data do not support this, if both advisory and veterinary services are included in the analysis. The data displayed in Figure 6 shows that the average broadacre farm expenditure on advisory services (including both veterinary and other advisors) has more than doubled over the last 20 years, and was equivalent to approximately 0.5% of gross farm revenue in 2012. The figure for beef specialists was higher than for crop farmers, although that result was caused by sharply lower average revenue for beef farms in 2012, and not increased advisor costs.

 

Figure 6:    Broadacre farm expenditure on advisory and veterinary services as a percentage of total farm revenue.
Sources:      ABARES Agsurf database, AFI analysis.

At 0.5% of total farm revenue, national farm business expenditure on private-sector advisory services is estimated to be approximately $240 million per annum (assuming this figure applies across all sub-sectors of agriculture). This exceeds the estimated value of public-sector extension expenditure referred to earlier, and is also equivalent to the annual R&D levy contributions of farm businesses.

A final point to note is that while the analysis suggests that extension has been relatively unimportant in generating productivity growth, it is worth noting that effective extension services (either public or private sector) are an important lever in ensuring that any innovations originating from any of the other factors (international R&D, domestic R&D and other economy-wide factors) are more rapidly adopted by Australian farm businesses.

In fact, in considering ways to trigger a recovery in productivity growth rates in Australian agriculture, it is worth noting that there is little that Australian farmers or agricultural policy-makers can do to change the amount of international agricultural R&D that is occurring, or the rate of productivity change occurring in the broader Australian economy. Additionally, while there is some potential to change the amount of domestic agricultural R&D that is occurring, current government fiscal policies in Australia mean this is unlikely, at least for the time being.

This leaves extension – specifically improving the effectiveness of agricultural extension – as the main short-term lever available to resuscitate agricultural productivity growth in Australia. In saying this, there is no doubt that over the longer term, investment in agricultural R&D is needed to add to the stock of knowledge available to providers of extension services to farm businesses in an effort to improve farm productivity.

Improving the effectiveness of agricultural extension

A starting point in looking at ways to improve agricultural extension services in Australia is to be very clear about the fact that:
•    private-sector advisory service providers greatly outnumber public-sector providers
•    private-sector advisory services are likely to continue growing in importance in the future while public-sector services are rapidly disappearing
•    private-sector advisory services are driven by and responsive to farmer demand, rather than by any particular imperatives identified by government.

Adding to these complications, there are no widely recognised qualification standards, accreditation systems or professional organisations for private-sector advisors (apart from veterinarians), and apart from advisors employed by three larger farm service organisations, Australian farm advisors tend to work as individuals or in small groups, rather than in larger cooperatives or corporate structures.

The challenge for research providers in Australia (including rural research and development corporations, private-sector corporations, universities and government research agencies) is that there are no well-structured information supply chains that can be used to reliably communicate the outcomes of research to farmers, through their advisors.

Whereas in the past each of the state governments had an extension agency with personnel who interacted directly with farmers, this has not been the case for most of the past decade, and with some minor exceptions will not be the case in the future. State government agricultural agencies in most states do maintain networks that include farmers and their advisors to a greater or lesser degree, although the available state government resources are rapidly shrinking, and being centralised.

This creates a particular challenge for researchers in the major universities and the CSIRO who do not have a readily available network of farm advisors or farmers involved in the development of research programs or in the communication of research outcomes. This is exacerbated by the fact that many of these researchers achieve career advancement through international research publications, and not as a consequence of time spent interacting with farm advisors and farmers.

Rural research and development corporations have addressed this challenge in a range of different ways. Research agencies in sectors that have a small geographic footprint (such as sugar, cotton and winegrapes) can more easily organise networks of advisors and farmers, and can incorporate industry engagement as part of research program development. This is not as easy for more geographically diverse sectors such as broadacre livestock, cropping and horticulture. A number of research agencies in these sectors (such as the Grains Research and Development Corporation) have for many years staged a series of conferences that specifically target advisors, and produce a wide range of publications targeted at different audiences, including some specifically for advisors. This is not as simple in the broadacre livestock industries, which have a much greater proportion of small-scale farm businesses that are not as likely to have regular contact with advisors. Many research agencies also encourage the formation of farmer groups, which provide networks of motivated advisors and farmers (although they do not involve a large proportion of farmers).

While the above initiatives appear to be addressing the challenge of improving the effectiveness of extension services, there is a strong argument to the effect that research funders need to place a higher priority on researchers being engaged with networks of farmers and advisors as a foundation stone of research programs, rather than just as a way of communicating research outcomes.

It has also been observed that farmer groups increasingly provide good networks at a regional or local level, but often lack the expertise necessary to run robust, objective research trials. Requiring researchers, as a mandatory part of their research activities, to spend time helping farmer groups would undoubtedly benefit both researchers and farmer groups, and help to create stronger networks.

The development of electronic information platforms that provide access to easily searchable databases of research outcomes would also help to create a stronger information supply chain between researchers and farm advisors, although the severe constraints imposed on rural and remote internet access by Australia’s telecommunications system needs to be clearly recognised. Unfortunately, it is a fact of life that every state government research agency, research and development corporation or federal government agency seems intent on developing their own internet presence, which leaves farmers and their advisors with a confusing array of different information sources that are inefficient to search from a user’s perspective.

The Australian private-sector farm advisory industry (including farm business consultants, crop advisors and livestock advisors) also needs to seriously consider the issue of professional accreditation systems and standards. Developing and promoting a professional accreditation system (such as the Certified Crop Advisors scheme in the United States) enhances the professional reputation of advisors, provides greater confidence to the community, policy-makers and farmers, and can also result in a more structured and reliable information supply chain, through professional development requirements. A key challenge in establishing such schemes is ensuring they provide significant service benefits to advisors, rather than just being bureaucratic compliance requirements.

Private-sector research organisations (such as multinational agrichemical and bioscience companies) need to seriously consider how they can best interact with what is essentially an unstructured information supply chain. The development of agreed national protocols for some of the simpler research trials conducted by the private sector would enable farmers to have greater confidence in the outcomes of such research, and should improve the flow of information to farmers and their advisors.

Finally, governments need to clearly recognise that, when it comes to public good issues such as natural resource management and biosecurity, they can no longer expect that information about these will be efficiently conveyed to landholders by their agencies. Such programs will need to incorporate a greater proportion of total funding to contract private advisors to communicate with farmers. Failing to do this will simply result in these programs being ignored by farmers.

References

Dahl, A, Leith, R, Gray, E (2013), Productivity in the broadacre and dairy industries, Agricultural Commodities, vol. 3, no. 1, March Quarter, ABARES.

Sheng, Y, Gray, E, Mullen, J, Davidson, A (2011), Public investment in agricultural R&D and extension: an analysis of the static and dynamic effects on Australian broadacre productivity, ABARES Research Report 11.7, September.

Images:  GrainCorp Limited, USDA, IRRI

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