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.