Agflation in Australia

The good people at Food News sent me a snippet this morning that’ll come in handy on my last day here in Australia. It’s a piece from the Murdoch-owned Australian, that nicely sums up the pinch that we’re going to be feeling in our pockets in the future…

Drought, oil send food prices soaring
Asa Wahlquist, Rural writer | September 15, 2007

IT’S called agflation and it’s coming very soon, propelled by climate change and drought.

Grain prices have hit record levels, and those prices will ramify through the feed chain – beef, dairy, pork, eggs and chicken — and reach consumers.

The nation’s food bowl, the Murray-Darling basin, does not have enough water in the system to keep 150,000ha of citrus, apples, pears, apricots, plums, cherries, table grapes and winegrapes alive, let alone in production.

Fruit production in the basin is worth more than $1.5 billion and accounts for 60 per cent of Australian-grown fruit.

Australian Horticulture Council chief executive Kris Newton says the severe cutback in irrigation water could result in price rises, as seen with bananas after Cyclone Larry.

“But that will be across all the commodities,” Ms Newton said.

“We are facing a disaster unprecedented in Australian history. I can’t think of anything in agriculture that comes even close.”

Dairy prices are skyrocketing, too, although that is little comfort for those farmers having to pay high grain prices.

Australian Dairy Farmers policy director Robert Poole says agriculture is going through its most profound change in modern history.

“The whole oil price, climate change, food for fuel scenario — that has changed the world forever,” Mr Poole said.

“The linking of agriculture land and its use to the price of energy, in the medium to long term, will radically change the way the world works.

“We will see land use change, which will change the supply pattern of all products, including dairy products. We will see the run-down of stocks, we will see the increasing of food prices. It will bring the issue of food security back on to the table.”

Those with good wheat crops, and there are patches in most states, or dairy farmers in coastal areas where there has been good rain will have a very good year. But the dry winter over the Murray-Darling basin has withered crops and forced intensive livestock farmers into the rising grain market.

In June, ABARE forecast a 22.5 million tonne wheat crop — if there were normal conditions. There weren’t. The next forecast is out on Tuesday, and will probably be between 14 and 19 million tonnes.

Grain prices are rising due to increased demand from the biofuel sector, along with a series of weather events leading to crop failures this year, which have resulted in world grain stocks being at a 30-year low.

Australian Lotfeeders Association president Malcolm Foster has been campaigning against mandated ethanol in petrol.

“It is putting extreme pressure on the world grain prices, because of what the US has done,” Mr Fraser said.

“Our concern was Australia would do it and put pressure on Australian prices, but it is happening in the US anyway. The impact is going to be quite severe on food prices around the world.”

Along the Murray River, irrigation allocations have been slashed. On the NSW side of the Murray they are zero, on the Victorian side 5 per cent, and in South Australia 13 per cent, rising to 16 per cent next month. Only on the Murrumbidgee do growers have enough water to survive, with 60 per cent of high-security allocations.

Ms Newton said around 48 per cent of normal allocation was “required to simply keep them alive — not produce a crop, just keep them alive — and we are not going to get that, with the exception of the MIA (Murrumbidgee)”.

She said that, even with above-average spring rains, “there is not going to be enough. Basically between now and Christmas they will die”.

Blair Trewin from the National Climate Centre says 2007 has been the worst post-drought year on record.

“Not only was 2006 a severe drought year, but 2007 in many areas is unprecedentedly poor.”

Dr Trewin says climate change, particularly rising temperatures, has made climate forecasting more difficult.

“Our outlooks are based on historical relationships between sea surface temperatures and rainfall and temperatures,” he says. “We are not as confident as we once were that those relationships are still stable.”

He says there are signs a La Nina is developing, although it is late. “There is still hope for decent rainfall, particularly in the summer rainfall areas,” Dr Trewin said.

Ms Newton points out that horticulture is a huge employer in the regions, in food processing, winemaking, farm and irrigation services, transport and even wine and food tourism.

Dairy also has a big multiplier effect. Milk production since the drought began in 2002 is down by nearly 2 billion litres. Mr Poole estimates that has cost “about 15,000 jobs and approximately $3 billion to the economy”.

Australian Farm Institute executive director Mick Keogh says: “The thing that scares me this time is when you add the widespread nature of the drought to the lack of water.

“There is not a sector of agriculture, with perhaps the exception of some of the coastal fruit and vegie and the northern beef industry, that are missing out. I can’t recall that sort of widespread impact before.”

The grain industry is full of rumours about grain growers, new to hedging, being badly caught out.

Risk management consultant with regional NSW company MarketAg, Colin Lethbridge, explained that “because AWB hasn’t been there, growers have had to do their hedging themselves this year”.

Many locked in a prudent one-third of their crop at the beginning of the season at what were very good prices. Then prices soared and the crop failed.

“Now they are facing a $US120 to $US150 loss a tonne. They might have sold forwards only 1000 tonnes, but that is $US150,000 which is perhaps $200,000 on top of your input costs. There are a lot of blokes around here who are still short and who may lose a property,” Mr Lethbridge said.

Ms Newton is worried that if permanent plantings die, many farmers will not be in a position to replant. The average farmer is over 55, “and you have to wait eight to 10 years (for income), assuming you have the confidence to replant, or you can afford to”.

“People are going to throw their hands up and go, ‘well that’s it, I’m out’,” she said.

Ms Newton says many of the best operators, and the most innovative, will be the hardest hit. The most water efficient, computer-controlled method of growing fruit trees results in a dense root ball.
“The intention is to reduce the amount of water it needs, but it means it has no deep tap roots so the moment irrigation goes off and there is no rain they will die in about two weeks.

“Most of these people are extremely efficient farmers. We are not talking about the marginal or the vulnerable who may have been caught up in the drought.”

Ms Newton says the effect of the dry will be felt in the cities. “Whether it is in the hip-pocket nerve, whether it is in terms of unemployment in regional communities, it will be felt across the nation,” she said.

Mr Keogh said: “I don’t think anyone in their wildest dreams would have imagined a problem on this scale.”