Rocketing energy costs threaten to deter Australian ag investment

High energy prices are eating up increasing amounts of farmers' cash at a time when policy is in flux, warn two distinct pieces of research.

Rising energy costs is making Australian agriculture less competitive compared with other countries, the Australian Farm Institute has said.

AFI executive director Richard Heath told Agri Investor that the spectre of high energy prices could put off overseas investors, especially those looking to invest in agribusinesses involved in food processing.

“Particularly in the processing of agricultural goods, the competitiveness of [that sector] in Australia now compared with other countries is being affected by the cost of energy,” he said. “That’s anecdotal and has been reported to us by big companies that have a global presence, and it’s very hard to get the figures to back that up, but certainly they’re saying to us that their cost of doing business in Australia is significantly higher than in other countries because of the cost of energy.”

Heath’s comments came as the AFI published a report titled The impact of energy costs on the Australian agriculture sector.

The report found that energy costs to Australian agriculture as a proportion of the industry’s gross production value is 9 percent, meaning that 9 cents in every dollar is going towards energy. The AFI estimated the total cost at A$5.85 billion ($4.2 billion; €3.6 billion) per year. “That’s very significant – and is a lot more significant than it has been in the past,” Heath said.

It also found that even a conservative estimate of energy cost increases, of 30 percent in electricity and 5 percent from other sources, would have an annual cost impact of A$863 million for the sector.

The AFI’s findings are backed up by research from Commonwealth Bank of Australia, which found in its latest monthly Agri Insights report that Australian farmers were increasingly concerned about managing energy costs.

“Four in five Australian farmers have told us that cost is a bigger issue than reliability and more than three-quarters of them say they feel like they don’t have control over energy costs on farm,” CBA regional and agribusiness banking executive general manager Grant Cairns said. “While drought is clearly the leading concern for a number of our farmers right now, we know that across the industry, farmers are taking a medium- to long-term view, and managing energy costs remains an important goal.”

CBA’s research found that 11.4 percent of farmers’ input spend was going on energy across Australia and the industry as a whole, rising to 14.6 percent for dairy producers and 14.1 percent for cotton growers.

The AFI wanted to help build a benchmark for monitoring what impact a rise in energy costs would have on the sector, Heath added, with definitive data on average prices proving hard to come by.

“The driver to get that information was because of the uncertainty over energy policy at the moment,” he said. Former prime minister Malcolm Turnbull was recently ousted following a disagreement within his own party over the proposed National Energy Guarantee, a policy designed to secure the reliability of electricity supply while also lowering costs and emissions.

No replacement policy has yet been put forward by new PM Scott Morrison or new energy minister Angus Taylor. “It’s uncertainty as much as anything else which is causing a lot of angst, because any planning around long-term energy sources or energy-efficiency measures is very difficult to do when you haven’t got a stable, consistent energy policy,” Heath said.

The AFI also identified an increasing trend among Australian agribusinesses to install renewable energy measures on their properties in an attempt to mitigate against future price rises.

“We’re seeing a large movement from agribusinesses to get off the grid entirely or at least supplement energy coming from the grid with alternative energy sources,” Heath said. “That’s not just because it’s renewable, but because it’s cheaper and often more reliable.”