Bumper crops and increased demand to increase farm income to near record levels: RBA

Farm income during 2011 and 2012 is expected to be double the average of the previous two decades due to a combination of high food prices and bumper crops, according to Philip Lowe, assistant economic governor with the Reserve Bank.

Speaking at Australian Farm Institute Agriculture Roundtable Conference, Lowe said in an uncertain global financial environment the outlook for Australian agriculture was good.

According to IMF figures, global food prices have increased 40% since 2004 and other figures show commodities such as wool, beef, wheat and sugar experienced similar boosts.

These increases have had an impact on the costs of inputs for farming, like fuel fertiliser and seed, but overall Lowe says the rise in prices is good news for domestic producers.

Lowe says the near-record-breaking expected winter wheat crop of around 40 million tonnes follows a good harvest last year. Farm output has increased by about 70% since the mid-1990s.

“This combination of generally high prices and high output has provided a substantial boost to aggregate income of the farming sector over the past financial year, and another favourable outcome is expected this year,” Lowe says.

“After adjusting for inflation, farm incomes over these two years are expected to be almost double the average of the previous two decades.”

Lowe says the increase in global demand for food comes from the rising food consumption in Asia as well increased meat consumption, which demands large amounts of grain, as well as an increase in the use of foods for non-consumption purposes like bio-fuels. This comes with a modest expansion in the global supply due to urbanisation in Asia and an increase in extreme weather.

Ivan Colhoun from ANZ Research says: “While the speech is mainly focused on the medium-term positive outlook for agriculture, there was some guidance about monetary policy. It's currently neutral, and it seems increasingly dependent on how things play out in Europe.”

“The European situation remains grim… there is likely to be considerable uncertainty about the global economy for an extended period.

“Encouragingly, the US economic data has generally been better than expected recently, corporate balance sheets remain strong and there are few signs that the financial turbulence has led to the significant deferral of spending on capital goods that caused so much damage in 2008 and 2009. At the same time, while Asian growth has slowed, growth remains firm and is increasingly domestically sourced (something that needs to continue to increase across time),” he says.

He also notes: “The downward trend for global food prices over the past 100 years appears to have ended.”