The agriculture boom we missed.

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Politicians seem to be very good at picking booms – at least after they have happened or are on the way down. That appears to be the case with agriculture. The growth of Asia has not only led to a mining boom but has also pushed up world food prices. Together with the end of the decade-long drought in Eastern Australia, increased demand from Asia has been a major benefit to Australian farmers over the last 5 or so years. It also explains why foreign investors have been interested in our agricultural land. With high world food prices, it is a good investment.

Now the politicians appear to be spruiking an agricultural boom. For example, see here. Unfortunately, they may be too late. If we pick one commodity, dairy, it is pretty clear that world dairy prices have peaked and have been on the way down over the past year or so. The 2010/11 farm gate prices in Australia were down about 13% from their 2007/08 high. And prices are predicted to go lower.

This drop is not because Asia has lost its interest in food, although the GFC did put a dent in dairy prices. Rather, it reflects an uncomfortable fact about resources. Supply responds. This has happened in dairy. For example, our cousins across the Tasman seem to have ratcheted up their dairy production. A report is here. Overall, the world supply of dairy products has responded to higher prices, and in so doing have returned the price of dairy products back to more ‘normal’ levels.

I expect to see this same sort of response in most agricultural and resource industries. We have had a great decade in Australia. We have ridden a fantastic resources boom. But it is now quite likely on the way down as supply has responded to meet the increased demand  from Asia.

So what can we do about this? Not much. However we can avoid introducing policies that would have been beneficial on the upside of the boom but are pretty useless (or harmful) on the downside.

5 Responses to "The agriculture boom we missed."
  1. Stephen,  I believe there will be a boom in Australian agricultural exports particularly in areas such as beef and lamb exports.  Australia has an enormous comparative advantage in producing such products – based on our abundant land – and the demand for such products is rocketing way in countries like China.  Look at countries like China and India – they are pathetically endowed in producing agricultural products based on broad acre agriculture.

    The interesting thing about the mineral export boom is that it is largely based on prices rather than quantities.  The quantity effects – and the massive investments in developing new resources – are only just coming on stream.  Yes i think this boom is coming to a short-term interruption but, medium term, increased quantities at somewhat lower prices will sustain the Australian resource sector.  

  2. Hi hc. I agree on the demand side but think the public discussion underplays supply responses. For example, in gas we have been crowing about our Coal Seam Methane reserves. But so have the US and Canada (at least with Shale oil and gas) and apparently last year the US became a net exporter of petroleum-based fuels for the first time since 1949. So supply is responding to increased demand for gas and oil and the price will come back down.

    The same has happened in dairy and will occur in other agricultural products. NZ, Europe, and the Americas can all produce agricultural outputs and will have increased incentives as prices rise. While we have some natural assets, we are not alone. So I expect total agricultural output in Australia to rise significantly, but that prices will not be `a lot higher’. And, yes, this is good for farmers, but it will not be a ‘boom’ as politicians tend to use the word. 

    Of course, governments could always intervene to stuff up production growth in their country and provide Australia with a ‘free kick’ (e.g. Argentina nationalising its main oil producer before it has invested to exploit shale oil and gas reserves). But I am not sure we can count on this.

  3. Firstly, whatever happens to prices in the next year I think agribusiness is still a good investment.  7 bilion hungry people getting ever richer means long-run demand for “luxury” foods (eg meat, dairy) aint gonna subside.  Another name for luxury foods is “high profit margin” foods.

    Secondly, there’s two ways you can make more money – sell at a higher price, or sell more.  Even if a supply response takes the top off prices the suppliers will make more money because they’ve shifted their resources to higher-value uses to meet the extra demand.  That increased NZ dairy production, for example, has in part come from farmers running fewer carpet-wool sheep and more dairy cows on those lovely green pastures.

    This is something to remember when commodity prices go off the boil as all those new mines open.  So long as the QUANTITY demanded remains very high (ie so long as the BRICs are getting richer) BHP et al will still make a lot of money from most of those mines, which typically have high fixed costs but low operating costs.  Their operating margin per tonne will be lower than today but they’ll be shipping a helluva lot more tonnes.

  4. derrida derider – exactly right on mines. Once a mine is started (which is the big fixed cost) the marginal operating costs are relatively low and it is usually worthwhile to keep the mine going at capacity (or shut-down if the relevant world price drops too low – as occurred with coal in the early 2000s). But the investment in new mines is likely to slow considerably. 

    On agriculture, the issue is the size of the world-wide supply response and the degree to which margins simply return to a normal return on capital. If this occurs in the next few years then we will have a very healthy and growing agricultural sector – but it will not be ‘booming’ in the sense that the politicians and media tend to treat the word. 

  5. Knowing what we know now about wheat, soybean, and corn supplies, how does this change your forecast considering it is becoming harder and harder to predict supply interruptions due to weather?

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