Evaluation of Australian and Chinese Agricultural Assets

3894 words (16 pages) Essay in Economics

08/02/20 Economics Reference this

Disclaimer: This work has been submitted by a student. This is not an example of the work produced by our Essay Writing Service. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

“Global financial markets are driving volatility in asset prices in developed and emerging economies alike.”

Respond to this statement in the context of the Australian economy with reference to an asset class of your choice (e.g. housing or stock market). Your response should include reference to relevant theories, scholarly research, and industry data where applicable.
 

Get Help With Your Essay

If you need assistance with writing your essay, our professional essay writing service is here to help!

Find out more

Agriculture has been at the foundation of all civilisations in human history. Cultivating, harvesting, and trading agricultural commodities may very well be economics at its purist where the basic microeconomic principals of supply and demand are brought to life. Agriculture is also a key sector in any economy, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) estimated the gross value of Australian agricultural production was $63.8 billion in 2016-17. The National Farmers’ Federation (NFF) estimates the agricultural sector as contributing 3 per cent to Australia’s total gross domestic product (nff.org.au, 2019). While it may be a reasonable assumption that global financial markets drive volatility in various asset classes, factors such as seasonality, government policy and intervention, climate change and environmental conditions, water, changing diets and population growth all contribute to agriculture price volatility through changes in both global and local supply and demand. The following essay will review these factors in the context of Australian and Chinese agricultural assets and demonstrate that financial markets alone are not solely driving price volatility.

Before we explore these factors, we must first understand some core economic definitions, principles and theories that are particularly relevant in agricultural production. The four factors of production in any economy are land, labour, capital, and enterprise. In the context of agriculture, these are farms and the natural resources on the land (land), famers and other workers (labour), farming equipment such as tractors, ploughs, planters, and sprayers (capital), and farming businesses (enterprise). These factors form the base of inputs in the agricultural economy to produce outputs such as grains and other crops, livestock, and dairy products that are necessary for people to survive. The Organisation for Economic Co-operation and Development (OECD) state that productivity is commonly defined as a ratio between the output volume and the volume of inputs, and how efficiently inputs such as labour and capital are being used in an economy to produce a given level of output (oecd.org, 2019). As these factors are optimised, efficiency can be created resulting in more output or production of agricultural commodities. The NFF identifies that Australian famers remain internationally competitive through efficiencies and productivity growth and the ABARES define that ongoing productivity growth has enabled Australian farmers to maintain profits by producing more output from each unit of input (agriculture.gov.au, 2019).

Increasing output alone doesn’t mean much unless there is someone to sell to, leading to a fundamental microeconomic principle, supply and demand. With all factors held constant, the supply curve captures the quantities at various prices that producers are willing and able to supply goods (Samuelson and Marks, 2015). Represented below as the upwards sloping curve. The factors of production are underlying drivers of supply. The demand curve captures the quantities at various prices that consumers are willing and able to purchase (Samuelson and Marks, 2015). Represented below as the downwards sloping curve.
Figure 1:

From this model, we can identify that producers can obtain higher prices and increased profits if they are willing and able to supply more goods; in return they will receive lower prices if they supply less goods. Whereas at higher prices, consumer demand is less as there may be substitute products available meaning consumers see less value in paying a higher price. Demand increase as the price drops, and where the market supply meets market demand there is equilibrium. The underlying principle in this model is that price changes at each point, and frequent and/or steep changes will drive price volatility. In the context of agricultural assets there are several key drivers that create supply and demand movement which are not just due to financial markets but factors such as seasonality, climate change, and extreme environmental conditions, government policy and intervention, water, and changing diets. These factors impact both developed economies like Australia and emerging economics like China.

Agricultural commodities are grown year-round, sown and harvested in different seasons with climate as a primary determinant of agricultural productivity (Adams et al., 1998). The ABARES classify agricultural commodities into two categories. Winter crops mainly consisting of wheat, barley, canola, and oats, and summer crops mainly consisting of sorghum, cottonseed, maize, soybean and sunflower. Seasonal conditions such as above/below average or delayed rainfall, heat and moisture conditions have a significant impact on summer and winter crops production. Based on the agricultural commodities forecast and outlook in March 2019 from ABARES summer crop planting in Queensland and northern New South Wales increased due to late spring rainfall, however dry and hot conditions in December 2018 and January 2019 are expected to negatively impact the summer crop production. These conditions reduced the number of crops that were able to be planted and will therefore reduce the yield of the harvest. If we consider this in context of the factors of production along with the supply and demand model and assume that demand is unchanged, we can see that the entire supply curve would shift to the left as producers would have less to supply as there is a change in the land factor of production, resulting in prices increasing.

Figure 2:

If we consider the reverse of this seasonal factor with an increase in rainfall we likely see an increase in supply that would result in prices decrease.

Figure 3:

While this view of supply changes is relatively simplistic in nature, let’s consider rainfall percentile changes across agricultural zones. The following map from the Bureau of Meteorology is an extract from the Agricultural Commodities forecast and outlook from March 2019.

Figure 4:

We can see that severe rain deficiencies are likely to have a negative impact on supply in key agricultural areas such as northern New South Wales, southern Queensland, and northern Australia and have the reverse impacts in far north Queensland and southern Western Australia with rainfall well above average percentiles. Thus, resulting in volatility for agricultural commodities produced in these areas.  

We can take the seasonality factor one step further as Australia has some of the harshest and extreme environmental conditions in the world with drought, flooding and fire causing significant impacts to agricultural commodities. During the recent drought conditions the forecast for winter crop production was predicted to be 20 per cent below the 20-year average and the lowest since the last drought in 2008-09 (Davis, 2019). As a result, in March 2019 it was estimated that the value of all faming produce fell to $58 billion from $63.8 in 2016-17. In December 2018 ABARES forecasted major drops in grain production with wheat forecasted to drop by 20 per cent to 17 million tonnes, barley by 18 per cent to 7.3 million tonnes, canola by 39 per cent to 2.2 million tonnes, and oats by 21 per cent to 888,000 tonnes. This has resulted in grain prices expected to increase in 2018-19 by 11 per cent, which is in line with principles from our supply and demand model. In an article from the Australian Institute of Company Directors, economist Saul Eslake describes the obvious economic impact of drought is on the volume of agricultural production, particularly of crops, which typically fall sharply during a drought, and then rebound strongly after the drought has broken, and that gross farm product has declined on average 27.5 per cent over the past 50 years during drought conditions (Eslake, 2019).
The below graph shows an example of wheat prices rising sharply during the drought seasons between 2006-09, and then dropping back to average prices.  

Figure 5:


                                                                               Source: ABARES 2019

In a more recent example, coarse grain prices have risen by 12 per cent in December 2018 due to lower stocks, this was significantly driven by drought conditions and increased demand for livestock feed (ABARES 2018). Eslake also states that droughts are occurring more often most likely as result of climate change and he is not alone.
 

Find out how UKEssays.com can help you!

Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

View our services

There is countless literature on climate change, and strong debate between those who believe it’s a myth and those who believe it’s a significant issue that needs to be addressed. In a journal from the Australia Agribusiness Review, impacts on agriculture will include altered rainfall, increased temperatures, higher evaporation rates, increased soil erosion, more frequent droughts and heat waves (Kingwell, 2006). One of the predictions is that agriculture will gradually drift southwards and move to higher latitudes of ‘optimal’ temperate climate (Quiggin and Horowicz 2003). Farmers now identify that extreme seasonal changes such as drought and higher temperatures are outside the standard range in the agricultural cycle and weather patterns and are fundamentally changing the agriculture industry as the extreme conditions are becoming more frequent. The question is not if climate change is real, but rather what needs to be done about it. (ABC News Australia, 2018).

Climate change impacts both developed and emerging economies. China has varied agricultural regions consisting of farms that are either rainfed or irrigated. In an agricultural economics report on the impact of climate change on China’s agriculture,   Wang et al. 2009, argue that global warming will likely be harmful to rainfed farms in the wetter southeast region and as a result they will suffer from lower net revenues but will benefit irrigated farms in remaining regions as they will benefit from increased rainfall of which some of the water can be used to offset heat. We can assume that as changes happen the factors of production would need to adjust over time to accommodate. For example, new land would need to be prepared, and labour would need to be moved or resourced. However, as the change occurs with increased frequency as predicted supply levels will likely be more volatile, giving way to increased volatility in agricultural commodity prices.

Seasonality and climate change impact the supply side of agriculture, now we must consider changes in demand. The Australian agricultural industry services part of the local food demand, but farmers export approximately 77 per cent of what they produce (nff.org.au, 2019), with approx. 70 per cent of exports going to Asia, exports to China alone were valued at $11.8 billion in 2017-18. In 2018, the global economic growth rate for agriculture was 3.7 per cent, while there is strong income and population growth in emerging Asian economies which is expected to support strong demand for Australian exports up until 2023-24, the total economic growth rate is expected to slow by 0.3 per cent to 3.4 per cent by 2024 (ABRES 2019). While economic growth in China is expected to increase by 6.2 per cent in 2019 and 2020, a decline in growth to 5.4 per cent is anticipated by 2024 (ABRES 2019), combined with trade tensions with the United States there will be downstream impacts to Australian exports. The speed of the economic slowdown as China transitions from being reliant on imports to a consumption and service-driven economy (ABRES 2019) would reduce the demand for Australian exports. If we consider this in reference to our supply and demand model and assume supply remains unchanged we can see from the below that a decrease in the demand curve would result in lower price points across all quantities. This would put pressure on producers to reduce prices at which they supply goods requiring changes to the factors of production such as a smaller workforce possibly driving unemployment, increased costs of storage, and/or increase wastage resulting in lower productivity.

Figure 6:

On the domestic front Australia’s resident population is expected to increase by an average of 1.4 per cent each year (ABARES 2018). Economic growth is estimated to be 2.8 per cent in 2018-19 and is expected to accelerate to 3 per cent in 2019-20, primarily supported by an increase in household and government consumption along with business investment (ABARES 2018). Illustrated below, with the assumption supply levels remain unchanged, an increase in demand would push prices up at all quantities which is favourable for producers, however with the increase in prices consumers will likely look for substitutes which increases the risk of sharp spikes and drops in demand across the agricultural sector.

Figure 7:

It could be argued that the changes in demand alone may not drive an increase in volatility but let us consider that sharp spikes and drops in demand across the whole range of agricultural commodities combined with supply changes as previously discussed would drive an increase in volatility across the board.

Government policy and intervention plays an important role in agricultural trade. In Australia there is little government intervention in the agricultural sector. The strategy is oriented towards market liberalisation, allowing the market to self-regulate and resulting in a more competitive level of primary industry (Hogan, 2015). With the onus on the industry and enterprise, it’s up to farmers to manage risks with changes to climate and water needs and manage the factors of production with minimal government intervention. The Department of Agriculture is geared more towards providing advice rather than legislation to enable industries to remain competitive, productive, and sustainable. Levies are more for research and development, with the key regulation around imports to protect against pests and disease, biosecurity to manage health and improve the health of the water supply (agriculture.gov.au, 2019). It is important to note that while there is little government intervention on agricultural trade, water remains a key component that has been impacted by reforms due to its scarcity and extreme weather conditions, this will be reviewed in more detail later in the essay. Historically in China there was strong government intervention was due to the nature of a ‘state-farmer’ framework. As resources were heavily controlled by the state, famers had relatively weak bargaining power and price policies for grain were determined through bargaining between farmers and the state rather than the free market (Huang, 1993), resulting in downward pressure on prices. As the Chinese economy moves to integrate with the free market economy, the process of change will impact supply and demand levels of agricultural commodities driving volatility in prices.

There is no question on the necessity of water when it comes to agriculture. Our most scarce resource is as critical to agriculture as it is to sustain life. The Murray-Darling Basin is one of the largest sources of water supply to the agriculture industry as it serves as a catchment for several river systems. Water dictates levels of agricultural output and agriculture is the main consumer of water, accounting for approx. 70 per cent of consumptive use (BOM, 2018). Water allocations are determined by state governments based on volume held in storage, with prices being determined by the supply which is reliant on the weather (ABARES 2018). With the impacts from climate change, scarcity would drive prices up meaning farmers are paying more to irrigate their crops which in turn would be passed through to consumers. The volatility in changing weather, means the water supply is subject to sudden shocks in increase and decrease of supply that would also be passed through in changing commodity prices. An extract from the ABARES water report shows the price peaks over $1000/ML during the millennium drought in the early 2000’s and then falling to record lows of near zero during 2011-2012 flooding which would drive volatility in agricultural prices.   

Figure 8:


The final factor we must consider is changing diets and overall population growth. Changing diets can be because of income changes, changes in health awareness, or a movement to more plant and grain-based diets drawing demand away from meat products increasing the demand for agricultural commodities. ABARES forecast that wheat demand is expected to increase in line with population growth, changing diets, and rising incomes up until 2023-24, however prices are expected to fall due to oversupply from increased production in countries like Argentina and India, resulting in supply growing faster than demand (ABARES 2019). Changing diets and population growth are two points are somewhat interrelated as stated in an article from the American Association for the Advancement of Science (AAAS). The proposition put forward is that feeding a growing global population of 10 billion people with a sustainable diet by 2050 is not possible without changing our eating habits. The daily requirements of a balanced diet would contain approx. 35% of calories from whole grains, tubers eg potatoes, and proteins sourced from plants, along with 14g of red meat and 500g of fruits and vegetables. This would require a decrease in meat and sugar consumption of approx. 50 per cent while nuts, fruits, vegetables, and legumes would double (EurekAlert! 2019). With this level of change required in food production we can expect that the market would self-regulate to a degree, but we can also anticipate impacts to supply and demand driving volatility.

The factors explored in this essay provide a base for the argument that drivers such as seasonality, climate change, government policy and intervention, water, and changing diets, and population growth all play a role in driving volatility in agricultural asset prices in developed and emerging economies. We can see how price and quantity changes with shifts in supply and demand and as the frequency of these factors increases or decreases we can expect to see volatility in prices. It is expected that with changes in economic activity markets would develop and/or adjust, agriculture would be no different. Technology advancements and policies to address significant impacts such as climate change will support ongoing productivity growth and sustainability to the agricultural sector and in turn to the global food supply. This argument can be further developed with more in-depth research and critique to quantify the extent of the volatility along with the effects of substitution and price elasticity to identify more specific impacts to asset prices and the economy. 

References

Cite This Work

To export a reference to this article please select a referencing style below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

DMCA / Removal Request

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please: