After centuries of working in a relatively challenging environment Australian farmers are amongst the most efficient in the world measured on a factor productivity basis. The Australian mixed cropping-livestock production system has also helped to make Australians some of the world’s most versatile farmers.

Their achievements have in large part been facilitated by a long-term commitment to agricultural research and development by the Australian government. There has been a significant increase in real terms in Australian public investment in agricultural R&D over the past 50 years, from AU$131 million in 1952–53 (measured in 2006–07 dollars) to $778 million in 2006–07. The breakthroughs achieved as a result have allowed Australian farmers to enjoy significant ongoing gains in productivity and farm incomes.

Labour productivity growth in Australian agriculture compared to other resource sectors (change in gross value added per hour worked, 1996-97 = 0)

Labour productivity (i.e. change in gross value added per hour worked) in the agricultural sector has been particularly impressive, with productivity having almost doubled in the last 15 years (1996-97 to 2010-11) compared to a drop of over a third in other resource sectors. This has been driven primarily by the adoption of mechanised farming technologies and the increasing size of farms allowing greater economies of scale (i.e. each farm worker is able to farm a larger area of land more efficiently). For more on this see The importance of farm size and economies of scale.

This is further evidenced by the fact that the ratio of operating surpluses to capital in the Australian agricultural sector has more than doubled in the last 20 years (1991-92 to 2010-11). Whilst non-land net capital (depreciated value of all capital stock within the agricultural sector including machinery, plant and equipment) has increased by only 33% from AU$83 billion to AU$110 billion over the last 20 years, the operating surplus of the agricultural sector has increased by 203% from AU$9.3 billion to AU$28 billion.

Change in the operating surplus to capital stock ratio of Australia’s agriculture sector, 1991-92 to 2010-11

Over the past 30 years (1977-78 to 2007-08) the overall productivity (measured in terms of total factor productivity) of Australian broadacre farms has increased by an average of 1.6 % annually. This productivity gain reflects a long-term decline in input use, averaging 0.6% during the period, coupled with an increase in output averaging 0.8% a year (albeit with notable year to year variations due to fluctuating seasonal conditions).

Annual total factor productivity growth for different farm types in the Australian Wheatbelt, 1977-78 to 2007-08

Note: Total factor productivity (TFP) is the indicator most commonly used to measure long-term increases in productivity due to technological progress and improved management practices. TFP is the ratio of all production outputs to market (crops and livestock produce) to all the inputs used in the production of those outputs (land, labour, capital, materials and services).

The broadacre agricultural sector encompasses all farms generating most of their income from dryland cropping, beef and sheep farming activities. Within the broadacre sector, productivity growth has been highest for cropping specialists (those farms with a strong emphasis on grain production) who have benefited most from new mechanised farming technologies and increased farm scale, averaging productivity growth of 1.9% a year. Despite reducing input use by an average of 1.7% a year, sheep specialists have been the worst performers because output also declined at an average annual rate of 1.5% over the same period.

Due to its more reliable climate and larger average farm sizes Western Australia has achieved the highest rate of productivity growth of the Australian states. Western Australian output has increased by an average annual rate of 1.8% over the last 30 years whilst input use has reduced by an average of 0.5% annually, resulting in average annual productivity growth of 2.4%. This is three times the productivity growth rate of Queensland (0.8%), more than twice that of New South Wales (1.0%) and comfortably higher than South Australia (1.8%) and Victoria (1.3%).

Annual total factor productivity growth of all broadacre farms in different Australian states, 1977-78 to 2007-08

Since the ability to effectively plan input use one of the most important determinants of TFP and farm profits, rainfall reliability and extreme weather events have a major impact on investment returns. For a more detailed analysis on the relationship between yield variability and investment returns, download our free report, Comparative Analysis of the Australian Wheatbelt. The document also addresses the key question: which region of Australia has delivered superior returns to agricultural investors in the past and is most likely to offer superior risk adjusted returns in the future?

References and data sources:

• Australian Bureau of Statistics, Value of Agricultural Commodities Produced Data Series (chain volume measure), 2012
• Australian Government Department of Agriculture, Fisheries and Forestry, Australian Bureau of Agricultural and Resource Economics and Sciences, Agricultural Commodities Statistics, 2012
• Jackson, T 2010, Harvesting productivity: ABARE-GRDC productivity workshops, client report prepared by ABARE for the Grains Research and Development Corporation, Canberra, March.
• Mallawaarachchi, T, Walcott, J, Hughes, N, Gooday, P, Georgeson, L and Foster, A 2009, Promoting productivity in the agriculture and food sector value chain: issues for R&D investment, ABARE and BRS report for the Rural R&D Council, December.
• Mullen, JD 2007, ‘Productivity growth and the returns from public investment in R&D in Australian broadacre agriculture’, Australian Journal of Agricultural and Resource Economics 51, 359-384.
• Nossal, K and Gooday, P 2009, Raising productivity growth in Australian agriculture, ABARE research report, Issues Insights 09.7, Canberra.
• Nossal, K, Zhao, S, Sheng, Y and Gunasekera, D 2009, ‘Productivity movements in Australian agriculture’, Australian Commodities, vol. 16, no. 1, March quarter, pp. 216–230, ABARE, Canberra.
• Zhao, S, Sheng, Y and Gray, E 2010, ‘Productivity in the Australian grains broadacre and dairy industries’, conference on the Causes and Consequences of Global Agricultural Productivity Growth, Washington DC, 11–12 May 2010.