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australian grains

OUTLOOK FOR 2006-07 AND INDUSTRY PRODUCTIVITYoverview

> World and Australian prices for grains and oilseeds are forecast to increase in 2006-07. World wheat prices are forecast to increase in response to reduced global supplies. For coarse grains and oilseeds, increasing demand and relatively unchanged supplies are driving the increase in prices in 2006-07.

> Most of Australia’s winter grain growing regions are in the grip of serious drought. Conse-quences for the farm sector, especially for broadacre winter grains and grazing livestock, are likely to be severe in terms of lost production and forced sales respectively.

> Seasonal conditions have deteriorated markedly since mid-September, with little or no worthwhile rain and continued warmer temperatures, particularly in South Australia, Victoria, New South Wales, southern Queensland and parts of Western Australia. As a result, production of the major winter crops in 2006-07 will be substantially lower than in 2005-06.

> Output of the three main winter grains, wheat, barley and canola, is forecast to be down by more than 60 per cent from last year and more than a million tonnes less than during the 2002-03 drought.

> The gross value of production of the three major winter grains is forecast to be around $3.7 billion in 2006-07, compared with an estimated $8.1 billion in 2005-06. However, refl ecting the substantial increase in world and Australian grain prices since early this year, the unit gross value of production is forecast to increase from $224 a tonne in 2005-06 to $273 a tonne in 2006-07.

> Recent good rains in early November provided an opportunity for producers in northern New South Wales and Queensland to plant grain sorghum. The fi nal area and production of sorghum and other summer crops will depend on the timing and amount of rain during the remainder of the growing season.

> Productivity growth on specialist cropping farms has been greater than the average for all broadacre industries. Technical innovation through the uptake of advanced machinery and the increased use of purchased inputs have contributed to the strong growth in crop industry productivity.

06.2december 2006

market overview

wheatWorld wheat prices (US hard red winter, fob Gulf ports) have been at record highs over the past 6 months, averaging above US$200 a tonne. The rapid price rise has been in response to reduced production in many of the world’s key producing and exporting countries. The latest pool return estimate from AWB Limited (13 November 2006) is for Australian premium white (APW 10) wheat to be $248 a tonne in 2006-07, $58 above the pool return estimate for 2005-06.

Harvesting of 2006-07 wheat crops in the northern hemisphere is complete, and global wheat production is forecast to be lower than in the previous season. In the United States, drought has reduced production and the 2006-07 wheat crop is estimated to be14 per cent lower than in the previous year. Adverse seasonal conditions have also hampered production in the European Union (high temperatures in July) and the Russian Federation (severe cold early in the year), and wheat production will be lower in 2006-07 than in the previous season. In China, however, production is estimated to be higher in 2006-07 as seasonal conditions have been favorable.

Global wheat consumption is forecast to decline in 2006-07, as the demand for wheat for livestock feeding is forecast to fall. The European Union is the world’s largest consumer of feed wheat and demand is forecast to fall in 2006-07. The price of other feed grains is expected to become relatively more competitive than feed wheat and livestock producers are likely to switch to other grains.

coarse grainsIncreased demand for coarse grains is driving a forecast increase in world coarse grains prices in 2006-07, as global supplies are forecast to remain largely unchanged. The world coarse grains indicator price (US corn, fob Gulf) has increased from US$103 a tonne in December 2005 to an average of US$141 a tonne in October 2006. Consistent with the movements in world prices, and with the low production forecast for Australia, barley prices have also increased in Australia. Feed barley prices in Australia increased from $157 a tonne in December 2005 to an average of $238 a tonne in October 2006.

World coarse grain production is forecast to remain largely unchanged in 2006-07. In the United States, harvest of the 2006-07 corn crop is approaching completion and production is forecast to be largely unchanged from the 2005-06 season. In China, corn production is fore-cast to be higher than in the previous season as growing conditions have been favorable. In the European Union, the world’s largest barley producer, production is forecast to fall marginally as hot dry conditions experienced in July reduced yield potential.

Consumption of coarse grains is forecast to increase to record levels in 2006-07, as continued strong growth in industrial use, particularly corn based ethanol, drives the increase, especially in the United States and China. Feed use of corn and barley is also projected to remain high, refl ecting growth in intensive livestock industries worldwide and the forecast reduction in the availability of feed wheat.

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oilseedsIncreased demand for oilseeds and oilseed products is driving a forecast increase in world oilseeds prices in 2006-07 as global supplies are forecast to remain largely unchanged. In October 2006 the world oilseed indicator price (soybeans, cif Rotterdam) averaged US$267 a tonne, US$10 above the price in October 2005 and US$9 above the price in September 2006.

In the United States — the world’s largest soybean producer — harvest of the 2006-07 soybean crop is under way and production is forecast to be higher than in the 2005-06 season. In South America, production is forecast to increase in 2006-07 despite a slight reduction in plantings in Brazil. Canola/rapeseed production is also forecast to fall in 2006-07 as production in some of the major producing countries declines. This is particularly so in Canada where drier condi-tions have resulted in yields falling from the records achieved in the previous season and in Australia where drought has substantially reduced canola production.

Strong demand for oilseed products has resulted in world consumption of oilseeds growing by an average of 4 per cent a year over the past ten years. In 2006-07, world demand for oilseed products is forecast to continue to grow strongly, driven largely by increasing demand for vegetable oils in industrial uses. Vegetable oil can be used in the production of biodiesel, a product used as a transport and heating fuel. Any increase in biodiesel processing capacity has the potential to increase demand for vegetable oils. In the European Union — the world’s largest producer of biodiesel — biodiesel production capacity is forecast to increase from 4 million tonnes in 2005 to 6 million tonnes in 2006. This increased capacity is expected to lead to increased EU consumption of vegetable oils (canola, palm and soybean) in 2006-07.

winter crop production in 2006-07

With the exception of central Queensland and pockets of northern New South Wales, rainfall during the key crop growing months of May–October was very much below average or the lowest on record over virtually the entire winter grain belt.

These continued exceptionally dry conditions mean that Australian produc-tion of the three major winter crops, wheat, barley and canola, in 2006-07 is forecast to decline to around 13.6 million tonnes, down 63 per cent from last season’s harvest of 36.4 million tonnes for these crops (tables 1, 2, fi gure A). A harvest of this size would be the smallest for these crops since the drought of 1994-95, when 12.1 million tonnes were harvested.

The Australian wheat crop is forecast to be 9.5 million tonnes in 2006-07, down 15.5 million tonnes from the previous season. The national barley crop is forecast to be down 64 per cent to 3.6 million tonnes and canola down 69 per cent to 440 000 tonnes. Canola production is forecast to be the lowest for the past ten years.

Since the beginning of spring, areas of rainfall defi ciency have gener-ally expanded or intensifi ed over South Australia, New South Wales and Victoria (map 1). The dryness has been exacerbated by temperatures that

major winter crop productionfigA

Mt

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2006-07

Australia (wheat, barley, canola)

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australian grains 06.2 3

have been well above average, combined with periods of strong winds and frosts in some areas. In contrast, rainfall defi ciencies eased in Western Australia as a result of above average September rainfall.

Rainfall in October was patchy and largely confi ned to shower activity. The poor conditions have resulted in an earlier start to the harvest this season. It is generally too late for further rainfall to signifi cantly improve crop yields, particularly if warmer temperatures continue to prevail.

In many areas, seasonal conditions appear to be worse than during the last major drought in 2002-03, and comparable to the 1982-83 drought. However, improved management prac-tices and the development of improved grain varieties since 1982-83 mean that growers may

1 Australian winter crop production

1994-95 2002-03 2005-06 s 2006-07 f kt kt kt kt

Australia a

wheat 8 961 10 132 25 090 9 549barley 2 913 3 865 9 869 3 588canola 264 871 1 441 440total 12 138 14 868 36 400 13 577

New South Waleswheat 875 2 497 7 921 2 100barley 291 428 2 245 580canola 73 184 254 20total 1 239 3 109 10 420 2 700

Victoria wheat 944 890 2 705 690barley 448 478 2 059 540canola 57 177 338 90total 1 449 1 545 5 102 1 320

Queensland

wheat 225 601 1 385 750barley 73 148 259 100total 298 749 1 644 850

Western Australiawheat 5 438 4 047 9 478 4 900barley 915 1 349 2 598 1 600canola 108 299 630 260total 6 461 5 695 12 706 6 760

South Australia

wheat 1 487 2 072 3 578 1 090barley 1 159 1 440 2 685 750canola 26 210 218 70total 2 672 3 722 6 481 1 910

a Total includes Tasmania. f ABARE forecast. s Preliminary estimate.

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generally achieve relatively better production outcomes from limited rainfall. Practices such as direct drilling have improved soil structure and stability and, more importantly, have improved the ability of growers to conserve limited soil moisture.

The gross value of production of the three major winter grains is forecast to be around $3.7 billion in 2006-07, compared with an estimated $8.1 billion in 2005-06. However, refl ecting the substantial increase in world and Australian grain prices since early this year (fi gure B), the unit gross value of production is forecast to increase from $224 a tonne in 2005-06 to $273 a tonne in 2006-07.

A clear picture of the grain growing areas hardest hit by the drought emerges from the wheat yield simulation model developed by the Queensland Depart-ment of Primary Industries and Fisheries. The model integrates climatic (daily temperature, rainfall) impacts on broad soil and crop parameters, along with crop management practices, to predict likely yield outcomes by shire.

2 supply and disposal of major Australian winter crops a

2001-02 2002-03 2003-04 2004-05 2005-06 s 2006-07 f kt kt kt kt kt kt

wheat production 24 299 10 132 26 132 21 905 25 090 9 549domestic use 4 894 5 666 5 139 5 282 5 527 6 162– human and industrial 2 291 2 378 2 351 2 361 2 408 2 456– feed b 2 100 2 700 2 185 c 2 338 c 2 618 c 3 142 c – seed 503 588 603 584 501 564exports 16 317 9 107 17 867 14 675 15 488 10 814

barley production 8 280 3 865 10 382 7 740 9 869 3 588domestic use 2 535 2 016 2 476 2 685 2 805 2 907– as malt and other human use 161 165 168 172 176 166– feed b 2 200 1 650 2 100 2 300 2 450 2 560– seed 174Z 201 208 213 180 181export 5 274 2 608 6 996 4 862 5 737 2 458– feed barley 2 971 885 4 241 2 798 3 386 874

canola production 1 756 871 1 703 1 542 1 441 440domestic use 399 354 501 423 540 318– crushers 393 349 495 418 535 314– seed 6 5 6 5 5 5exports 1 380 517 1 202 892 858 242

a Export fi gures are for winter crop years defi ned as follows: October–September for wheat; November–October for barley and canola, Production may not equal the sum of apparent domestic use and exports in any one year due to reductions or increases in stocks. b Calculated as a residual: pro-duction less exports less change in stocks. c Does not include imports. s ABARE estimate. f ABARE forecast.Note:The export data refer to market year export periods, so are not comparable with fi nancial year export fi gures published elsewhere.

australian grains 06.1 5

Victoria

NorthernTerritory

Western Australia South Australia

Tasmania

New South Wales

Queensland

Source: Bureau of Meteorology

Highest on record

Decile ranges

1

10

8–9

4–7

2–3

Lowest on record

Very much above average

Very much below average

Above average

Below average

Average

Australian rainfall deciles, 1 August to October 2006map 1

0 500 1,000250 kilometers

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australian grains 06.2 7

The model predictions at the beginning of October (map 2) were for wheat yields to be 40–60 per cent below the long term average across most growing regions in southern Queensland, southern and central New South Wales, South Australia and Victoria (colored maroon and yellow). There are some pockets within these states where yields are expected to be more than 60 per cent below average. In Western Australia, yields are expected to be close to the long term average (colored grey).

seasonal conditions in the states

New South WalesSeasonal conditions continue to deteriorate across all grain growing regions, with almost the entire grain belt now drought declared. Dry conditions and above average temperatures during September and early October have signifi cantly reduced yield potential. Total crop failures are likely in many areas.

September rainfall in New South Wales was variable. The central and southern slopes west of the Great Divide, and the north western and inland southern border regions all recorded below average rainfall. There were areas in the north west of the state, the South West Slopes and parts of the Central Tablelands and Central Slopes that recorded very much below average rainfall. Some localised pockets in those regions also recorded the lowest September rainfall on record. October rainfall has also been well below average. This, combined with above average temperatures, is expected to result in a signifi cant decline in yields.

The potential harvestable area for grain in New South Wales continues to decline as growers cut crops for hay and silage, or graze them out. The estimated wheat area to be harvested is around 1.7 million hectares, from an estimated area planted of 3.35 million hectares.

Production of the three major winter grains in New South Wales is forecast to be 2.7 million tonnes, making it the smallest harvest since 1994-95, when 1.2 million tonnes were produced.

VictoriaSeptember rainfall in Victoria was well below average in all parts of the state, with the exception of a few pockets in Gippsland, where rainfall was close to average. This lack of rainfall was combined with a widespread and severe frost that affected large areas of northern and central Victoria on 25 September. October has remained very dry to date, with little or no chance of crops improving from this point.

Potential crop yields in the Mallee continue to decline in the face of warm days and little rain. Recent frosts have damaged fl owering crops, further reducing expected yield. In the Wimmera, production will be very poor this season because of the lack of moisture. Some wheat crops in the southern Wimmera could yield as much as 1 tonne of grain per hectare but most are being cut for hay or grazed.

Victorian production of the three major winter grains in 2006-07 is forecast to be 690 000 tonnes of wheat, 540 000 tonnes of barley and 90 000 tonnes of canola. Overall, production is forecast to be down by around 74 per cent from the previous season.

QueenslandDry seasonal conditions resulted in very few planting opportunities in most of the southern crop-ping areas. However, central Queensland received early planting rain and, as a result, planting intentions were mostly realised. While conditions have remained good in central Queensland, well below average winter rainfall resulted in signifi cant yield penalties in the small areas planted to winter grains in southern Queensland.

Average rainfall was recorded during September for most of the state’s cropping region. This slightly improved expectations for the crop, especially for late planted crops in most parts of southern Queensland. It also ensured an average to above average crop for most areas of central Queensland.

Queensland production of wheat and barley in 2006-07 is forecast to be 850 000 tonnes, just over half of what was produced last season, but above what was produced in 2002-03 because of the good seasonal conditions in central Queensland. Around 70 per cent of the total crop in 2006-07 is expected to come from central Queensland. This compares with around 40 per cent from that region in an average year.

Western AustraliaIntermittent rainfall across the central and southern grain growing regions during September and October has maintained crop development in those areas. However, above average tempera-tures in October mean that further rainfall will be required to maintain crop potential.

Conditions at the beginning of the winter cropping season in the northern part of the grains belt were poor. As a result, the area sown to winter crops in this region was well below average and it is estimated that production will be about 20 per cent of the fi ve year average. However, across the rest of the grains belt, winter crops will achieve yields close to the historical average. Harvesting of some crops has commenced earlier than usual, with canola in the Esperance region already being harvested. The hot and dry fi nish to the season is encouraging the early canola harvest.

In 2006-07, production of the major winter grains in Western Australia is forecast to be just over half of last season’s production. Wheat production is forecast to be 4.9 million tonnes, barley production 1.6 million tonnes and canola 260 000 tonnes.

South AustraliaTotal winter rainfall in South Australia has been well below average for most grain growing regions. Light patchy rainfall, above average temperatures and frequent windy conditions throughout September put crops in all districts under severe moisture stress. September rainfall varied from below average to very much below average, with most of the Eyre Peninsula having the lowest rainfall on record for the second month in a row. The fi rst three weeks of October remained very dry, further reducing potential yields of crops that have not already been grazed or cut for hay.

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With harvesting close or already begun, there remains little potential for improvement in crop yields. Some grain growers in the worst affected regions have been harvesting for seed recovery at best.

Production of the three major winter grains in South Australia in 2006-07 is forecast to be around 1.9 million tonnes, well short of the nearly 6.5 million tonnes produced last season.

summer crops outlook

The rainfall outlook for summer crops is not promising. In its latest seasonal rainfall outlook (26 October 2006), the Australian Bureau of Meteorology indicates drier than normal conditions for south east Queensland and northern New South Wales during the main sowing period for summer crops.

The chances of exceeding the median rainfall for the November–January period are between 30 and 40 per cent for northern New South Wales and south east Queensland, with some areas having a 25–30 per cent chance. These probabilities mean that there is a 60–75 per cent chance of falls being below median falls (click here for map). However, in early November, good rainfall was received throughout northern New South Wales and Queensland, providing an opportunity for producers to plant grain sorghum and other summer crops. The size of the resulting summer crops will, of course, depend on the timing and amount of rain during the growing season.

There is also a moderate to strong shift in the odds toward warmer than normal conditions. Aver-aged over the coming three months, the chances are 60–75 per cent of higher than average maximum temperatures across the eastern half of Australia, and 75–85 per cent over much of southern Queensland (click here for map).

total factor productivity

Total factor productivity is one of the main indicators used to monitor and analyse the performance of various sectors of the economy. Technological advances, improvements in management and effi cient exploitation of economies of size all infl uence the rate of growth in productivity.

Sustained productivity improvements have long been the engine of growth driving Australia’s agriculture sector. Farmers have continually pursued more effi cient ways to produce more output from less input to offset declining terms of trade and to maintain viability (fi gure C). In the past 25 years, there has been a decline in the real prices of agricul-tural commodities. At the same time there has been a substan-tial increase in the prices paid for agricultural inputs.

farmers’ terms of trade in broadacre industriesfigC

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priceindexindex

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prices receivedprices paidterms of trade

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trends in productivity, input use and output in the grains industries

Between 1977-78 and 2004-05, total factor productvity in the broadacre sector (that is broadscale cropping and livestock industries) grew on average by 2.06 per cent a year, which almost offset the decline in the terms of trade over the same time period (table 3). Total factor productivity in the crops industry (defi ned as broa-dacre farms whose main source of income is from grains) increased on average by 2.37 per cent a year, while the estimated growth in the mixed livestock–crops industry was 1.87 per cent a year for the 28 year period to 2004-05 (fi gure D, table 3). This suggests that mixed livestock–cropping farmers who have the option may increase productivity by expanding their cropping operations. The fi ndings of Knopke et al. (2004) also indicate the likely positive infl uence of crop productivity on the overall productivity of mixed livestock–crop systems.

Estimates of the partial productivity growth rates for broadacre, crops and mixed livestock–crops farms are also given in table 3. For both the crops and mixed live-stock–crops industries the highest productivity growth occurred in labor and capital inputs. This growth was in part achieved through a substitution of capital for labor, and the uptake of advanced cropping machinery.

An ongoing hypothesis on technological innovation is that it is embodied in capital and purchased inputs. To the extent that input quality is not refl ected in the input indexes, the hypothesis suggests that the rate of growth of total factor productivity would be positively correlated with the growth of capital and purchased inputs (Ball et al. 2001). This appears to be the case for the crop specialist industry and the mixed livestock–crops industry as the real value of purchased inputs

increased by over 2 per cent a year between 1977-78 and 2004-05. Over the same period the partial produc-tivity of purchased inputs increased at a lower rate (table 3). In other words, for many farms, productivity growth was in part achieved through the increased use of inputs such as fertilisers and chemicals, the latter of which may be related to the continued adoption of reduced tillage tech-niques within the cropping industry.

However, there are some signs that productivity improve-ment in the specialist crop and mixed livestock–crops indus-tries has been slowing in the past decade or so (table 4). For example, over the period 1977-78 to 1989-90, the annual productivity growth rate for crop specialists was around 4.63 per cent, compared with 2.37 per cent over the 28 year period to 2004-05.

As an indicator of overall productivity, the measure ‘total factor productivity’ has some shortcomings. For example, the measure can be affected by the impact of seasonal climatic conditions on output and by deferred input expend-iture in low income years. The climate effects on output can

3 productivity growth in broadacre industriesaverage annual growth,1977-78 to 2004-05

all broadacre crops industry mixed livestock –crops industry % % %

total factor productivity a 2.06 2.37 1.87outputs 3.05 4.04 3.13inputs 1.00 1.67 1.26

partial productivitylabor 3.28 3.91 2.91capital 3.41 3.73 3.35purchased inputs 0.94 0.90 0.71land 2.06 2.70 1.68

pricesterms of trade –2.20 –2.34 –2.25prices received (outputs) 2.24 2.33 2.41prices paid (inputs) 4.43 4.68 4.65

a TFP is measured as the ratio of a Tornquist index of output quantities to a Tornquist index of in-put quantities, using value weights.

trends in productivity in broadacre industry

figD

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cropsmixed livestock–cropsall broadacre

australian grains 06.2 11

have substantial impacts on the growth in produc-tivity, as evidenced by the falls in productivity in the droughts of 1982-83, 1994-95 and 2002-03 (fi gure D).

The estimates of productivity growth rates including and excluding soil moisture availability for the winter wheat crop given in table 5 are taken from Kokic et al. (2006). These estimates are calcu-lated over the period 1989-90 to 2002-03 and are for the crops and mixed livestock–crops indus-tries combined. The northern grains region covers the crop producing regions of northern New South Wales and Queensland, the western region is Western Australia and the southern region is the remaining part of the grains producing regions in southern and eastern Australia.

When the impact of moisture availability is removed, the resulting measure of productivity is considerably larger than the corresponding growth rates including moisture availability. The drought in 2002-03 was the major reason for this result.

references

Ball, E.V., Jean-Pierre. B, Richard, N. 2001, U.S. Agriculture, 1960-96: A Multilateral Compar-ison of Total Factor Productivity, Technical Bulletin no. TB1895, Economic Research Service, US Department of Agriculture, Washington DC, May.

Knopke, P., Rodriguez, G., Jahan, N. and Shafron, W. 2004, Productivity in Livestock Indus-tries, 1978 to 2002, ABARE Report to Meat and Livestock Australia, Canberra, April.

Kokic, P., Davidson, A. and Boero Rodriguez, V. 2006, Australia’s Grains Industry: FactorsInfl uencing Productivity Growth, ABARE Research Report 06.22 Prepared for the Grains Research and Development Corporation, Canberra, November.

4 productivity growth in broadacre industriesaverage annual growth

all broadacre crops industry mixed livestock– crops industry % % %1977-78 to 2004-05 2.06 2.37 1.871977-78 to 1989-90 2.25 4.63 2.36

5 productivity growth in the cropping and mixed livestock–crops industries, by GRDC region

average annual growth, 1988-89 to 2003-04

GRDC grains region

north south west allgrowth rate % 0.82 2.20 1.80 1.86growth rate excl. moisture availability % 1.26 2.81 2.67 2.58

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Australian grains series of reports are produced by ABARE for GRDC. Printed copies email: ground-cover-direct@canprint.com.au; free call: 1800 110 044; free fax: 1800 009 988

Electronic copies ABARE’s web site: www.abareconomics.com

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