Agricultural Systems 123 (2014) 34–42

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Agricultural Systems

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Modelling interactions between farm-level structural adjustment and aregional economy: A case of the Australian rice industry

0308-521X/$ - see front matter � 2013 Elsevier Ltd. All rights reserved.http://dx.doi.org/10.1016/j.agsy.2013.08.010

⇑ Corresponding author. Tel.: +61 (7) 4631 2019; fax: +61 (7) 4631 5581.E-mail address: Shahbaz.Mushtaq@usq.edu.au (S. Mushtaq).

1 Refers to government-led promotion of extensive use and development of‘natural capital’ (Mercer et al., 2007).

Shahbaz Mushtaq a,⇑, Geoff Cockfield a, Neil White b, Guy Jakeman c

a Australian Centre for Sustainable Catchments, University of Southern Queensland, Toowoomba 4350, Australiab Queensland – Department of Agriculture, Fisheries and Forestry, Toowoomba, Australiac ACIL Tasman Pty Ltd., Canberra, Australia

a r t i c l e i n f o

Article history:Received 6 December 2012Received in revised form 6 August 2013Accepted 30 August 2013Available online 15 October 2013

Keywords:Climate changeWater and environmental policyStructural adjustmentRiceGeographic relocationRegional economic model

a b s t r a c t

Climate change and on-going water policy reforms will likely contribute to on-farm and regional struc-tural adjustment in Australia. This paper gathers empirical evidence of farm-level structural adjustmentsand integrates these with a regional equilibrium model to investigate sectoral and regional impacts ofclimate change and recent water use policy on rice industry. We find strong evidence of adjustmentsto the farming system, enabled by existing diversity in on-farm production. A further loss of water withadditional pressures to adopt less intensive and larger-scale farming, will however reduce the net num-ber of farm businesses, which may affect regional rice production. The results from a regional CGE modelshow impacts on the regional economy over and above the direct cost of the environmental water,although a net reduction in real economic output and real income is partially offset by gains in rest ofthe Australia through the reallocation or resources. There is some interest within the industry and frompotential new corporate entrants in the relocation of some rice production to the north. However, stronggovernment support would be crucial to implement such relocation.

� 2013 Elsevier Ltd. All rights reserved.

1. Introduction

Climate change and increasing demands for water, including forenvironmental flows, are forcing Australian state and federal gov-ernments to rethink how they value, use and manage water. Whilestatist developmentalism1 remains as a strong strand of thinking inAustralian agricultural narratives, there are arguments for radicalrevisions of use and consumption patterns (Mercer et al., 2007;Schofield et al., 2003; Khan et al., 2008). A key challenge in the man-agement of irrigation water under climate change, is maintaining re-gional and perhaps even national economic development withoutseriously undermining the environment’s ability to provide those re-sources into the future (Grafton et al., 2011; Mercer et al., 2007;Connell and Grafton, 2011; Yohe and Schlesinger, 2002).

In response to climate change and fears of irreversible environ-mental degradation, Australian governments are attempting tointroduce a system of water management, the Murray Darling Ba-sin Plan (the Plan), to halt the decline in environmental conditionsand resource security and provide a foundation for managingclimate change (Connell and Grafton, 2011). The Plan tries toreflect a more detailed understanding of the complexity of

human–environment interactions under climate change, with amajor challenge being the estimation of the cost of reallocatingwater from extractive uses, such as irrigated agriculture, to envi-ronmental flows (Grafton and Jiang, 2010a,b). The regional impactsof changing allocations including climate change impacts could beconsiderable and could significantly impact regional resilience(Martin, 2012), especially given that agricultural production wasfor many years a mainstay of regional development (Davison,2005) and many communities are highly dependent on irrigationsystems. We aim to investigate the impact of such reallocationson the rice industry along with the broader regional implicationsby combining farm-level structural adjustment and regional eco-nomic impact modelling. We selected the rice industry as a casestudy because, although rice growing in Australia is highly profit-able, several years of severe drought (2002–2009), known as theMillennium drought, led many to call for its elimination becauseof its extensive water use and the consequent effects on fragileaquatic ecosystems.

In the past various economic models, such as regional hydro-economic optimisation models, regional CGE models incorporatingwater trading, and market-based models, have been used to evalu-ate the impact of droughts, climate change impacts and water‘buyback’ programs in Australia (Grafton et al., 2011; Connell andGrafton, 2011; Grafton and Jiang, 2010a,b; Quiggin et al., 2008;Horridge et al., 2005; Peterson et al., 2005; Adamson et al., 2009;Connor et al., 2009; Goesch et al., 2009; Dixon et al., 2010; Qureshi

Fig. 1. Key rice producing area in Riverina (NSW) – Murray Irrigation, Murrumbidgee and Coleambally Irrigation areas.

S. Mushtaq et al. / Agricultural Systems 123 (2014) 34–42 35

et al., 2007). Although all of these researchers aim to identify andquantify the economic impacts to irrigated agriculture of reducedsurface water diversions, their focus was regional and national,rather than industry specific, which ignores on-farm and localadaptations

Our paper focuses on the rice industry and builds the body ofknowledge in two ways. First, we explore the dynamics of farm-le-vel structural adjustments as a result of increased water scarcity,and second, we explore the interface between farm-level produc-tion decision-making, a regional economy and national water pol-icy. We find strong evidence of rapid structural adjustment in ricefarming system in response to low water availability, based onanalysing production in the drought years. We then used climateprojections, based on various warming patterns to develop futurescenarios.

The results from the economic modelling show that for one2070 scenario, the implementation of the MDB plan and expectedclimate change would decrease the regional (southern inland NSWwhere most rice is produced) real income by $896 million. How-ever, this decrease is partially offset by the gains achieved($682 million) in rest of the Australia. We note that it may be pos-sible, subject to further agronomic studies, to offset the national ef-fects by expanding production in areas such as the Ord River inWestern Australia and the Burdekin region of Queensland.

We began the study with an examination of the national and re-gional significance of the rice industry and the significance and im-pact of climate change, in order to show how water policy andfuture climate could constrain the rice industry and affect the re-gional economy.

2 Producer-driven chains are those in which companies that produce the produccontrol the networks within the chain. Producer-driven chains are most common incapital and technology intensive industries where high barriers to entry exist inproduction (Kaplinsky, 1999).

2. Rice industry significance and challenges under climate andwater policy change

2.1. Significance

The Australian industry has a relatively small number of pro-ducers, geographically concentrated in the Riverina region ofNSW (Fig. 1), generating considerable export income as well as va-lue added production. Australian rice is only 0.2% of world produc-tion but exports (80% of the rice produced) are more than 4% ofworld trade. Australian rice varieties (for example Japonica) are dif-ferent to those grown in monsoonal wetland countries such asThailand and Indonesia and were specially developed to suit the

hot and dry conditions of southern NSW. Several factors combineto make rice production in Australia successful: the high qualitygrain owing to the climate, which provides plenty of sunlightand suitable temperatures, excellent water quality, good soils, ex-pert producers who obtain an average of around 10 t/ha whileincreasing water use efficiency (RGA, 2011) and the tight integra-tion of the production, commercial, and research arms of theindustry. Taking into account processing and packaging operations,the rice industry directly employs over 8000 people and supportsmore than 60 towns. Indirectly, the industry supports 33,000 peo-ple, mostly in the Riverina (SunRice, 2010).

Australia has one of the highest average yields of rice (10 t/ha)in the world and over the past thirty years there have been sub-stantial increases in irrigation and total water productivity. Thelong term water use efficiency for rice has increased by more than60% from the 1980s to 2008 (Lacy et al., 2009) and Australian pro-ducers use 50% less water than the world average (RGA, 2011). Netreturns from medium grain rice can be close to $2000 per ha whilelong grain rice can make around $1750 per ha, which are relativelyhigh rates of return in Australian agriculture. The value chain ismainly and unusually producer-driven2 and the barriers to entry in-clude high start-up costs, resource limitations and the lingering im-pacts legacy of the state-sponsored commodity marketingorganisations, characteristic of post-war agricultural policy in Aus-tralia, which at various times included compulsory centralised mar-keting and licensing and quota schemes. From that centralisedsystem, more contemporary marketing parameters include productspecifications and standards and environmental regulations forproduction.

2.2. Challenges under climate change and water policy

In the future, water will probably be more expensive, less avail-able and allocations will be less secure, particularly for waterintensive industries such as rice and so production will be signifi-cantly influenced by droughts and water buy-backs. In the past,significant gains have been achieved in improving rice water useefficiency but there are likely to be diminishing returns from pur-suing this within the current systems (Humphreys et al., 2006).

t

Fig. 2. Historical rice area and yield.

36 S. Mushtaq et al. / Agricultural Systems 123 (2014) 34–42

Since, the establishment of the first commercial crop of rice in1924, there has been a gradual increase in rice area and yield(Fig. 2a and b). However, drier winters, demand for water for min-ing and domestic consumption, and the national government pur-chasing of water for the environment has meant that riceproduction is unlikely to return to the peak production of the1990s. There are significant concerns about the longer term impactof climate change and climate variability on water availability.

Noticeable reductions in water availability from 2002 to 2010,as a result of prolonged drought, resulted in a significant declinein the area planted (Fig. 2a). According to climate modelling, it isexpected that average water availability will decline and that thefrequency of extreme events will increase (Sanders et al., 2010).CSIRO modelling based on the median climate change scenario,while acknowledging the uncertainty in these predictions, projectsan 11% decline in surface water availability in the north of the MDBand a 13% decline in the southern MDB (CSIRO, 2008). The south-ern part of the basin is more dependent on winter rainfall, whichis expected to generally decrease in Australia. The Millenniumdrought illustrates the difficulties that would be faced if thereare to be more extended dry periods and constrained water supply.There was significantly reduced rainfall and above average temper-atures from 2001–02 to 2009–10 and basin inflows were muchlower than average and consequently allocations to irrigators de-clined, resulting in an ‘irrigation’ drought (Sanders et al., 2010). To-tal rice area in Australia has a strong linear relationship with totalwater allocations (Fig. 3a) and there also seems to have been a de-crease in the number of farms growing rice (Fig. 3b).

Some efficiency gains can be achieved through: the adoption ofnew irrigation practices, such as Alternate Wetting and Drying(AWD) and Aerobic rice (Humphreys et al., 2006); reduced wateruse in rice production through more accurate determination ofthe least permeable soils using revised rice soil suitability criteria

Fig. 3. Relationship between annual water allocation and rice

(Beecher et al., 2002); optimising sowing dates that move pondedperiods outside peak evaporation periods (Humphreys et al.,2005); and investments in more water efficient irrigation methodssuch as lateral move and centre pivot irrigators (personal commu-nication with Blue Ribbon Rice and Pulse Exporters, March 2011).Nonetheless, these currently seem unlikely to offset a reductionof available water of the order of 26–35%, so the Australian indus-try is likely to contract based on current parameters and conse-quently there will likely be changes that affect farm profitabilityand regional economies.

3. Methodology

In tracking potential regional economic changes, the first step isan examination of the evidence of farm-level structural adjust-ments in response to water scarcity using the past droughts as aproxy for on-going water shortages. It is assumed that the deci-sions made by farmers affect industries (and vice versa) and localand regional communities. These farm-level structural adjustmentdecisions and regional impacts are linked through a CGE modelthat enables the analysis of issues at the industry, global, national,state and regional levels and the determination of the impacts ofvarious economic changes on production, consumption and tradeat the macroeconomic and industry levels. In the case of the regio-nal rice model, a reference case simulation was developed (busi-ness-as-usual) with which various water availability scenarioswere compared.

3.1. Structural adjustment assessment

The empirical analysis evaluates the evidence of structuraladjustment in rice farming with increasing water scarcity.Structural adjustments comprising the decisions by farmers to

area and rice farms in southern NSW, Riverina, Australia.

S. Mushtaq et al. / Agricultural Systems 123 (2014) 34–42 37

continually adjust the size and nature of their farming operationsto improve efficiency and profitability, contribute to economicgrowth and higher living standards (Harris, 2006; Nelson et al.,2005; McColl and Young, 2005; Frontier Economics, 2010). As de-scribed by Musgrave (1982), structural change is the aggregate re-sponse at the regional, industry and national level to the myriad ofadjustment decisions made at the business or individual level.There have been at least ten national rural structural adjustmentschemes since the 1930s, each building upon the knowledgegained from those that came before them (McColl and Young,2005) but most structural change in rural industries Australia isautonomous (undertaken by the farm business without externalassistance) (Cockfield and Botterill, 2006).

A number of hypotheses related to structural adjustment in therice industry were tested using regression modelling. The hypoth-eses include that water shortages will result in: an increase in farmsizes to make a viable living; decreases in the total rice area; thesubstitution of rice with dryland wheat while increasing the totalfarm area; water trading in low water availability years whenprices are high to support income; and changes in off-farm incomeand financial impact. Limited data availability on key factors suchas water use volumes and trading activity, and for water chargesand other costs incurred in the use of irrigation water and lengthof data sets (only last 20 years of data), restricted the scope ofthe modelling.

The Australian Bureau of Agricultural and Resource Economics(ABARE) Farm Survey data was used for the analysis. The detailsof the survey and methods are available at http://www.abare.go-v.au/publications_html/surveys/surveys/surveys.html. This surveyprovides a broad range of information on the economic perfor-mance of farm business units in the rural sector since 1990. Infor-mation collected from each farm in the survey includes details ofarea sown, area harvested, quantity produced, quantity sold, grossreceipts and the volume of water used for each crop (with drylandand irrigated crops identified separately). Unit prices received perhectare were calculated for each crop from these data. Apart fromthe ABARE farm survey, there were data from the Australian Bu-reau of Statistics (ABS), rice industry publications and informantsfrom organisations such as the Rice Growers’ Association (RGA)of Australia and SunRice, Blue Ribbon Seed & Pulse Exporters andirrigation companies.

3.2. Regional Computable General Equilibrium modelling

ACIL Tasman’s CGE model, Tasman Global, was used to estimatethe regional level economic impacts of the different scenarios. Tas-man Global is an iterative dynamic model that estimates relation-ships between variables at different points in time. This is incontrast to comparative static models, which compare two equilib-ria (one before a policy change and one following). A model such asTasman Global is beneficial when analysing issues where both thetiming of adjustments and the adjustment paths that economiesfollow are relevant. The model provides a representation of thewhole economy, set in a national and international trading context,starting with individual markets, producers and consumers andbuilding up the system via demands and production from eachcomponent. When an economic shock or change is applied to themodel, each of the markets adjusts according to the set of behav-ioural parameters that are underpinned by economic theory. Akey advantage of CGE models is that they capture both the directand indirect impacts of economic changes while taking accountof economic constraints (such as land and labour supply). Anotheradvantage of CGE models is that they are able to capture a widerange of economic impacts across a wide range of industries in asingle consistent framework that enables rigorous assessment ofa range of policy scenarios.

For this analysis the model has been aggregated:

� Three levels, namely the Southern Rice region, the Rest of Aus-tralia, and the Total Australia.� 34 industries/commodities to provide the maximum detail pos-

sible for the key industries related to this analysis.

The economic impacts of an event, project or policy are oftensummarised by quoting the change in Gross Domestic Product(GDP), which is a measure of the economic output of the Australianeconomy. At the state level, the GDP equivalent is called GSP (GrossState Product) while changes at the regional level are called GRP(Gross Regional Product). (To reduce the potential confusion withthe various acronyms, the term ‘economic output’ is used in thediscussion of the results.) Although changes in real GDP are usefulmeasures for estimating how much the output of an economy maychange, changes in the real income of a region are more importantsince they provide an indication of the change in economic welfareof the residents. Indeed, it is possible that real economic output canincrease with no, or possibly negative, changes in real income. InTasman Global, changes in real income at the national level are syn-onymous with real gross national disposable incomes (RGNDI) asreported by the ABS.

To eliminate the impact of nominal price movements, economicvariables such as the change in economic output are reported asdeviations from their real rather than nominal values. Similarly,all aspects not directly related to the assumed changes in the riceindustry have been kept constant across all the scenarios (includ-ing, for example, productivity growth, national population and alldemand and supply elasticities).

3.3. Rice water availability scenarios

Three scenarios were developed based on the evidence of farm-level adjustments, discussions with rice industry informants andkey researchers and informed by climate change trends and gov-ernments water policies.

� Baseline scenario: For the baseline scenario, the 2004 wateravailability was selected. This is the ‘no rice reduction’ sce-nario. Over the last decade water availability fluctuated sig-nificantly in the Riverina but the baseline water availabilityscenario assumes that irrigators operate close to historicallevels of production with average water availability (50%allocation).� Scenario 1 – Future period 2030: This is based on CSIRO

(2008) projections, whereby under the best estimates andfuture development scenario, runoff will decrease by 11%. Afurther reduction in water availability for water recoveryfor environmental purposes as a result of a new MDB Planis assumed, for a total reduction of 15%, compared to thebaseline scenario (50% water availability). Using a linerregression model of rice areas as a function of water avail-ability (see Fig. 2a), a 15% reduction in water availability willreduce the rice area by about 18,500 ha. For simplicity, is itassumed that the same area will be converted to irrigatedand dryland wheat – 10,000 ha to irrigated wheat, whichrequires less water than rice(with 1–2 irrigations), and8500 ha to dryland wheat.� Scenario 2 – Future period 2070: For the future period of 2070,

based on projections from CSIRO (2008), a 27% reduction inwater availability is predicted. Assuming a further reductionin water availability for water recovery for environmental pur-poses as a result of a new MDB Plan, it is expected that a totalreduction of 30% may occur, compared to the baseline scenario.Using the linear regression model (Fig. 2a) a 30% reduction in

38 S. Mushtaq et al. / Agricultural Systems 123 (2014) 34–42

water availability is expected to reduce the rice area by about37,200 ha, which will be converted to irrigated (17,500 ha)and dryland wheat (20,000 ha).

Furthermore, the average rice yield is assumed to return, as astarting point, from its recent high to its long term trend of 9 t/ha. Then subsequent productivity improvements of 0.4% a year(equal to the rate over the past 20 years) are assumed to occur suchthat the average rice yield is 9.7 t/ha by 2030 and 11.3 t/ha by2070.

4. Results and discussions

4.1. Characteristics and drivers of structural adjustment in rice farms

Rice farmers are continually faced with pressures to adjust tochanging environmental, climatic and economic conditions. Theexternal drivers of structural adjustment in Australian agricultureare well known and include declining terms of trade, technologyinduced productivity changes, and productivity changes associatedwith changes in the natural resource base including climate change(Hyder Consulting, 2010). However, water and non-water relatedkey pressure points relevant to structural adjustment have beenidentified (Frontier Economics, 2010).

The main elements of the structural adjustments over the last10 years in rice growing areas as observed by Hyder Consulting(2010), Sanders et al. (2010) and Marsden Jacob Associates et al.(2010) are:

� Rice farmers have increased farm size. This includes the pur-chase of additional land (both dryland and irrigated land).� During low water availability years, rice farmers sought other

sources of income and decreased the area of rice crops (and insome instances, farmers did not grow rice at all). Sources ofoff-farm income have included investments in the share mar-ket, off-farm employment, contract sowing and harvesting andoperating a produce store.� Water selling, mainly of temporary water allocations, was a key

tactical response during low water availability years.� Changes in crop mixes and less reliance water intensive crops.

Alternative low water intensive crops, including cereals suchas wheat and barley, are generally planted during winter.� Additionally, Marsden Jacob Associates et al. (2010) found in a

survey that, with reductions of 20% in water availability relativeto the long-term average, a quarter of rice farmers would exitand a further quarter would change their activity, but halfwould not change their activities. This water reduction wouldalso increase the level of borrowing by about 20%.

4.2. Empirical evidence of structural change in rice farming

In this section, we use the production data to test the proposi-tion that rice production is sensitive to water availability.

Farm sizes, irrigated area and rice area: Rice farms are more flex-ible than purely dry land farms as the operators can reduce ricearea and shift to less water intensive crops. It is hypothesised thatincreased water scarcity in the Riverina has resulted in an increasein farm size while reducing total rice and irrigated area. Fig. 4a andb, and the accompanying regressions on rice area, total irrigatedarea and total area under farm operation support the hypothesis.The average total farm area is increasing significantly, which couldbe attributed to the decreasing number of farms (including ricefarms – see Fig. 3b).

Crop switching: rice to wheat: An assessment of crop switching inthe Riverina (as shown in Fig. 5) indicates that farmers are

continuously adapting to climate variability and climate change(and consequent reduced water availability) through changingcrop mixes and farm restructuring. The regression results indicatethat rice area per farm is generally declining and being replaced bywinter dryland wheat. The reduction in rice will have broader im-pacts, for example, rice industry mills and storage depots were left‘stranded’ and were shut down as a result of lower level of rice sup-ply during 2007–08.

Rice area and water trading: Bjornlund and McKay (1999)showed that water markets facilitate farm adjustment and struc-tural change within the irrigation industry. To maintain a liveableincome during drought periods, when water allocations and lowand prices are relatively high, some farmers adjust their operationsby temporarily trading water to other growers to take advantage ofhigher water prices. Fig. 6 shows the relationship of water tradingto rice area in the Coleambally Irrigation Area (CIA), Riverina(NSW); rice area is significantly influenced by water trade-in. How-ever, over the last 5 years CIA is trading-out water to satisfy the de-mand of high value crops. In some instances, rice farmers purchasetemporary groundwater in order to continue growing relativelywater intensive crops, including rice (Sanders et al., 2010). Thiscould perhaps be to satisfy forward contracts.

Rice area and price: Rice prices provide important signals tofarmers to potentially make adjustments to their farming opera-tion to that maintain or improve their profitability. The relation-ship between rice area and price was modelled using change inrice area against previous year and changes in lagged changes inrice prices with previous year (Fig. 7). The relationship was notfound to be significant but the positive coefficient of lagged riceprice shows a direct relationship with rice area, and indicates thatprice does influence rice area. This finding was consistent withConnor et al. (2012) who also find statistically insignificant rela-tionships between observed land area and prices. This result isnot surprising given the limited variation in prices. If however,water becomes scarce and therefore more expensive, either in ac-tual or opportunity costs, this suggests that producers will stillconsider rice if and when the price is high enough.

Financial impact: The reductions in the available water have sig-nificantly influenced farm business profit and overall family in-come. Fig. 8 indicates that farm businesses are no longer makingeconomic profits. Farmers have managed to sustain family incomethrough off-farm activities but a large decline in agricultural profitis reducing overall family income. During 2007–2008, under extre-mely low water availability (<10% water allocation), overall aver-age family income per farm and farm business profit was�$27,893 and �$109,536, respectively. Clearly, this is not sustain-able in the long-run and, when considering future climate change,considerable adjustment (in terms of cropping pattern or off-farmactivities) will be required to sustain reasonable family income.Alternatively, relocation of rice production could be an option.

4.3. Regional economic impact assessment through CGE model

The macroeconomic impact of water policies and climatechange impacts and the subsequent structural adjustment, are pre-sented in terms of changes in real economic output, real incomeand changes in employment. For these results, the initial impactof the scenario relates to the assumed changes in agricultural out-put in the southern rice region. These changes then affect other re-gions’ total economic output with changes in the demand forlabour and capital. Capital is naturally mobile (albeit sluggishly)between all regions based on changes in the rates of return, while,labour is assumed to be fully mobile. Consequently, the supply offactors in the Rest of Australia is also impacted by the changes indemand in the Riverina regions. At the national level, the adjust-ments in the Rest of Australia act to reduce the magnitude of the

Fig. 4. Water availability, rice Area, total irrigated area and area operated (per farm) in Riverina, NSW, Australia.

Fig. 5. Water allocation and wheat and rice production by area per farm in Riverinafrom 1992 to 2009, NSW, Australia.

Fig. 6. Relationship of net water trading (water trading in-water trading out) andrice area in the Coleambally Irrigation Area in Riverina, NSW, Australia.

Fig. 7. Relationship of rice area (per farm) to price.

Fig. 8. Relationship of water availability and farm business profit and total familyincome, Riverina, NSW, Australia.

S. Mushtaq et al. / Agricultural Systems 123 (2014) 34–42 39

aggregate impacts experienced in the southern rice region(Riverina).

The macroeconomic results from both scenarios are discussedsimultaneously for clearer comparison of regional impact of waterpolicy and climate change.

Real economic output: Table 1 summarises the projected changesin real economic output and real income for each region under

scenario 1 and 2 while Figs. 9–11 show the year on year changesin real outputs, real income and employment.

The loss of water and consequent switching away from rice towheat is projected to change the real economic output of theSouthern Rice region by:

Table 1Cumulative change in real economic output and real income under scenario 1 and 2, relative to the reference case (in 2010–11 terms).

Real economic outputa Real incomeb

Scenario 1: 2029–30 Scenario 2: 2069–70 NPV (2010–11 to 2069–70) Scenario 1: 2029–30 Scenario 2: 2069–70 NPV (2010–11 to 2069–70)2010–11$m 2010–11$m 2010–11$m 2010–11$m 2010–11$m 2010–11$m

Southern Rice �44 �135 �896 �71 �155 �1266Rest of Australia 29 118 682 44 125 900Total Australia �15 �17 �215 �27 �30 �366

Notes: Totals may not add due to rounding. NPV = Net Present Value (calculated using a 4% real discount rate). It should be noted that the NPV calculation only includes theimpacts through to 2069–70 even though the impacts will be likely to continue producing beyond this artificial time horizon.

a The term ‘real economic output’ is used instead of Gross Regional Product (GRP). The sum of the GRP of all three regions equals the change in Australian GDP.b Real income for Australia is synonymous with real gross national disposable income (RGNDI) as used by the ABS. In this modelling real income is a measure of the change

in economic welfare.

Fig. 9. Projected changes in real economic output, relative to the reference case(2010–11 dollars).

Fig. 10. Projected changes in real income, relative to the reference case (2010–11dollars).

Fig. 11. Projected changes in employment level, relative to the reference case.

40 S. Mushtaq et al. / Agricultural Systems 123 (2014) 34–42

� �$44 million in 2029–30 (in 2010–11 terms),� �$135 million in 2069–70,� A cumulative total of �$896 million over the 59 years to 2069–

70 (using a four per cent real discount rate).

In a region with around 295,000 people, this is a significantchange, with the change by 2069–70 representing an averagedecrease in real economic output of around $550 per person pro-jected to be living in the Southern Rice at this time.

Nationally, employment has been assumed to remain constantbetween the scenarios, hence there is a net movement of labourfrom the Southern Rice region to the Rest of Australia. Conse-quently, it is projected that there will be an offsetting impact on

the Rest of Australia as the supplies of scarce labour and capital(but not land or natural resources) are increased.

At the national level, real economic output (or real GDP) is pro-jected to change by:

� �$15 million in 2029–30 (in 2010–11 terms),� �$17 million in 2069–70 (in 2010–11 terms),� A cumulative total of �$215 million in net present value terms

over the 59 years to 2069–70 (using a four per cent real dis-count rate).

Real income: As the Southern Rice region exports almost all of itsagriculture production, the changes in agriculture exports has afurther effect on the region’s terms of trade (of the same sign). Con-sequently the projected change in real income is greater than theprojected change in real economic output.

The real income (in 2010–11 terms) is projected to change by(See Table 1):

� �$71 million in 2029–30 and by �$155 million in 2069–70 inthe Southern Rice region,� $44 million in 2029–30 and by $125 million in 2069–70 in the

Rest of Australia,� A national total of �$27 million in 2029–30 and �$30 million in

2069–70.

As with the projected changes in real economic output, theseare significant at the regional level. In the Southern Rice region,the projected change in real income in 2069–70 is equivalent toan average decrease of over $600 per person living in the regionat that time. At the national level, real income is noticeably lowerthan real economic output highlighting the lower total return tofactors resulting from the loss of highly productive land and

S. Mushtaq et al. / Agricultural Systems 123 (2014) 34–42 41

associated purchasing power of Australian output. Consequently,the projected changes in water availability and consequent pro-duction of agriculture commodities essentially results in a region-ally significant reallocation of resources and wealth around thenation with a small impact on the total output or wealth of Austra-lia as a whole.

Employment: The structural adjustments as a result of climatechange and water policy will reallocate resources from the South-ern Rice to the rest of Australia, which is evident from the pro-jected changes in employment shown in Fig. 11. Southern Rice isexpected to lose around 460 jobs, relative to the reference case,with all of the people filling these jobs assumed to be moving tothe rest of Australia. In fact, the losses are so high that total popu-lation in 2069–70 is around 10% lower than in 2012.

5. Conclusions and policy implication

In managing the impact of climate change and previous waterreforms and shortages, the rice industry and rice growers haveproved adaptable. At an industry level, the rice processing andmarketing organisations have global partnerships that insure acontinuous supply of rice during critical periods. At farm level, dur-ing the low water availability years, rice growers trade water as atactical response and shift to low water intensive or dry land farm-ing. Rice farmers are comparatively diversified already and so theywill be able to relatively easily change production systems but theloss of water will reduce the net number of farm businesses in theRiverina (and Australia), because of the additional pressures toadopt less intensive and larger-scale farming.

Climate change and on-going policy reform will reduce theaverage area of rice production as water allocation reductions of25–35% cannot be offset by productivity gains given current pro-duction techniques and increasing temperatures and rainfall vari-ability. The reduction in output will also reduce net exports andhave some impact on GDP, especially because of the extensive va-lue-adding that occurs in Australia. The increase in wheat produc-tion will not compensate for the reduction in the higher valuecommodity. This will result in a cost to the economy over andabove the direct cost of buying back the environmental water.The rice supply chain could still be run from Australia, but moreof it would be located overseas, to cope with the reduction indomestic production. There could be very large effects on some re-gional economies, especially if one or more mills close or operateonly occasionally, as the employment effects multiply throughthe community. This study has not taken account of thresholdeffects, such as school or service closures, which may additionallyaffect some towns.

There is some interest within the industry and from potentialnew corporate entrants in the relocation of some rice productionto the north. However, lack of suitable varieties that would sustainAustralia‘s market niche, competition with existing sugarcane land,lack of processing infrastructure, pest and disease problems andconcern about local reactions to land use change could pose poten-tial constraints of such relocations.

In regard to the policy implications of this study, the findingsraise some questions for governments as to whether or not theyshould provide additional support to industry in terms of infra-structure investment and structural adjustment to manage the im-pact of on-going water reduction and climate change. The threemain arguments for support would be: cushioning the impactson the national economy of reducing southern production; helpingto support the maintenance of rice processing infrastructure inAustralia through local value-adding; and providing a boost to a re-gional economy. On the other hand, they could treat climatechange as an external factor which incurs no state obligation and

water scarcity as resulting in the appropriate prices, given the pre-viously subsidised public irrigation schemes. With these assump-tions and the thought that there are adjustments in other regionsthat limit the national economic impacts, there are arguments forno or little government intervention.

Acknowledgements

This project was conducted with funding from the Departmentof Agriculture, Fisheries and Forestry (DAFF), Canberra. We are ex-tremely grateful to the many people who have contributed in avariety of ways to this project, including key rice industry.

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