CHAIR —The last time the bureau was here I recall Dr Fisher said that he thought oil would go back to $40. I have lived on the dream of this happening every since. Now the dollar is rising does anyone want to make a prediction as to what is going to happen to the price of oil?

Dr Sheales —What I would say is that oil is on the way down for a whole host of reasons. As to Dr Fisher’s projection of $40—

CHAIR —That was courageous.

Dr Sheales —He was a courageous man when it came to this committee. Certainly you would expect that it will trend down for a while. As we know, there will be the odd hiccup, but that is the trend for the moment because the higher prices are bringing on more supply and it is probably fair to say that the higher prices also cause people to economise more in its use. In many important producing areas it is a little bit more settled. Political environments help too.

CHAIR —I realise the vagaries of agriculture and all things natural.

Senator O’BRIEN —You would have to say that agriculture is more renewable than oil. I wanted to ask about the escalating impact of the drought. There are a few commodities that I would like to get an update on the outlook for—pork, chicken, sugar, wine and wool.

Dr Sheales —As you would be aware, we put out a report last Friday updating basically the effects of the drought on the crops and some of the major livestock industries. We have copies here if any of the senators would like a copy. The picture is that it will be very costly to the rural sector and also to the national economy in terms of lost production, especially on the part of crops, and also forced sales. For example, with respect to wheat we are forecasting a crop of about 9½ million tonnes. That will be the smallest since 1994-95, and down a bit over 60 per cent on what it was last year. It is a very big reduction. It is a similar story for barley and canola is in even worse shape.

Importantly for the livestock sector, we have witnessed very large turnoff of livestock, particularly in New South Wales but also in Victoria and South Australia as the on-farm pasture growth has been very poor this spring and people are offloading stock to a significant extent to try to get their way through until next year. Not surprisingly, that influx in stock has resulted in a sharp reduction of prices for two reasons—the increased supply but also some of that stock is not in tip-top condition. With respect to the beef industry, we estimate the gross value of production is forecast to fall about 13 per cent relative to last year. That is not all due to drought, but a fair amount of it is.

In the case of sheep it is a much bigger impact and we will see it also in flock numbers. We are forecasting a combination of increased turn-off, poorer condition and lower prices. The value of production of sheep meat in 2006-07 will be down about 35 per cent on what it was last year. We are also forecasting the sheep flock to decrease by about four million over the course of the year as farmers turn off stock for slaughter, mainly because they cannot carry them. Beef cattle will not be quite as hard hit, but still we are expecting the herd to come down a couple of hundred thousand over the course of 12 months.

You asked about wool. One of the issues with wool is that quite a bit of the wool that we will produce this financial year has been grown in the previous financial year, that is, we shear them once a year. We are not expecting a big impact on the value of wool produced in 2006-07. Quite clearly the longer the drought persists then the bigger the impact will be, not only on wool, but on other industries as well.

Senator NASH —Can I get a copy of those reports?

Dr Sheales —Certainly. There are more than enough to go around here.

Senator SIEWERT —Can I jump in and ask a question?

Senator O’BRIEN —I was also asking about pork, chicken, sugar and wine.

Dr Sheales —We have not tried to do detailed estimates on those industries, but to give you a bit of what we see happening is that with horticulture there are two key things really. One is the availability of irrigated water supplies. That is clearly under a lot of pressure in many regions. The other thing—I am talking about wine as well—is that as you know there have been quite severe frosts through some of the producing areas and that will have an impact on production this year. We have not tried to estimate those yet. We will be doing that in December when we put out our next Australian commodities forecast.

The chicken industry will be affected to some extent by higher grain prices and also competition in the meat market—particularly if you are talking about meat—from lower beef prices. We do not expect a huge impact on the chicken industry really. It is one of those industries where they have been extremely adept at improving productivity, maintaining returns to the industry and also achieving lower prices over the long term. It is almost like a fact of life. Chicken prices in real terms after inflation have declined for many years and so they are in an extremely competitive position, even though grain constitutes a big proportion of their costs. What was the other one?

Senator O’BRIEN —Pork and sugar.

Dr Sheales —The pork industry will be affected by grain prices. As I indicated earlier we have not done estimates for that yet, but there will be some impact. The sugar industry is not being affected by the current season but will be affected by some declining world prices for sugar. It is almost one of those written-in-stone things with the sugar industry that they get these price peaks from time to time and they never last long because you get a big supply response. The other complication for sugar at the moment is what is happening with oil prices. As Brazil is the major sugar producer and it is probably still the major ethanol producer, there is a trade-off that goes on in Brazil between producing sugar came for ethanol or producing it for sugar itself. What we are likely to see is some reduction in the amount of ethanol produced in Brazil and, as oil prices come off a little bit, more of that cane will go into sugar production and that will take some of the pressure off sugar prices. We are already seeing that; sugar prices internationally have come down about 3c a pound US over the last six or eight months.

Ms Hewitt —You were asking about the wine industry. Separate from the drought, last week ABARE published a comprehensive report on the wine industry and the outlook for the wine grape sector, if you are interested in hearing anything about that.

Senator O’BRIEN —Yes, please.

Ms Hewitt —We can make a copy of the report available.

Dr Sheales —I have a copy I could also leave with you. I have got only one of these.

Senator O’BRIEN —I got in first.

Dr Sheales —Did you want any comments?

Senator O’BRIEN —Given that there is only one copy of the report, you might lay out for the committee some detail to whet the committee’s appetite.

Dr Sheales —Would you like me to make a few comments?

Senator O’BRIEN —Yes, please.

Dr Sheales —What we tried to do in this report that we put out last week was in a sense take a step back and look at the bigger picture of what is going on in the wine industry globally. I emphasise ‘globally’ because the Australian industry has grown tremendously over the last decade or so and most of that growth in production has been destined for the export market, because the amount you can sell on the domestic market is fairly limited. So we have to look at what is happening globally. What is happening globally is that we have a world market for wine that is—to use my words—fairly static. There is very limited growth in wine consumption around the world. Some markets are still growing reasonably well; others are declining. We have an Australian industry that has been selling what has been an increasing amount of wine into a market where demand is virtually stagnant. Not only is Australia doing that but we also see that some of our important competitors, such as the United States, Chile and Spain—but focused on United States and Chile—are also selling into that market, and they are producing similar grape types to us and selling similar types of wine to us. This combination of static demand and supply still growing but growing at a slower rate than it was means that the only thing that will give in that situation is for the prices to come down and stocks to rise. That is exactly what we have seen happening over the last few years.

That brings us to: what does this mean for Australia? Apart from the fact that the market is intensely competitive and will remain that way, we have what the industry regards as excessive stocks in this country, and certainly they are above what their preferred levels would be. One of the issues that we face as an industry in this country is, if the industry reduces its stocks and we are still competing in that global market, we are probably not going to achieve much by way of improved returns to our growers.

The last point I would make in relation to it is that, based on our surveys of the wine-grape growers, there are a couple of important points. First of all, on average wine-grape producers are making reasonable incomes, particularly if you compare them with the broadacre sector, but the price decline that we have seen in the last 12 months will have a major impact on that. We surveyed most recently two regions—the McLaren Vale and Riverina—and we estimate that in 2005-06, based on just the decline in prices, we would see about a fifth of the McLaren Vale producers losing money in terms of farm cash income and, in the case of the Riverina, around about 44 per cent. They are quite large numbers in terms of those losing money.

Relating to all that we also look at the best performers in the industry—the top 25 per cent of the industry—and they are doing a lot better. For example, in 2004-05 average farm cash income in McLaren Vale—with the larger ones—was about $240,000, with a return on capital of about 6.4 per cent. In the case of the Riverina, the average farm cash income was about $287,000, with a return on capital of about seven per cent. I would emphasise that is 2004-05. They will be a bit less for 2005-06, but we do not have the detailed farm level data to give you an estimate on that. So that would imply that, like many other sectors in agriculture, over time in order to remain efficient and competitive in the world market average farm sizes will have to increase. That is the bottom line out of all that. It is a situation where the market is difficult and will remain difficult despite our best efforts, and we are going to have to be very competitive to remain sustainable.

CHAIR —Do you have a view about how you do that in conjunction with also competing in the same capital market with the MIS wine producer?

Dr Sheales —We have not looked at that particular issue. I am aware of it.

CHAIR —It is about time that you did.

Dr Sheales —All I could say, and this is really a personal view, is that new money being invested in the industry presumably is not being invested to lose money.

CHAIR —If you use the Tandow example—

Senator Abetz —If you ask the question, you might actually let the person finish.

CHAIR —I am chairing this and you are not.

Senator Abetz —That is why I think it is particularly rude for the chair not to abide by the requirements of presiding.

CHAIR —If you are adding to your answer the Tandow proposition where—

Senator Abetz —This is outrageous.

CHAIR —Just because it is an MIS, you think it is outrageous.

Senator Abetz —No, you interrupted him. Let him answer.

CHAIR —The example, if you know the one that I mean, is Tandow.

Dr Sheales —I do not know.

CHAIR —They doubled the capital value just by an exchange of contracts in a wine situation.

Dr Sheales —I am not across that—

CHAIR —What I am really saying is: does ABARE give consideration to a prospect where production from an MIS grape industry, which can actually make a profit from fees rather than production, and also give consideration to what influence that will have in the wine industry, as well as the downturn and overproduction?

Dr Sheales —We have not looked at that and I am not in a position to comment on that.

CHAIR —Might I suggest that you could.

Dr Sheales —It is one of those issues that is probably extremely complex.

CHAIR —Do not worry about the minister whispering in your ear. He is a bit agitated over this.

Dr Sheales —A large element of that would be beyond our expertise.

CHAIR —It would not be beyond your expertise to predict what that could do to the market.

Dr Sheales —What I would say, as I said earlier, is that larger operations are making good money still and will continue to do so. If they fit within that sort of category, one would expect that they will continue to make money in their own right.

Senator O’BRIEN —Quality or volume? If they were a larger operation then it could be a larger return, but with a small operation it could be based on quality.

Dr Sheales —It could be. The important thing about any of these businesses, whatever the farming operation, is the bottom line. You either make money or you do not make money.

CHAIR —It does not matter how large or small the operation is if the nexus is the tax deduction, which is the generosity of the taxpayer and the interpretation of the tax office. If it all revolves around that for making the capital investment, then I think there are some clear warning signals. We are to hear later today about an operation in Queensland with an MIS strawberry farm that is going to put Victoria out of business, but I am happy to watch you people gladly oversee the destruction of the institution of family farming, if that is what you want to do.

Senator Abetz —That is an inappropriate comment to this witness. If you have problems with the tax scheme, as we know you do, that is fine, but to then visit the destruction of the strawberry industry in Victoria on ABARE—

CHAIR —I am not visiting it on ABARE.

Senator Abetz —I am sorry. I think Hansard would disclose that that is what you did, and that is not appropriate.

CHAIR —In any event, could I ask that ABARE give some consideration to the impact of annual MIS crop production on future markets.

Dr Sheales —Certainly I hear the question and we are sensitive to that. I suspect that we do not have the sort of information that can divide up who owns what and in what way to be able to do that sort of thing.

CHAIR —We cannot get access to MIS water accumulation either because the register is commercial-in-confidence. But, as I say, it is all driven by the generosity of the tax deduction.

Senator O’BRIEN —Going back to drought issues and the wheat crop, what percentage of last year’s crop would have been exported?

Dr Sheales —Last year, if we are talking crop year—and I think that is probably the most sensible way to talk about this rather than the fiscal year, which gets reported in Australia’s export statistics—for 2005-06 we estimate that about 15.5 million tonnes of the 25 million tonnes produced were exported. Those exports would include a bit of carry-in stock from the previous year, on which I do not have information.

Senator O’BRIEN —If you take 15.5 from 25 you get 9.5, which is about our crop as predicted, so that would mean there is none to export.

Dr Sheales —No, not at all. There is quite a bit of carry-in stock or carryover stock from the previous season, which is available to service markets and also domestic demand this financial year.

Senator O’BRIEN —Do you have any idea what is in stock?

Dr Sheales —That is one of those things that AWB and the grain handlers guard fairly closely. There is an initiative under way, which I do not think has been talked about yet today, by the food and agriculture people to have ABS collect data on stocks held by the major organisations, such as AWB, Graincorp, CBH and ABB. That initiative, I believe, will get under way as of about now, and we will start seeing data probably next month or in December at least on holdings of grain. Obviously, that will not identify individual companies but will be in terms of what is in the country. So until we do that we—

Senator O’BRIEN —You have got no idea or do you think there is some sort of a ballpark idea of how much is available?

Dr Sheales —We do not have a clear idea, because that information is not made available. We can look at exports and we can look at production and make some estimates for domestic consumption, and say, ‘It looks like stocks might be about that,’ but we have got nothing that we can hang a hat on, so to speak. There would have been a reasonable amount of carryover, but what that means exactly we do not know.

Senator O’BRIEN —No. The reduction in the crop implies there will be a significant cut in the amount of wheat available to meet overseas contracts next year.

Dr Sheales —For this current year, that is correct. That report that was tabled would indicate on page 8 that with respect to wheat we are looking at exports of about 10.8 million tonnes in crop year 2006-07. That is compared with what I said earlier, about 15.5 in crop year 2005-06. How well that comes out obviously depends on the actual size of the crop once it is harvested and how much gets used domestically. We have put some estimates in for those and that is in that report.

Senator O’BRIEN —Have you any idea of the impact that this shortage of grain will have on the price of grain in coming months?

Dr Sheales —On what?

Senator O’BRIEN —On the price of wheat.

Dr Sheales —It is important to note that, at the same time as we are having a drought, there has been drought in some other important producing countries, and I especially point towards North America, where their grain harvest was down quite substantially on what previous expectations had been. That has been a major driver of an increase in wheat prices in particular over the past probably four or five months. Our developing situation here is adding to that strength in the market. Certainly, grain prices are quite a bit higher than they might otherwise have been mainly, I would suggest, because of what is happening globally rather than in this country. But we are contributing to that.

CHAIR —It would be fair to say, though, that for the last harvest, which was nearly 12 months ago, world grain stocks were at a low and the price was also at a low.

Dr Sheales —I do not have figures quickly to hand at least on grain stocks last year. I would agree that they had come down a fair bit, especially wheat. They are going to come down quite a bit more this year. That is what is driving that market.

CHAIR —It has taken a while for that to be reflected in the price, because stocks have been down.

Dr Sheales —That is true.

CHAIR —So we sort of all got dudded last harvest.

Senator O’BRIEN —You probably stored yours. I am interested in the impact the shortage will have on intensive industries which are major users domestically, and what price you might think domestic grain would have to be to make the importation of grain an option.

Dr Sheales —We have not tried to estimate what exactly it would have to be to encourage imports. As I think you have heard earlier today, there have been a number of applications made to import grain. At the end of the day that will be a commercial decision on the part of those involved in the trade.

Senator O’BRIEN —An assumption that seems reasonable to me is that, once local prices jump ahead of the international spot price plus freight, there will be pressure to import grain.

Dr Sheales —As I said, it will be ultimately a commercial decision on the part of those that can import grain. There are a lot of things to be dealt with, including compliance, but I think that is something that is probably better answered by the people who have to deal with that day to day.

CHAIR —I think the short answer to that is that wheat will be tough enough but corn and other things will be a possibility.

Dr Sheales —If you look at the global picture and the wheat prices now compared to 2002-03 when a lot of wheat came into the country, yes, that wheat is not available this year globally, so it is more likely to be—

CHAIR —The Ukraine has closed the door and it will take two years to get it in from China. It is all pretty hard for wheat. This time next year, if it has not changed, we will be in real trouble.

Dr Sheales —We will all be in trouble.

CHAIR —There were no fat prisoners of war; it was probably the best thing for obesity that ever happened. There will be nothing to eat.

Senator O’BRIEN —The national solution is famine, says Senator Heffernan. What work is ABARE doing, if any, in respect of the climate change-type impacts on the economy?

Dr Sheales —I will hand over to one of my colleagues for that.

Dr Gunasekera —We are not doing any specific work at the moment on the relationship between climate change and agriculture, but we will be looking at some of the adaptation issues, particularly structural adjustment and the extent to which farmers are in a position to adapt to climate variability and climate change, but we have not done any research in this area at the moment.

Senator O’BRIEN —Thank you for that.

Senator MILNE —I would like to follow up on that. When we had the oil inquiry, ABARE came before us and said, ‘Well, putting climate change to one side, we calculate the economics, blah, blah, blah, of oil price’, and so on. Given that you have not done any work at all on the link between climate change and impacts on agriculture, does ABARE still regard it as appropriate that you put climate change to one side in giving any economic analysis to government?

Dr Gunasekera —I am not really sure I understand your question clearly. If you can be a little bit more specific, please?

Senator MILNE —When ABARE appeared before the oil inquiry I asked specifically Mr Fisher, who was telling us about the coal to liquids project, about the fact that we had no problems about future fuel supplies in this country because if oil got to a certain price coal to liquids would be achievable for fuelling transport. I asked him how that was possible in view of climate change particularly because coal to liquids gives you the same greenhouse gas emissions at the pipe as does conventional oil. He said, ‘Well, putting climate to one side...’ At the time I said, ‘But you can’t put climate to one side’, and he repeated, ‘Putting climate change to one side...’ What I just heard you say in response to Senator O’Brien was that, in spite of overwhelming global scientific evidence about climate change, ABARE has done no analysis of the relationship between climate change and agriculture to date. What I am asking you is: does ABARE still believe that you can put climate change to one side when giving advice to government on any matter?

Ms Schneider —The modelling that ABARE is doing on climate change is looking at the costs of meeting certain abatement targets under different policy options. Our modelling is directed at looking at the costs of alternative emission abatement policies.

Senator MILNE —Is it looking at the cost of not acting on climate change?

Ms Schneider —We do not have the capacity to undertake what you would call an integrated assessment of climate change.

Senator NASH —When you are talking about capacity, do you mean manpower or funding?

Ms Schneider —It is modelling. It is having a model that is able to do that sort of analysis.

Senator NASH —So you are just unable to do it?

Ms Schneider —We do not have that modelling capacity.

Ms Hewitt —Correct me if I have not understood you correctly, I think what Don Gunasekera was saying was that a lot of ABARE’s work on adaptation to changes and shocks in the economic sense to Australia’s farm operators is relevant to some of the impacts that some people might predict as a consequence of adapting to climate change. If we look at all the work, for example, that you have heard about this afternoon in response to the drought, the projection of crop reports, the impact on producers, farm incomes and so on, a lot of that sort of work is relevant if you were to imagine that something like the scenarios that we are seeing at the moment in relation to prolonged, unprecedented dry periods might be the sort of thing that we might see more of, if indeed we do see climate change impacts of the sort that some predict. The sort of work that we traditionally do in ABARE around these sorts of issues is the sort of work that is, I think, relevant but we are at a very early stage where, in terms of making assumptions and projections about what might unfold into the future, there is high uncertainty. It is not that there is not work that is relevant and useful. It is really I think a question of whether you call that an adaptation to climate change sort of work program or whether it is adaptation of the farm sector in response to a whole lot of variables in the farm economics environment. A lot of what ABARE is doing is relevant. It is a question of whether you would categorise that as work specifically in response to climate change or whether you see that as work that is relevant to climate change and a number of other variable elements in the farm environment.

Senator NASH —In a nutshell, you are saying the work you are doing is about farmers being able to adapt to the variability rather than the cause of the variability?

Ms Hewitt —Yes.

Dr Gunasekera —That is correct.

Ms Hewitt —That was a much more precise way of putting it, yes.

Dr Gunasekera —Perhaps the impact of climate variability or climate change will have certain flow-on impacts on, let us say, the water regimes and the land regimes. Those changes in water and land regimes could have an impact on farm productivity. Some aspects are scientific or biophysical. We have not looked at those issues because we do not have the capacity to do those things.

Senator SIEWERT —So you are not looking at those?

Dr Gunasekera —That is correct.

Senator SIEWERT —You are not factoring those into your modelling?

Dr Gunasekera —We are factoring in a sense, because farmers adapt to climate variability on an ongoing basis, but we are not looking at scientific aspects.

Senator SIEWERT —The science is showing that in fact that has happened up until now, but it is highly likely that there is going to be a significant rapid change rather than a slow change. Yes, Australian farmers are really good at adaptation but not really good at the rapid change. Are you doing any work around that rapid change and the need for rapid adaptation?

Dr Gunasekera —We are not doing any work on rapid adaptation.

Ms Hewitt —A lot of the work that ABARE is doing in relation to water, native vegetation and other aspects of the physical environment is highly relevant to these sorts of scenarios.

Senator SIEWERT —The latest report that was released in September, the one about native vegetation in Queensland—

Ms Hewitt —But other work in the natural resources stream of ABARE’s work?

Senator SIEWERT —I will come back to that after Senator Milne has finished.

Senator MILNE —Two days before the federal election in 2004 ABARE brought out a report detailing the costs to the Australian economy if Australia ratified the Kyoto protocol. If you can quantify the costs, why can you not quantify the costs of not ratifying?

Dr Gunasekera —I am not really sure what you mean by ‘not ratifying’, because in our analysis of what we have looked at, if you are going to reduce emissions by using various mechanisms that could have an impact on various sectors in the economy. Those are the aspects that we have looked at in analysing the impact of reducing greenhouse gas emissions. I am not really sure what you mean by not signing the Kyoto protocol.

Senator MILNE —What I am completely puzzled by is the inability of anyone in ABARE to come out with a statement about climate change. Are you aware that Sir Nicholas Stern’s report has come out in the last 24 hours?

Dr Gunasekera —Yes.

Senator MILNE —Are you aware that he is a former head of the World Bank?

Dr Gunasekera —Yes.

Senator MILNE —Are you aware that he said that not dealing with climate change, not reducing emissions, is potentially able to take five per cent off global GDP every year henceforth?

Dr Gunasekera —We have not had a chance to look at the report in detail, but I have seen those comments.

Senator MILNE —So do you accept that not reducing greenhouse gas emissions may well have a more substantial cost to the economy because of the impacts—which you have not modelled and which you have not even apparently been aware of—than actually taking the action now?

Dr Gunasekera —I cannot comment on that because we have not looked at those issues, but I have seen literature on some of those aspects.

Senator MILNE —I would like to put it on notice for you. When you have told government that it will cost X amount to reduce greenhouse gases what analysis, if any, have you done on the cost to the Australian economy of not taking those actions?

Dr Gunasekera —We have not looked at those issues. We have looked at the cost to the economy of mitigation.

Senator MILNE —But not on the impacts of not mitigating?

Dr Gunasekera —Because if you look at the impacts, if you look at the Stern report—and I was able to quickly scan through some of the key findings—you see that when they talk about the impacts what they are talking about basically are the estimated potential damages. When they talk about the estimated potential damages there is a range of issues that they discuss—sea level rising, hurricanes, floods and all sorts of other extreme natural events. We do not have the capacity to look at those issues, as my colleague mentioned before. We do not have the analytical framework. You need an analytical framework. You can look at the damages, the impact of the damages and the cost of the damages. We need a framework, what you call an integrated assessment model. We do not have that framework and we have not looked at those issues.

Senator MILNE —Who does have that framework across the Australian government if ABARE does not?

Dr Gunasekera —I am not really sure whether anybody else is capable of doing that analysis in Australia in the Commonwealth agencies.

Senator MILNE —So we have got a capacity in Australia to cost what it might cost to reduce emissions, but we have no capacity to even do a ballpark on what it might cost not to do so? Do you accept in ABARE that climate change is real?

Dr Gunasekera —I cannot comment on that, because that is a fairly broad question. I am not a scientist so I am not in a position to answer one way or the other.

Senator MILNE —As an economist in ABARE, do you believe that greenhouse gas emissions are an externality and ought not to be costed?

Dr Gunasekera —Greenhouse gas emissions have various impacts, but in our analytical work we are not looking at the health impacts or any other damages. In fact, in almost all of our work what we have looked at is the cost to the economy if we are going to reduce greenhouse gas emissions, because that could have an impact on various sectors. The output or the activity in different sectors might decline. What are the impacts of that? Those are the aspects that we have looked at as economists.

Senator Abetz —I think in fairness there is a substantial difference. Where you have a particular target, you have a sum certain that you are dealing with, I would imagine, to make an analysis. In relation to the phrase ‘the impact of climate change or greenhouse gases’, in all of the literature that I have been reading of late, some people tell me—and they are all scientifically qualified—that it is going to be this amount, that amount or the another amount. So ‘the impact of climate change or extent of greenhouse gases’ is an uncertain sum against which to try to then model. I would imagine it would be very difficult to get accurate modelling on this, but I have read estimates somewhere that, if we were to abide by the Kyoto protocol worldwide, we would reduce the world temperature at this stage by about less than one degree fahrenheit. You then have to ask: what is the actual impact in relation to that? To try and model that economically, I would have thought, would be a very big ask, given all the variables. Whereas with the Kyoto agreement you had a specific target that you could measure.

ACTING CHAIR (Senator Siewert) —Where I am coming from is the other end of it, and that is the impact that existing climate change—what is happening already—will potentially have on agriculture and looking at overlaying the models across, for example, land capability. There are models. The models for Australia now have been fairly well refined. Looking at those models over Australian agriculture, where can we expect the most change and where should we be planning for that—for example, with water resources? In WA we know that rainfall has decreased in south-west Western Australia. It is indisputable, and I think that is where Senator Milne was coming from as well. It was definitely where I was coming from when I was asking my questions. What work have you done around that?

Ms Hewitt —Perhaps I could make a suggestion. Part of what you are asking—and I think perhaps this is the difficulty the ABARE colleagues are having with the questioning—relates to the biological or the biophysical impacts of climate change. We have another whole work program under way in relation to some of those matters in our Bureau of Rural Sciences. We also have some work, not so much at this stage in the climate change area, which is jointly worked on between the two bureaus—between the economists and the scientists in the Bureau of Rural Sciences. But there is a significant work program around climate change and adaptation in agriculture that is done by our scientific staff in the BRS. I suggest we spend some time when they come to the table talking about that work.

ACTING CHAIR —It still needs to relate to your economic modelling for the industry. I am still asking the question: how has that been relating to the modelling and the work that you are doing? It does not sound like you are doing it. Is that correct or not? I am not trying to put words in your mouth. It just does not sound like you are doing it.

Ms Hewitt —As to the sort of integrated analysis that you are looking for, which comes to some conclusions about physical impacts, an event will enable the economists to cost them. I think that is what we are saying. We have not at this point.

Ms Schneider —We do not have a formal link between the scientific assessments of the impacts of climate change and the economic-modelling framework that we utilise at this point.

CHAIR —There is no formal link in that modelling?

Ms Schneider —There is no formal link in that modelling. There are some models. The sorts of models that do that analysis at the global level are extremely large and complex models. There are not many of them in the world. The Stern report used a particular model. We do not have that capacity at the moment.

Ms Hewitt —I am not sure whether the Greenhouse Office and the Department of Environment and Heritage may be able to provide further comment on Australian capability in that area. Clearly, it is beyond ABARE’s capability at this point.

Senator MILNE —If I could just return to the question I asked before about the economics and the way you approach something in ABARE. Do you regard the climate as a public good and greenhouse gas pollution as an externality when you cost anything?

Ms Hewitt —I would have to ask my other colleagues to answer that.

Dr Gunasekera —I think it is accepted and well regarded that the climate and most of the natural variables are public goods. That is why people always comment about these being public good issues, so we need the cooperation of everybody to address some of these issues. I agree with you; it is a public good. It has strong externalities and so on.

Senator MILNE —When you do your assessments, do you regard greenhouse gases as an externality?

Ms Schneider —Yes, that is implicit in the sort of modelling that we are doing. We are modelling alternative policy approaches to reducing greenhouse gas emissions. Implicit in that policy framework is that notion.

Senator MILNE —So they are an externality and are just something that other people pay for; they are not an economic cost. A different economic model would internalise the cost of that pollution, wouldn’t it?

Ms Schneider —No, I do not think that is the way that we would view it at all. When we do our modelling, the most efficient way of meeting a target is to impose a cost on carbon emissions. We do that through the implementation of the carbon tax in the modelling framework. That could reflect different sorts of regimes. It could be a tax. It could be an emissions-trading regime. It could be a system of regulations. However, implicit in that notion is that there are externalities associated with greenhouse gases.

Senator MILNE —Thank you. Coming back to when you costed the changes that were being talked about in relation to the carbon, oil and emissions from motor vehicles, ABARE came out with a report saying that, if you put a price on carbon, you would double or treble the price of fuel. Can you just tell me whether you included the tax on top of the current arrangement. Did you take away the excise and put the tax on instead of the excise, or did you add it on the top?

Dr Gunasekera —In such analyses, we have not removed any existing taxes or excise duties. The carbon taxes are on top of the existing tax regime.

Senator MILNE —Do you think that was an honest appraisal given that everywhere else in the world where they have introduced a carbon tax they have taken away the excise and imposed the tax on the embedded carbon? To add the carbon tax on top of the excise inflates the impacts wildly. Can I ask why you did not give the option of removing the excise and putting on the carbon tax, which might well have resulted in a neutral price change as opposed to just giving the option that will double the price of petrol?

Dr Gunasekera —I think the work that you are referring to was commissioned by CSRIO, and the scenarios that we analysed were basically given to us by the CSRIO. We did not change the scenarios. The scenarios were basically given to us. The reference case or the ‘business as usual’ case includes the existing policies, taxes and various other excise regimes. In analysing those scenarios, we have used a carbon tax on top of the existing regime. That was the way CSRIO and the other members of the Energy Futures Forum formulated those scenarios. We took those scenarios and we examined them as they were given to us.

ACTING CHAIR —I want to follow up a couple of questions we were just talking about with respect to climate change. Ms Hewitt, I think it was you who referred to the other reports that ABARE is doing, such as the native vegetation reports et cetera. Does that include the report that was released in September, Native vegetation: public conservation on private land?

Ms Hewitt —What I was thinking more of, although when I mentioned native vegetation that was in the back of my mind, was some of the more innovative work that ABARE has been doing in the water area, on trading in options, options for water purchase and that type of thing. There is a very significant stream of work in the natural resources area that has capabilities and skills that are relevant to—

ACTING CHAIR —Would you mind providing me with a list? I have been doing quite a bit of research in this area. I may have missed some of the reports that you are talking about.

Ms Hewitt —Certainly; I would be happy to let you see what has been published over recent times.

ACTING CHAIR —That would be useful. I do have the one that was released in September.

Ms Hewitt —That was in relation to the Queensland regulation presumably.

ACTING CHAIR —I also have the Natural resource management on Australian farms report that was released in September also, which I would like to ask a couple of questions about. It contained some really interesting information. I had a couple of specific questions. One of the favoured options of farmers increasing their involvement in natural resource management was increasing and upgrading their machinery to implement sustainable management practices. What sort of machinery are we talking about?

Mr Gooday —That sort of machinery is basically for people moving towards machinery that allows them to implement minimum till.

ACTING CHAIR —We are talking about min-till and things like that?

Mr Gooday —Yes.

ACTING CHAIR —You also make some really interesting comments about the benefits of adjusting natural resource management programs to increase adoption of sustainable agriculture practices. What specific practices are you talking about in this case? It is in your conclusion. I have just printed out the summary.

Mr Gooday —There are a number of sustainable agriculture practices that people recognise as best practice, and in doing this report we noticed that quite a few of those practices had some focus on them through different programs, which groups such as National Landcare Programme provided funding to, that that was increasing the adoption of particular practices and that there might be some benefit in expanding or broadening that.

ACTING CHAIR —Are you talking about issues like min-till? Coming from Western Australia, we regard that as standard agricultural practice now. In no way would I suggest that we would be funding that under NRM funding anymore. Is that the sort of thing that you are talking about?

Mr Gooday —It varies from region to region. While minimum tillage would be a standard practice in some regions, it is not in others and it is not suitable in some others. The survey that was used to collect these results was a reasonably broad survey, so it could not really dig down into the detail of a particular region.

ACTING CHAIR —It also talked about the skill levels. When people said they thought they had the skills necessary to implement some of the sustainable management practices, was that self-assessed skill and knowledge?

Mr Gooday —Yes, that is right. Essentially, when they were asked whether they had the skills necessary to implement sustainable management practices, the majority of them were indicated that they thought that they did.

ACTING CHAIR —How is this information being handed on to the NRM agencies that are implementing NHT? Is there an automatic process?

Mr Gooday —This report was funded by the NLP, and we work closely with them in designing the survey. We presented the results of the report to them. They are fully across it.

ACTING CHAIR —I just want to go back to the crop and livestock report. You talk about summer crops but touch on this very briefly. You provide some figures on the expectation for rainfall and temperature. Will you be producing a similar report like this around the summer crops?

Dr Sheales —Our next report on crops, which will include summer crops in more detail than in this, will be released on 5 December. The early indications, as this report indicates, are not too flash, to put it mildly, for that important Queensland/Northern New South Wales growing area. All we can do is hope that that improves somewhat, but it does not look too good at the moment.

ACTING CHAIR —Will you have a clear idea by 5 December?

Dr Sheales —A clearer idea, both for the winter crops—how harvest has progressed to that point; it is so small it might mostly be over by then, which is unusual—and to what degree there have been summer crops. I guess the important one is grain sorghum when we are interested in feed issues. We will have a pretty clear idea then how plantings have gone. Obviously, we are still some way to harvest, and they will need plenty of moisture to get them through to harvest.

ACTING CHAIR —You may have answered this for Senator O’Brien, who might have asked this and I missed it. How confident are you now of the figures in the October report? I understand the reasons why you have had to downgrade your estimates over the last month or so. Is it likely that you are going to have to do it again, or are you fairly confident you have an accurate prediction now?

Dr Sheales —We can never be 100 per cent sure.

ACTING CHAIR —I appreciate that within the bounds—

Dr Sheales —It is the nature of the game.

ACTING CHAIR —Yes.

Dr Sheales —But what I would say is that, if it were to rain today or tomorrow, it is not going to help.

ACTING CHAIR —No, not yet.

Dr Sheales —We have tried to factor in the case of it not raining at least for a couple of weeks. Beyond that, I do not think it can do any more damage, frankly, to the winter crop. In some smaller areas that might not be true but, as a general statement, I do not think there is a lot of downside risk left in that crop estimate. There could be a little bit but not a lot.

ACTING CHAIR —I appreciate that. I suppose where I am coming from is: are you fairly confident that the existing estimates, in light of no rain, are accurate?

Dr Sheales —That is what I am trying to imply. We are close to about where it will turn out. If it does not rain, it is not going to make much difference to what we have there. If it does rain, it will not make much difference either, unfortunately. We are just too far gone.

ACTING CHAIR —If it rains, in fact, you will get to a certain point and it will damage it, not help.

Dr Sheales —That is true. We can get to that situation as well. However, the way this year is shaping up, I do not think we are likely to be worried by that too much.

Senator NASH —In relation to crop and stock work that you have done, have you done any work on hay, given the amount of crops being cut for hay, and how important that will be as a fodder over the coming 12 months? Have you done any work in terms of capacity and pricing around hay?

Dr Sheales —No, we have not. It is really too hard to get any sort of quantitative handle on that. We are aware, as you are, that quite a few crops are being cut for hay. Unfortunately, they are not getting much hay off them. Even grain crops are being cut for hay. Some are so poor they cannot even cut them for hay. As to quantifying how much hay we might get off them, we are not in a position to estimate that. All we can do is listen to some of the anecdotal information that is coming forward. I would agree, though, that it is going to be fairly tough, because there will not be much hay around coming out of this year.

ACTING CHAIR —I have another question. I want to go back to the natural resource management report. I have the full report, but I am just reading from the summary. At the end of the summary, you make the statement:

I appreciate that. You continue:

Start from the premise that I understand what you mean by ‘off-farm’ in terms of if the benefits are off-farm. What do you mean by that last statement?

Mr Gooday —Some of the benefits of some of the practices we would like people to adopt in a global sense obviously are not captured by the farmers themselves.

ACTING CHAIR —I read about that.

Mr Gooday —So in order to get those sorts of practices adopted it is unlikely that purely persuasive measures in terms of providing them with information on—

ACTING CHAIR —I understand all that. Assume I understand that. It is the next piece of advice.

Mr Gooday —There are basically two ways you can get people to adopt these sorts of things without regulating it. One of them would be to invest in R&D. That would lower the cost of the techniques. The other would be to provide them with some financial incentive to adopt.

ACTING CHAIR —So you are talking about ecosystem services and those sorts of things.

Mr Gooday —Yes.

ACTING CHAIR —Thank you.

[3.32 pm]