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13. The Sheep Production Sector in the Australian Economy

Euan Fleming

Learning objectivesAt the end of this topic, in respect of the sheep enterprise in Australia you should:

Understand how it has developed Have a sound appreciation of its role in the economy Be able to identify the market forces that have brought about pressures for its economic

change Have an understanding of its economic development and general trends in the Australian

agricultural economy Be able to explain the nature of its structural change and assess measures designed to

facilitate adjustment

Key terms and conceptsAustralian economy, economic development, farmers’ terms of trade; productivity change, sheep industry, structural adjustment

Introduction to the topicThis topic is directed to an analysis of the sheep enterprise in the Australian economy. The main purpose is to develop an understanding of the processes of change in the enterprise as economic development has occurred. The main topics to be covered are the:

1. A brief history of the economic development of the sheep industry2. The structure of the sheep economy3. Factors influencing sheep enterprise performance4. Factors leading to a need for structural adjustment in the sheep enterprise5. Economic pressures facing sheep producers to adjust6. Rural adjustment policies in Australia.

13.1 A brief history of the economic development of the sheep industry

Contributions by the sheep Industry to economic developmentThe sheep industry has made a major contribution to economic development in Australia since European settlement. This contribution has been in four main ways:

1. Production effect, through the contribution of wool, sheepmeat and live sheep output to gross domestic product

2. Employment effect, as employers of labour including self-employed member of the farm families

3. Capital effect, as a supplier of economic surplus to the rest of the economy4. Demand effect, where families on sheep properties have been purchasers of farm inputs and

household goods.While all four contributions continue, they have diminished over time.

© 2009 The Australian Wool Education Trust licensee for educational activities University of New England ANPR350/450 - 13 - 1

The evolution of sheep farming in AustraliaExploiting comparative advantagePhysical conditions in rural areas have favoured certain broadacre activities, such as wool, wheat and beef production. Farmers have concentrated on grazing activities in which they have had a comparative advantage. The activities chosen were those best suited to managing the risks associated with production and marketing, saving on labour resources, and avoiding the need for large amounts of capital expenditure. In the early period of European settlement, limited labour supply and high land-labour ratios encouraged those industries that did not rely on intensive labour use, and encouraged labour-saving production methods that were suited to pastoral activity rather than the more intensive activities found on small farms in European agriculture at the time. Capital supply was initially restricted, encouraging the use of on-farm capital accumulation, such as post-and-rail fences cut from timber on the property. Wool production was the most prominent pastoral activity, and remains an important rural industry today.

Sheep production was particularly suitable for specialisation in large tracts of the country given the nature of exogenous factors such as soil, climate, vegetation, location, pests and diseases (Williams 1973). Characteristics of 19th century and 20th century sheep farming have shaped the modern sheep industry in Australia in terms of the direction of change and rate of growth. In the early years of European settlement, the suitability of export products for storage and transport was crucial given the long period of shipment to export markets in Europe and the limited size of the domestic market. Its storability and high value-weight ratio made wool especially suitable as an export product.

From an export viewpoint, comparative advantage is a ‘situation in which country 1 has an advantage over country 2 in producing a good because the cost of producing the good in 1, relative to the cost of producing other goods in 1, is lower than the cost of producing the good in 2, relative to the cost of producing other goods in 2’ (Pindyck and Rubinfeld 2001, p. 664). Consider the following example of wool and manufactures in Australian economic history, illustrated in Figure 1. Without the possibility of international trade, production would be situated at point A where the isorevenue line, RDRD, is tangential to the production possibilities frontier for wool and manufactures. This domestic isorevenue line reflects the relative domestic prices of wool and manufactures, given that there would have been limited domestic demand for wool. An amount of 0W1 of wool and 0M1 of manufactures would be produced, providing a level of social welfare indicated by the curve, SW1.

With growing demand for wool in Europe, the international price would have risen relative to the price of manufactures. Such a situation is reflected by the international isorevenue curve, R IRI, opening up the prospect of a lucrative wool export industry. There would have been a movement around the production possibilities frontier from A to B to exploit the comparative advantage in wool production. At point B, where the international isorevenue curve, RIRI, is tangential to the production possibilities frontier, wool production would have increased from 0W1 to 0W2 while the production of manufactures would have declined from 0M1 to 0M2. This allows domestic consumption to exceed the constraints imposed by the production possibilities frontier, enabling consumption of 0W2’ and 0M2’ at point C on a higher social welfare function, SW2. Economic development in Australia was accelerated by exploiting this comparative advantage in wool production.

While the comparative advantage in wool production had its roots in a set of factors and resources available for exploitation, historical events that emerged from the time of early European settlement also played a role. Most of the natural advantages present a century or two ago remain important today. But improved technologies, institutional factors and markets have grown in importance in shaping the Australian agricultural sector and the sheep industry’s position in it.

Even as recently as 1958/59, 37 per cent of the gross value of agricultural output was produced in the sheep industry and around one-third of this value was derived from wool and sheepskins (BAE 1983, p. 39). The combined output of the sheep, wheat, dairy and beef industries contributed about 70 per cent of the gross value of agricultural output.

13 - 2 - ANPR350/450 © 2009 The Australian Wool Education Trust licensee for educational activities University of New England

Figure 13.1. Exploiting the comparative advantage in wool production in Australia.Source: Fleming, (2007).

TechnologyThe increased importance of technological change has been due to the facts that (a) labour has become a relatively more expensive resource, encouraging labour substitution, and (b) further significant extension of farmland area is no longer possible. The area of farmland continued to expand until the mid-1970s when the limits to farmland expansion were reached. It has since declined to an area less than that which existed at the beginning of the 1960s. One response to the land constraint has been to intensify land use by switching from pastoral activities to cropping, with implications for wool production. The area used for cropping increased from 9.3 million hectares in 1962/63 to 24.1 million hectares in 2007/08 (ABARE 2008, p. 25). The area sown to pasture has declined and greater attention is now paid by farmers to mixed farming practices.

Shortages of capital in the early period of European settlement restricted the purchase of capital items embodying improved technologies. But the gradual increases in investment capital, primarily from the United Kingdom, and recognition of the need for a less exploitative approach to farm production (Peel 1973, BAE 1983), led to the gradual adoption of improved technologies.

For much of the period of European settlement, the broadacre industries strengthened their pre-eminent positions in Australian agriculture through technological improvements, as farmers and researchers improved their understanding of the environmental conditions in which production took place. Peel (1973, pp. 66-71) provides a number of examples of the early application of science and technology to improve sheep production in the areas of pest and disease control, wool production, and trace element nutrition in plants and animals.

Marketing factorsThe main marketing factors that led to specialisation in a limited number of major enterprises have been market access, product prices and relative factor prices. As mentioned above, export-oriented industries expanded because of the small domestic market. With a limited domestic market in the early period of European settlement, the industries best suited for expansion were those with strong export demand. The wool industry was the most obvious beneficiary in this respect, and attention shifted from sheepmeat production for the domestic market to wool production for export, particularly to the United Kingdom when the demand for fine wool expanded rapidly from the 1830s (Peel 1973, p. 44-45). Since that period, the fortunes of the wool industry have waxed and waned in response to fluctuations in wool prices. Changes in product prices have brought about shifts in the product mix. Examples of response to market incentives at either end of the past 160 years are


the shifts in production from wool to tallow in the 1840s (Peel 1973, p. 44-45) and, recently, the shift from Merino wool production to dual-purpose and lamb production. In between these events, market fluctuations have occurred such as the fall in the price of wool after 1925 and the Korean War-induced boom in wool prices and production in 1950/51 (Peel 1973, pp. 62-66).

Institutional factorsInstitutional changes have had marked influences on Australian agriculture in the areas of policy making, international agreements and farm organisation. An early example of the effect of a policy change was the removal of interstate barriers to trade and import duties that had encouraged some intensive farming activities. In terms of international agreements, the 1932 Ottawa Trade Agreement granted preferential treatment to Australian exporters to United Kingdom, increasing sheep exports.

Various attempts at closer settlement schemes also influenced the product mix and nature of the family farm. These attempts were mostly to the detriment of grazing industries in the long term (Peel 1973, pp. 58-66). Closer settlement schemes fostered some smaller specialised farming activities, and caused land use to change from sheep production and other grazing activities to intensive farming, such as horticulture and dairying, and cropping. Some farmers in these schemes still engaged in sheep production in areas of southern Australia, but many later suffered financial difficulties because of their small farm size.

The early expansion of sheep production units took place primarily through the extension into new areas of land through both planned and unplanned settlement. By European standards, the properties established were large in area. Even so, the family farm emerged as the dominant form of farm organisation in most areas although corporate development took place in some parts of the pastoral zone. By the end of the 1970s, the corporatisation of grazing enterprises had not made much headway. BAE (1983, p. 36) reported that 4.4 per cent, 6.7 per cent and 5.0 per cent of sheep-cereal grains, sheep-beef and sheep farms, respectively, were public or private companies.

Institutional influences on enterprise selection have changed over time. Historically, they included the traditional links to the United Kingdom that served as the major market for agricultural exports. For example, Peel (1973, pp. 63-64) reported that the Ottawa Agreement of 1932 ‘assured outlet in the British market for set quotas of Australian meat and this provided a stabilizing influence on the trade and permitted confidence in meat production’ including lamb and mutton.

The family farm has remained an important institution in sheep farming for good reasons. Sturgess (1973, pp. 435-436) outlined a number of attributes of the family farm that made it suitable to specialisation in grazing enterprises and, it could be added, the management of a sheep enterprise in particular:

The inextricable links between production, household labour supply and domestic consumption provided flexibility in decision making and labour use that helped farm families to manage the uncertainties inherent in sheep production.

Family labour supply was well suited to the multitude of technical tasks that needed to be accomplished on grazing properties.

Skills needed for these tasks could be learnt informally through the family farm system in the absence of extensive formal training opportunities.

Social attitudes in rural Australia influenced managerial decisions about which enterprises to operate in livestock industries, associated with the prestige of being a grazier as opposed to a farmer.

These influences have tended to wane over recent decades. In particular, the growing need for management skills as opposed to technical skills has placed a much higher priority on the need for formal training to be a successful grazier.

Institutional change has increased in importance as the role of government in agriculture has become more prominent and the nature of input supply chains have changed. As mentioned in Topic 2, services inputs in sheep production have grown in importance relative to inputs of materials. Expansion of institutional services such as credit, input supply and transport has influenced farmers’ capacity to expand their output. More recently, the withdrawal of some services


from smaller rural towns has had an adverse impact on the sheep farming activities of smaller, poorer farmers who find it less easy to obtain these services from more distant large rural centres.The entry of United Kingdom into the European Economic Community in the 1970s (now European Union) led to a contraction of markets for some major exports such as sheepmeat. The conclusion of the GATT Uruguay Round and subsequent establishment of the World Trade Organisation had some beneficial effects for Australian agriculture but has had little effect on the sheep industry.

Specialisation in sheep production versus diversification in the agricultural sectorSome agroclimatic regions are more specialised than others in input use and outputs produced. In general, production possibilities expand as the length of the growing season increases (Sturgess 1973, p. 437). As technologies and markets have developed in other agricultural industries, production possibilities have expanded and there is now a much broader enterprise mix in Australian agriculture.

Diversification related to the sheep industry has proved profitable in two respects. First, there is evidence of synergies between wool, dual-purpose and lamb activities on sheep farms (Fleming et al. 2009). Second, there is also evidence of scope economies between sheep and grain enterprises, in particular, and between sheep and beef enterprises (Villano et al. 2006).

Structural changeStructural change in the sheep industry has taken place in two ways:

changes in the structure of the sheep farm itself changes in the relations between the sheep farm and its environment, covering the rest of the

Australian economy and the world economy.

As in all developed countries, the relative contributions of agriculture to gross domestic product (GDP) and employment have declined over time as other economic sectors have expanded. This is an inherent feature of economic growth, as consumers demand more products with higher income elasticities of demand, and has been characteristic of the sheep industry (Anderson 1987).

In 1952, agriculture accounted for 18 per cent of GDP. By 1974/75, this proportion had declined more than four-fold to 3.6 per cent. Figure 13.2 shows that this decline in relative contribution to GDP by farm output has continued at a slow and erratic rate, reaching a historic low of 2.03 per cent in 2006/07 before rising slightly to 2.10 per cent in 2007/08 (see Figure 13.2). Other rural output (forestry, fishing and hunting) has remained fairly static at around 0.3 per cent of GDP. The most remarkable change in product mix in Australian agriculture has been the decline in relative contribution by wool to the value of farm output, from 25 per cent in 1960 to 7 per cent in 1999 (ABARE 2006). Farm sector contribution to employment sank to 2.9 per cent in 2008, its lowest ever level (ABARE 2008, p. 26).


Figure 13.2 Rural sector contributions to GDP in Australia, 1975/76 to 2007/08. Source: ABARE (2008, p. 1).

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The rate of decline in the number of sheep farms in Australia has been gradual but continuous, as has the rate of decline in the number of farms in agriculture in general. This trend is shown in Figure 13.3 where data beyond 2005 are excluded because of a change in farm definition from 2006. There have been no major fluctuations in numbers around this trend. A high proportion of farmers leaving sheep farming owned small farms. The rate of entry into sheep farming is low. Small entrants face higher risks than large entrants of subsequently leaving farming. Only a small proportion of farmers leaving a particular farm size category adjust into a different size category (ABARE 1997).

Figure 13.3 Number of farms in Australia, 1955/56 to 2004/05. Source: ABARE (2008, p. 25).

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As the number of sheep farms has been declining, the average farm size has been increasing. Average farm size for broadacre agriculture as a whole doubled between 1960 and 2000. Yet sheep numbers have declined dramatically, with the 2007/08 figure less than half the figure for 1988/89 following a recovery fuelled by higher wool prices in the latter part of the 1980s (see Figure 13.4). For the first time in decades, the number of sheep fell clearly below 100 million in 2005/06.


Figure 13.4 Number of sheep in Australia, 1959/60 to 2007/08. Source: ABARE (2008, p. 25).

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The proportion of the working population employed in sheep production also declined gradually in the second half of the 20th century. But the proportion of the working population employed in the farm sector as a whole fell more sharply than actual numbers, from around 10 per cent in the early 1960s to just 2.9 per cent in 2007/08. Figure 13.5 shows a decline in the number of people employed in the farm sector as a whole from 448 000 in 1960/61 to 310 000 in 2007/08. The rate of decline is similar for those working in the sheep industry and the rural sector as a whole. While specific data are not available for sheep enterprises, broadacre employment numbers (encompassing grains, sheep and beef cattle) fell from 229 500 in 1990/91 to around 60 per cent of that number (139 800) in 2005/06 (ABARE 2006, p. 107).

Figure 13.5 Working population in the farm sector, 1960/61 to 2007/08. Source: ABARE (2008, p. 26).

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The aggregate figures hide a major change in the nature of rural employment, shown in Figure 13.6 (which, unlike Figure 13.5, includes rural employment in forestry, fishing and hunting in addition to farm). The categories of self-employed and contributing family workers have experienced appreciable declines in numbers over the past four decades while the numbers of wage and salary earners have increased by 28 per cent.

Figure 13.6 Categories of rural employment, 1966/67 and 2007/08. Source: ABARE (2008, p. 26).

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Sheep output and productivityWool output has fluctuated since the mid-1960s, as shown in Figure 13.7. These fluctuations have mirrored changes in sheep numbers, with a precipitous decline from 1990. Wool output in 2007/08 was only 43 per cent of the output level reached in 1989/90. While increased output per DSE would have offset the decline in wool output to some extent, the shift in recent years to more lamb and dual-purpose production has played a role in accelerating the decline.

Figure 13.7 Greasy wool output in Australia, 1965/66 to 2007/08. Source: ABARE (2008, p. 24).

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While sheep industry exports remain important to the Australian economy, they have shrunk dramatically in relative importance as shown in Figure 13.8. The share of wool and sheepskins exports in total rural exports fluctuated around 20 per cent to 40 per cent between 1970/71 and 1994/95, but has since declined rapidly and has been hovering around 10 per cent in recent years.

Figure 13.8 Share of wool and sheepskin exports in total rural exports, 1970/71 to 2007/08. Source: ABARE (2008, p. 227).

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In contrast, the contribution of lamb output to agricultural output has increased in recent years. Figure 13.9 shows that lamb exports were in the doldrums for many years and remained at low levels until the mid-1990s. Since then, they have expanded substantially while the decline in domestic lamb consumption has been arrested.

Figure 13.9 Exports of lamb, 1981/82 to 2006/07. Source: ABARE (2008, p. 158).

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Improved production of lamb to meet consumer needs, an imaginative marketing campaign and the development of new export markets have been largely responsible for the upturn in prospects in the lamb industry over the past decade or so. In 1982, only 34.3 kt of lamb (carcass weight) were


exported, or 12 per cent of total production. By 2006-07, 192.6 kt of lamb were exported, accounting for 44 per cent of total production. The proportion of lamb supplied to the domestic consumption has decreased as a result, despite the fact that the amount of consumption increased from a low of 197.2 kt in 1995/96 to 246.5 kt in 2007/08 (ABARE 2008, p. 158).

Productivity increases have played a role in increasing lamb output (ABARE 2009, p. 29) or, in the case of the wool industry, slowing down the rate of decline in wool output arising from the decline in volume of inputs used in production. The productivity of a farm is defined as the ratio of the outputs to the inputs used in production. This is a measure of total factor productivity (TFP), which is the best measure of productivity change. Increases in TFP are derived from gains in:

technical efficiency scale efficiency technological change scope efficiency.

These concepts are explained in detail in Topic 3.

There have been many previous studies of the productivity changes in Australian agriculture and in the Australian sheep industry in particular. Table 1 contains some of the productivity growth figures relating to the Australian sheep industry reported by several researchers over the past few decades. Most authors (Lawrence and McKay 1980, Coelli and Kingwell 1991, Mullen and Cox 1996, Stoneham et al. 1999, ABARE 2004) used data published by the Australian Bureau of Agricultural and Resource Economics (ABARE). The estimated productivity changes they calculated relate to either the national, state or zone level for slightly different data periods.

Table 13.1 Some Productivity Measures Associated with the Australian Sheep Industry. Source: Villano et al. (2006).Author Data period Area Data Enterprise TFP

% p.a.Lawrence and McKay

1952/53 – 1976/77 Australia ABARE Sheep 2.9

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ABARE Wheat-sheep 2.7

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Australia ABARE Sheep

All sheep farms:prime lamb >20%prime lamb 5-20%prime lamb <5%Specialist sheep farms:prime lamb >20%prime lamb 5-20%prime lamb <5%

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Note the negative TFP rate estimated by Fraser and Hone (2001), but this estimate fails to adjust for unfavourable seasonal conditions towards the end of the period of analysis. Using a data set from the early 1950s to the early 1990s, the annual productivity growth on sheep-related enterprises on a national or state level was estimated to be between 2 per cent to 3 per cent. Once the time period was reduced by only considering productivity changes from 1977/78, the annual productivity growth estimates dropped to under 1 per cent on an Australia-wide basis. ABARE (2009, p. 28) published annual productivity growth estimates using a time period starting in 1977/78 and ending in 2006/07. Here, the national annual productivity growth estimate is 0.3 per cent. The national figure masks large regional differences in annual productivity growth estimates, ranging from 1.9 per cent in Queensland to 0 per cent in Victoria (Stoneham et al. 1999). More generally, ABARE (2009, p. 31) displays trends in the TFP index for sheep specialists between 1977/78 and 2006/07 that show substantial divergences between zones over time. By 2006/07, producers in the Pastoral Zone had outperformed those in the High Rainfall Zone, which, in turn, had performed better than those in the Wheat-Sheep Zone. As an indication of the extent of TFP fluctuations, the positions were reversed a couple of years earlier with producers in the Wheat-Sheep Zone ranked first and those in the Pastoral Zone ranked third. Fluctuations in TFP increased in magnitude over this period.

The decomposition of farms according to whether or not they are specialist sheep farms and according to the percentage of total farm receipts received from prime lamb production yield interesting divergences in annual productivity growth rates (ABARE 2004). Farms with sheep as one of their enterprises exhibit higher annual productivity growth than the specialist wool producers (prime lamb receipts less than 5 per cent) and specialist prime lamb producers (prime lamb receipts greater than 20 per cent). This higher rate presumably reflects the mixed-enterprise farmers’ ability to increase their farm productivity by increasing the allocation of resources to other more profitable enterprises on the farm (for example, crops or beef) at the expense of the sheep enterprises and also possibly to exploit scope economies (synergies between enterprises). The estimated annual productivity growth rates for the specialist wool producers (0.3 per cent) and prime lamb producers (0.8 per cent) since 1988 are disturbingly low. The rates are interesting for both specialist sheep farms and all sheep farms when prime lamb receipts lie between 5 per cent and 20 per cent. Farms that obtained from 5 per cent to 20 per cent of their receipts from prime lamb had a TFP growth of 2.8 per cent if they were sheep specialist farms and 2.1 per cent TFP growth for all sheep farms. These results suggest that there are productivity gains obtainable by changing the emphasis in the production of the possible outputs in the sheep enterprise.

TFP growth has generally been higher in cropping industries than in livestock industries. It has also been much higher on large farms than on small- and medium-sized farms. The main source of growth on sheep farms has been technological change through the adoption of improved production methods and better genetic material. As a result, the gap between best-practice and average sheep producers has been widening (Fleming et al. 2007).

Induced innovationThe purpose in this section is to review the evidence on technological change and input substitution in the sheep industry. First, some background is given on the theory of induced innovation, plus a summary of evidence in agriculture in Japan and USA.

The theory of induced innovation can be simply described in terms of the way in which R&D institutions respond to price incentives in the research work they undertake. The relative scarcities of factor endowments are assumed to influence the relative prices of these factors. Changes in relative scarcities induce R&D institutions to find ways to save on the increasingly scarce factor. This is achieved by researching into and developing improved production technologies. These improved technologies are typically embodied in capital inputs, and the factors for which capital is substituted are typically unimproved land and labour.

Two possible alternative paths of induced innovation could occur (apart from the substitution of capital for land and labour). Current inputs (materials and services), rather than capital, could substitute for land and/or labour. The technological change could be disembodied or embodied in ideas and information rather than physical items (see Topic 2).


The nature of land-saving induced innovation is shown in Figure 13.10. Let A be land, L be labour, PA be the price of land and PL be the price of labour. Hence, as land becomes relatively scarce over time (A/L ß), the price of land increases relative to the price of labour (PA/PL Ý). The shift inwards of isoquants from I1I1 to I2I2 (that is, reduction in inputs used to produce the same level of output) is biased towards increasing capital use while reducing land use.

Figure 13.10 The nature of isoquant shifts with induced innovation. Source: Fleming, (2007).

This is the type of situation that occurred in Japanese agriculture. Research was directed towards land-saving technologies that were biological-chemical processes to augment the limited supply of land. The term, ‘Green Revolution’, has been used in developing countries since the mid-1960s to describe a package of technologies (improved seed varieties, chemicals, fertiliser and water) that are land-saving. Capital and current inputs (mainly the latter) thus served as the intermediating factor, increasing the opportunities to substitute for the scarce factor, land. Without fixed capital and current inputs, the opportunities for factor substitution are very limited (that is, the elasticity of input substitution between land and labour is negligible).

The second example is US agriculture where labour has historically been scarce relative to labour. Hence, as labour becomes relatively scarce over time (L/A ß), the price of labour increases relative to the price of land (PL/PA Ý). These changes are different from those that occurred in Japan. Research was directed towards labour-saving technologies that were mechanical processes, to augment the limited supply of labour. Mechanisation is the term used to describe labour-saving mechanical technologies. Capital was again the intermediating factor, this time increasing the opportunities to substitute for the scarce factor, labour.

Despite the different development paths that were followed, technological change in both countries led to increases in TFP. Cropping industries were the focus of R&D efforts in both countries. One difference concerns the comparative scope for private and public research. Private research has been more prominent in mechanisation.

What about the situation in the sheep industry in Australia? Induced innovation in Australian agriculture has featured both labour- and land-saving technological change. It has also been particularly important in extensive livestock enterprises such as the sheep enterprise as well as in crop enterprises. This has had two important implications for the nature of induced innovation. First, livestock have been an intermediating factor in substitution for labour and land, as demonstrated by early post-war experiences.


Second, the nature of technological change in livestock production has been different from that in crop enterprises. For instance, land-saving technologies have included aerial topdressing and other means of augmenting pasture land, and some services that provide details of variations in soil quality. Labour-saving technologies in sheep production have included five important categories:

Structural improvements have probably been the most important means of incorporating improved technology (e.g. fences, yards, shearing sheds and watering holes).

Many improvements have occurred in materials and services, such as veterinary requisites and artificial insemination services.

Genetic improvements have increased the intrinsic value of the sheep themselves. The value of livestock per operator labour increased in real terms from $4.95 in 1946/47-1950/51 to $12.15 in 1971/72-1975/76. The value of livestock per hectare increased in real terms from $0.66 in 1946/47-1950/51 to $0.94 in 1971/72-1975/76 (Fleming 1987).

Some mechanical advances have occurred in pastoral as well as cropping industries (e.g. shearing and aerial mustering).

The breeding and training of sheep dogs has been a quintessentially Australian source of labour-saving technological change that should not be under-estimated.

The overall level of capital investment in the sheep enterprise has been influenced by the buoyancy of the sheep industry. The two main factors causing short-term variations in economic conditions in the industry that influence investment are changes in sheep product prices and seasonal conditions. Changes in the investment climate in the general economy and financial services have also affected investment levels. In turn, they influence the associated introduction of embodied technologies. Furthermore, technological change in information and communication is increasingly influencing technological change in sheep production.

Economic pressures for structural change in the post-war period have intensified the search for innovations in the sheep enterprise as farmers have sought ways to maintain their profits. A secular decline in the sheep farmers’ terms of trade (see below) has made labour a more expensive farm input, encouraging labour-saving technological change, especially mechanisation. The ability of farmers to take advantage of new production, marketing and communication technologies to save on more costly inputs varies across space and within broad farm input categories.

An economic dimension to induced innovation, additional to relative factor prices, has been product prices. An increased sheep product price induces innovation in production of the output whose price has increased. The direction of innovation is influenced by which product prices have changed, given variations in the production processes.

Technological change and the demand for farm inputsFarmers invest in capital inputs to get access to improved production technologies that enable them to maintain growth rates of TFP and farm income. The residual funds theory of investment has been found in the past to explain the level of farm capital investment, where residual funds are the amount remaining after meeting all farm operating costs, finance costs and living expenses of

the owner-operator. However, the influence of this theory has weakened in recent times with the

development of the financial sector and a range of new financing mechanisms for farmers. Criteria related to rates of return and ability to meet cash flows have become more relevant.

A particular aspect of technological change and the demand for labour in the sheep and other pastoral enterprises has been the impact on the demand for different types of labour. A lot of the technological change in these enterprises has favoured the substitution of capital inputs (e.g. motorised vehicles, aircraft and dogs for mustering), current inputs (drenches) and contract labour for casual labour rather than permanent and operator labour. According to BAE (1983, p. 35):

Substitution by non-labour inputs appears to have affected itinerant labour more than permanent labour. ...

The availability of contract services by specialists enhances the flexibility of operations. Contractors undertake work such as land clearing, dam sinking, fencing and, more recently, the capital-intensive and labour-intensive harvesting operations (e.g. shearing ...). Aerial spreading of fertilisers, seeds and pesticides, which developed rapidly in the 1950s


and early 1960s, is likely to continue to provide an important input into agricultural production. The use of such services as these allows the farm operator access to the latest capital equipment, while avoiding the necessity for large investments in sophisticated equipment which may be subject to obsolescence within an increasingly short period after purchase. The very high fixed cost (e.g. depreciation, opportunity cost of capital, storage) associated with ownership of large capital equipment means, in many cases that the cost-effective application of such equipment can only be achieved through the relatively intensive use made possible by contract operation.

Overall input use in the sheep industry increased substantially from 1977/78 until the late 1980s (ABARE 2009, p. 29). Since then, there has been a steep decline. From the mid-1990s, overall input use has been below that in 1977/78 in almost all years.

Market forces generating economic changeMarket forces that generate economic change in the sheep industry are:

Price responsiveness of output supply Supply shifters Price responsiveness of demand Demand shifters.

These concepts are described in Topic 2.

Supply responsiveness and demand responsiveness to price influence output, product mix and the demand for farm inputs. They can also affect the degree of market instability, which can be high in Australia. Price elasticities of supply tend to be low in the short run but higher in the long run. Price elasticities of demand for sheep industry products are in the range of -1 to -5 in the export market (see Topic 2).

Supply and demand shiftersSupply shifters in the sheep industry have had a greater effect than demand shifters. This outcome is common to most other agricultural industries in developed countries.

The main supply shifters are:

climatic factors, most obviously the impact of drought production technology (see below) input prices, such as the price of labour which has become relatively more expensive over

time substitutability between enterprises, such as the increase in cropping land at the expense of

pasture, and the change to more lamb production at the expense of wool in recent years, mentioned above

changes in the area of farmland, which, as stated above, has been in decline since the 1970s pests and diseases, such as blowflies, rabbits and pasture weeds (e.g. Peel 1973, p. 68).

Technological change has been particularly prominent among these supply shifters, and has increased in importance over time. Advances in production technology have been numerous, and largely explain the increases in TFP described above.

A small sample follows of innovations in production technology, an outcome of research and development in input supply industries and public research institutes as well as on-farm innovation:

Introduction of annual legumes prior to World War 2, and their subsequent widespread use to intensify existing farming methods

Rotation of legumes, particularly sub clover, with grain crops such as wheat Introduction of improved pasture and forage crop varieties


Use of superphosphate, followed by increasingly sophisticated and precise methods of application of fertilisers

Aerial sowing and fertiliser application in hilly farming areas Mechanisation of shearing, followed much later by the introduction of wide combs. Introduction of cell grazing in flock management Aerial mustering of livestock Improvements associated with the feeding of stubble from cropping activities to sheep Genetic advances in wool production Timing of shearing and lambing.

The main demand shifters are:

incomes in importing countries prices of related products (synthetics, cotton, beef, pork, chicken) population in importing countries tastes and preferences in clothing and food promotion differences in product quality (e.g. microns, staple strength, lean lamb) institutional barriers to market entry.

Markets and farmers’ terms of tradeMarkets for sheep products vary according to:

structure marketing channels nature of competition (including barriers to entry) price responsiveness of demand size.

The nature of the markets for wool and sheepmeat are discussed in detail in Topics 5 and 6, respectively.

Farmer goalsFarmer goals influence the rate of development of the sheep industry, and vary considerably between farmers. Goals are influenced by:

the risky farming environment farm asset values attitudes to borrowing desired living standards and leisure aesthetics and conservation values attitudes to community service.

13.2 Structural change in the sheep industry

Factors influencing performanceThe factors influencing performance in sheep production include:

Ability of farmers to benefit from specialisation The way in which the family farm is organised Government policies and support services Access to infrastructure


Reliance on fixed inputs Biological and climatic factors Market demand Spatial variations in technical attributes Product quality.

Nature and extent of the farm problemSheep producers, like most farmers in Australia, are subject to the so-called ‘farm problem’. The main symptom of the farm problem is a sustained decline in farm incomes relative to non-farm incomes. The main cause of the farm problem is demonstrated in Figure 13.11.

Figure 13.11 Supply and demand shifts in Australian agriculture. Source: Fleming (2007) author's estimates.

This diagram shows a price-inelastic demand, which is typical of demand for agricultural products in the domestic market but not typical of export demand. Wool is the exception in export demand, with the price elasticity of export demand for greasy wool declining over time. The more price-inelastic the demand for farm products, the greater the decline in price for a given shift outwards in the supply curve.

Producers selling mainly in the domestic market have faced greater difficulties than those producing products mainly destined for export markets. Nevertheless, wool exporters have also suffered from falls in real world prices, and from barriers to export markets for lamb. Declining real world prices for wool are largely a function of low income elasticities of demand. As people’s incomes increase, expenditure on items such as food and clothing tends to rise less than proportionally. Competition from substitutes has also been important.

Relative to other goods and services, the proportions of income spent on food and clothing decline. For some major food items in developed countries, the income elasticity of demand is close to zero, or even negative (e.g. mutton). The decline in farm output prices relative to farm input prices has caused a sustained decline in the farmers’ terms of trade (ratio of the index of farm output prices to the index of farm input prices). But the evidence can mask considerable variations in net farm profit and rates of return on capital within the sheep industry. It is more accurate to say that the Australian sheep industry suffers from a ‘selective farm problem’. While all industries have some problem farmers, some have more than others.


Four factors have interacted to bring about the selective farm problem in the sheep industry in Australia:

‘Cost-price squeeze’ Risky farming environment Land degradation Lack of structural adjustment.

Each of these factors is now discussed.

‘Cost-price squeeze’The farmers’ terms of trade are measured as an index of farm prices received to prices paid for farm inputs. They have been turning against farmers for a long period, resulting in what has become known as the ‘cost-price squeeze’. This can be seen in Figure 13.12, which charts the index for wool producers (using the ratio of the greasy wool mean auction prices to the farm input price index) over the period from 1965/66 to 2007/08. A quadratic trend line shows the downward trend clearly. Note that there has been only a relative decline in farm output prices. The ABARE index of prices received (base 1997/98=100) was 24.8 in 1965/66; it had increased to 133.2 by 2007/08 – more than a five-fold increase. In comparison, the ABARE index of prices paid (base 1997/98=100) increased from 12.6 in 1965/66 to 152.4 by 2007/08 – a 12-fold increase (ABARE 2008, p. 17). Therefore, the prices paid index had increased at more than twice the rate of the prices received index over this period. Note, however, that the rate of decline in the farmers’ terms of trade appears to have lessened in recent years.

Figure 13.12 Sheep farmers’ terms of trade in Australia, 1965/66 to 2007/08Source: ABARE (2008, p. 17).

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This downward trend in farmers’ terms of trade is accentuated by the fact that inputs purchased from off the farm (external inputs) have been increasing in importance (that is, they have become a higher share of the gross value of production). This makes farm performance more sensitive to trends in the prices of these inputs.


A feature of the farm problem is the low to negative net farm incomes and returns to capital in farm activities. ABARE surveys showed that sheep farms earned average net farm losses of -$15 000 during the three years, 1995/96 to 1997/98, and -$30 500 during the two years, 1998/1999 to 1999/2000. In the most recent years of 2006/07 and 2007/08, respectively, 40 per cent and 32 per cent of farmers achieved negative farm cash incomes in the sheep industry (Table 13.2). Farm business losses were experienced across both the sheep industry and the sheep-beef industry in both years. Losses at full equity excluding capital appreciation were experienced in both years in the sheep industry and profits only emerged once capital appreciation was taken into account. On average, sheep farms suffered losses (excluding capital appreciation) during the period, 2004/05 to 2007/08 (Figure 13.13), with around three-quarters of sheep farms and two-thirds of sheep-beef farms experiencing losses. Over this period, rates of return on capital were very low to negative when capital appreciation was excluded. While these years might have been a period of abnormally low incomes in agriculture, it demonstrates the extent of the farm problem in the sheep industry.

Table 13.12 Mean Net Farm Incomes by Farm Enterprise, 2007/2008 to 2008/2009. Source: ABARE (2009, pp. 17-18).Farm type Sheep industry Sheep-beef industry

2007/2008 2008/2009 2007/2008 2008/2009Farm cash income ($) 6 910 36 600 19 900 40 800Proportion negative cash income (%) 40 32 42 34Farm business profit ($) -76 370 -42 900 -76 370 -19 800Profit at full equity (excl. cap. apprec.) ($) -45 440 -6 800 -49 690 26 500Profit at full equity (incl. cap. apprec.) ($) 97 170 96 700 258

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30 980 40 000 37 960 31 800

Figure 13.13 Farm business profit on sheep and sheep-beef farms, 2004/2005 to 2007/2008. Sources: ABARE (2007, pp. 13-14), ABARE (2009, pp. 17-18).

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An important trend illustrated in Figure 13.14 is the growing importance to sheep and sheep-beef farm families of off-farm income earned by the owner-manager and spouse. First, off-farm income is important in terms of its magnitude, averaging $32 401 on sheep farms (and slightly lower on


sheep-beef farms) during the period from 2004/05 to 2007/08. Second, it adds to farm income stability: the coefficient of variation of off-farm income for sheep farms was 16 per cent over this period compared with 52 per cent for farm cash income. (You need to keep in mind that the sample of farms from which this information was derived includes many small farms that are not large enough to be regarded as financially sustainable units and which therefore rely very heavily on off-farm income.)

Figure 13.14 Average farm cash income and off-farm income on sheep farms, 2004/2005 to 2007/2008. Sources: ABARE (2007, pp. 13-14), ABARE (2009, pp. 17-18).

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Another factor offsetting low and variable profits in broadacre agriculture, including sheep farms, has been the appreciation in value of farm capital. The average rates of return excluding capital appreciation on sheep and sheep-beef farms during the period from 2004/05 to 2007/08 were -0.43 per cent and 0.10 per cent per annum, respectively. After taking capital appreciation into account, the comparable rates of return look much more impressive. They averaged 4.65 per cent and 5.25 per cent per annum, respectively, for sheep and sheep-beef farms over the period.

Fluctuations in net farm incomesAs indicated in the previous section, it is not simply a question of low farm incomes but their volatility that contributes to the farm problem on sheep properties. While not a direct cause of the farm problem, the risky environment in which farmers operate is a major factor making the problem worse. This income volatility is caused by biological, climatic and market factors.

Farmers facing a more uncertain production environment tend to have lower rates of productivity growth (Sheep CRC Project 1.2.6). Producers selling to export markets over which they have little control (except for wool) face considerable market uncertainty. Even in the wool industry, market control is limited as the raw material becomes a smaller cost share in the final products. These price fluctuations are difficult or impossible to control.

Fluctuations in net farm income tend to be more volatile than fluctuations in farm output. This is demonstrated in Figure 14.1 of the next topic (Topic 14) showing fluctuations in the real net value of rural production from 1960/61 until the present. Apart from risk in physical production and markets, farmers have to reckon with the volatility in interest rates. Interest rate sensitivity makes the farm problem in Australia worse because farm operations typically entail a high proportion of fixed costs. Farmers therefore frequently need to borrow large sums to finance their activities. While farm borrowing might be greater in the cropping industries, it is also a feature of the sheep industry. Interest costs increased rapidly in the 1980s, as shown in Figure 13.15, peaking in 1990.


But they began to decline sharply in the early 1990s and have been low and relatively steady since the turn of the century. Recent interest rate increases shown in Figure 13.15 are expected to be reversed when 2008/09 figures become available, as a result of the global financial crisis that has led central banks (including the Reserve Bank of Australia) to reduce base rates to low levels.

Figure 13.15 Average indicative broadacre interest rates, 1978/79 to 2007/08.Source: ABARE (2008, p. 93).

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Total farm indebtedness has been increasing substantially as farmers rely more on improved technologies embedded in capital inputs. Rising levels of indebtedness partly reflect increasing financial pressures on farmers. Fifteen years ago in 1992/93, total farm indebtedness was around $1.5 billion. It reached almost $60 billion in 2007/08 (see Figure 13.16). They also reflect the capital needs of the different farm enterprises. Average sheep farm indebtedness in 2007/08 was $331 500 compared with $810 800 on crop farms (ABARE 2009, p. 17), which have much greater capital requirements for their operation. Funding the purchase of farms has been a major factor increasing indebtedness recently (ABARE 2009, p. 21).

Figure 13.16 Gross farm indebtedness in Australia, 1979/80 to 2007/08.Source: ABARE (2008, p. 94).

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Growing problem of land degradationLand degradation is another important factor that is increasingly contributing to the farm problem. Its impact is being felt by its adverse effect on yields, or land productivity, and TFP (see Topic 9). Table 13.3 shows the proportion of farmers experiencing degradation problems by agroecological zone, with the problem apparently greatest in the wheat-sheep zone and least in the pastoral zone.

Table 13.3 Productivity Impacts of Land Degradation. Source: ABARE (2000).Proportion (%) of farmers who have:

Pastoral Wheat-Sheep Zone

High-Rainfall Zone

All Zones

Experienced on-farm degradation

9 24 17 20

Removed land from production

3 10 10 10

Experienced productivity decline

6 21 12 16

Lack of structural adjustmentStructural adjustment is a simultaneous movement towards larger farms and a reallocation of farm resources within agriculture and between agriculture and the rest of the economy. Existing small farms merge or amalgamate into larger, more viable units. Resources are shifted from enterprises with low prospective returns to those with higher prospective returns.

The concept of opportunity cost is central to the issue of structural adjustment. If farm input markets are working efficiently, inputs will be allocated to those activities that provide the highest return. For many inputs the markets work well in resource allocation. In theory, market signals should indicate the direction of change in input use through changes in relative prices of the factors of production as economic development occurs. These relative price changes have the effect of adjusting the optimal usage of resources in sheep production (described in Topic 2). Labour use on the farm declines while capital use increases.

Such a scenario of desirable economic growth and structural adjustment processes in the sheep industry is presented in Figure 13.17. The first part of the diagram shows adjustment processes set in motion in agriculture to raise incomes and achieve intersectoral parity in response to the emergence of a gap between farm and non-farm incomes. The second part shows adjustments in the use of land, labour and capital resources between agriculture and the rest of the economy.

But farm operator and family labour has been an important farm input in Australia and other developed countries where markets have not worked well in adjustment. Given a continuation of the adverse trend in the farmers’ terms of trade, a major factor causing the farm problem has been an inability of a significant proportion of farmers in the sheep industry to adjust sufficiently to changing economic circumstances. Medium- and small-sized farms have found it more difficult than large farms to make the necessary adjustments. This is particularly the case where they have limited opportunities to supplement on-farm income with off-farm income (see above).


Figure 13.17 Desirable economic growth and structural adjustment processes in the sheep industry. Source: Fleming (2007) author's estimates.

13.3 Facilitating structural adjustment

Potential measures for accelerating structural adjustmentFarm family labour does not adjust as quickly as it should for a variety of reasons. The course of policy action to overcome this problem is a need to:

invest in rural areas to maintain the transformation process look after the welfare of those left behind by generating higher incomes, safety nets and

facilitating movement out of agriculture.


Structural adjustment programs in AustraliaIn Australia, the government has grappled with the dual goals of the economic transformation of rural areas while protecting the welfare of those who struggle to keep up. Various Commonwealth Government schemes have been in place since 1935. The Rural Adjustment Scheme (1977-1997) met with mixed success and was replaced in 1997 by a series of programs under the Agriculture Advancing Australia Program.

The aim of the Rural Adjustment Scheme was to assist farmers facing financial crisis. Low-interest loans or interest subsidies on existing loans were provided to farmers:

unable to get loan funds on reasonable terms from commercial sources whose businesses had been assessed as having good long-term prospects.

This assistance could be used to:

improve or expand farm operations restructure farm debts to make them more manageable allow the farm to continue to operate where there is a temporary severe downturn in an

industry other than because of drought or natural disaster.

In the past, the Scheme was subject to many criticisms. Improvements were made over time but problems in implementation remained. The most difficult problems were in:

ensuring assistance reached farmers who would most benefit from it reaching the right balance between helping viable farmers recover and encouraging non-

viable farmers to leave farming.

The FarmBis Program has been a key part of the Agriculture Advancing Australia Program. It provides financial assistance to farmers, among others in the rural population, to undertake business and natural resource management training and education activities. While part of a Commonwealth Government initiative, it is implemented by State Governments.Other support in the Agriculture Advancing Australia program includes:

support for industries undergoing change financial management tools financial information and referral funding for professional advice, skills development and training assistance for farm families in serious financial difficulty improved access to markets.

The government has long provided support for farm families suffering from drought. Exceptional circumstances assistance was widespread during the 2002-2005 drought (now returned in many regions). Many farm families received either Exceptional Circumstances Relief Payments or Exceptional Circumstances Business Assistance. Improved risk management has probably reduced calls by farmers for drought assistance. The issue of managing drought policy in the sheep enterprise is covered in detail in the next topic (Topic 14).


Readings No readings are available on the web learning management systems. There are numerous references available which deal with different parts of the material and issues covered throughout this topic. A few main readings are recommended for this topic. A number of other key resources are provided in the useful websites and reference list.

ReferencesABARE 1997, Changing Structure of Farming in Australia, Australian Bureau of Agricultural and

Resource Economics, Canberra.ABARE 2000, Australian Farm Survey Report 2000, Australian Bureau of Agricultural and

Resource Economics, Canberra.ABARE 2004, 'Australian sheep industry productivity.' Australian Lamb 04.2, pp 1-6.ABARE 2006, Australian Commodity Statistics 2006, Australian Bureau of Agricultural and

Resource Economics, Canberra.ABARE 2007, Australian Farm Survey Results, 2003-04 to 2006-07, Australian Bureau of

Agricultural and Resource Economics, Canberra.ABARE 2008, Australian Commodity Statistics 2008, Australian Bureau of Agricultural and

Resource Economics, Canberra.ABARE 2009, Australian Farm Survey Results, 2006-07 to 2008-09, Australian Bureau of

Agricultural and Resource Economics, Canberra.Alexander, G. and Williams, O.B. (eds) 1973, The Pastoral Industries of Australia: Practice and

Technology of Sheep and Cattle Production, Sydney University Press.Anderson, K. 1987, ‘On why agriculture declines with economic growth’, Agricultural Economics,

vol 1(3), pp 195-208.BAE 1983, Rural Industry in Australia, Bureau of Agricultural Economics, Canberra.Coelli, T. and Kingwell, R., 1991. 'The productivity of Western Australia's wheat and sheep

industry.' Western Australia Journal of Agriculture, vol 32, pp 142-145.Fleming, E.M. 1987, Technological change and trends in factor use in Australian agriculture:

1946/47 to 1975/76, Unpublished paper, Department of Agricultural Economics and Business Management, University of New England, Armidale.

Fleming, E., Villano, R., Farrell, T. and Fleming, P. 2007, Efficiency and Productivity Analysis, Final Report on Benchmarking Sub-Project, Australian Sheep Industry CRC, Armidale.

Fleming, E., Villano, R. and Fleming, E. 2009, ‘Do synergies exist in Australian Sheep production?’, International Journal of Sheep and Wool Science, vol 57(1), pp 1-10.

Fraser, I. and Hone, P., 2001. 'Farm-level efficiency and productivity measurement using panel data: wool production in South West Victoria', Australian Journal of Agricultural and Resource Economics, vol 45, pp 215-232.

Godden, D. (2001), Agricultural and Resource Policy: Principles and Practice, Oxford University Press, Melbourne.

Lawrence, D. and McKay, L., 1980. 'Inputs, outputs and productivity change in the Australian sheep industry.' Australian Journal of Agricultural Economics, vol 24, pp 46-59.

Mullen, J. and Cox, T.L., 1996. 'Measuring productivity growth in Australian broadacre agriculture.' Australian Journal of Agricultural Economics, vol 40, pp 189-210.

Peel, L.J. 1973, ‘History of the Australian pastoral industries to 1960’, Ch. 2 in Alexander and Williams.

Pindyck, R.S. and Rubinfield, D.L., 2001. Micro-economics. 5th edition. Prentice Hall, NJ, USA.Stoneham, G., Andrews, D. and Strappazzon, L., 1999. Productivity growth: multi factor

productivity on Australian and Victorian broadacre and dairy farms, Economics Branch, Research paper, Department of Natural Resources and Environment, Victoria.

Sturgess, N.H. 1973, ‘Management economics in the pastoral industries’, Ch. 14 in Alexander and Williams.

Villano, R., Fleming, E., Farrell, T. and Fleming, P., 2006. Productivity change in the Australian sheep industry revisited, Contributed paper to the 26th International Conference of the International Association of Agricultural Economists, Brisbane. August, 2006.

Williams, O.B. 1973, ‘The environment’, Ch. 1 in Alexander and Williams.


Glossary of termsCapital Buildings, plant, equipment, livestock and improvements that can be used

to produce output that generates of future stream of cash inflows

Comparative advantage

A situation in which country 1 has an advantage over country 2 in producing a good because the cost of producing the good in 1, relative to the cost of producing other goods in 1, is lower than the cost of producing the good in 2, relative to the cost of producing other goods in 2

Diversification Allocation of resources to a variety of activities that are not closely related to each other

Economic development

The process of improving the quality of life of humans in an economic system.

Farm problem A sustained decline in farm incomes relative to non-farm incomes

Farmers’ terms of trade

A measure of an index of farm prices received to prices paid for farm inputs

Induced innovation The way in which R&D institutions respond to price incentives in the research work they undertake

Isorevenue line A line that joins up all points of constant revenue for two outputs

Mechanisation A term used to describe labour-saving mechanical technologies

Production possibilities frontier

The output that can be produced by farmers who are technically efficient, and therefore can be considered as an envelope around the relations between all inputs and outputs in production (alternatively, a curve joining all points of output for two goods with fixed levels of inputs)

Productivity (total factor productivity)

A measure of the output produced from all inputs available to the farmer, allowing for differences in production technology between farms

Resources Scarce inputs that can be used in production

Scope efficiency A situation in which full advantage is taken of the opportunities to exploit synergies in the sheep enterprise and the overall production system

Sheep enterprise The production of related sheep outputs, for sale or domestic use

Sheep industry The process of producing the major outputs of wool, lamb and live animals using sheep as the major input in the production process

Specialisation Concentration of resources on a small number of activities that are closely related to each other

Structural adjustment

A simultaneous movement towards larger farms, and a reallocation of farm resources within agriculture and between agriculture and the rest of the economy

Technology The sum of knowledge applied to the methods of producing goods and services

Technical efficiency A situation in which all the inputs available to the farmer are used to produce the maximum possible output; hence, a farm that is technically inefficient produces less than this maximum possible output

Technological change

Change in the sum of knowledge applied to the methods of producing goods and services, reflected in a change in the production frontier


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