Climate effects are currently severe but farm incomes are likely to be less affected than in previous droughts

ABARES estimates the effect of climate on farm cash income (holding all other factors constant) is among the worst two years since 1978, comparable only to the 2002-03 drought. However, farmer incomes are likely to decline by substantially less than in previous droughts, as comparable poor climate effects are being buffered, or offset to some extent, by more favourable economic circumstances and other factors.

These factors vary across sectors:

  • Crop farm incomes are likely to be buffered somewhat by improved productivity, and in particular a greater capacity to manage through poor years.
  • For livestock farms, while feed costs will be higher, output prices remain relatively high, and this is likely to at least partly offset the increase in costs. Livestock farms also had relatively high reserves of feed going into the drought.
  • For dairy farms, the main effects of drought are likely to be through higher fodder prices. Milk prices are forecast to increase slightly in 2018-19, which will only partly offset rising input costs for these farms. In addition, dairy farms in dry regions are likely to reduce stock numbers.

It is important to recognise that aggregate trends in farm performance mask significant variation between individual farms and regions. A significant proportion of farms are likely to make significant cash losses in 2018-19, while some farms are likely to perform relatively well.
The experience of previous droughts is that many farms have the capacity to manage through a single dry year, particularly when coming out of a period with relatively high incomes  – but this becomes increasingly difficult if dry conditions persist.