WHILE increasing droughts in Australia are hazards that need to be managed, financially they were often not as bad as anticipated and the east coast drought could even be seen as a commercial opportunity for Western Australia.
That's according to Australian Export Grains Innovation Centre (AEGIC) chief economist Ross Kingwell is his address at The University of Western Australia's Institute of Agriculture Industry Forum 2020 last week.
A paper published by professor Kingwell in 2016 tracked the same set of 240 farms in WA over a decade in which drought occurred at both a sub-regional and State-wide level.
Professor Kingwell said he found that while some droughts were worse than others, the financial impact wasn't always equivalently as bad.
"The drought in 2004, which in biological terms wasn't a terrible drought, was from a financial perspective very deleterious because in that year grain prices were the lowest in a decade, so the combination of lower yields and very low prices hammered those farm businesses," professor Kingwell said.
"By contrast the droughts in 2007 and 2010 coincided with a spike in international grain prices and when you multiply a low yield by a very high price, the revenue ramifications aren't as serious as you'd expect if you viewed the landscape from a purely biological point."
The paper also examined farms that experienced three droughts over the decade and found that of those three, two were consecutive and those farms were better off than those that experienced three separate droughts.
"The reason why those farm businesses that experienced consecutive droughts were better off was that it propelled them out of sheep production," professor Kingwell said.
"The cost of caring for and maintaining a sheep population on-farm for two years in drought conditions marred those businesses such that they took a strategic decision to shift out of sheep production and most of those farms have not gone back into it.
"What tended to happen over the decade was that those farm businesses increased their cropping intensity and that became a source of additional profit.
During that period there were two sub-periods of spike in international grain prices which helped deliver profits to those businesses.
While 2010 was a widespread drought through WA which resulted in incredibly low yields, either side of that drought were two favourable years in 2009 and 2011.
In 2010, there was a price spike of $150 per tonne for Australian Noodle Wheat (ANW), which is equivalent to an extra 0.5 tonnes per hectare of yield for standard Australian Premium Wheat (APW).
"ANW is a wheat for which Australia is the sole global provider, it's a unique wheat that WA farmers grow and deliver to Japan and Korea for the production of udon noodles," professor Kingwell said.
"Because we are the single supplier of this wheat class into those two international markets, whenever we are in short supply of that class, there is upward pressure and in 2010, the market price spike delivered significant revenue to those businesses that were able to grow ANW.
"Those farm businesses, despite the drought conditions and low wheat yield, received significant financial benefit from the ability to grow a portfolio of wheat types, especially ANW."
A similar trend occurred in 2012, which was a poor year yields wise, but there was a $75/t premium for the production and sale of ANW wheat.
"So despite drought being a deleterious biological phenomenon, it doesn't always perfectly translate into a deleterious financial calamity," professor Kingwell said.
If Australia is heading into a period of worsening frequency of drought and provided droughts were not perfectly simultaneous across the country, it could be an important commercial opportunity for WA farmers.
The east coast drought in 2018/19 meant that Queensland, New South Wales and Victoria were in grain deficit, which is unusual as Australia is renowned as a grain exporter.
Professor Kingwell said over the past three decades, the consumption of meat in Australia had changed.
"No longer is beef and sheep our main meats consumed, it's chicken and pork and they are grain fed meats, so consumers across Australia are consuming much more grain indirectly than was the case a few decades ago," he said.
"When you combine high populations, diets underpinned by grain fed products and drought, those regions over east become grain deficit regions and they become opportunities for WA.
"In the past few years we've exported more than five million tonnes of grain into eastern Australia and in some years that has been our biggest market."
According to professor Kingwell, if the east coast's 2018/19 drought was replicated in 2030, their grain deficit would increase drastically.
"They would have to import many more millions of tonnes of grain than was the case in 2018/19 because in the next decade there will be another five million Australians and 75pc of those will reside in Queensland, New South Wales and Victoria," he said.
"That becomes an important opportunity for Western Australian grain growers to fill that deficiency."
