May 10th 2014

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Articles from this issue:

CHILD CARE INQUIRY: Should parents or paid strangers raise children?

ECONOMIC AGENDA: Sorting out the confusion over Australia's agricultural exports

EDITORIAL: Is the Coalition government losing its way?

CANBERRA OBSERVED: Joe Hockey's two-phase plan to cut budget deficit

EDUCATION: How contemporary schooling devalues great literature

ENVIRONMENT: PM's top business adviser rejects climate alarmism

HEALTH: Kirby Institute report silent on incidence of AIDS

TRANSPORT: Finding a better solution to our traffic problems

FOREIGN AFFAIRS: Russia ups the ante, but faces backlash in Ukraine

LIFE ISSUES: What really happens outside the abortion clinic?

UNITED KINGDOM: Christian arrested in Britain for quoting Bible, wins damages

PAKISTAN: Council of Islamic Ideology 'anti-women': Sindh assembly


CULTURE: Remembering the quality of mercy

BOOK REVIEW: The Tragedy of Liberation, by Frank Dikotter

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Sorting out the confusion over Australia's agricultural exports

by Patrick J. Byrne

News Weekly, May 10, 2014

There is widespread confusion over how to measure the proportion of Australia’s agricultural output that is destined for export.

In the last issue of News Weekly (April 26),[1] we asked whether exports are worth 80 per cent, 70 per cent, 60 per cent or just 25 per cent of the earnings from agriculture.

Agriculture Minister Barnaby Joyce.

It was pointed out that there was a problem with the estimates produced by leading government bodies such as the Department of Agriculture Fisheries and Forestry (DAFF), the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), which is part of DAFF, and other agencies.

As recently as February this year, the Agricultural Competitiveness Issues Paper produced figures for the current agricultural competitiveness inquiry, which estimated that “around 60 per cent of agricultural production” is exported and was worth $32.4 billion in 2010-11.[2]

But in arriving at this figure the paper wrongly compared the value of exported wine with the value of unprocessed wine grapes. When one uses such calculations, one ends up with the astonishing conclusion that Australia was exporting 274 per cent of its wine production!

This calculation is based on the old statistical fallacy, which says that it is invalid to compare apples and oranges. Comparing dissimilar items produces only meaningless results. Yet official government papers compare the value of wine with the value of unprocessed grapes as if they were the same thing.

On further examination, it appears that the wine industry is not the only farm sector whose exports ABARES and DAFF show as exporting more than 100 per cent of their production.

The same flawed methodology has been used to assert that Australia exports 60 per cent or more of its total agricultural produce.

So how is it that there has been such confusion on agricultural exports for decades? After all, we don’t seem to have the same problem when calculating minerals exports.

Our government agencies clearly understand the difference between (a) the mining of minerals and coal, (b) the smelting of minerals into metals, and (c) the manufacturing of these metals into products such as motor vehicles.

They separately value each of the minerals produced by our mines (iron ore, copper ore, etc), then the value added to these minerals by smelters (iron, steel, copper), then the further value added when these metals are manufactured into motor vehicles and the like.

This is an example of the “industry production method” of calculating the value of minerals and related manufactured products used at successive stages of the production process — in this example, from the mine to motor cars.

Our government agencies don’t lump together minerals, metals and motor vehicle production and then call it “mineral production”.

Yet this is what they have been doing when measuring production values in agriculture and its related industries. They have lumped together (a) farm-gate production (wheat and sugar cane), (b) first-stage manufacturing (flour, raw sugar, refined sugar), (c) final-stage manufacturing (bread, biscuits, cakes) and then call it “food production”. Then they have compared “food production” exports with total agricultural farm-gate production.

This is like comparing apples and oranges. It leads to meaningless statistics and damaging agricultural policies.

This mistake occurs because our government agencies have chosen to combine the value of unprocessed and processed “food products” rather measuring the value of “industry production” at each stage in the production chain, which is the conventional method for making export and domestic market comparisons.

The problem and the solution become clearer when we examine some of Australia’s 53 agricultural industries and their vast array of dependent manufacturing industries.

Consider wheat and sugar cane. People don’t eat wheat and sugar cane. Wheat and cane are manufactured into flour and sugar. Even then, people don’t eat raw flour and most don’t eat sugar straight. Rather, people eat manufactured biscuits and cakes made from flour and sugar that have been milled from wheat and sugar cane.

Consider cattle. People don’t eat cattle. Abattoirs process live cattle into beef, and butchers prepare the final cuts. Then people eat beef cooked at home or at restaurants.

Consider apples. They can be considered food in several ways. Some are sold direct as eating apples. Others are manufactured and sold as canned apples, then as manufactured apple pies. Others are crushed to manufacture apple juice, apple cider or apple cider vinegar.

Consider vegetables. Some are sold fresh to consumers. Others are manufactured into canned soups or into frozen packaged vegetables. Then these frozen or fresh vegetables are combined with flour and dairy products to produce pies.

The stages of food production are as distinct as the three stages of mining, smelting and motor vehicle manufacturing.

Figures from the Australian Farm Institute’s paper, Australia’s Farm-Dependent Economy (March 2005),[3] illustrates the vast difference between the farm-gate value of agricultural production and the value of food, beverages and fibre products after they have moved through the manufacturing and distribution chains to the domestic consumer or for export.

The value of agricultural output at the farm gate is only 3 per cent of the Australian economy (gross domestic product). But after the various input and downstream manufacturing industries are included, the final value at the end of the production chain is 12.2 per cent of the economy — about $190 billion in today’s figures.

This also illustrates why agriculture is called a “primary industry” — it feeds a plethora of secondary industries that can quadruple the value of the farm-gate product.

In the previous issue of News Weekly, it was pointed out that seven economists — three from the Australian Bureau of Statistics and four academic economists who were input-output specialists — produced what became known as the Customs House Agreement in Brisbane in 2000.[4]

These economic specialists agreed that only 22 per cent of Australian farm produce is sold directly overseas as measured at the farm gate.

So what do farmers, manufacturers, government agencies and politicians need to learn in order to make policy?

They all need to understand — from the ABARES farm-gate figures (2010-11) and from the Customs House Agreement’s conclusion that only 22 per cent of farm-gate agriculture is directly exported — the following points:

• $48 billion is the figure for total farm output at the farm gate.[5] That is how much our farmers receive for all their wheat, cattle, wool, lambs, milk, fruit and vegetables, etc.

• $10 billion is exported, as measured at the farm gate, before any processing (e.g., wheat, sugar cane, live cattle, eating grapes, etc). That is how much farmers receive from direct farm-produce exports.

• The remaining $38 billion of farm produce is used domestically. Some (e.g., lettuce, eating grapes) will be retailed to domestic consumers “as is”. The rest is manufactured (e.g., to flour or cakes or pies). Food manufacturing sells most of its output to Australia’s domestic market and exports the remainder.

It is in untangling the “farm share” of “food manufactures” where problems arise if analysis is inadequate. The details are important and require careful analysis.

This is where the skills of economists who specialise in input-output analysis and the national accounts are called into service. They know that the valid methodology for such comparisons requires measuring “industry output values” and value added for each of Australia’s 53 rural industries, for each of the food manufacturing industries and other players in the food production chain.

They know that it is important to measure for each of Australia’s 53 rural industries the value of farm-gate production that is destined for export. They also know how to allocate competing imports.

The value of farm-gate products destined for export can be calculated by specialised methods and conventions. These methods are used by every other country in the world to calculate the proportion of agriculture that is exported, but not Australia.

Consider wine grapes. Given that about 45 per cent of Australian wine was exported in 2011-12,[6] then, of the $712 million in wine grapes sold to wineries,[7] $319 million is destined for export. This $319 million is what wine-grape farmers receive for the proportion of their grapes that are exported as wine.

Following this “industry production method” involves detailed determination of industry output values and value added for the various farm, manufacturing and related industries. It eliminates the problems associated with the ABARES methodology.

It is the standard method used in calculating the nation’s national accounts. It is used to measure and distinguish the value added by the minerals industry, the smelting industry and the manufacturing industry when it produces motor vehicles.

The Customs House Agreement, in 2000, used peer-reviewed research that applied industry production methods to conclude that:

• exports measured at the farm gate were “22% of the gross value of farm production”;

• adding first-stage production sees around a quarter exported, and this figure has “been essentially unchanged for 30 years or so”; and

• “the ABARE and NFF (80%) export figure has no basis of fact”.

Subsequently, Dr Guy West, an associate professor at the Centre for Economic Policy Modelling at the University of Queensland, produced a second peer-reviewed paper on this important issue, entitled “Decomposition of exports and GDP into direct and indirect industry contributions,” Australasian Journal of Regional Studies, vol, 8, no. 2, 2002.[8]

His paper explained in depth that the methodology for calculating “estimates of the direct and indirect industry contributions to GDP, of which exports are a part, [and] which are consistent with the national accounts”.

Applying this standard methodology, Dr West’s calculations came to the same conclusion as the Customs House Agreement as regards direct exports.

He said that “the direct value of goods and services leaving the farm gate and destined for the export market” is 22 per cent, which is consistent with the national accounts data.

West then used a more sophisticated method than in the earlier study to estimate the “indirect” agricultural exports after processing. Combined, these direct and indirect exports accounted for 26.5 and 27.6 of value added in the two years analysed (1993-94 and 1996-97).

Dr West, an input-output analyst of international standing, also concluded that “the ABARE figure of 60–70% [exports] is clearly unsupportable, and simply defies both economic logic and the national accounts data”.

Why is it important to calculate a true value for farm exports?

Agriculture can be a high-risk industry. Risks are needlessly increased and incomes depressed if the markets for farm produce are not properly understood. Such has been Australia’s experience. Oversimplification, flawed policy analysis and bureaucratic denial need to rectified if risks and incomes are to be returned to reasonable levels.

When around three-quarters of all farm value-added is actually associated with domestic activities, then governments have a wide range of policy instruments available to help manage these risks in the major market for farmers.

In contrast, governments have few effective external policy options with which to manage risks for products sold into volatile global markets.

Differentiated strategies are required to accommodate the needs of highly exposed exporting sectors (such as wheat-growing and sugar-manufacturing) — and also for those facing significant import or supply chain “imperfections”.

In conclusion, it has been more than a decade since a valid methodology has been used to calculate the true value of direct farm-gate production for Australia’s domestic and export markets. Policy settings have not been adjusted. It is high time they were.

The current agricultural competitiveness inquiry provides the opportunity to update these figures using the industry production methodology to evaluate agricultural markets.

More competent analysis will enable industry and government to develop new policies with which to manage farm risks and restore higher investment and profitability to the farm sector.

Patrick J. Byrne is national vice-president of the National Civic Council.


[1] Patrick J. Byrne, “Does Australia export 274 per cent of its wine production?”, News Weekly, April 26, 2014.

[2] Australia’s Agriculture, Fisheries and Forestry: At a Glance 2012 (Department of Agriculture Fisheries and Forestry, 2012), cited in Commonwealth of Australia 2014, Agricultural Competitiveness Issues Paper, Canberra, February 2014, Commonwealth of Australia 2014.

[3] Australia’s Farm-Dependent Economy: Analysis of the Role of Agriculture in the Australian Economy (Australian Farm Institute), March 2005, pp.1-76.

[4] The Customs House Agreement, May 9, 2000, at the old Customs House, Brisbane.

[5] Australia’s Agriculture, Fisheries and Forestry: At a Glance 2012 (Department of Agriculture Fisheries and Forestry, June 2012): p.6.

[6] “Domestic sales value of Australian wine”, 1329.0 – Australian Wine and Grape Industry, 2012-13, Australian Bureau of Statistics (ABS), December 5, 3013.

Australia’s Agriculture, Fisheries and Forestry: At a Glance 2012 (Department of Agriculture Fisheries and Forestry, June 2012): p.9.

[7] Tim Caboche et al., Australian Wine Grapes: Financial and Business Performance of Wine Grape Growers 2011-12. Research by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES): Research Report 13.14, 2011-12, December 2013, p.10.

[8] Guy West, “Decomposition of exports and GDP into direct and indirect industry contributions”, Australasian Journal of Regional Studies (Brisbane), vol. 8, no. 2, 2002, pp.143-164.

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