Productivity drivers

On average, the size of Australian farms has expanded over the past four decades. The number of large farms has increased while the number of small and medium farms has declined.

ABARES has found that larger farms tend to be more productive than smaller farms.  This may be because large farms benefit from economies of size, where the average cost per unit of output declines as the size of the operation increases because fixed costs are spread more thinly.

Large farms may also be relatively efficient because the developers of new technologies are likely to direct their efforts towards satisfying the needs of larger farms, and because large farms typically have the greatest financial capacity to invest in innovation.

Management skills plays a key role in productivity growth. Managers require a broad range of knowledge and skills to maximise profits given uncertainty about seasonal conditions and prices. The capacities of managers and other workers are related to factors such as age, education, training and health.

The best managers are more likely than others to make use of information and change production systems when doing so is advantageous. These changes include altering organisational structure, reallocating resources between enterprises and changing the scale and scope of production.

Workers’ attributes (including skills, abilities and incentive) can also affect farm productivity. For example, pacific island workers on the Seasonal Worker Program are found to be more productive than backpackers on horticulture farms (Zhao et al. 2018; Leith and Davidson 2015).

Climate variability (fluctuations in temperature, rainfall and other conditions) is one of the main determinants of farm productivity. For example, generally above average rainfall between the late 1970s and mid 1990s increased cropping yields and pasture growth, boosting productivity growth. In contrast, adverse seasonal conditions during the 2000s contributed to a slowdown in productivity growth.

Australian farmers manage climate variability by adjusting their production systems as circumstances change, and by adopting new technologies and management practices. Ongoing growth in Australia’s agricultural productivity over time indicates that farmers have successfully adapted to climate variability and the challenges it creates for production.

Technological progress is the key driver of long term productivity growth. In turn, the underlying determinant of technological progress is investment in research and development (R&D), which delivers new technologies and knowledge.

R&D conducted in Australia and overseas is responsible for almost two thirds of average annual productivity growth in Australia’s broadacre agriculture sector (Sheng, Gray & Mullen 2010).

Public investment in R&D has contributed significantly to agricultural productivity growth in Australia. ABARES estimates that every dollar invested in public R&D generates around 12 dollars of benefit within 10 years (Sheng et al. 2011).

Key productivity-enhancing technological developments in Australian agriculture include higher yielding plant varieties, more pest and disease resistant crops, better livestock genetics and superior planting and harvesting techniques.

In addition to the rate at which new technologies become available, the willingness and ability of farmers to innovate also has a fundamental effect on productivity growth.

Reforming agricultural input and output markets and reducing the impact of regulations on farmers have also contributed to productivity growth. For example, the removal of marketing and price supports during the 1980s and 1990s contributed to productivity growth in the broadacre and dairy industries.

Past policy reforms have led to the amalgamation of farms, better risk management and changes in the mix of agricultural commodities produced. ABARES work shows that past reforms have encouraged the reallocation of resources from less efficient farms to more efficient ones.

Competition between farms encourages the adoption of productivity-increasing innovations. For example, competition in international markets puts downward pressure on output prices, which provides a strong incentive for Australian farmers to reduce input costs.

Maintaining adequate access to infrastructure makes an important contribution to long-term productivity growth. Rail and road networks give farmers access to markets, while communications infrastructure is increasingly important for accessing market information, adopting innovations and improving management skills and knowledge.

ABARES research shows that access to better transport infrastructure (which reduces transport costs) increases the value of farmland through its impact on farm productivity. A one per cent of reduction in the cost of transportation between farms and ports leads to a 0.33 per cent increase in land prices. The benefits generated by particular types of infrastructure services vary between industries and with farm size—with land prices on large and cropping farms are more affected by transport access (Sheng, Jackson and Lawson 2018).