AUSTRALIAN agriculture's competitive advantage in "the Asian century" may lie in how well farming works with the environment, according to the Centre for Policy Development (CPD).
The CPD report "Farm Smarter, Not Harder" notes that agriculture's challenge in coming decades is to increase production per hectare, but without ramping up use of costly and limited inputs.
That means working more effectively with natural processes to improve the efficiency of inputs like fertilisers and water.
Boosting the health of agricultural ecosystems - soils, water and biodiversity - will help lower risk, particularly from climate change, the CPD points out.
And putting more emphasis on managing the farm environment may help farmers diversify their income through avenues like the Carbon Farming Initiative.
"We're trying to use economic understanding of environmental services to explain why the environment is important to agriculture," said the report's lead author, Laura Eadie.
The report acknowledges the broad desire of most Australian farmers to support good environmental outcomes, but argues that policy and economics don't always support those desires.
On a global ranking, Australia's farmers are in good shape. They are more energy-efficient than their US counterparts; have long exposure to the realities of the global market, without the buffering of subsidies; and are on the doorstep of Asia, the world's economic growth centre.
But the CPD notes that Australia is already a high-cost producer, and that maintaining cost-competitiveness in Asia will mean controlling costs. Enter the environment.
The CPD wants ecosystem services put on the farming books. Ecosystem services include the natural fertility-building capacity of soils, better capture and retention of rainfall by healthy soil, and the recharge and filtering of waterways by healthy ecosystems.
All these things contribute to farming's bottom line, without ever being considered by the farm accountant or being recognised in GDP.
The CPD argues that it's time for ecosystem services to be recognised as essential to the process of "sustainable intensification" - getting more productivity from the same or less farmland.
Resilient farm environments are also essential for managing risk, the CPD report says. Risk looms large for agriculture in coming decades, not least because of climate variability.
In the last decade, Australian farm productivity fell by 13 per cent compared to the last decade of the 20th Century, largely due to extreme climate events.
"By 2050, climate change has the potential to reduce beef production by 19 per cent, wheat production by 13 per cent, and dairy production by 18 per cent below a baseline with no climate change," the report said.
New or improved farming systems could minimise the effects of flooding and evaporation from soil, and cut productivity losses from stock under increasing temperatures.
After three decades of stagnating agricultural research, the CPD thinks that renewed efforts should be made to uncover resilient crop varieties, better farming practices "and possibly entirely new business models".
The reports suggests three broad policy initiatives to support these changes.
Governance of land and water resources should be handed to networks of regional bodies, which are charged with setting regional benchmarks for sustainable practices.
State and Federal funding of agriculture-related research and development should be increased by up to seven per cent a year, to match investment levels from the 1950s-1970s.
Research should be targeted at new crops and innovative practices that "raise productivity, increase input-efficiency, and improve land and soil condition".
And incentives and policy should be increasingly focused on preparing farmers for greater climate and price risk.
The CPD suggests that this might include only giving drought assistance to landholders who meet regional benchmarks for sustainable practices, and who can maintain economic viability under projected weather variability.
The National Farmers Federation's Matt Linnegar said the broad thrust of the report hit on key priorities for the NFF, although the organisation did not agree with all the CPD's recommendations.
The CPD describes itself as "a progressive think tank" that grew out of the online magazine New Matilda.
Its latest report is part of a series examining the environment's role in Australia's fiscal economy.
* "Farming Smarter, Not Harder" is available for download at http://cpd.org.au/?p=15522