Productivity growth is an important concept for stakeholders in the agricultural industry to understand. As a measure, productivity growth at the farm level reflects the changes in efficiency with which farmers use land, labour, capital and other inputs (e.g. chemicals, fertiliser, technology etc.) to produce outputs such as crops, meat, wool and milk. At the industry level, it reflects changes in industry structure, including the exit of less efficient farmers and more efficient resource use across farms (ABARES, 2016).

It is important to understand because in the long run, productivity is the predominant driver of profitability in the industry. I say predominant as there are other obvious short term factors that influence profitability such as interest rates, commodity prices, and weather events. However, in any given region, these factors are generally uniform across participants. i.e. they all can access the similar interest rates, commodity prices, and generally (but not always) the same weather patterns. However, the point of difference that sets farmers apart is their productivity, with the most productive generally being the most profitable. In my opinion, the three KPI’s of productivity in agriculture are:

Unit cost of production

Production per ha

Labour use efficiency

Furthermore, profitability has a flow on effect to land values, as increasingly productive/profitable farmers have a higher capacity to purchase land than less productive farmers. This is a link that has recently been highlighted by Holmes & Sackett consultant John Francis, who suggested that a large increase in profitability over the past ten years has been one of the key contributing factors to the current growth in agricultural land values (Francis, 2018). Note that productivity growth is sometimes not best measured based on a commodity basis, but on a land basis. This is because some of the biggest increases in productivity have come from changes in land use, where the landholder has converted from producing one commodity, to producing another. For example, the conversion of sheep country to cotton production around Moree in the 1970’s & 80’s, or more recently the conversion of cropping country on the Murray/Murrumbidgee to tree nut production.

Consequently, I think that for all stakeholders in the agribusiness industry including investors, input suppliers, technology providers, government, as well as existing farmers, an understanding of productivity growth and its drivers is paramount for the future success of the industry.

If this is the case, it begs the question, what drives productivity improvement? And what are some industry examples of productivity improvement in Australia? Some key drivers that seem obvious to me include:

Capital efficiency Labour efficiency Machinery

Infrastructure Technology implementation Soil productivity Water efficiency Land use change Management skill

In the future, I hope to examine these drivers in further detail as well as explore many other areas relating to the productivity of the Australian agriculture industry. If anyone has any other areas or ideas they would like to suggest please let me know!

References

ABARES, 2017, Agricultural commodities: March Quarter 2017. CC BY 3.0, http://www.agriculture.gov.au/abares/research-topics/productivity/agricultural-productivity-estimates

Francis J, 2018, Farm Profitability – contributing to the increase in land prices?, published via linkedin, https://www.linkedin.com/pulse/farm-profitability-contributing-increase-land-prices-john-francis/