Impact of environmental changes on economic performance of broadacre farms in Australian wheat belt regions

Impact of environmental changes on economic performance of broadacre farms in Australian wheat belt regions

Nearly all grain production in Australia takes place in the Wheat Belt regions. However, adverse environmental conditions in these areas pose a major challenge to the management of broadacre farm businesses. The aim of this study was to determine the main drivers of profitability and productivity changes, and the determinants of inefficiency for wheat and non-wheat crops (e.g. canola, sorghum, oats, rice, barley, field peas, lupines and grain legumes) in 12 farm regions from 1990 to 2016 in the Australian Wheat Belt regions. The 12 farm regions were grouped based on rainfall and temperature levels into low, medium and high average annual rainfall farm regions (AARFRs) and average annual temperature farm regions (AATFRs), respectively.

The standard data envelopment analysis (DEA) technique was utilised to estimate the production frontier and to compute and decompose the total factor productivity (TFP) index (Lowe index method) into measures of technical, environmental and several efficiency changes. An aggregate quantity-price framework was adopted to decompose profitability change into measures of TFP and terms of trade changes. Efficiency measures were estimated using an output-oriented DEA model under the variable returns to scale (VRS) assumption. Technical efficiency was estimated under the constant returns to scale (CRS) assumption. Tobit regression was used to examine the effects of socioeconomic variables on eight efficiency indicators (scores) and the robustness of the results was checked using double bootstrap with truncated regression analysis, random effect Tobit model and lag model. These analyses were performed using the R software program.

Assessment of the effect of rainfall variation on productivity and profitability change revealed that the main drivers of TFP change were output-oriented rainfall efficiency change and technical change in high and medium AARFRs. TFP change and terms of trade change were the main drivers of profitability in the high and medium AARFRs, respectively. Results from the effect of temperature variation on productivity and profitability change also revealed that output-oriented temperature efficiency change, and technical change were the main drivers of TFP change in high AATFRs. The main driver of profitability change was change in terms of trade for the high, medium and low AATFRs.

The Tobit and double bootstrap models produced similar estimations, which confirmed the robustness of the Tobit model under both rainfall and temperature variation analysis. The capital-labour ratio had a positive and significant influence on six efficiency indicators (technical and scale-mix efficiency and output-oriented technical efficiency (CRS and VRS), scale efficiency, scale and mix efficiency, and residual scale efficiency) under rainfall variation analysis, and five efficiency indicators (except scale efficiency) under temperature variation analysis. For both rainfall and temperature variation analyses, capital-labour ratio had a significantly negative influence on environmental efficiency. The land-labour ratio had a negative and significant influence on five efficiency indicators (technical and scale-mix efficiency and output-oriented of technical efficiency (CRS and VRS), scale and mix efficiency, and residual scale efficiency) under rainfall variation analysis, and six efficiency indicators (including mix efficiency) under temperature variation analysis. There was a positive and significant relationship between environmental efficiency and the land-labour ratio under both rainfall and temperature variation analyses. Age of farm manager had a negative and significant impact on four out of eight efficiency indicators (mix efficiency, scale and mix efficiency, residual scale efficiency, and technical and scale-mix efficiency) in only the temperature variation analysis. Significantly negative relationships were observed between some efficiency indicators (e.g. scale and mix efficiency, residual scale efficiency, and technical and scale-mix efficiency) and off-farm work of farm manager under both rainfall and temperature variation analysis.

These findings imply that farmers should be encouraged to continue adopting new technologies and management practices to overcome challenges due to environmental changes. Additionally, to improve the efficiency of farm regions in the face of both rainfall and temperature changes, policies that ensure the availability of capital and land should be developed that are aimed at encouraging younger people to join the farming workforce.