Despite the financial stress caused by a current severe drought on some Australian farms, the sector as a whole is well positioned for a solid recovery after rains arrive, according to a regional economic report issued Tuesday by Westpac Banking Corp.
While the drought will decimate farm incomes in 2007 with some official estimates suggesting it will shave around 0.75 percentage point from gross domestic product this fiscal year, other, longer-term positive forces also are at work, according to the report edited by senior agribusiness economist Justin Smirk.
From 1998 to 2004, there was a surge in rural land transactions that peaked in 2001-02, this pushed prices sharply higher, so farmers shifted focus to lifting productivity rather than expanding land holdings, the bank said.
Investment in plant, machinery, vehicles and farm improvements has remained relatively high while land purchases have slowed, particularly in the beef industry, while the cropping industry has eased back on capital spending during the drought, it said.
The robust investment has been financed in part by profits, a reduction in liquid assets, and an increase in debt, it said. As the debt increase was invested to lift productivity, the subsequent rise in farm receipts has helped support debt servicing ability, it said.
"Agriculture remains a profitable industry," the report said. Low rates of return often quoted are industrywide averages that reflect the high proportion of small farms in many rural industries it said.
"By comparison, the larger better performing farms generate rates of return that are comparable to, if not better than, other investments elsewhere in the Australian economy," it said.
Official figures, which measure the farm gate value of commodities, had agriculture contributing an average 3.2% a year to GDP this decade. But a study last year by the Australian Farm Institute found the farm-dependent economy accounted for an average 12.1% of GDP a year in the six fiscal years ended June 30, 2004, suggesting that farm sector conditions could have wider ramifications.
In a review of the beef industry, Westpac said events unfolding in prime export markets should assure producers that better times are ahead after the drought breaks.
Prices for Australian beef in Japan are well up on year-earlier levels with the recovery "assisted by the reality that U.S. products won't be available in market changing volumes for some time," it said.
Global conditions also remain supportive for dairy export prices, even though Australian profits are squeezed by higher feed grain prices during the drought, it said.