A free lunch for some

Perspectives

A free lunch for some

Agribusiness Bulletin

We look at what global agricultural commodity price movements mean for regional Australia.

It’s often said that there is no such thing as a ‘free lunch’ in economics. But, in agriculture, there is something very close – a rise in agricultural commodity prices near harvest time, after the costs of production have largely been borne.

The role of commodity prices in driving economic success is well documented at a national level. Australia’s recent mining boom was triggered in no small way by high world mineral prices. The post-WWII ‘golden years’ of Australian agriculture was driven by high commodity prices, resulting from demand for food for a hungry world. Even further back, Australia’s ride to prosperity ‘on the sheep’s back’ was spurred by high wool prices paid by European textile factories during the industrial revolution.

While the role of global commodity prices driving economic prosperity at a national level is well understood, it is less commonly considered at a regional level. In this Agribusiness Bulletin, we consider the role of global agricultural commodity prices in driving farm revenue and, by extension, the prosperity of agriculturally dependant regional economies. 

Methodology

Time horizons

We measured real prices for key commodities (representing around three-quarters of Australia’s $43 billion in agricultural exports) along three time horizons:

  • The long-term historical price (the average real price for the 15 years to 2014-15)
  • The recent historical price (the average real price for the three years to 2014-15)
  • The current price (as at 10 February 2016)

In table 1, the recent and current prices are compared against the long-term historical price. Using wheat as an example, the average price for the three years to 2014-15 was one per cent higher than the long-term average, while the current wheat price is seven per cent below the long term average. Beef, lamb, sugar and wool producers are currently experiencing favourable commodity prices; while cotton, dairy and canola producers are receiving prices well below the long-term average.

Table 1: Real commodity prices relative to the Long-term average (in real $AUD)

 

Wheat

Canola

Coarse grains

Wool

Dairy

Cotton

Sugar

Beef

Lamb

Recent

+1%

-5%

+7%

-2%

-1%

-18%

-1%

-12%

1%

Current

-7%

-10%

-5%

+12%

-31%

-15%

+8%

+44%

+18%

Sources: ABARES Agricultural Commodity Statistics 2015, ABARES Weekly Australian Climate, Water and Agricultural Update

Global commodity prices

Where possible, global prices were used as they offer a more pure measure of exogenously imposed price impacts on each region. This recognises that, for example, a drought induced spike in prices provides no ‘free’ lunch for the affected region. In the absence of recognised global commodity prices, Australian indicator prices were used for wool, beef and sheep meat. The global whole milk powder price was used for dairy products. Coarse grains prices were an average of sorghum, barley and oats prices.

Analysis

The analysis measures the effect that the global commodity price change has (relative to the long-term average) on the gross value of agricultural production for each Local Government Area (LGA) across Australia for both periods.

For the time horizons considered, the relative price calculated for each LGA is the average relative price of all the commodities that the region produces, weighted by each commodity’s value share of agricultural production in the region.

The value of the price-induced benefit for each region, in annual terms, is calculated as the weighted relative price for each LGA multiplied by that region’s gross value of production for 2010-11 (the last census year - ABS Value of Agricultural Commodities Produced, Cat. No. 7503.0). The price-induced change in gross agricultural output is therefore measured relative to this baseline year.

Results

Three year time horizon

Map 1 displays the revenue effect of recent (last three years) historical agricultural commodity prices relative to the long-term average.

The few winners, on this time horizon, were the grain belts of Western Australia, South Australia and Victoria; they all benefited from above-average grain prices. Cereal growing areas further north benefitted less overall, reflecting more diversification (across crops and livestock) in those areas.

The map also shows the cotton-growing areas of northern New South Wales and Southern Queensland being negatively affected by low global cotton prices, particularly in those regions where cotton is the dominant crop. Low cattle and beef prices, especially early in the three year period, also had widespread impact on Northern Australia’s cattle dominant regions.

Despite relatively high prices in 2014, global dairy prices were below their long-term average for the three year period, negatively affecting Victoria’s Murray-Goulburn, Gippsland and South West and Tasmania’s north-west dairy areas.

Free lunch

Current prices

Looking at the present, Map 2 displays the revenue effect of current global agricultural commodity prices (as at 10 February 2016) on Australia’s regions. The combination of relatively strong global prices (compared to long-term average prices) and the depreciated Australian dollar has broadly positive for producers of most commodities and, therefore, agricultural regions.

Near record beef and lamb prices is the main story here, with beef cattle regions across Northern Australia benefitting most. Strong lamb and wool prices are complementing the high beef price to benefit mixed cropping and livestock areas along the Great Divide of New South Wales and Victoria. Higher sugar prices are also benefitting coastal Queensland areas, such as Mackay and Bundaberg.

Victoria’s dairy regions and the cotton growing areas of New South Wales and Queensland are the main areas negatively affected by current global prices (down 31% and 15% respectively from their long-term average prices).

Do high global prices guarantee profitability?

The above maps are an illustration of the revenue volatility experienced in Australian agricultural regions in recent times. Of course, revenue fluctuations and global price movements alone do not translate into farm level profitability. Many of the regional areas that could have benefitted from higher commodity prices have not been able to benefit given El Nino-influenced seasonal conditions, for example. Nevertheless and debatably, the fate of such regions would have been even worse but for the ability to sell produce at a higher (than long-term average) price.

For those areas that have had the rare combination of both favourable prices and favourable seasonal conditions in the past year – such as North East Victoria, South East NSW and parts of South West Western Australia – the benefits of the 'free lunch' should already be flowing through the regional economies.

In a future article we will examine the impact that recent commodity prices and other factors, such as seasonal conditions, have had on farm profitability in Australia’s agricultural regions.

The Agribusiness Bulletin

The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise. To get more articles like this delivered straight to your inbox subscribe to the Agribusiness Bulletin.

Agribusiness Bulletin

Subscribe here
Did you find this useful?