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Australian Wheat Output May Widen by Ray Brindal Wall Street Journal, December 12, 2005

CANBERRA, Australia -- Australian wheat production will continue to grow, fueled by mounting Asian demand as personal incomes in the region rise and diets become more Westernized, industry participants say.

Productivity growth will support the increased output, in part reflecting the commercial application of the A$250 million (US$188 million) that Australia plows into grains research and development every year.

Australia's 2005 crop, harvested mostly in November and December, looks like it will come in at about 24 million metric tons. But in the long term, production could grow to 40 million tons a year or more, according to Peter Reading, managing director of industry- and government-funded Grains Research & Development Corp.

"There's probably twice the production capacity in Australia without too much trouble," he said, although that figure could take several decades to reach.

Australian wheat production is in a strong uptrend. Annual output in the 1980s averaged 15 million tons; it was 17.4 million tons in the 1990s, and already this decade it has averaged 20.5 million tons, which includes just 10.4 million tons from the drought-affected 2002-03 crop. The biggest crop to date was 25.7 million tons in 2003-04.

After domestic demand of about 5.5 million tons is met, the balance of output is available for export, sometimes earning more than A$4.5 billion a year. However, growing domestic use of grain in Australia -- in the livestock industry and for ethanol production -- means not all of the increased output in coming years will be exported.

In some years, Australia provides more than 15% of the world wheat trade, which in recent years has averaged about 105 million tons. Australia competes directly with the U.S. on the global wheat market.

David Ginns, chief operating officer of grower lobby Grains Council of Australia, says the long-term global trend for wheat production is upward, and Australia is part of that. Global production averaged 509 million tons in the 1980s, rising to 571 million tons in the 1990s; so far this decade it has averaged 580 million tons.

Amid all the optimism, however, wheat grower Doug Clarke sounds a note of caution. Mr. Clarke farms about 4,000 hectares (9,880 acres) and is president of the grain section of the Western Australian Farmers' Federation, a lobby-services concern. He believes growers will only lift production if they can be guaranteed higher prices. And he worries that a relentless cost-price squeeze, compounded over the past year by surging energy prices, means "it's coming up to crunch time" for many in the industry.

"If the price stays low, I can't see" production growing, he says. "There's just not enough margin at these low prices," he adds, estimating the industry's return on capital has dropped to just 2% to 5%.

Mr. Clarke has experimented with buying more land to improve economies of scale, a broader trend that Mr. Reading, of the Grains Research & Development Corp., says has helped boost national output in recent decades. The trend to larger farms has been boosted by a decline in the wool industry over the past 15 years, resulting in more areas devoted to cropping.

But Mr. Clarke subsequently decided to sell off 1,200 hectares; he had difficulty servicing loans on his expanded holdings and found it hard to find and keep labor. Australian unemployment is near a 30-year low at just over 5%. "You tend to come back to what you can manage," Mr. Clarke says.

Mr. Reading says productivity growth has been an important factor boosting Australian wheat output, along with strong overseas demand for Australia's hard white milling wheat. Total factor productivity growth, or the increase in total output over total inputs, has averaged 3.2% per year for 20 years, about half of which comes from research and development, he estimates. This compares with total factor productivity growth in Australian industry as a whole of about 1% a year, he says.

In the Western Australian grains industry, total annual factor productivity growth has been "even more phenomenal" at about 4.7%, Mr. Reading says.

Some of the growth in Western Australia stems from widespread adoption of reduced tillage technologies, which enable sowing of winter crops from the opening rains in autumn, increasing potential yields.

A decade ago, total winter grains production of 10 million tons was seen as an excellent crop in Western Australia, but in 2003-04, around 15 million tons were produced. "So in a very short period of time, they have basically increased production by 50%," Mr. Reading says.