Food Security 3 — Agricultural productivity growth

At the recent ABARES Outlook 2014 conference, there was an excellent presentation by Ken Ash of the OECD on Policies to Enhance Agricultural Productivity Growth.

One particularly interesting chart in Ash's presentation showed the contributions to growth in agricultural production from various factors. It demonstrates that:

• output growth from the 1960s to the 1980s was driven by increased use of inputs other than land and water (factors such as capital and fertilisers)

whereas:

• output growth in the 1990s and 2000s came mainly from improvements in efficiency (total factor productivity growth)

Interestingly, the expanded use of land and water contributed only around 20 per cent of increased agricultural production over the period.

Another of Ash's charts shows the OECD's projections for water use by sector. In stark contrast to Cribb's forecast (see separate blog today, Food Security 1), the OECD sees a modest decline in agriculture's water use of about 10 per cent by 2050 (or a quarter per cent reduction annually). This reflects a shift in water consumption to higher value uses—particularly manufacturing.

















I would expect the impact of this shift in water out of agriculture to be relatively small (and possibly even positive) because:

• irrigation represents a small proportion of total water use by agriculture—the largest source of water by far (even for much irrigated agriculture) is rainfall

• farmers will trade (relatively higher priced) water for (relatively lower priced) other factor inputs (e.g. capital)—by way of example, we saw the capital-intensification of Australian irrigation as one response to the Millennium drought

• capital-intensification would see more effective watering and significantly greater output per unit of water used

Capital-intensification will occur more rapidly if farmers have secure property rights over the water they use. Intensification will still occur in the absence of secure water rights, but at a much slower rate because the ability of farmers to sell the water they use to higher value uses releases capital they can use to invest in other factors of production.

Of course, the focus of Ash's presentation was on the importance of getting policies right in order to support more robust agricultural productivity growth—essentially, getting governments to stop distorting agricultural markets and (in doing so) encouraging sustainability in farming practices.