Broad trends that are influencing Australian and global agriculture will become increasingly important in the future, a leading agricultural economist believes.

Dr Jared Greenville, who is executive director of the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), says an expected decline in agricultural production and value in coming years – due to the return of “more usual” seasonal conditions – will be part of a broader set of trends affecting the industry.

These “megatrends” include:

• a more-contested international trading and geopolitical landscape;
• a changing climate;
• the need for continued productivity growth;
• an increasing number of high-income consumers worldwide; and
• new disruptive technologies.

“Some of these megatrends are only beginning and will become more of a feature in the future,” Dr Greenville says.

International trade becoming more contested

Speaking at the recent Australian Grains Industry Conference in Melbourne, Dr Greenville said Australia’s bilateral trading relationships and the multilateral environment had been disrupted in the past few years.

For example, tensions between Australia and China had affected the market for barley, along with other farm products. A key lesson from this episode had been the importance of alternative market options “to allow exports to shift when needed”.

“Market concentration often happens for a sound economic reason – it is the most profitable market. But, if this occurs, risks must be known and managed,” he said.

“Australia has, to date, sought to manage this international trade space through free trade agreements and ongoing support for the multilateral system. Both are needed.

“We cannot forget imports in the trade equation either. We need to import in order to export competitively – both agricultural products to support manufacturing, such as in the case of dairy, along with things we don’t competitively produce domestically.

“Imports have been shown to have increased the growth of domestic returns from agricultural exports and are a beneficial part of a competitive sector.

“When considering market access, imports should also be included to ensure we have options. Imports will also remain a key part of managing supply chain risks, particularly those related to weather risks.”

Cooperation needed on biosecurity risks

While imports can help reduce some risks, Dr Greenville said, they can also increase others.

“At the moment it’s hard to escape news of biosecurity risks,” he said. “Khapra beetle is an ever-present risk and fall army worm has established in Australia. It’s with good reason these risks are present in the media. In 2014, Khapra beetle was estimated to potentially cost $15.5 billion over 20 years. No doubt the costs are much higher now.

“We cannot feasibly reduce these risks to zero, and it seems like this task is going to become more expensive and difficult as climate and trade patterns continue to change. We also need to make sure we operate within the rules-based system as it is in our long-term interest.

“Management of these risks is not just a domestic issue. As we are seeing play out with foot-and-mouth disease, it requires international cooperation. Having friends helping deal with issues before they get here is more effective than having to deal with an incursion.”

Our climate future

In terms of the climate challenge, Dr Greenville said, while no path was locked in, “what is certain is that there will be further change”.

“ABARES work shows that without adaptation, farm profits are likely to be negatively impacted by future climate conditions. For a number of sectors, profits could come under increasing pressure. For others, it is likely that the relatively poor conditions of the past 20 years are indicative of the future – we are already living the new normal.

“Those facing most climate pressures include livestock under higher warming scenarios and cropping in Western Australia.

“It is likely that recent drought patterns will not be exceptional; rather, they should be expected. There is, however, considerable uncertainty largely related to unknowns around how rainfall will behave – particularly winter rainfall in south-eastern Australia, which drives those cropping systems.”

Continued productivity growth required

Despite the changing climate, ABARES data showed an increase in farm productivity across the cropping sector of about 64 per cent since 1989.

These gains in productivity had offset the negative effects of climate over the past 30 years, he said.

“But we need to keep going and R&D will be even more critical than it has been in the past as other low-hanging fruit has already been picked. Getting more from less is now more than just that.

“We continue to face pressure from competitors as they improve their own productivity. We are also facing greater competition in international markets as our competitors gain similar market access to us – for example, selling wheat into Vietnam.

“But now there is a pressing need to be competitive on the sustainability and social licence axis. These will likely become a feature of international markets and trading rules.”

Opportunities in emissions intensity

While Australia trades on a clean and green image, expectations are increasing, and we are one of multiple potential suppliers and need to meet these expectations on a competitive footing. “We know more work needs to be done. For grains, recent research suggests we are doing better than our competitors, but it is unclear how far off they are.

“This puts us in a good starting position, but the race is only beginning, and it remains unclear what rules will be set around emissions intensity. R&D will be important here as well.”

Structural change ever-present with growth

Dr Greenville said productivity growth and a changing climate would continue to change the face of agriculture, including both how and where we produce.

Past structural reforms had enabled the structural adjustment that delivered strong sector performance over the past 20 years.

“While this has led to the number of farms falling, it has delivered growth in farm sector returns and average farm returns.

“There are likely to be more changes to farm types and sizes going forward and the general trend that has seen farms continue to get larger and use more capital in place of labour – leading to fewer on-farm jobs – is expected to continue.

“One thing, however, has been a persistence in the absolute number of smaller farms, which we expect to continue. This reflects the fact that there are lots of reasons to own a small farm other than making a profit, such as long-term land price growth, amenity and lifestyle benefits, and we know that the use of off-farm income is very important in meeting the living expenses of small farm households.

“An important consideration here is that the kinds of research and development – and policy – that are good for large and small farms are different. This is likely most important for issues such as pest and weed management, adoption of good biosecurity practices more generally and adaptation to climate change.”

Reasons for optimism

With all these pressures, the grains sector must not lose sight of the huge opportunity in front of it. A three-fold increase in the number of consumers in high-income countries between now and 2050 – creating an extra three billion high-income consumers – would dramatically change demand and expectations around the way food and fibre is produced.

“This represents a real opportunity for continued growth if we can rise to the challenges of the other megatrends.”

Digital agriculture could unlock benefits

Meanwhile, new technologies will apply information in different ways: from automating farming systems to improving sector and system-level performance in relation to market access and biosecurity, he said.

These technologies have been suggested to have the ability to add about $20 billion to the sector, assuming everyone adopts what is available.

“What we see is that technology will need to change across the supply chain. This will require coordination of information and data to allow interoperability. We are currently a long way from that, and coordination is needed.

“What is more, nobody as yet ‘owns’ this problem. It is going to require partnership across industry, the research and development corporations and government, as each group has different needs but they all have interest in the same data.

“Disruptive technologies are also likely to create new forms of structural adjustment and could open up new areas of competition policy and concerns over how markets operate. And before it happens, we don’t know what is coming. Think of Uber. Uber significantly altered the taxi market and has led to new issues around pay, conditions and market operation. It is likely that other platforms could have similar effects.

“As many of these issues will cut across a broad range of sectors, dealing with them will require an economy-wide approach covering all participants in the supply chain.”