MI H1 ECONS P1

2015 Preliminary Examination II Pre-University 2 H1 ECONOMICS 8819/01 Paper 1 15 September 2015 3 hours Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams or graphs. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Section B Answer one question. You are reminded of the need for clear presentation in your answers. Start each question on a fresh sheet of paper. At the end of the examination, fasten your answers to the three questions separately. The number of marks is given in brackets [ ] at the end of each question or part question. This question paper consists of 10 printed pages. [Turn over

2 8819/01/P2/MI/15 Section A Question 1 Australia’s Agriculture Sector Extract 1: Challenges faced by Australian farmers A near-perfect growing season for small farmers in two of Australia's biggest food belt regions - south-east Queensland and Victoria - has produced a bumper crop. But despite a bountiful yield, oversupply has driven down prices. It should be a time for celebration for growers, who have become hardened to a relentless cycle of droughts and floods in recent years. Instead many are complaining that t hey are being paid less at wholesale markets than the cost of harvesting their crops. The number of farmers in Australia is shrinki ng, and it's not just the current domestic oversupply that is hurting the bottom line. The amount of imported fresh produce has reached record levels, and growers are facing unfair competition from overseas imports. Local farmers want prices to be set by the federal government to guarantee a decent return. If not, the sector will continue to contract. In Queensland's sugar capital, Bundaberg, Mark Presser, a fourth generation cane farmer, enjoyed a record crop last year, and is on course to harvest another reasonable yield this time around. Yet he too feels besieged by falling prices and growing competition from overseas, most notably Brazil and India, where production costs are far less. He also complains about protectionism in Europe and the US. Source: Adapted from BBC News, 31 October 2013 Extract 2: Milk is now cheaper than water Domestic and international demand for dairy produce (cheese, yoghurt, butter etc) is booming, but the price of Australian milk has declined so far that it is now cheaper than water. In South West Victoria, which produces about a quarter of Australia’s milk, net farm incomes fell, with some farms running at an absolute loss. Not surprisingly, milk production is falling as farmers cull their herds and sell their farms (sometimes handing the keys to the bank). Milk processors are already experiencing shortages of supply, and this situation can be expected to worsen. However, even this isn’t leading to an increase in the farmgate price (the price paid by milk processors to dai ry farmers for raw, unpasteurised milk), with milk processors being locked into long term contracts for cheap milk. As large supermarket chains (Woolworths and Coles) engage in a price war for milk, low domestic prices are driving up demand for fresh milk but there is no supply to satisfy it, meaning that even less is available for export. What a contrast with the situation in New Zealand – their farmers receive around 50% more per litre for their milk, in an environment with much lower production costs. Milk production has doubled there over the past 10 years, with the result that the lucrative export markets in Asia are being gobbled up by the New Zealanders, while Australia is being left out in the cold. Some plausible explanations include a relative weaker currency that helps boost New Zealand farmers’ export competitiveness, the absence of drought compared with Australia, and the less intense competition for land, labour and expertise amongst domestic industries (unlike Australia which draw resources away from dairy towards higher returning industries such as mining during the resources investment boom). Source: Adapted from The Guardian, 17 December 2013

3 8819/01/P2/MI/15 Extract 3: Australia’s dairy future is bright It is true that the Australian dairy industry has been buffeted by the perfect storm in the last decade: severe drought, the global financial crisis, a persistently high Aussie dollar, rising costs for feed and depressed milk prices. It’s been rough ride, but the majority of the country’s dairy farmers have by and large weathered the tempest by adjusting their businesses to meet these challenges. It is farmers' responsibility to take up the challenge of adopting and adapting new techniques and technologies to ensure they are profitable. The fact is, the Australian dairy industry remains a A$13bn manufacturing and export industry that employs 43,000 Australians direct ly on farms and in milk factories in towns where they are often the economic mainstay. Dairy is also the third largest agricultural industry in Australia and the largest in Victoria. Exports in 2012-13 were worth A$2.76bn. The world thinks Australian dairy has so much to offer that they want to invest in the industry to supply new markets in Asia. While farm gate price volatility and unpredictable seasonal weather patterns are creating serious challenges for dairy farmers, the overall picture in Australia’s dairy community is not doom and gloom, but rather a sense of hope and opportunity. Source: Adapted from The Guardian, 31 December 2013 Extract 4: Tackling greenhouse pollution All fresh produce; dairy, meat, fruit and vegetables naturally require cooling. But the refrigerant gases are often not natural . These synthetic gases are heavy greenhouse polluters and they also attract a penalty price. The alternatives are natural gases that don’t attract a penalty, because they are not greenhouse polluting. The association which represents the alternative sector says Australian companies should transfer their cooling systems to natural refrigerant gases. President of the Australian Refrigeration Association, Tim Edwards, says other countries like China, the US and Europe have moved towards cleaner technology within 15 years. “The industry is responsible for more than 11 per cent of national greenhouse gas emissions. The government should support the industry’s move in switching to natural refrigerants and discourage firms from using refrigerants containing synthetic gases.” Source: Adapted from Australian Broadcasting Corporation, 2 July 2013 Extract 5: Competition in Australia’s dairy industry There is little the average farmer can do about rainfall, but the removal of protectionist measures of Australia’s milk markets ov er the past 30 years has exposed these small businesses to competitive market pressures. Recently, the Abbott government has secured a historic free trade agreement with South Korea, Australia's fourth largest trading partner. Under the deal, tariffs will be eliminated on Australian agricultural exports, including beef, wheat, sugar, dairy, wine, horticulture and seafood, as well as resources, energy and manufactured goods. Trade Minister Andrew Robb cited modelling by the Centre for International Economics that showed the free trade agreement would be worth more than $5 billion in extra income to Australia between 2015 and 2030. Such measures have forced farmers to invest more in economies of scale and technology designed to enhance on-farm productivity. Despite such investment, the total number of dairy farms has fallen from a peak of 20,300 in 1982 to its current level. There is also a

4 8819/01/P2/MI/15 correlation between the farm gate price of milk a nd the attrition rate of family-owned farms. Pe