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Soaring wheat production to fuel GDP growth in 2017

It's not just gas and commodity exports helping keep Australia's trade balance and economic growth in the black. This year, a record wheat crop is expected to contribute around half a per cent worth of economic growth to Australia's figures.

Unlike with iron ore or coal, where soaring prices and production have poured billions into Australia's economy, the impact of the wheat production spike will be muted by falling prices – there is a global surplus of wheat that has sent the price tumbling from $US9.00 a bushel in 2012 to around $US4.41 a bushel this month.

Nonetheless, the sheer volume of Australian wheat production is still enough to make a healthy contribution to the country's gross domestic product of "around 0.5 per cent", Commonwealth Bank chief economist Michael Blythe said. 

"There's something of a farm boom under way," he told Fairfax Media. "All this rain is good for rural production."

Wheat production is up 45 per cent this year to 35.1 million tonnes, according to the Australian Bureau of Agricultural and Resources Economics and Sciences February crop report

Rural exports comprise 13 per cent of Australia's total exports, but the sector is often a drag on economic growth rather than a net boost. Its size as a proportion of the total economy has shrunk steadily in recent decades to comprise a record low of 2.1 per cent of GDP in the second quarter of 2016. 


'Unusually large' contribution

Booming production since then means the farm sector's contribution to GDP has grown, and by the fourth quarter, actually added more in real GDP growth than the booming housing sector (if one excludes any consideration of multiplier effects, which are considerably higher for housing).

Farm production was a "key driver" of the surprisingly high growth in the most recent GDP figures, wrote UBS economist Scott Haslem. Without the growth in the farm sector, he noted, GDP growth in 2016 would have been just 2 per cent year on year, a weak figure close to those experienced by Australia as it came out of the GDP.

"Although the farm sector is still relatively very small (as would be expected given Australia is a well-diversified advanced economy), the contribution of farm to total real GDP growth is currently unusually large," Mr Haslem wrote.

Dan Basse, the founder of agricultural researcher AgResource Company, said Australian wheat producers had been helped in finding buyers by flooding in France and Germany, which had lessened the stock of high-quality wheat mostly produced in Europe and Australia

"However, this shortage is expected to be alleviated when the northern hemisphere crop comes back online in June," he said, adding that overall the world is "awash in grain". 

"There are no longer 'levers that can be pulled' to return balance to the global grains market, which remains burdened by record wheat, corn and soybean stocks.

"In years gone by, we saw low grain prices and low profitability essentially correct itself by the EU and US reducing acreage. However changes to US farm income support and EU cap reforms ensure this is no longer the case."

$A will be key

Global grain demand has in the past few years been driven by biofuels usage and the livestock sector. With China almost self-sufficient in grain, it will take expanding livestock herds in India or Africa to generate further demand growth. 

For Australian producers, the value of the Australian dollar will be key to determining what margin farmers can make on their bumper yields, Mr Basse said. 

"Over the past three years we have seen the Australian dollar fall by around 24 per cent against the US dollar, and it has been this currency shift that has helped underpin Australian grain grower revenues and incomes."

Rising interest rates in the US suggest the Australian dollar should weaken against the greenback. But the sector's strong showing isn't expected to last. 

UBS, citing ABARES financial year forecasts for farm production, expects the farm sector's contribution to GDP will peak in the first two quarters of this year before declining in the coming financial year.