By Anne Kruger

A reporter’s guide

to the economic fundamentals

of Australian commodities

IN THE FIELD

2

Cover image

World record wheat crop, Coggan family farm, Meandarra, Queensland.

“A Heartfelt Harvest” broadcast 16/11/2008, ABC TV Landline.

www.abc.net.au/landline/content/2008/s2420009.htm Photo by Sally Nicol, copied with permission.

http://www.abc.net.au/landline/content/2008/s2420009.htm

3

CONTENTS

LIST OF FIGURES ........................................................................................................................ 4

LIST OF TABLES ........................................................................................................................... 4

ACKNOWLEDGEMENTS ............................................................................................................. 5

DEDICATION ............................................................................................................................. 6

PREFACE .................................................................................................................................... 7

CHAPTER 1 QUICK START ....................................................................................................... 10 Glossary (jargon busters, acronyms and definitions) ........................................................................... 10

Check and double check ........................................................................................................................ 14

Regular financial and economic reports ............................................................................................... 15

CHAPTER 2 THE ECONOMIC IMPORTANCE OF AUSTRALIA’S COMMODITY EXPORTS ......... 17 Australian Agriculture ................................................................................................................................. 18

Mining ............................................................................................................................................................ 20

Australia’s main export destinations ........................................................................................................ 22

CHAPTER 3 CHINA CASE STUDY ............................................................................................. 26 Re-Orient: The Economic Drivers of China’s Long Run growth .......................................................... 26

China case study: Implications for Australia .......................................................................................... 30

CHAPTER 4 ECONOMICS I ...................................................................................................... 33 Microeconomics ......................................................................................................................................... 33

Microeconomic concepts ........................................................................................................................ 34

CHAPTER 5 ECONOMICS II ..................................................................................................... 42 Macroeconomics........................................................................................................................................ 42

Macroeconomic concepts ...................................................................................................................... 42

Production factors and facilitators .......................................................................................................... 49

CHAPTER 6 SEASONALLY ADJUSTED ...................................................................................... 50 Rural finance cycles ................................................................................................................................... 50

Trade .............................................................................................................................................................. 51

CHAPTER 7 ECONOMICS OF THE ENVIRONMENT .................................................................. 56 Policies ........................................................................................................................................................... 57

Weighing up the policies ........................................................................................................................... 57

Broad mix ...................................................................................................................................................... 58

A final word .................................................................................................................................................. 59

WHAT NEXT?............................................................................................................................ 60

REFERENCES ............................................................................................................................ 61

4

LIST OF FIGURES

Figure 1. In the field: Anne Kruger and Kerry Lonergan OAM, Landline ABC TV, 2008. ......................................... 7

Figure 2. Major Australian agricultural export markets .............................................................................................. 19

Figure 3. China’s Annual GDP 1981-2010.................................................................................................................. 27

Figure 4. X Marks the Spot.......................................................................................................................................... 40

Figure 5. Harvesting the world record wheat crop, Coggan family farm, Meandarra, Queensland. ........................... 50

LIST OF TABLES

Table 1. Top eight Australian agricultural exports in 2010-11 .................................................................................... 20

Table 2. Top 11 Australian Exports ............................................................................................................................. 21

Table 3. Australia’s main export destinations (goods and services), 2012 .................................................................. 22

Table 4. Factors of production ..................................................................................................................................... 34

Table 5. Annual financial cycle for farmers ................................................................................................................ 51

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ACKNOWLEDGEMENTS

I would like to thank my QUT supervisor Dr Angela Romano for her unwavering support and

expertise throughout the process of writing this guidebook. I would like to acknowledge and

thank the Adrian Scott Trust for awarding me the Adrian Scott Scholarship (2011) for study in

QUTs Master of Arts (Research) into issues affecting rural and regional journalism. The research

for my Masters of Arts studies led to the identification of the need, and then the formation of this

guidebook. I would also like to thank Dr Louisa Coglan from the QUT Business School. I am

also very grateful to the news editors and industry experts who took part in the research project

to inform the contents of this book. I would also like to acknowledge the continuing moral

support from ABC TV management and former colleagues. Finally, thank you to my family for

sharing this enriching journey with me.

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DEDICATION

To Eileen Ellis 1915–2013

Dedicated to my grandmother Eileen Ellis who read the Sydney Morning Herald and The

Courier Mail from cover to cover daily until her nineties, and had the wisdom only an elder can

in predicting economic outcomes from political decisions and world events.

7

PREFACE

Figure 1. In the field: Anne Kruger and Kerry Lonergan OAM, Landline ABC TV, 2008.

Photo by Giulio Saggin, copied with permission.

I was humbly honoured when I was invited to work on ABC TV’s iconic rural current affairs

program Landline as presenter. The phone call in late 2007 from senior management came as

something of a surprise. For a split second I wracked my brains thinking of what I may have

done wrong in my then position at the ABC’s Australia Network. But my fears turned to relief

and excitement – I would be able to bring to a national audience the issues I’d covered a decade

earlier as a cadet rural and regional journalist. I took up the position with relish and spent four

years meeting people that make up much of Australia’s identity. I saw first-hand the importance

of primary industries to Australia’s economy as well as the importance of Australia’s trading

partners.

Prior to joining the ABC I’d spent nearly a decade in international broadcasting including at

CNN International as well as at public broadcasters in Hong Kong and Singapore. I thought

Landline would be a pleasant return to my old stomping ground, but my, how the landscape had

changed in that decade! Some changes were man-made such as ‘big business’ coal seam gas

mines dotted throughout the landscape. Other changes were a cruel twist of nature that brought

8

shock and tragedy: When I began at Landline, Australia was in the grip of drought. Tragic fires

then caught national headlines, followed by devastating floods.

From my observations and interactions, I saw that despite many hardships, people in rural and

regional Australia didn’t want ‘tea and sympathy’. What they really hungered for was politicians

and people in the cities to have a more thorough understanding about their situation and where

they fit into the ‘bigger picture’ – how the primary industries contribute to the economy and food

supply; that farmers’ finances are linked to the seasons, policies, scientific research and

development. Risk management has to be built-in to cater for extreme weather events – the

effects of which can last years beyond the initial news headlines. I’ve never met a farmer who

draws a weekly or monthly wage like I do, and many of the farmers I met have to wait years

before any profit comes in.

Landline is an iconic Australian television programme and has been running since 1991 – more

than a lifetime in the television industry! One of the keys to Landline’s longevity can be

attributed to the shows’ founding Executive Producer Kerry Lonergan OAM. His ‘mission

statement’ was clear: he wanted the programme to provide a positive view of Australia’s rural

and regional life (Lonergan, interview 2011).

It’s a view shared by leading economists and rural industry experts alike. According to renowned

Australian economist Saul Eslake, there is a strong tendency for journalists always to be looking

for negative news:

That is (the) people or regions which are struggling, battling or doing it tough – which

undoubtedly some are. But it tends to create the impression among city folk that life in

rural and regional areas isn’t very pleasant and the people who live there always have

something to complain about. I know that’s not true, but that’s because I have spent

plenty of time in these areas myself. (Eslake, interview, 2011)

Miriam Silva, former General Manager of Commercial Operations at agribusiness service

company Elders, deals every day with the finances of farming. Miriam says all media reports

need to have a human element. But Miriam urges caution about how the economic effects on

people are presented:

Reinforcing the ‘down trodden’ farmer image may be starting to grate on the Australian

psyche and reinforces the victimisation culture rampant in agriculture. Greater care

needs to be taken in bringing out the human element so that it breeds understanding and

compassion for those affected – not apathy. (Silva, interview, 2011)

Knowledge of a specific industry takes years to develop, yet not everyone need necessarily be a

‘specialist’ rural reporter when covering events on or in rural and regional Australia. This book

aims to provide an overview and an easy foundation about the economic ‘bigger picture’. The

guidebook is for any reporter who finds themselves reporting on Australia’s primary industries:

Journalists from the city are often sent to regional or remote locations for example to report on

flooding and fires. And while some journalists are physically at the scene, others (including

producers and editors) are gathering data and putting it all together at the desktop at metropolitan

9

headquarters. This guidebook offers information that may provide nuances (whether large or

small) to either situation.

This guidebook draws together years of experience and expertise from rural and industry

economists, academics and journalists into an easily digestible summary of economics relating to

Australia’s soft (agricultural) and hard (mining) commodities. At the end of each chapter easy to

access online resources are listed that relate to the topic. These sites are useful for building

general knowledge as well as for quick access when researching ahead of an interview or report.

The top tips relate the information to key journalistic areas to help reporters consider the ‘big

picture’.

CHAPTER 1 begins with a Quick Start reference to cut through the jargon and explain economic

and financial terms for the journalist on the run. A list of some key easy-to-read economic

reports is also included.

CHAPTER 2 explains how Australia’s farming and mining commodities play two very different,

yet crucial roles in the Nation’s economy.

CHAPTER 3 uses a case study on China’s economic development since the late 1970s to illustrate

why Australian resources have been in high demand in emerging markets.

CHAPTER 4 explains micro economics and how markets function.

CHAPTER 5 gives a macro view on the economic tools available to the government and decision

makers to influence the economy and people’s spending habits.

CHAPTER 6 outlines how seasons affect money supply in agriculture and other financial

considerations.

CHAPTER 7 introduces the concept of the economics of the environment.

Note: Details are correct to the best of my knowledge at the time of writing. The online resources are suggestions

only and are designed to be built upon and updated over time by the journalist.

10

CHAPTER 1

QUICK START

This Quick Start guide is designed as a fast guide for journalists to refer to before, during and

after interviews. The glossary takes the mystery out of the jargon or terms and acronyms

typically used in business reports, with a particular focus on those used in the primary industries.

The list of REGULAR REPORTS compiles suggestions from finance experts who specialize in rural

and regional issues. It summarises the monthly, quarterly and annual government and industry

reports that journalists should add to their reading lists so they can see patterns in information

and more importantly any changes in economic and business conditions.

Glossary (jargon busters, acronyms and definitions)

AWEX (AUSTRALIAN WOOL EXCHANGE)

This public company manages and regulates the Australian wool industry. The AWEX provides

daily, weekly, monthly and annual market information. Journalists working full time in rural

areas are more likely to refer to the AWEX on a regular basis, but it is useful for all journalists to

know this is where pricing is regulated.

www.awex.com.au

CAPITAL ACCOUNT

The capital account shows international trade figures of financial capital, flowing into and out of

Australia.

CBOT (CHICAGO BOARD OF TRADE)

An historic futures and options exchange. Agriculture goes high finance. CBOT now offers a

global array of agricultural futures and options trading.

www.cmegroup.com

CPI (CONSUMER PRICE INDEX)

The CPI measures the change in prices paid by households for the same items (goods and

services) that they consume.

http://www.awex.com.au/http://www.cmegroup.com/

11

CURRENT ACCOUNT

Current Account deficits are often strong news items. The current account captures the balance

of trade in goods and services. A current account deficit would mean that Australia is buying

more from overseas than it is selling overseas. “The current account also captures the ‘net

income’, which is the income that Australians earned abroad minus the income foreigners earned

in Australia” (Frijters, Dulleck and Torgler 2010, 293).

EXCHANGE RATE

The means of converting one currency to another. An appreciating exchange rate is a rise in the

value of ‘currency A’ compared to ‘currency B’. In this case, a unit of ‘currency A’ buys more

units of ‘currency B’.

EXPORTS AND IMPORTS

Exports are the flow of goods or services out from one’s own country to other countries. Imports

are the goods or services received by one’s own country coming in from another country.

EYCI (EASTERN YOUNG CATTLE INDICATOR)

This is the general benchmark of Australian cattle prices. According to the MLA, the indicator is

a seven-day rolling average produced daily by MLA's National Livestock Reporting Service

(NLRS). The EYCI and other livestock prices can be found at www.mla.com.au/Prices-and-

markets

FACTORS OF PRODUCTION

The resources that are used to produce commodities (or any goods and services) are divided by

economists into four factors of production, which are:

1. Land (natural resources)

2. Labour (work, both physical and mental by employees)

3. Capital (man-made tools and machines)

4. Enterprise (managers)

FOREIGN DIRECT INVESTMENT (FDI)

When an overseas business establishes itself within another country or when the overseas

business has enough investors to give authoritative instructions to the management of the

business in another country.

http://www.mla.com.au/Prices-and-marketshttp://www.mla.com.au/Prices-and-markets

12

FUTURES AND OPTIONS

Futures contracts are binding agreements to trade a specified quantity of a commodity at an

agreed price. OPTIONS are another contract, but in this case the buyer of the option has the right

(not the obligation) to buy or sell a future at a set price on or before a set date. Options are

considered a financial product. The ASX (Australian Securities Exchange) gives a thorough

explanation of grain futures and options at the following website:

www.asx.com.au/documents/products/asx_grain_futures_brochure.pdf

GROSS DOMESTIC PRODUCT (GDP)

GDP is a broad way to measure a country’s economic growth. GDP graphs are particularly

useful for comparing long term developments in a country’s growth. GDP Calculates

Consumption spending + Investment spending + Government spending + Exports but then

subtracts Imports.

GDP PER CAPITA (OR GDP PER HEAD)

GDP divided by the population or head count.

HARD COMMODITIES AND SOFT COMMODITIES

The term ‘hard commodities’ generally refers to mining output. The term ‘soft commodities’

generally refers to agricultural output. However it should be noted specifically that the ‘hard’

commodities includes grains and oilseeds and are traded by CBOT. Soft commodities generally

refers to sugar, cotton, coffee, orange juice and are traded ex ICE or the NYBT.

ICE

InterContinentalExchange or ICE offers futures and options for hundreds of commodity products

(including soft commodities such as sugar, cotton, coffee, orange juice as well as hard

commodities such as coal and oil) in real time. Online reports summarising the season results

and effects on prices (such as weather) can be found on the ICE website for example:

https://www.theice.com/publicdocs/futures_us/ICE_Monthly_Softs_Fast_Facts.pdf

IMPORTS

See EXPORTS AND IMPORTS

http://www.asx.com.au/documents/products/asx_grain_futures_brochure.pdfhttps://www.theice.com/publicdocs/futures_us/ICE_Monthly_Softs_Fast_Facts.pdf

13

NEGATIVE OR POSITIVE EXTERNALITIES

An additional cost or negative impact arising from the production of goods or services is a

negative externality. For example when pollution occurs during the manufacturing process, a

nearby community may be exposed to that pollution regardless of whether or not they are

consuming the product being manufactured.

Conversely, positive externalities bring an additional benefit to an individual or community other

than those that have paid for it. For example, National Parks are paid for by the government (via

taxes) but are available for use by the public and help to provide a better environment.

NLRS (NATIONAL LIVESTOCK REPORTING SERVICE)

Through its network of livestock market officers across Australia, the NLRS independently

collects market data from the key auction and direct markets, in addition to slaughter statistics,

wholesale, skin and hide prices. For more information, see Meat and Livestock Australia (MLA)

www.mla.com.au

OECD (ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT)

34 countries around the world make up this organisation with the goal of improving world

economies. More economic definitions, statistics and history of the OECD can be found on the

website: www.oecd.org

PURCHASING POWER PARITY (PPP)

PPPs compare the prices of a bundle of goods (the same or very similar products or services) in

different national currencies. PPPs can be used to compare the purchasing power of incomes

across countries. According to Frijters, Dulleck and Torgler (2010, 153), PPPs are useful to

explain situations when the same amount of money buys a different amount of similar products

in one country compared to another. For example in one country, people may be able to buy a

lot more of the products with the same amount of money than in another country. See Case Study

Re-Orient, regarding China’s expanding economy (GDP) but small PPP.

QUALY

Quality of Adjusted Life Years: A measurement often used by governments to determine how to

best spend public money. The larger the number of added years of life to the benefit of the

maximum number of people, the more desirable the QUALY is considered to be. An example of

a desirable QUALY is in community health programmes, such as vaccinations. The cost of a

wide-reaching preventative health measure provides a high level of QUALYs to a large or

dispersed population rather than having to pay later to treat an outbreak of disease which can

have added rehabilitation costs.

http://www.mla.com.au/http://www.oecd.org/

14

TOP TIP: PUBLIC SPENDING – WEIGHING UP DECISIONS

QUALYs are only one measure for governments to determine public spending. Consider the many stories

on the lack of rural doctors or health programmes. As a city-dweller I would not tolerate for example, a

lack of obstetric or children’s health services, however, this frightening situation is what many rural

women and families face.

There have also been many positive stories in recent years about how the internet is being used for long-

distance health consultations. If rural communities have affordable internet access, less urgent medical

cases can be diagnosed cost-efficiently.

(By affordable, I mean comparable to internet packages paid by city dwellers. On one of my earlier

Landline stories, a farmer near the Gwydir River told me how she spent over $1000 in a month just to use

an air-card to try to generate some publicity about her award-winning irrigation farm. At the time, I

calculated the same amount of data would have cost me only $50 from my Brisbane base).

RBA

Reserve Bank of Australia

SOFT COMMODITIES

See HARD COMMODITIES AND SOFT COMMODITIES

VOLUME

The amount of the product. Generally this book refers to ‘volumes’ of commodities and price.

TOP TIP: VALUE OF COMMODITIES

When considering the value of commodities to the economy, when ‘increases’ are referred to, check

whether the increases are due to volume (i.e. the amount produced, or price changes, or both volume and

price).

Check and double check

The economists consulted for this book agreed that small mistakes can make journalists (and the

organization they work for) look silly. The experts noted they often see simple mistakes by

journalists in what would otherwise be well-researched stories. One of the most common errors

is mixing up ‘millions’ and ‘billions’.

15

Many economic graphs will abbreviate figures, so look for the fine print, usually at the top of a

graph, or in a reference note at the end of the graph or information.

For your calculations:

One BILLION = a thousand million. Be aware though, as the Australian Oxford dictionary

explains; the word ‘billion’ originally meant a million million, (hence, the ‘bi’ in billion).

However, nowadays it usually means a thousand million.

Likewise One TRILLION = a million million. So yes, China’s economy IS a pretty big deal! (Do

be aware, again, it used to mean a million, million, million – hence the ‘tri’ in trillion, but as the

Australian Oxford dictionary notes, this is now not in common use).

Regular financial and economic reports

Economist Saul Eslake (interview, 2011) identifies the following reports as among the more

important ones for Australian reporters to note.

BUDGET DOCUMENTS

Budget papers contain Treasury’s analysis of the current state of and outlook for the Australian

economy (and State economies in the case of State Budgets) and details of decisions about

spending and taxes. For example:

Annual Federal Budget (which is almost always handed down on the second Tuesday of May).

Mid-Year Economic and Fiscal Outlook (MYEFO), which is usually released by the Department of Finance sometime between mid-October and late December. Available at:

www.budget.gov.au

State Budgets, which are usually brought down by the State Treasury department either just before or in the weeks after the federal budget.

State Budget Mid-Year Reviews, which are released by the State Treasury department, the mid-year reviews provide updated information on economic conditions and financial

projections.

RBA STATEMENTS

The RBA’s quarterly Statements on Monetary Policy give a detailed account of the RBA’s view

of the economy and the stance of monetary policy (interest rates) and usually have something to

say about commodity prices. The statements following each monthly board meeting will give

reasons for the decisions (if any) that are taken at those meetings to raise or lower interest rates.

http://www.budget.gov.au/

16

There will be more detailed explanations given in the subsequent minutes of those meetings.

Keep a look out for:

The Reserve Bank’s quarterly statements on Monetary Policy, made on the first Friday of February, May, August and November each year.

Available at www.rba.gov.au/publications/smp/index.html

Statements released after each RBA Board meeting, which are scheduled for the first Tuesday of the month, and the minutes of those meetings, (usually published in the third

week of each month.

The six-monthly Reserve Bank Financial Stability Reports, released in March and September each year. These reports have a lot of analysis of borrowing and lending.

ABARES REPORTS

ABARES reports offer comprehensive cover of issues of interest to primary producers and

people living in rural areas. They are easy to read and can be accessed online at

www.daff.gov.au/abares

The Australian Commodities quarterly reports contain an economic overview and give a breakdown of farming crops/livestock as well as energy minerals and metals.

ABS FIGURES

The ABS reports provide information about growth in jobs and changes in unemployment. There

are subsequently detailed releases giving information about employment and unemployment in

particular regions. Ones to look out for include:

Monthly employment reports, usually released on the first Thursday of the month.

CPI, usually published on the last Wednesday of January, April, July and October.

Quarterly national accounts, usually circulated on the first Tuesday or Wednesday of March, June, September and December.

For regional areas the monthly trade statistics contain data on exports of agricultural and resources exports.

(Source: Eslake interview, 2011)

http://www.rba.gov.au/publications/smp/index.htmlhttp://www.daff.gov.au/abares

17

CHAPTER 2

THE ECONOMIC IMPORTANCE OF

AUSTRALIA’S COMMODITY

EXPORTS

The contribution of soft and hard commodities to Australia’s expert earnings is significant to

Australia’s economy. As well as supplying high world demand for hard commodities, Australia

is well placed to address global food security issues. Agriculture and mining together “comprise

the largest proportion of Australia’s export earnings, at 68 per cent in 2009” (Lewis et al 2010,

104). This figure actually underestimates the importance of agriculture and mining, because it

doesn’t take into account low-value added primary products such as sugar, honey and even

alumina. These goods are often classified under manufacturing statistics.

At some stage in their career, most journalists will cover a news item or feature story that deals

with Australia’s commodity–based exports. At first glance, the story may not appear to be an

economic one, but upon closer inspection, there are often economic impacts that have

ramifications on people downstream of the event. For example, if you are covering a flooding

event that wiped out a farmers’ crop, consider if this follows a prolonged period of drought and

whether the farmer has received any income over the last four years to pay back bank loans or

staff. During the same floods truck drivers may be unable to deliver their goods for days or even

weeks if high-ways are cut. As a result some contracts may be unable to be fulfilled.

Concerning the summer flooding of 2010/2011 in Queensland, Miriam Silva noted there needed

to be more consideration in the media on the flow-on effects and impacts that could be linked to

back to one event such as a flood. “There are up/downstream impacts on the farm support sector,

for example livestock truck drivers (downstream) and livestock exporters (upstream) that have

big impacts” (Silva, 2011 interview).

Miriam Silva gave another example in the 2011 Federal government export ban on live cattle to

Indonesia. This event made headlines in Australia and around the world, with many of the

upstream and downstream impacts immediately obvious such the sudden halt of graziers’ sole

source of income. However there are still many other ramifications to consider besides the most

obvious. One of the lesser-known anecdotes I heard from rural reporters in far north Queensland

included tradespeople such as electricians losing major contracts as a result of the industry’s

financial uncertainty.

18

Australian Agriculture

While the primary industries are an important component of Australia’s economy, there are also

key differences in how mining and agriculture are important. In terms of GDP, agriculture’s

contribution to Australia’s economy at first appears small. In 1950 agriculture’s share of

Australia’s GDP was around 30 per cent. Since then, the sector’s share has decreased to about

three per cent by 2010 (Lewis et al 2010, 104).

With figures like three per cent, one could be forgiven for wondering why or how agriculture is

so significant. Simply put, Australian farms feed most of Australia. Australian farmers produce

almost 93 per cent of Australia’s domestic food supply (PMSEIC 2010, 15). As well as

providing most of Australia’s domestic food supply, there is still enough surplus to contribute to

feeding world demand. Australia exports a massive 60 per cent in volume of “total agricultural

production” (PMSEIC 2010, 15).

The statistics surrounding GDP further improve when links with other sectors of the economy

and flow-on industries are taken into account, such as packaging, transport, food retailing,

accommodation, cafes and restaurants. This is explained further in the following section.

FARM FIGURES, FLOW-ON SUPPORT BUSINESSES, BENEFITS AND PROSPECTS

The gross value of Australian farm production in 2009-2010 was $48.7 billion (equating to the

three per cent of GDP discussed above). Yet as the NFF (2012) explains, more consideration of

the figures is required:

This is only part of the picture When the vital value-adding processes that food and fibre

go through once they leave the farm are added in, along with the value of all the

economic activities supporting farm production through farm inputs, agriculture’s

contribution to the GDP averages out at around 12 per cent (or $155 billion). (NFF 2012,

5)

Remembering that Australia’s exports are commodity based, let’s return to the 60 per cent of

Australian farm produce that leaves our shores for other countries. In 2010-2011, these exports

contributed $32.5 billion (NFF 2012, 5). Add to this the wider agriculture, fisheries and forestry

sectors and earnings then rise to a combined $36.2 billion from agricultural exports (NFF 2012,

5).

Australian exports by their very nature, are at the mercy of international market conditions,

which in turn determines the level of demand for our exports. Figure 2 illustrates Australia’s

major agricultural export markets include some of the largest and some of the fastest growing

economies in the world, including China (14 per cent), Japan (13 per cent), and ASEAN nations

(21 per cent).

19

Figure 2. Major Australian agricultural export markets

Source: ABARES, Australian Commodities, December Quarter 2011

Queensland Governor Penelope Wensley has seen first-hand the potential of Australia’s

agricultural assets. Prior to her current role, Her Excellency spent 40 years as a career diplomat

representing Australia in a wide range of positions in Europe, Asia, Africa, the Americas, the

Pacific and at the United Nations. Based on this experience, Governor Wensley noted “Australia

is well positioned to deliver on the growing demand from our neighbouring countries, with the

quality of Australian produce being a major selling point” (Kruger 2010). It’s a view shared by

National Farmers Federation (NFF) President Jock Laurie:

The prospects for agriculture are huge, with the need to feed, clothe and house a

booming world population. World population growth will continue to expand to

more than nine billion by 2050, driving demand for both quality and quantity of

food and fibre. In just eight years’ time it is predicted that half the world’s

population will be on Australia’s northern doorstep. Four billion people across

Asia, enjoying economic growth of around 10 per cent per year, represent

unparalleled opportunities for Australia. (NFF Farm Facts 2012, 3)

An example of the economic magnitude of the developing countries is that of China. For more

on this, see the China Case Study ‘Re-orient: The Economic Drivers of China’s Long Run

Growth’ in CHAPTER 3.

In terms of export earnings for Australia, Table 1 shows the top eight commodities supplying

international demand for our agricultural products.

China14%

Japan13%

ASEAN21%

other Asia16%

European Union8%

Middle East8%

United States7%

Other13%

Major Australian Agricultural Export Markets %

20

Table 1. Top eight Australian agricultural exports in 2010-11

PRODUCT EARNINGS (AUD $ MILLION)

1. Wheat $5,526

2. Beef and veal $4,328

3. Wool $2,376

4. Wine $1,957

5. Dairy (excl. cheese) $1,614

6. Sugar $1,492

7. Barley $1,295

8. Lamb $1,026

Source: ABARES, Australian Commodity Statistics 2011, 17

Mining

Mining is the other important export commodity in Australia. According to the Australian

Bureau of Statistics (ABS, 2012b), the mining industry was the fourth largest contributor to

Australia’s GDP in 2009-2010, with 8 per cent of total GDP. The ABS (2012b) noted:

Australia continues to rank as one of the world's leading mining nations with substantial

identified resources of major minerals and fuel close to the surface. In 2009, it had the

world's largest economic demonstrated resources of brown coal, mineral sands (rutile and

zircon), nickel, uranium, lead and zinc.

Australia was the largest producer of iron ore, bauxite and the mineral sands, rutile and

zircon in 2009. It was also a top ten producer of a wide range of other minerals including

coal, copper, gold and uranium.

During 2010-2011 the value of exports from the mining industry more than doubled to $136

billion (ABS, 2012b). The mining industry contributed 55 per cent of the total value of goods

exported from Australia in 2010-11, which was an increase of 37 per cent from 2006-07 (ABS

2012b).

The mining sector has not always been a strong contributor to Australia’s exports. “Over the

period from 1950 to 2009, the rural sector declined as a proportion of Australia’s total exports

from over 80 per cent to a little more than 12 per cent in 2009, while mining has taken over as

the major exporter in the economy, its share increasing from 2 per cent in 1950 to 56 per cent in

2009” (Lewis et al 2010, 104).

Coal is Australia’s leading export commodity. Overseas economies such as India and China

require electricity to industrialise and modernise – coal being the main ingredient for the

majority of the power grids. But these countries are also turning their attentional other means of

generating power, such as gas. “Coal comprises the largest single proportion of the value of total

minerals produced, with gold, oil, iron ore and liquefied natural gas (LNG) also among the most

21

valuable mining products” (Lewis et al 2010, 120). The demand for LNG in the Asia-Pacific

region is promising:

(Demand) in particular by India and China, has risen rapidly since 2005 and is expected

to continue to be rapid over the next 20 years due to strong economic growth fuelling

growth in their demand for energy. In response, Australia is increasing its number of

LNG mining operations. (Lewis et al 2010, 120)

Figures from the Department of Foreign Affairs and Trade (from September 2010) show

Australia’s top exports include many hard and soft commodities (see Table 2). Iron ore and

concentrates rank number one, coal ranks number two and wheat is ranked at eight.

Table 2. Top 11 Australian Exports

PRODUCT EARNINGS (AUD $ MILLION)

2010-11 2011-12

1. Iron ore and concentrates 58,383 62,703

2. Coal 43,717 47,912

3. Gold 14,256 16,650

4. Education-related travel 15,510 14,768

5. Personal travel (excl education) 11,928 12,007

6. Natural gas 10,286 11,962

7. Crude petroleum 11,090 11,176

8. Wheat 5,482 6,354

9. Copper ores and Concentrates 5,130 5,371

10. Aluminium ores & concentrates 5,281 5,277

11. Beef 4,527 4,683

Source: DFAT 2012a, compiled using data from the ABS Sep 2012

CHAPTER 3 highlights the growth of China as an example of how Australia’s agricultural and

mining commodities serve the growing needs of emerging countries. However, most of

Australia’s mining ‘boom’ resulted from an increase in the prices paid for commodities due to

demand from emerging economies, not necessarily because of the amounts of commodities

produced. Saul Eslake explains:

Mining production actually hasn’t increased all that much over the past decade –

by an average of 1.8% per annum compared with real GDP which has grown at an

average annual rate of 3.0% over the same period. However that calculation only

refers to the volume of mineral production, and doesn’t reflect the huge increase

in the value of mineral production of the past decade driven by the enormous

increase in the prices received for each tonne of minerals exported.

That additional income has circulated through the broader economy (including

through the higher royalties and taxes paid by mining companies to governments)

in various ways that have boosted national income and spending quite

considerably. Moreover, there will be a substantial increase in the volume of

22

mining production over the coming decade as the large number of projects now

under way come into full production. (Eslake, interview, 2011)

Saul Eslake compares these figures to previous decades:

The 1.8 % pa growth in the volume of mining output over the past decade has been

substantially slower than over previous decades – the volume of mining output grew at an

average annual rate of 4.1% in the 10 years to 2000-01, and by 6.7% per annum in the ten

years to 1990-91. However, over both of these decades, prices of mineral and energy

commodities were generally declining, so that growth in the value of mining output was

slower in these two decades than over the past one. And declining revenue from mining

output meant that mining companies ran down their investment, which is the main reason

why the increase in mining output over the past decade has been so sluggish (Eslake,

interview, 2011).

Australia’s main export destinations

In Table 3, DFAT (2013a) lists China and many other Asian nations as Australia’s main export

destinations. Mining (including energy), agriculture and education services make up the majority

of exports to these countries.

Table 3. Australia’s main export destinations (goods and services), 2012

1. China 26.3%

2. Japan 16.6%

3. Republic of Korea 7.2%

4. United States 4.9%

5. India 4.7%

Source: DFAT, last updated May 2013

CHINA

A more detailed case study explaining complementarity of trade is provided in China case study

‘Re-orient: the economic drivers of China’s long run growth’ in CHAPTER 3. The case study

highlights the importance of mining and energy in Australia’s exports to China. DFAT (2013c)

also noted there are strong prospects for further cooperation between Australia and China in the

agricultural sector as China's new middle class is also beginning to move away from traditional

staple foods and towards higher protein foods such as beef, lamb and top quality horticultural

products. DFAT (2013c) also notes that travel services are increasingly important exports to

China.

23

JAPAN

DFAT (2013e) states Japan is Australia's second largest export market, and will remain so for the foreseeable future:

Australia is a safe, secure and reliable supplier to Japan of food, energy and mineral

resources. In 2011, Australia's major exports to Japan included coal ($17 billion), iron ore

($10.8 billion), beef ($1.58 billion) and copper ores and concentrates ($1.4 billion).

Japan was Australia's largest export market for beef, fish, fruit juice, animal feed, copper

ores and concentrates, coal, liquefied propane and butane, aluminium, transmission

shafts, dairy products and natural gas.

REPUBLIC OF KOREA (ROK)

Trade between Australia and South Korea (Republic of Korea, ROK) developed from the 1960s

as Australia exported raw materials to feed demand as the ROK was undergoing rapid

industrialization. Australia exports iron ore, coal, crude petroleum and copper and other ores to

the ROK. Australian beef exporters have found a strong market in the ROK with beef exports

valued a $773 million in 2011, up from $633 million in 2010 (DFAT 2013f). Australia’s

education industry is also meeting demand from the ROK. According to DFAT (2013e),

“education has also been a major export, with the ROK Australia’s third-largest source of foreign

enrolments after China and India for the last three years.”

INDIA

Australia has significantly increased its economic ties with India in recent years, but there are

some considerations regarding accessing the market. Australia's strength in exporting primary

products, particularly minerals and fuels as well as services like education, positions us well to

supply growing Indian industrial and consumer demand” (DFAT 2013d).

Yet (DFAT 2013d) notes there are still major barriers to trade with India with tariff rates and

trade barriers in India “among the highest in the world.”

UNITED STATES

DFAT (2013b) lists the United States as Australia's most important economic partner country

(when goods, services and investment are combined).

The United States is Australia's fifth largest merchandise export market and our most

important market for services. It is Australia's largest import source for services and

second largest import source for merchandise. The United States is the largest investor in

Australia. Australia is the ninth largest provider of foreign direct investment (FDI) in the

United States. The United States is one of the top five source countries for visitors to

Australia in terms of numbers and expenditure.

24

Australia's strong economic links with the United States do not mean we agree on all

trade issues. Indeed, Australia has a number of concerns about US trade barriers. For

example, the size of US farm assistance packages in recent years has caused much

concern. (DFAT 2013g)

TOP TIP: TRADE AT A GLANCE

For more details on Australia’s economic trade indicators for both mining and agriculture, access the

Department of Foreign Affairs Trade at a Glance publication via:

www.dfat.gov.au/publications/trade/trade-at-a-glance-2011.html

DFAT provides details of more than 200 countries on its main website. More information about

Australia’s key export destinations can be found on DFAT’s Country Brief index via:

www.dfat.gov.au/geo/

TOP TIP: FLOOD COSTS

Keep in mind the contribution and importance of the agricultural export crops should you find yourself

reporting on floods that cover vast areas of the country.

When floods cover cities and towns, the costs are obvious. What about the costs of the hundreds of

hectares of crops in the same region? The damage bill can easily come to be hundreds of thousands of

dollars for one farm.

While working at Landline, I met a farmer in Gatton who put his damage bill after the January 2011 flash

floods at $1 million dollars. He had to foot the costs himself after his insurance company refused to pay.

He had staff to pay and contracts to supply his vegetables to supermarkets to meet. The financial impacts

are strong and the emotional impacts heart-wrenching.

TOP TIP: FLOODED MINES

It’s not only farms and houses that are susceptible to flood waters. Very little was mentioned in the media

about the impacts of flooded mines during the Queensland 2010-11 floods. Perhaps this is because

businesses do not want any negative publicity affecting the share price. Yet ABARES gathered data by

the March 2011 quarter that showed the impacts of heavy rainfall and flooding in eastern Australia from

late November 2010 onwards:

It is estimated that Queensland’s coal exports between December 2010 and March 2011 could be

around 15 million tonnes lower than previously expected. This represents a reduction in export

earnings of around $2-2.5 billion. Effects on coal exports could continue into the June quarter as

it will take time to return mines and rail infrastructures to full capacity. (ABARES March 2011,

17)

25

TOP TIP: FLOODING & RELATED INDUSTRIES

When covering stories, keep in mind the related industries. Consider for example, who or what else is

likely to be affected in flooding. In this case transport of commodities is cut off, jeopardising the

livelihoods of truck drivers as well as delaying payment for goods for farmers and supply to restaurants.

ONLINE RESOURCES

Farm Facts: www.nff.org.au

The NFF’s annual ‘Farm Facts’ document provides an easy to read list and guide of Australia’s

major agricultural commodities. It includes the financial contribution to Australia and

international markets. Note that the NFF is the peak body representing Australian farmers on a

national level and would be classified as a lobby group.

ABARES: www.abares.gov.au

The quarterly reports provide a comprehensive, detailed analysis of Australia’s agricultural and

mining commodities. It summarizes past and present figures and provides economic estimates.

While detailed, it is easy to read and the contents are divided into helpful sections.

Note ABARES is a government run organisation using industry economists.

PMSEIC:

www.innovation.gov.au/Science/PMSEIC/Documents/AustraliaandFoodSecurityinaChangi

ngWorld.pdf

PMSEIC stands for The Prime Minister’s Science, Engineering and Innovation Council,

Canberra, Australia. The link above provides a useful summary by PMSEIC titled Australia and

Food Security in a Changing World.

ABS: www.abs.gov.au/ausstats/abs@.nsf/mf/1301.0

The Australian Bureau of Statistics publishes an annual Year Book with simple statistics

from Australia’s major industries as well as other useful information. The 2012 version

can be found at the above link.

The following link by the ABS provides an interesting history of the importance of primary

industries to the Australian economy. ‘Evolution of Australian History’ summarizes how

Australia’s modern day economy initially ‘rode off the sheep’s back,’ to current issues:

Australian Bureau of Statistics. 2012. 1301.0 Year Book Australia: 2012. Industry structure and

performance, Evolution of Australian History. Latest issue. Released 24/05/2012.

www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20Feature

s~Evolution%20of%20Australian%20Industry~239

http://www.nff.org.au/http://www.abares.gov.au/http://www.innovation.gov.au/Science/PMSEIC/Documents/AustraliaandFoodSecurityinaChangingWorld.pdfhttp://www.innovation.gov.au/Science/PMSEIC/Documents/AustraliaandFoodSecurityinaChangingWorld.pdfhttp://www.abs.gov.au/ausstats/abs@.nsf/mf/1301.0http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20Features~Evolution%20of%20Australian%20Industry~239http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20Features~Evolution%20of%20Australian%20Industry~239

26

CHAPTER 3

CHINA CASE STUDY

CHAPTER 2 listed China and other growing Asian economies as Australia’s leading export

markets. The following case study gives a more detailed look into China’s economy and why

China has become a strategic trading partner for Australia.

Re-Orient: The Economic Drivers of China’s Long Run Growth

CHINA’S RAPID ECONOMIC TRANSITION

In a little more than three decades, China has transitioned from a poor, inward looking rural

based economy, into a booming, open, market-orientated economy. China began market reforms

in 1978 and over the next three decades, economic growth as measured by Gross Domestic

Product (GDP) grew rapidly at about ten per cent a year (World Bank, 2013a).

The population reached approximately 1 billion people by 1981. As a result of economic growth

there was a substantial contraction in the number of people living in poverty from 1981 to 2004.

The World Bank indicated that the proportion of China’s population living below the

international poverty line fell from 64% in 1981, to 10% in 2004; “the number of poor by this

measure fell by about 500 million” (Chen and Ravallion 2008, 2).

While there have been huge gains, these figures indicate of course that hundreds of millions of

people are still living in poverty in China. Much work is still needed to continue to reap the

rewards of growth and focus on remaining problems. Rapid economic growth has brought on

many challenges such as environmental concerns and unequal distribution of income. China’s

annual growth target of seven per cent (GDP) in its five year plan from 2011 “signals the

intention to focus on quality of life, rather than pace of growth” (World Bank, 2013a).

China, “has the world’s second largest manufacturing sector and is now the world’s largest

exporter of goods” (OECD, 2010, 11). China remains in a strong economic and influential

position. China’s GDP growth continued even during the global financial crisis, however income

and consumption levels for individuals remain low when compared to advanced economies. “By

2008, measured in purchasing power terms, private consumption per head was just one-tenth of

the average level in the OECD area and between one-fifth and one-quarter of those in low-

income OECD countries such as Mexico and Turkey” (OECD 2010, 21).

27

ECONOMIC GROWTH: THE RISE SINCE THE REFORMS OF 1978

China began the process of rapid industrialization during the capital intensive central planning

era of 1952 to 1978 (Hu, Zuliu and Mohsin S Khan 1997, 103). However, the turning point for

china’s economic growth was market–oriented government reforms from 1978 that lead to

phenomenal rates of growth.

Figure 3 represents China’s annual GDP growth in US dollars spanning from 1981 to 2010. Just

after the reforms, GDP was $194 billion, rising steeply to $1 trillion in 1998, and $5.8 trillion in

2010.

Figure 3. China’s Annual GDP 1981-2010.

Source: The World Bank Data, GDP (current US$ at purchaser’s prices, 2013b).

The OECD (2005, 2010) and World Bank (2011) have noted how the market-based reforms

facilitated growth by using economic factors of production of land, labour, capital and enterprise

via:

The ‘Open Door’ policy allowing far greater foreign trade and investment, via ‘special Economic Zones’. These were marked geographical locations where central government

rules were relaxed.

Allowing market forces to direct prices rather than price controls.

Facilitating the growth of private enterprise (which became the main creator of new jobs) while reducing less efficient state-owned enterprises.

Huge investment in physical capital and infrastructure (relatively large investment percentage of GDP compared to other OECD countries).

1980

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Investment in human capital (education and training).

Facilitating the mobilization of labour (away from rural areas and into ‘economic zones’).

China’s accession to the World trade Organization further developed these reforms for example in the reduction (but not necessarily elimination) of tariffs and trade controls.

These reforms resulted in:

A surge in productivity.

High levels of domestic savings (compared to previous levels).

Domestic consumption growth.

A surge in earnings via foreign domestic investment (FDI) and trade.

CHANGING TRENDS IN CONTRIBUTION TO CHINA’S GDP

Key drivers of China’s economy

While industry growth remained capital intensive, productivity became a new driver of the

economy by making more efficient use of physical capital (OECD 2010, 26). Productivity rose

rapidly as the government began to mobilize the labour force away from agriculture and into

Industry.

Investment in factories, building (such as building of ports), highways and other infrastructure

reached 35 per cent of GDP in 2000, and increased to about 43 per cent in 2007 (Vincelette

2010, 4). Much of the input for this investment was resource intensive:

China now accounts for around one-third of world steel production (requiring iron-ore imports).

17 per cent of world electricity production in 2005(requiring coal imports) (Figures from: RBA 2007).

International raw prices for commodities have risen in the last decade. This has been to the

benefit of countries such as Australia that supply to China’s commodity demands.

Domestic saving

Domestic saving rates in China are high when compared to other industrialised countries as

Vincellete et al (2010, 4) note, “the bulk of China’s investment has been financed domestically.”

Foreign trade and investment

China’s open-door policy attracted huge levels of foreign direct investment (FDI) with foreigners

able to take advantage of lower labour costs fuelling the boom in growth. China also benefitted

by being able to adopt new technology or methods introduced by overseas countries. Foreign

direct investment into China was negligible prior to 1979, yet by 2008 cumulative foreign direct

investment had reached US$100 billion (World Bank 2010b)

29

‘Re- exports’ - where a country imports a product, adds value to the product (for example by

further processing the product) and then exports the improved product play a valuable role in

China’s economy. The RBA (2007) summarizes the importance of ‘re-exports’ in China’s

economy:

China’s economy has a large and rapidly growing traded sector compared with other

major economies. Between 2002 and 2007 the value of exports grew by around 30 per

cent a year, and exports accounted for around 35 per cent of GDP in 2006. Much of this

reflects growth in the processing of goods that have been imported from other countries,

particularly east Asia: imports have grown at an annual pace of around 25 per cent over

the same period, and are now around 30 per cent of GDP. Nonetheless, the domestic

value-added component of recent exports has been rising over time, and much of the

growth in imports is for domestic use. (RBA 2007)

Annual GDP growth in China rose from around 8 per cent to more than 11 per cent in the five

years between 2002 and 2007 as exports surged (RBA 2007).

“Foreign domestic investment played an important role in China’s development, particularly in

transferring technology and linking China to global markets. However, at 3-4 per cent of GDP,

FDI has not been the main source of financing for China’s growth” (Vincelette et al 2010, 4). As

Vincelette et al (2010, 4) noted above, the bulk of China’s investment in the growth period to

2007 was financed domestically.

Global Financial Crisis (GFC)

China was not hit as hard by the global financial crisis as the United States and Europe, however

in a world linked by economic trade, China did of course feel some effects of the GFC.

Despite its favourable initial macroeconomic position, in November 2008, China began

to feel the effects of the financial crisis that commenced in the developed world and was

spreading globally. The impact has been mainly through the trade channel, and not so

much through private capital flows and the financial sector. In the last quarter of 2008

China’s exports declined dramatically... A large part of the export contraction was the

result of reduced exports of machinery, transport equipment, and manufactured goods…

Negative growth in China’s major trading partners – namely, Europe and the United

States, where demand plunged – is the main reason for the steep drop in Chinese exports

In contrast to other emerging-market economics, China’s financial sector has not been

seriously affected by the crisis due to China’s limited exposure to the toxic assets of the

developed world.. (and) the country’s minimal reliance on foreign capital for financing

economic growth in recent years (Vincellete et al 2010, 13- 15).

Conclusion and future implications

Economic reforms since the late 1970s have delivered fast growth for China and have

continuously been endorsed and updated by the government. But as The World Bank (2013a)

states, “rapid economic ascendance has brought on many challenges as well, including high

inequality; rapid urbanization; challenges to environmental sustainability; and external

imbalances.”

30

China’s leaders use a series of five year plans to map out economic and social goals. The World

Bank (2013a) states that China’s 12th Five-Year plan (2011-15) forcefully addresses these issues:

It highlights the development of services and measures to address environmental and

social imbalances, setting targets to reduce pollution, to increase energy efficiency, to

improve access to education and healthcare, and to expand social protection. Its annual

growth target of 7 per cent signals the intention to focus on quality of life, rather than

pace of growth.

China case study: Implications for Australia

As explained in CHAPTER 2, Australia has an abundance of natural resources. This includes rich

mineral and energy resources and a sophisticated agricultural sector. These natural resources

help to make up what are known as ‘economic endowments’. Of course, not all economic

endowments are equal for all countries. Take, for example Singapore. This island nation has little

natural resources, yet is considered one of the richest economies in the world. Singapore used

other resources such as human capital, knowledge and its strategic geographic positioning of a

global port to develop into a financial services hub. In the case of China, one of its main

economic endowments was its abundance in lower-cost labour.

In terms of economic endowments, Australia and China have different comparative advantages.

“A country is said to have a comparative advantage in a particular good if it can produce it at the

lowest opportunity cost or, in other words, in which it is relatively more efficient” (Lewis et al

2010, 221). Mai et al (2005, 3) describe the matching up, or trade of comparative advantages as a

“complementarity”.

Australia and China have become important economic partners in the past 15 years. As Mai et al

(2005, 7) explain, “the deepening in the economic partnership between Australia and China is

due, in the main, to the complementarity in the dynamics of the two economies.” In simple

terms, Australia has the raw ingredients (e.g. iron-ore, coal) that are turned into the building

blocks or energy used to create infrastructure in China. Mai et al. (2005, 7) note four key

examples of Australia and China’s economic complementarity:

First, rapid industrialisation in China has resulted in (and continues to cause) rapid

urbanisation, reducing the number of people relying on scarce land resources for their

livelihood. This is increasing the proportion of the population relying on commercial

food, thus increasing China’s demand for imports of various agricultural products.

Australian barley, for instance, has become a key input into the production of China’s

most popular beer. Second, as china becomes the world’s largest producer of iron and

steel, its demand for Australian iron ore has jumped. Third, rapid economic growth has

caused China to source increasing amounts of oil and gas from overseas, including

Australia. This factor is shaping China’s energy imports as well as its investment pattern

in Australia. From the perspective of the Australian mineral and energy suppliers, China

will continue to be a significant market. Fourth, China’s demand for advanced farming

and mining technology and management will shape bilateral investment in the near

future.

31

These four areas give examples that journalists will find a lot of stories can relate to when

covering both soft and hard commodities.

ABARES (2011) forecasted growth of around 8.5 per cent a year toward 2016 for China. With

the global financial upheaval such as the European sovereign debt crisis, a downgrade of China’s

GDP figures by Beijing closer to 7. 5 per for the end of 2012 cent was the topic of much

speculation in the media such as the ONLINE RESOURCES articles below. However even figures

of 7.5 per cent are still considered strong economic growth levels by economists.

The ABS 2012 Year Book on Australia’s bilateral relationships (2012a) notes:

China's importance to Australia has grown with China's increasing economic, political

and strategic influence in the Asia-Pacific region and in the global economy. In 2010–11,

China was Australia’s largest two-way trading partner for goods and services. The value

of trade with China topped $100 billion for the first time in 2010. Two-way goods and

services trade was $113.3 billion in 2010–11, an increase of 26% compared to the

previous year. Australia is working to diversify its trading relationship with China and

exploit new opportunities presented by China’s continued high growth, including in

South West China. Both governments are continuing negotiations for a bilateral free trade

agreement.

TOP TIP: CHINA–AUSTRALIA TRADE FACTS

• China has the world’s second largest manufacturing sector and is now the world’s largest exporter of

goods.

• China’s open door policy attracted huge levels of foreign direct investment (FDI) with China benefiting

from overseas technology and knowledge; while foreign companies were able to take advantage of lower

labour costs.

• China now accounts for around one-third of world steel production, 17 per cent of world electricity

production in 2005, 40 per cent of iron-ore imports, 10-20 per cent of copper and nickel imports and four

cent of coal imports.

• A key driver of economic growth was China’s mobilization of its massive population from the rural to

the manufacturing sector.

• Abundant in cheap labour, China became a dominant supplier of labour-intensive manufactured goods

(Mai et al 2005, 8).

• Australia is using its comparative advantage (low opportunity cost) in resources to trade with China.

Australian commodity exports such as coal, iron ore, copper and other minerals provide the essential

input ingredients of growth for China and other nations.

ONLINE RESOURCES

For more background research into Australia-China free trade agreement proposals:

www.acbc.com.au/deploycontrol/files/upload/report_fta_modelling.pdf

http://www.acbc.com.au/deploycontrol/files/upload/report_fta_modelling.pdf

32

For examples about media speculation on China’s recent GDP growth prospects visit:

www.businessweek.com/articles/2013-04-15/chinas-gdp-report-delivers-disappointing-news

www.reuters.com/article/2012/07/13/us-china-economy-gdp-idUSBRE86C04220120713

(last accessed March 19th 2013)

http://online.wsj.com/article/SB10001424052702303740704577523202849328184.html

(last accessed March 19th 2013)

http://www.businessweek.com/articles/2013-04-15/chinas-gdp-report-delivers-disappointing-newshttp://www.reuters.com/article/2012/07/13/us-china-economy-gdp-idUSBRE86C04220120713http://online.wsj.com/article/SB10001424052702303740704577523202849328184.html

33

CHAPTER 4

ECONOMICS I

Former First Deputy Managing Director of the International Monetary Fund Anne O Krueger

notes that people are constantly making economic decisions:

Every time you use your credit card, take out a loan, decide whether to rent or buy

a home, think about refinancing your mortgage, you are making an economic

decision – and one which will affect your future financial health. Every time you

cast your vote, whether it be in a Federal, State or local election, you are making

an economics decision – even if you don’t always recognize it as such. Which

candidate will raise your taxes, and what will you get in return for those taxes? As

an individual the only control you can exert over decisions that will have a

significant impact on your life – on your health and wealth – is your vote.

(Krueger, 2003, 31)

These are the very items that make up a large chunk of a news bulletin. When I was producing

radio programmes at the ABC in 2006 I was advised to find stories that either related to the ‘hip

pocket or the heart’ because that had the biggest listener feedback and interest.

The next two chapters explain some of the ‘bare bones’ of economics, divided into ‘micro-

economics’ and ‘macro-economics’.

Microeconomics

As the name suggests, microeconomics looks at the smaller picture of economics. It focuses on

the decision making process and behaviour of individuals and firms. For example

microeconomics looks at why a consumer decides to buy a certain product at a certain price from

a particular business over another business that may be selling a similar product.

Microeconomics is also concerned with how much of a product a business will sell and at what

price. This can be summarised as the concept of ‘supply and demand’, which is explained further

in this section.

34

Microeconomic concepts

SCARCITY

Do you ever feel the more you have, the more you want? For those lucky enough to be on an

occasional shopping spree it’s difficult while eyeing off all the goods on display to remind

oneself of ‘need versus want’. Yet for many, life is a struggle to simple get what they need – the

money barely stretches each week to cover costs.

“The core observation of economists is that all decision makers, i.e. individuals, firms,

households, governments and even whole blocs of nations, want more than is possible” (Frijters,

Dulleck and Torgler 2010, 2). They have infinite wants, but there are finite resources. Many

economists adhere to a history of a moral philosophy that ties in neatly with journalism. This is

the idea that what governments should care about is the combined welfare of all inhabitants. It’s

also central to governments ‘dividing up the pie’ at tax time and when creating or changing

policies. There is much competition from individuals and various organisations over scarce

resources. It is the job of economists to advise policy makers about possibilities available to

allocate scarce resources for the best positive societal outcomes. As any experienced journalist

will tell you from their observations, competition between different parties to get what they want

can be fierce!

In the wake of the GFC, much has been discussed about ‘market correction’ and debate about

whether the market always ‘naturally’ corrects itself, or whether government intervention is

needed. This next section looks at how the market functions, and what ‘tools’ are available to

governments to ‘correct’ the economy.

FACTORS OF PRODUCTION

Commodities (in this case meaning any physical goods as well as services) are produced by

using resources. These resources, as outlined in Table 4, are the ‘factors of production’ that go

into making the commodity. It’s important to note them as we will build on this when discussing

the macro-economic concepts in the following chapter.

Table 4. Factors of production

TYPE DESCRIPTION REWARD

Land (actually includes

water, minerals, plants and

wildlife).

All natural resources Rent/lease (in the case of primary

industries another reward is to use land

for production of more commodities)

Labour The physical and mental work of

people

Wages

Capital All human-made tools and machines Interest

Enterprise/contacts All managers and organisers. They

link and drive the other factors.

Profit

Source: Adapted from Frijters, Dulleck and Torgler (2010, 2).

35

THE MARKET

This section explains the concepts of ‘the invisible hand’, functioning markets and creative

destruction. Finance reports will often refer to ‘the invisible hand’ and many debates between

governments and opposition regarding industry often concern the notion of ‘creative

destruction’.

The ‘invisible hand of the market’ refers to how prices are set in accordance to the difficulty with

which goods can be made. Frijters, Dulleck and Torgler (2010, 8) use the following to illustrate

the interplay between producers, why they specialize and the resulting price:

Consider a world of butchers and bakers where bakers buy meat off butchers and sell

them bread. If the price of bread relative to meat is extremely high, then some

butchers would cease cutting meat and become bakers instead, thereby reducing the

amount of meat in the economy and increasing that of bread. This would decrease

the price of bread and increase that of meat. Given the new set of prices, some

people would again switch professions. This system only becomes stable when the

price of bread and meat is such that no baker or butcher could improve their welfare

by switching professions and hence when the ‘price’ that the bakers ask for their

goods reflects the cost to them of not being able to be butchers. The same holds for

the price that the butchers ask for their goods, implying that the relative price of meat

compared to bread reflects the relative difficulty of producing them. At any other

price there is either too much meat or bread produced and some suppliers will

undercut the others, thus bringing the price more in line with the relative costs of

production.

The ‘invisible hand’ refers to the tendency of prices to move to a situation where no-one’s

position can be improved by further undercutting.

TOP TIP: NEW BUSINESS VENTURES

Be careful to show that the ‘grass isn’t necessarily greener for all’ on the other side; stories on emerging

industries could lead to a rush or a new ‘craze’ – which may only last a short time or never profit. ‘Not

everyone can make a living from emu farming’ – something I heard said in the halls of the Landline

department.

TOP TIP: RUMOUR HAS IT…

The ‘word’ will get out that a commodity price is more favourable for a particular crop or agricultural

commodity, so many farmers decide to grow the crop that is in demand, but this often leads to an

oversupply. Thus as a journalist you can turn to rural leaders or lobby groups for a word of warning or

advice for producers as these groups can offer a ‘bigger picture’ regarding the market.

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FUNCTIONING MARKETS

The ‘invisible hand’ encourages prices to move towards costs of production, and allows people

to specialise in areas of interest and ability (which basically keeps people happy and some order

in society).

But for the invisible hand to work requires functioning markets; functioning markets require

competition. Competition only works in a situation where there are many sellers and buyers,

buyers have access to price information of all sellers, and there is no colluding or cheating such

as reneging on contracts (Frijters, Dulleck and Torgler 2010, 9).

EQUILIBRIUM

An economic system is said to be in equilibrium when it is not possible for anyone to improve on

their outcome by changing their current action or behaviour (Frijters, Dulleck and Torgler 2010,

12). For equilibrium to be possible, all information must be available to the individuals and they

must be free to trade if there is an opportunity to improve their situation. For example, in

agriculture, consider farmers supplying fresh fruit and vegetables to grocery stores. A broccoli

farmer who I visited in the Lockyer Valley in 2011 had expensive infrastructure such as sheds,

conveyor belts, packing equipment and machinery. It was in his best interest, despite the floods,

to keep his operations going and supply the major grocery chain with his boxed, fresh broccoli. It

was in the grocery chain’s best interest to renew the contract to this farmer as the vegetables

would otherwise have to be sourced interstate, at a higher price due to transport costs. It is in the

best interest of the farmer to be aware of these costs, so that he can ask for higher contract prices

and compete to his advantage against any interstate suppliers.

CREATIVE DESTRUCTION

When a business or industry is losing money and job losses are looming, there is often pressure

on the government to step in to save the industry. But many economists view the loss of

companies as a way of ‘moving forward’- that is, an opportunity to replace inefficient businesses

for new, improved ones. When a new business or economic development arises due to the

demise or destruction of a previous one, this is described by economists as creative destruction.

During my time at Landline I was constantly reminded of and witnessed why Australian farmers

have a reputation for being among the most innovative in the world. For example the managers

of the cotton irrigation property ‘Keytah’ in northern New South Wales have implemented

water-efficient technology known as electromagnetic survey (commonly known as EM survey)

connected to GPS. The technology reads information from probes in the paddock to measure

how much moisture is in the ground. The information can be uploaded from a computer in an

office and the manager can determine if irrigation has sunk deep enough into the soil. Farmers

can also use this technology to determine fertiliser needs.

In the case of Keytah, managers estimated they use 60 per cent less water due to the technology.

The property saves water and fuel costs, however, it also cuts the need for labour, hence creative

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destruction. However, it could be argued that new jobs in agriculture are created through

designing and manufacturing technology. As a result of the uptake in technology, the farm

actually produced more output (cotton) from less water, so the farm labour could be re-deployed

to other parts of the property.

Creative destruction can also stem from changing societal norms. What was accepted in the past,

may no longer considered acceptable as society gains new information. ABC reporter Lauren

Day (Landline, Sept 16, 2012) gives an example from Mareeba, in Far North Queensland:

“Mareeba was once a proud tobacco town, until times changed and growers were forced

to swap one crop for another.

“Italian born Bruno Maloberti was one of the farmers who made the switch and one of

the pioneers of the Australian coffee industry.”

This example shows that as societal norms change (in the case health information about the

harmful effects of smoking) so too do farming practices.

DESTRUCTION VERSUS NEW OPPORTUNITIES

Using the theory of ‘creative destruction’, economists argue that the world around us is

constantly changing therefore opening up new business opportunities and closing old

opportunities. Many economists view creative destruction recessions as part of the process

leading into long-term growth via restructuring and adapting to new technology. According to

Frijters, Dulleck and Torgler (2010, 147) “it’s the new, more productive links and technologies

adapted during recessions that form the basis of the higher wealth after the recessions. Without

the death of less productive industries and old forms of technologies, new technologies and

industries can’t emerge.” Creative destruction involves individuals taking rational opportunities

at the expense of others for example, by breaking old business links to find new, more profitable

ones. Often while the business links are being broken it is a time of stress or unrest, particularly

for the stakeholders on the losing side until they find new links themselves.

When agents choose to do business with a new agent the original business link is broken. For

example, in the case of a farmer and baker, the baker may find a second farmer more suited to

the type of bread they wish to sell. If this occurs on a large scale, the agents left behind in the

original link may become unemployed or go out of business, and this may be sufficient to trigger

a recession. The recession ends when the stranded agents find other stranded or new agents and

create a new link.

TOP TIP: CREATIVE DESTRUCTION

Think about how creative destruction relates to your reporting. If a lobby group is pushing a story on a

sector or industry that looks likely to lose jobs, the headlines often splash ‘hundreds set to lose their jobs’.

Look at all the angles – is there new technology – how can the company or employment agencies help

redeploy workers? How are politicians just getting on the ‘band wagon’ in the story? Or, was the

company so mismanaged that it’s all been a horrible waste?

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TOP TIP: AGRICULTURE

In the case of agriculture we will always need to feed and clothe people, so of course the industry can

never just ‘die out’. Australian agriculture can rightly boast about being fast to ‘uptake’ new technology –

ask the industry groups about the latest technology and advances, I guarantee it’ll blow your mind.

Keeping this mind, though, you of course must consider angles as to whether creative destruction is

‘required’ for any areas that may need to diversify or change (e.g. rotate or change crops).

OPPORTUNITY COSTS

We all have to decisions to make and weigh the ‘pros and cons’ of making out choices. This can

be explained in economic terms as an ‘opportunity cost’. “The ‘opportunity cost’ principle states

the cost (or value) of one good in terms of the next best alternative” (Frijters, Dulleck and

Torgler 2010, 31). For example, when a farmer plants a wheat crop, the opportunity cost of the

wheat harvest is the alternative crop that might have been sown instead. In making the decision

the farmer will look at the commodity price and forecast for wheat, against other possibilities or

uses of the land and what they may bring. The set of possible choices we can make is called the

opportunity set, the feasibility set or the budget constraint.

QUALYS

QUALYs are a tool governments and decision makers can use when assessing how to allocate

finite resources or money to infinite wants and needs. Governments and their advisors have a

finite budget and need to decide which sectors and groups to fund and which to tax further. This

is against the backdrop of often fierce lobbying from the groups or individuals competing for

resources.

‘QUALY’ or ‘QALY’ stands for the Quality Adjusted Life Years, and is a measure that was

designed by European public servants to help governments weigh up decisions for the maximum

gain or welfare of society (Frijters, Dulleck and Torgler 2010, 32). “One QUALY roughly means

another year of life of average quality of an average person” (Frijters, Dulleck and Torgler 2010,

32). Economists and the government weigh up how many people will benefit in terms of one

extra QUALY against the cost. For example the cost of a vaccination program is likely to add

many more QUALYs and save the government future expense, hence such schemes are

approved. When looking at the benefits of how many more QUALYs are potentially gained,

researchers must try to find the costs of implemen