Has growth in productivity in Australian broadacre agriculture slowed?

Introduction

Productivity growth in Australian agriculture has been an important source of wealth in Australia. The real value of agricultural production in Australia has been more than $40 billion a year since the late 1990s (figure a).¹
If productivity has grown at the rate of 2 per cent a year (Mullen 2010), about two-thirds of the value of production in recent years can be attributed to productivity growth since 1952-53. Agricultural productivity growth in Australia has also been strong relative to other sectors of the economy and relative to the agricultural sectors of other OECD countries (Mullen and Crean 2007).

However, recent data suggest that, similar to other developed countries such as the United States, Germany and the Netherlands, productivity growth in Australian agriculture may have slowed. In particular, the long-term annual growth rate of productivity in the broadacre cropping and livestock industries has declined from 2.1 per cent between 1978 and 1999, to 1.5 per cent between 1978 and 2007 (ABARE 2008). Note that these data relate to financial years, so 1978, for example, refers to 1977-78. This is also the case for the data referred to below.

A series of droughts extending back to the mid-1990s have reduced Australian agricultural production, in particular contributing to the trough of farmers’ output in 1994, 2003 and 2007. However, how these droughts may affect the long-term growth of agricultural productivity is still unknown because of a lack of thorough empirical studies. Also, public investment in agricultural research in Australia, which is the predominant source of funding for agricultural R&D in Australia, has shown little growth for the past 30 years. Whether the recent slowing down of agricultural productivity is caused by poor seasonal conditions or the lack of R&D investment is an important question.

This paper uses the adjusted cumulative sum square (CUSQ) index to examine the trend stability of total factor productivity (TFP) in Australian broadacre agriculture over the period 1953 to 2007. The objectives of this paper are:

• to review productivity growth within the broadacre agriculture industry (which comprises the cropping and livestock industries) in Australia and its determinants, using gross output-based TFP measures from ABARE farm survey data
• to assess whether productivity growth in Australian broadacre agriculture has slowed in recent decades and, if such a slowdown has occurred, when it started
• to determine whether real agricultural R&D investment and severe droughts have affected the trend stability of productivity growth in Australian broadacre agriculture.

Methodologically, this paper contributes to the previous literature by adopting the developments in structural analysis following Perron (2006) and Zhou and Perron (2008). Using the adjusted CUSQ index, some problems in dating structural breaks in agriculture productivity and analysing the determinants can be overcome. These problems can arise from some statistical difficulties such as endogeneity, heteroscedasticity and non-stationarity. Also, the paper contributes to public knowledge about trends in Australian agricultural productivity over time.

The remainder of the paper is organised as follows. Sections 2 and 3 review productivity growth in Australian broadacre agriculture in the past four decades. In section 4, the adjusted cumulative sum square (CUSQ) index, which is widely used for testing the stability of a statistical process, is discussed. Based on this method, three scenarios are specified for identifying the structural change of Australian broadacre productivity and its determinants since 1953. Section 5 contains a discussion of the estimation results and section 6 presents some conclusions.