potential economic impacts of the wheat stem rust...

Potential economic impacts of the wheat stem rust strain Ug99 in Australia Donkor Addai, Ahmed Hafi, Lucy Randall, Philip Tennant,

Tony Arthur and Jay Gomboso

Research by the Australian Bureau of Agricultural

and Resource Economics and Sciences

Research report 18.9 September 2018

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Cataloguing data Addai, D, Hafi, A, Randall, L, Tennant, P, Arthur, T & Gomboso J 2018, Potential economic impacts of the wheat stem rust strain Ug99 in Australia, ABARES research report, prepared for the Plant Biosecurity Branch, Department of Agriculture and Water Resources, Canberra, September. CC BY 4.0.

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Acknowledgements The authors thank Terence Farrell and Sarah Cumpston (GRDC), Evans Lagudah (CSIRO), Sarah Hilton and Alistair Davidson (DAWR), Gordon Murray (Graham Centre, CSU), and ABARES staff (Zoltan Lukacs, Sarah Smith and Christopher Price) for their valuable contributions to the report.

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Potential economic impacts of the wheat stem rust strain Ug99 in Australia ABARES

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Contents

Summary v

1 Introduction 1

2 Background 3

Australian wheat industry 3

Vulnerability of wheat growing areas to wheat stem rust 4

Wheat breeding to incorporate resistance to stem rust 6

3 Methodology 8

Spatial mapping and modelling 8

Economic modelling 12

Development of Ug99 spread scenarios 14

4 Economic impacts 16

Changes in quantity produced and price received 16

The economic impact on the wheat industry 16

Benefits from prevention 18

Benefits from adopting Ug99 resistant varieties 19

Key limitations 21

5 Conclusions 22

Glossary 23

References 24

Tables

Table 1 Potential yield losses from stem rust 1

Table 2 Ug99 likelihood ratings produced by linking climatic suitability and

varietal susceptibility ratings 11

Table 3 Assumptions of yield losses by Ug99 likelihood ratinga 12

Table 4 Average supply shocks estimated for key wheat growing states for the

hypothetical Australia-wide outbreak, at 2014–15 prices 13

Table 5 Effect of hypothetical Ug99 outbreaks on equilibrium wheat production

and price 16

Table 6 Revenue losses from hypothetical outbreak scenariosa, at 2014–15 prices 17

Table 7 Increased cost of production over 10 yearsa, at 2014–15 prices 18

Table 8 Total economic cost (revenue losses and increased cost of production)

from hypothetical outbreak scenarios 10 yearsa, at 2014–15 prices 18


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Table 9 Total cost of hypothetical outbreaks lasting one year 19

Table 10 Annual costs of adopting Ug99 resistant varieties 20

Table 11 The critical probability that equates the annual cost of switching to Ug99

resistant varieties to benefits 20

Figures

Figure 1 Australia’s wheat growing regions 3

Figure 2 Global stem rust vulnerability 4

Figure 3 Ug99 endemic and high risk areas 5

Figure 4 Spatial data (maps) used in the estimation of the likelihood of Ug99

establishing in Australia’s wheat growing areas 9

Figure 5 Ug99 wheat varietal susceptibility ratings in 2014–15 10


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Summary This report estimates the economic impact of a wheat stem rust strain Ug99 outbreak on the

Australian wheat industry.

Wheat stem rust is a fungal disease caused by the Puccinia graminis f. sp. Tritici (Pgt) fungus that

can affect wheat, barley, oat, rye and triticale when seasonal conditions are favourable. The

fungus survives on host plants and can spread quickly over large distances by wind, movements

of infected plant materials and contaminated farm machinery, equipment and clothing. Spread

through fungal spore movement is a major pathway for pathogen spread.

Wheat stem rust can attack all above-ground parts of the plant, including the stem, leaves and

inflorescence. Infected wheat plants may also produce shrivelled grain. An untreated infection

could reduce grain yield by up to 90 per cent. Treating affected crops with fungicide, to reduce

yield losses, would result in increased cost of production. However, fungicides would only be

used as an interim measure, until a resistant variety is planted in the following season.

Wheat stem rust has been present in Australia for over a century. Virulent forms of the fungus—

produced overseas through mutation—are believed to have caused three incursions in Australia

over the 1954–1969 period. The fungus has evolved since and produced other virulent strains.

The most recent and severe outbreak in Australia was the 1973 epidemic—which was estimated

to have cost the wheat industry between $200 million and $300 million (between $1.8 billion

and $2.7 billion in 2014–15 dollars).

The strain Ug99, found in Uganda in 1999, is a highly virulent strain of wheat stem rust that has

overcome 17 out of 34 stem rust resistance genes found in wheat. It is not present in Australia,

but poses a major risk to the wheat industry, in terms of industry revenue losses and increased

production costs, if the strain were to arrive in the country. Around 30 per cent of current wheat

varieties show moderate to high susceptibility to the Ug99 strain. Disruptions to Australian

wheat exports may also result if Ug99-sensitive countries ban imports of Australian wheat.

Preparedness activities for Ug99 being undertaken in Australia include significant work in

surveillance (particularly annual surveying), monitoring pathogen populations over time to

track potential virulence evolution, and pre-breeding for germplasm resistance. Eradication of

Ug99 would likely only be technically feasible if the rust is detected while still contained within a

very small area and the spore load is light (Park, 2009).

The results of this study highlights the importance of keeping Australia Ug99-free, by providing

a comparison of the costs to the wheat industry of successful versus unsuccessful prevention.

Disease spread scenarios

If Ug99 were to establish in a relatively isolated wheat growing region (such as south-west

Western Australia), the likelihood of successfully containing and eradicating the fungus would

be greater than if it were to establish in areas where wheat growing regions were in close

proximity (such as Australia’s southern wheat growing regions). To address uncertainty around

extent of spread, ABARES considered three disease spread scenarios of increasing scale:

Scenario 1: An outbreak originating in Esperance, Western Australia, spreading rapidly to all wheat-growing areas in the western region and lasting one year before complete elimination from paddocks. Esperance was chosen because historically, it has been an area prone to wheat stem rust


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Scenario 2: An outbreak originating in Ceduna, South Australia, spreading rapidly to all wheat-growing areas in the southern and northern regions of Australia and lasting one year before complete elimination from paddocks. Ceduna was chosen as it was identified as the starting point of the 1973 outbreak

Scenario 3: The Esperance outbreak, aided by westerly winds, spreads quickly beyond Western Australia to cover all wheat growing areas in the rest of Australia—thereby developing into an Australia-wide outbreak. It also lasts one year before complete elimination from paddocks.

ABARES also mapped both climatic and varietal suitability of Ug99 for the different wheat

growing areas.

In all three scenarios evaluated, it was assumed that the Ug99 outbreak would end once wheat

growers replaced susceptible (or non-resistant) wheat varieties with resistant varieties in the

following growing season. This is based on evidence that the industry already has adequate seed

stock of resistant varieties and the expectation that the profit margin from switching to resistant

varieties (influenced by avoided losses from potential future outbreaks less the cost of

switching) provide a strong economic incentive for the switch.

Economic cost of Ug99

The economic cost of the impact of Ug99 has two components: the cost of the initial outbreak

lasting one year and the cost of switching to Ug99 resistant varieties to save losses from future

outbreaks of Ug99.

When Ug99 spreads uncontrolled following its entry in Australia, the economic costs to the

wheat industry may arise from both supply shocks (wheat yield losses and mitigation costs) and

demand shocks (wheat import bans by overseas countries). Mitigation costs comprise the cost of

fungicides applied to affected crop to limit yield losses and the cost of labour inputs used to

monitor the spread of the disease. Demand shocks were determined by assuming that China

(one of the top five destinations of Australian wheat exports) would ban imports of Australian

wheat over the outbreak duration and the displaced exports would be sold in other markets at a

lower price. Other importing countries are assumed to be insensitive to an Ug99 incursion in

Australia and their imports are assumed to continue uninterrupted. The likely industry impacts

of both supply and demand shocks were estimated using partial equilibrium modelling. The

economic impacts from the outbreak are assumed to last only one year as all wheat growers

would plant Ug99 resistant varieties and Australia would regain access to the Chinese wheat

market in the following year. Ug99 resistant varieties are assumed to have the same yield and

quality characteristics as those they would replace.

The adoption of Ug99 resistant varieties also has costs: one-off seed cost, annual end-point

royalty payments and gross revenue losses from a cut back in production in response to

increased cost of production.

The total economic cost, estimated over a 10 year period, increases with the size of the outbreak

(Table S1). The costs estimated were $567 million for the Western Australia outbreak,

$803 million for the south-eastern Australia outbreak and $1,362 million for the Australia-wide

outbreak (Scenarios 1, 2 and 3, respectively in present value terms estimated assuming a 7 per

cent discount rate). Should an import ban be imposed on Australian wheat by China, the cost in

each scenario was estimated to be slightly higher.


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Table S1 Economic impact of Ug99 on the Australian wheat industry over 10 yearsa—with and without trade restrictions, in 2014–15 dollars

Scenario Extent of spread Without trade ban ($m) With trade ban ($m)

1 Western Australia 567 574

2 south-eastern Australia 803 838

3 Australia 1,362 1,403

Note: Economic impacts comprise revenue losses and increased costs of production. a Present value estimated at a 7 per cent discount rate. Source: ABARES modelling

Benefits from prevention

The economic cost in Table S1 would only be realised when Ug99 has entered, established and

spread to the full extent specified for each scenario. This cost was estimated over a 10-year

planning horizon, and comprises the cost of an outbreak lasting one year immediately after the

entry of Ug99 plus the cost of adopting resistant varieties over a 9 year period. As Ug99 is not

present in Australia and given the uncertainty around its entry, it is the expected (probability

weighted) value of these costs which approximate the gross benefits of prevention. Assuming

that it has only a 0.05 probability of entering Australia, followed by successful establishment and

spread, the expected gross benefits of investment in activities to continue to prevent the entry of

Ug99 are estimated to be between $28 million (Scenario 1 without a trade ban) and $70 million

(Scenario 3 with the trade ban) a year.

Long term benefits from switching to resistant varieties

Were Ug99 to enter, the fungus would likely become endemic in Australia. If it were not for the

availability of resistant varieties, it would result in considerably higher costs to wheat farmers

who continued to grow Ug99 susceptible varieties, as outbreaks would continue to occur

whenever seasonal conditions were favourable for the Ug99 fungus. However, switching to

resistant varieties involves costs: the one-off cost of seeds purchased first time; annual end-

point royalty payments (for each tonne of grain produced) as well as any revenue losses arising

from cutting back production to accommodate increased cost of production using the Ug99

resistant varieties.

ABARES also compared wheat farmers’ annual cost of adopting Ug99 resistant varieties against

their cost of maintaining existing varieties, following a Ug99 outbreak lasting one year. The same

three scenarios were modelled—and the outbreak was assumed to last only one year, as

seasonal conditions were assumed to be unsuitable for the virus in the following year.

The total annual costs of switching to Ug99 resistant varieties were estimated to be $57 million

for the Western Australia outbreak (Scenario 1), $83 million for the south-eastern Australia

outbreak (Scenario 2) and $139 million for the Australia-wide outbreak (Scenarios 3). These

costs were much smaller than the total estimated cost of corresponding outbreaks of $200

million, $267 million and $470 million, for the three respective scenarios (without trade ban)

and $207 million, $303 million and $511 million, respectively (with trade ban) that were

avoided by switching to Ug99 resistant varieties. However, a Ug99 outbreak would be unlikely

occur every year even if farmers continued to grow susceptible varieties despite the fungus

becoming endemic to Australia. Rather, an outbreak would occur only when seasonal conditions

are favourable for the fungus.

For switching to resistant varieties to be cost-effective in the long run, the annual expected

benefit of switching should exceed the annual cost of switching. This benefit will be affected by


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the likelihood (or probability) of an outbreak. In the absence of information on the annual

probability of an outbreak under endemic state, ABARES estimated the breakeven (or critical)

value of this probability that equates the expected benefit of switching to annual cost of

switching. This is presented in Table S2 both with and without a wheat trade ban.

Table S2 Critical probability thresholds for switching to Ug99 resistant varieties, with and without trade bans for Australian wheata

Scenario Extent of spread Critical probability

(without trade ban) b

Critical probability

(with trade ban) b

1 Western Australia 0.29 ($57m/$200m) 0.28 ($57m/$207m)

2 south-eastern Australia 0.31 ($83m/$267m) c 0.24 ($83m/$303m)

3 Australia 0.30 ($139m/$470m) 0.27 ($139m/$511m)

Note: a Critical probability represents the breakeven (or threshold) value at which the annual costs of switching to Ug99 resistant varieties and the annual expected benefits (or avoided losses) of switching to Ug99 resistant varieties equate. A higher probability of seasonal outbreak than the critical probability estimated means switching to Ug99 resistant varieties would be cost-effective. A lower probability suggests that Ug99 would not pose a large enough threat to warrant switching to Ug99-resistant wheat varieties. b Estimated by dividing the switching cost by avoided losses estimated for an outbreak lasting one year. Note, the total estimated annual cost of switching to Ug99 resistant varieties ranged from $57 million (Scenario 1) and $139 million (Scenario 3) (numerator in columns 3 and 4). The total estimated cost of corresponding outbreaks ranged from $200 million (Scenario 1 without trade ban) to $511 million (Scenario 3 without trade ban) that were avoided by switching to Ug99 resistant varieties (denominator in columns 3 and 4). c Compared to Scenario 1, the critical probability increased because the estimated avoided losses increased proportionately less (33 per cent) than switching costs increased (46 per cent), however the critical probability decreased when trade impacts were included as 83 per cent of Australian wheat exports to China are sourced from south-eastern Australia. Source: ABARES modelling

The estimated critical probabilities suggest that the cost of switching to Ug99 resistant varieties

would be cost-effective, if there were at least one Ug99 outbreak within (on average) every three

to four years (equivalent to an annual critical probability between 0.25 and 0.33) while farmers

continue to plant the susceptible varieties.

Benefits to R&D in developing wheat stem rust resistant varieties

Costs avoided by switching to Ug99 resistant varieties immediately following its entry also

represents some of the benefits of past research and development (R&D) activities. New wheat

varieties continue to be developed, both nationally and in collaboration with overseas research

facilities, to provide resistance for a broad spectrum of virulent strains, so that the likelihood

and consequence of them establishing in Australia is minimised.

The effectiveness of current Ug99 resistant seed stock will diminish as more virulent strains of

Ug99 appear overseas. However, ongoing investment in activities to prevent the entry of Ug99

and other exotic strains and pre-emptive wheat breeding programs to incorporate greater

resistance, is warranted, particularly if future strains are expected to be difficult to eradicate.

Investment in enhancing early detection (surveillance and diagnostics) would also be prudent so

that wheat growers could be promptly notified of an incursion and the need to switch to a

resistant variety at the earliest instance.


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1 Introduction Wheat stem rust, caused by the fungus Puccinia graminis f. sp. Tritici (Pgt), affects the stem, leaf

and inflorescence of plants belonging to the poaceae or gramineae families (cereal crops and

other grasses). Among Australian cereal crops, the disease could affect wheat, barley, oat, rye

and triticale when seasonal conditions are favourable. The severity of the disease depends

largely on the amount of spores (reproductive units of the fungus) present at the end of the

previous planting season, likelihood of temperature reaching 15C to 30C, the prevalence of

wet conditions (Beard et al. 2006; Hollaway 2014) and the susceptibility of varieties grown.

The Pgt fungus is likely to mutate quickly when conditions are favourable (GRDC 2007a; Park

2009; Singh et al. 2011). Previous mutations overseas have resulted in the emergence of a

potentially damaging strain of Pgt in Uganda in 1999 (Park 2009; Singh et al. 2012). Named

Ug99—after the place and year of its detection—this new strain has overcome 17 out of the 34

genes found in wheat germplasm that provide for stem rust resistance (Park 2009).

Of all wheat rust fungal diseases, the one caused by Ug99 has the potential to cause the most

damage when an epidemic occurs (Dean et al. 2012). According to FAO (2014) and Singh et al.

(2011), 90 per cent of wheat varieties grown globally are susceptible to Ug99. Stem rust is likely

to reduce grain yields of susceptible varieties by 10 to 50 per cent with higher losses, up to

90 per cent, reported in rare but more severe cases (Table 1) (Beard et al. 2006). In Kenya, for

example, Hodson et al. 2005 reported farm level yield losses from Ug99 wheat stem rust of

between 15 and 30 per cent (FAO 2010) and up to 71 per cent under experimental conditions.

Table 1 Potential yield losses from stem rust

Ug99 ratings Without mitigationa

(%)

With mitigationb

(%)

Resistant 0.1 0.1

Resistant/Moderately resistant 2.5 2.4

Moderately resistant 10.0 5.0

Moderately resistant/Moderately susceptible 22.5 11.3

Moderately susceptible 37.5 9.4

Moderately susceptible/Susceptible 70.0 17.5

Susceptible 90.0 22.5

Note: Stem rust includes Ug99. Sources: a Beard et al. 2006, b Estimates based on experts' advice from CSIRO, GRDC and the Department of Agriculture and Water Resources

The Ug99 fungus is likely to spread quickly over large distances. It is generally spread by wind,

movements of infected plant materials and contaminated farm equipment. Since its appearance

two decades ago, Ug99 has spread from Uganda to a number of neighbouring countries within

eastern Africa, and also further afield to some parts of the Middle East and southern Africa. If

new rust strains were to enter Australia, the industry would be able to quickly identify it owing

to recent developments in surveillance and disease awareness (such as Rust Tracker and The

Rust Bust initiatives under the Australian Cereal Rust Control Program) leading to early

response (ACRCP 2017; CIMMYT 2017). The United States Department of Agriculture (USDA)

and Australia's Grains Research and Development Corporation (GRDC) are also working

independently on rapid identification of the genetic make-up of rust pathotypes by focussing on


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the single DNA block—which uniquely identifies one pathotype from another—or genetic

variations based on what is called Single-nucleotide polymorphism (SNP).

There are a number of ways to prevent crop losses and control the spread of the fungus within a

wheat farm. Planting a resistant variety is the most effective way to avoid crop losses (FAO

2014). If seeds from these varieties are not available, using seeds treated with fungicides and

foliar sprays of infected and susceptible paddocks could help mitigate the damage by slowing or

even containing the spread within a farm (GRDC 2007a). Herbicide sprays and livestock grazing

between two planting seasons could reduce the density of self-sown cereals and grasses in

summer—which might support the survival of the fungus through oversummering—resulting in

fewer spores available to infect the next wheat crop (Beard et al. 2006).

Ug99 could significantly impact Australia’s wheat industry—which in 2014–15 had an estimated

gross value of $7.1 billion (ABS 2016). Industry impacts include production losses, increased

cost of production and losses of export sales to Ug99-sensitive markets. However, some

Australian wheat varieties resistant to the current endemic strains of stem rust are also resistant

to Ug99—and therefore the fungus would affect only those farms growing Ug99 susceptible

varieties in areas where climatic conditions are favourable for its survival and reproduction.

Affected wheat growers are likely to undertake measures to reduce crop losses when the cost of

control measures is less than the value of the crop losses avoided. However, control measures

would still leave some production losses as it is not profitable to avoid losses completely—there

will be a point at which the value of avoided yield losses resulting from an additional unit of

chemical input (marginal return) falls below the cost of that additional unit of input (marginal

cost). Additionally, some importing countries, such as China (one of the top five destinations of

Australian wheat exports) may reduce wheat imports from Australia because of biosecurity

concerns—resulting in displaced exports being sold in other markets at a lower price.

Information on the potential economic impact of Ug99 on Australia’s wheat industry is limited.

In 1973 an epidemic of wheat stem rust in south-eastern Australia, caused by an earlier strain, is

estimated to have cost the industry between $200 million and $300 million (Watson & Butler

1984)—equivalent to between $1.8 billion and $2.7 billion in 2014–15 dollars. Several strains of

wheat rust are endemic to Australia. An outbreak of any one of these could occur in susceptible

varieties under suitable seasonal conditions. Ug99 is significantly more virulent than the strain

that caused the 1973 epidemic (Smith et al. 2009). An outbreak today similar to that of 1973 but

caused by Ug99 would likely cost industry more.

Past investments in varietal improvement have made some Australian wheat varieties generally

resistant to different strains of wheat stem rust. The current pool of Australian wheat varieties

shows significant variation in resistance to Ug99—with around 30 per cent showing moderate-

to-full susceptibility (GRDC 2017b).

To determine the likely cost of a potential Ug99 outbreak on the Australian wheat industry, it is

important to understand the potential damage Ug99 could cause and how much damage could

be avoided by pre-emptive breeding which incorporate greater resistance in wheat varieties.

This research estimates the range of potential economic impacts of an outbreak of Ug99 on the

Australian wheat industry—including losses in production, increased production costs and

potential loss of export sales. The results assist government and industry stakeholders to

evaluate the returns on investment in different biosecurity measures against Ug99—including

investments in varietal improvements to incorporate resistance against Ug99 (to reduce the

likelihood of entry) and surveillance (to enhance early detection).


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2 Background

Australian wheat industry

The wheat industry contributed about 13 per cent of Australian agricultural gross value of

production (GVP) in 2014–15 (ABS 2016). It is the number one ranked Australian broadacre

industry by value. The Australian wheat crop is also by far the largest cereal crop grown in the

country—with the 2014–15 production (23.7 million tonnes valued at about $7.1 billion)

accounting for nearly two thirds of the value of all cereal crops (ABS 2016). More than two

thirds (around 70 per cent) of Australian wheat production is exported.

Wheat is a winter crop which is grown in the south eastern wheat belt—which stretches from

southern Queensland to western South Australia—and in south west Western Australia (Figure

1). There are three main producing regions: northern, southern and western. The northern

region, which stretches from southern Queensland to northern New South Wales experiences

heavy summer rainfall.

Figure 1 Australia’s wheat growing regions

Note: Data and boundaries sourced from GRDC. Source: ABARES modelling


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The southern region stretches from southern New South Wales through Victoria, South Australia

to Tasmania. The western region, which includes all wheat growing areas in Western Australia,

is separated from the other regions.

On a global scale, Australia is a relatively small producer but a major exporter of wheat—

contributing 3 per cent and 11 per cent of global production and exports, respectively by value

in 2014–15 (ABARES 2016).

About 80 per cent of Australian wheat is exported to 10 countries (AEGIC 2016). Key

destinations are all in the Asian region: particularly Indonesia and Vietnam in the South-East;

and China, Japan and the Republic of Korea in the North. Canada and the United States also

export to these markets. However, Australia maintains the largest market share of all countries

exporting to the Asian region, especially to Indonesia, with a market share of about 56 per cent

in 2015 (Trade Map 2016).

Vulnerability of wheat growing areas to wheat stem rust

International vulnerability

Wheat stem rust is present in many wheat growing areas throughout the world. According to

Pardey et al. (2013), about two-thirds of global wheat growing areas are climatically suitable for

the disease. Its spread depends on the suitability of the climate, susceptibility of wheat varieties,

presence of other host plants, and movement of spores over long distances (Fisher et al. 2012).

The areas vulnerable to the disease are either seasonal or persistent. In Figure 2, seasonally

vulnerable areas are in blue and persistently vulnerable areas are in red.

Figure 2 Global stem rust vulnerability

Note: Blue areas represent seasonally vulnerable areas while red areas represent persistently vulnerable areas. Source: Pardey et al. 2013

In seasonally vulnerable areas, the fungus mostly survives throughout a growing season but not

beyond. In persistently vulnerable areas, the fungus demonstrates an extended longevity to

survive through non-growing seasons to infect the next planting season.


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Domestic vulnerability

There are four documented outbreaks of wheat stem rust that occurred in Australia: 1889, 1899,

1947-48 and1973 (Dubin and Brennan 2009). The 1973 outbreak in south-eastern Australia is

believed to have been the most damaging. Started in South Australia, the outbreak quickly

spread to Victoria, New South Wales and parts of Queensland. It reduced the value of the 1973

Australian wheat production by 25 to 35 per cent (Dubin & Brennan 2009), costing around $200

million to $300 million (Watson and Butler 1984).

According to studies conducted at the University of Sydney, the first incursion of a new strain of

wheat stem rust in Australia occurred in 1925 (Park 2009). Three more incursions followed,

carrying three new strains: one in 1954 and two in 1969—all believed to be from Africa (Watson

and de Sousa 1983). The two 1969 introductions are believed to have been transported from

central Africa to Australia by wind (Watson and de Sousa 1983). Annual surveys of cereal rust

conducted by the University of Sydney since 1969 have detected several new strains—and all

are believed to have been derived from the 1954 and 1969 introductions (Park 2009).

Ug99 endemic and high risk areas

Of the various wheat stem rust strains present, Ug99 has the potential to cause the most damage.

Since its emergence in Uganda in 1999, Ug99 has spread to eastern and southern Africa and

parts of the Middle East (Yemen and Iran) within a decade (Singh et al. 2015). According to the

Food and Agriculture Organisation (FAO), the wheat growing areas in North Africa, the rest of

Middle East, and west and south Asia are potential new habitats for Ug99 (Figure 3).

Figure 3 Ug99 endemic and high risk areas


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Although not present in Australia, the Ug99 fungus currently present in endemic areas,

particularly in southern Africa, could act as a potential source for the long distance movements

of the disease to other countries, including Australia (Park 2010; Singh et al. 2011). Evidence

suggests that the westerly wind could carry fungal spores over long distances as far as Australia

(Luig 1985; Prospero et al. 2005; Watson and de Sousa 1983).

Wheat breeding to incorporate resistance to stem rust

Preparedness activities for wheat stem rust strains including Ug99 comprise surveillance

(particularly annual surveying), monitoring (of pathogen populations over time to track

potential virulence evolution), and in particular, pre-breeding (for germplasm resistance) (Park,

2009). New wheat varieties continue to be developed, both nationally and in collaboration with

overseas research facilities, to provide resistance for a broad spectrum of virulent strains, so

that the likelihood and consequence of them establishing in Australia is minimised.

Prior to 1938 wheat varieties used had no resistance to wheat stem rust, and research to

incorporate resistance began in earnest during the early part of the 1938–1964 period, when

varieties incorporating a single gene for resistance were released (Luig and Watson 1970; Park

2007). Since 1965, and faced with the potential arrival of more new strains with increased

virulence, varietal improvements focussed on broadening the genetic base of resistance (Luig

and Watson 1970). This resulted in the release of varieties with resistance against a broad

spectrum of strains. The 1973 outbreak of wheat stem rust provided further impetus to continue

along that path, and varieties incorporating a number of resistance genes have since been

released. This has resulted in fewer wheat stem rust incidences since the 1973 outbreak.

The Australian Cereal Rust Control Program—which has been working on better understanding

the potential response of Australian wheat germplasm against Ug99—has undertaken field

testing of Australian wheat germplasm in Kenya with the assistance of Kenyan Agricultural

Research Institute. The results of these efforts contribute to breeding activities aimed at

developing varieties resistance to Ug99.

Public and private sector investments in wheat breeding

Historically, wheat breeding investment has been the domain of the public sector—with a share

of 95 per cent in 1985 (Kingwell 2005). According to Jefferies (2012) the private sector share

did not increase much by 2000. The lack of institutional arrangements to facilitate the

appropriation of returns from wheat breeding has been the key barrier in private sector

investment. The government’s provision of intellectual property (IP) protection for research and

development (R&D) in agriculture is a relatively recent development.

Plant breeders rights (PBR) to protect new varieties were not introduced until 1994—when new

legislation was passed to introduce a range of measures, including end-point royalties (EPR).

EPRs are imposed on output produced each year the new variety is planted, and are used by

most plant breeders to appropriate returns on plant breeding investment.

Under the EPR arrangements, farmers buy seed from an agent authorised by the PBR owner

under a contractual arrangement to pay a royalty on all grains produced except the amount

saved for seed. When the saved seed is planted, the farmer is required under the contract to pay

the EPR on the resulting output. In return for paying the royalty, the farmer derives the benefits

from growing a wheat variety bred to express desirable attributes such as higher yield, superior

quality and processing characteristics and resistance to pest and disease.


7

Private sector participation increased since the introduction of end-point royalties, with the first

private sector bred wheat variety ‘Goldmark’ released in 1996 (Thomson 2013). The share of the

Australian wheat crop produced with varieties contracted under EPR arrangements increased to

71 per cent in 2010 (Jefferies 2012) and to 80 per cent in 2017 (Terence Farrell, GRDC, personal

communication, April 2018). There are now over 140 varieties currently being adopted by

Australia wheat growers under the end-point royalty arrangement (VarietyCentral 2018).


8

3 Methodology ABARES estimates the economic impact of a Ug99 wheat stem rust outbreak on the Australian

wheat industry, using spatial analysis and economic modelling.

Spatial mapping and modelling was used to determine the likelihood of Ug99 establishing in

different wheat growing areas of Australia—estimated at a small geographical scale (1km x

1km)—based on climatic suitability and varietal susceptibility. The likelihood values of the

spatial mapping and modelling served as inputs for the economic modelling to estimate supply

shocks. Demand shocks were represented by potential loss of export sales to Ug99-sensitive

countries. Partial equilibrium model results were used to estimate the economic impact of Ug99

on the Australian wheat industry for three disease spread scenarios.

Spatial mapping and modelling

Climate suitability rating

The likelihood of Ug99 establishing in a wheat growing area depends on the susceptibility of

varieties grown and suitability of its climate to the fungus. ABARES used the CLIMEX habitat

suitability model (Sutherst et al. 2007) to rate the climatic suitability of different wheat growing

areas in Australia. Using temperature and moisture stress threshold parameter values specified

in Beddow et al. (2013), ABARES produced a spatial dataset of eco-climatic index scores—which

measure the relative climatic suitability of different wheat growing areas. The different wheat

growing areas were grouped into three discrete climatic suitability classes based on two

thresholds of the eco-climatic index score (0 and 88): not suitable (equal to 0), moderately

suitable (greater than 0 to10) and highly suitable (greater than 10). Figure 4(a) shows the

spatial distribution of wheat growing areas belonging to the three suitability groups.


9

Figure 4 Spatial data (maps) used in the estimation of the likelihood of Ug99 establishing in Australia’s wheat growing areas

Source: ABARES modelling


10

Varietal susceptibility rating

While climatic suitability data is available on a small geographical scale (1km x 1km), varietal

susceptibility data is only available at much larger agro-ecological zone level (Figure 4b).

The GRDC has compiled an agro-ecological zone level varietal susceptibility dataset by

combining two datasets: (i) 2014–15 wheat receivals at depots owned by marketers across

Australia (disaggregated by varieties); and (ii) Ug99 ratings of wheat varieties grown—available

in a dataset developed and maintained by the Australian Cereal Rust Control Program. The GRDC

dataset defined seven susceptibility ratings: resistant (R), resistant to moderately resistant

(R/MR), moderately resistant (MR), moderately resistant to moderately susceptible (MR/MS),

moderately susceptible (MS), moderately susceptible to susceptible (MS/S) and susceptible (S).

The GRDC varietal susceptibility dataset contains, for each agro ecological zone, the percentage

distribution of wheat production by seven susceptibility ratings.

To simplify ABARES spatial modelling requirements, the GRDC’s seven susceptibility ratings

were reduced to five susceptibility ratings: very low, low, moderate, high and very high. The

manner in which the production shares (percentages) under some of the GRDC susceptibility

ratings were added to produce a dataset with only 5 susceptibility ratings is presented in Figure

5.

Figure 5 Ug99 wheat varietal susceptibility ratings in 2014–15

Source: ABARES modelling

It is assumed that susceptibility is measured on a scale of zero to one and the five susceptibility

groups represent the five equal interval classes: very low (0—0.20), low (0.21—0.40), moderate

(0.41—0.60), high (0.61—0.80) and very high (0.81—1.00). Figure 4(c) shows the spatial

distribution of wheat growing areas belonging to the five varietal susceptibility groups.


11

Likelihood of a Ug99 outbreak in Australia

ABARES used its Multi-Criteria Analysis Shell for Spatial Decision Support (MCAS-S) model to

rate the likelihood of a Ug99 outbreak for different wheat growing areas—using spatial datasets

on climatic suitability ratings and varietal susceptibility ratings as inputs (the data underlying

Figure 4(a) and Figure 4 (c)). The outbreak likelihood of each wheat growing area was rated as

either very low, low, moderate, high or very high.

Varietal susceptibility and climate suitability are both measured using interval scales with

intervals set arbitrarily—the former with 5 equal intervals and the latter with three unequal

intervals. One of the disadvantages of interval scales is the inability to define a measurable

(ratio) relationship between two classes. Taking the varietal susceptibility scale as an example,

ABARES has no evidence to treat varieties rated ‘low susceptible’ are twice as susceptible as

varieties rated ‘very low susceptible’, even though the particular interval scale chosen may

suggest this. Similarly, there is no evidence based method to measure how much less suitable a

locality with ‘moderately suitable’ climate for the fungus is compared to a locality with a ‘highly

suitable’ climate. This inability to define ratio relationships between ratings raises a question as

to the best way to combine varietal susceptibility ratings and climatic suitability ratings. There

could be a number of alternative ways the measurements made on the two scales can be

combined. In this study, ABARES chose to combine the two ratings in the manner presented in

Table 2 leading to 5 ordinal classes of Ug99 likelihood ratings (very low, low, moderate, high and

very high). The spatial distribution of wheat growing areas by likelihood group is presented in

Figure 4(d).

Table 2 Ug99 likelihood ratings produced by linking climatic suitability and varietal susceptibility ratings

Varietal susceptibility Climatic suitability

Unsuitable (0) Moderate (0<—10) High (>10)

Very high (0.81—1.00) Moderate High Very high

High (0.61—0.80) Low Moderate High

Moderate (0.41—0.60) Very low Low Moderate

Low (0.21—0.40) Very low Very low Low

Very low (0—0.20) Very low Very low Very low

The geographical distribution shows a marked difference in the likelihood of a Ug99 outbreak

across Australia's wheat growing regions. An outbreak is moderately to highly likely in most

wheat growing areas of central Western Australia and low to moderately likely in most wheat

growing areas of South Australia, and relatively less likely in most wheat regions of Victoria. The

northern wheat region—comprising the southern parts of Queensland and northern parts of

New South Wales—is less likely to have a Ug99 outbreak, largely reflecting the low climatic

suitability for the fungus. However, the southern New South Wales wheat growing regions,

particularly the New South Wales Victorian slope region (Figure 4b), are highly likely to have a

Ug99 outbreak reflecting very highly susceptible wheat varieties planted. The likelihood map in

Figure 4(d) is consistent with the wheat stem rust extent observed during the 1973 outbreak—

with a major impact in the southern region and a minor impact in the northern region (Luig

1985).


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Economic modelling

Economic modelling involves determining the magnitude of the supply shocks (yield losses and

mitigation costs) and demand shocks (reduction in exports). ABARES determines the supply

shocks by linking Ug99 likelihood measures—estimated through spatial modelling—with yield

losses and increased costs of mitigation inputs. The demand shock was determined by

identifying importing countries likely to ban imports of Australian wheat and calculating the

share of Australian exports destined to their markets. ABARES incorporated these estimated

supply and demand shocks into a partial equilibrium model of Australian wheat markets to

estimate the market and economic impacts.

ABARES drew heavily from its own database, GRDC and the Australian Bureau of Statistics (ABS)

for most of the economic data required for the study. It relied on experts in the Departments of

Agriculture in different states, the Department of Agriculture and Water Resources, GRDC and

CSIRO, and also private consultants on some of the parameters.

For each agro-ecological zone, ABARES used the average wheat price estimated over the five

years to 2014–15.

Supply shocks

Supply shocks—average wheat yield loss and increased production cost—were estimated for

each agro-ecological zone. Average yield loss was calculated by averaging yield losses assumed

for the five likelihood groups using the proportions of wheat areas under different likelihood

groups as weights. The yield loss assumptions for different likelihood groups (given in Table 3

below) are based on potential yield losses for wheat varieties with different resistant levels

(based on estimates by Beard et al. (2006) and expert advice (reproduced from Table 1)).

Table 3 Assumptions of yield losses by Ug99 likelihood ratinga

Likelihood rating Without mitigation

(%)

With mitigation

(%)

Very low 2.5 2.4

Low 10.0 5.0

Moderate 37.5 9.4

High 70.0 17.5

Very high 90.0 22.5

Notes: a ABARES developed these assumptions by assigning each likelihood rating a yield loss based on the range of yield losses given for varieties with different resistant ratings in Table 1. In selecting a yield loss estimate, each likelihood rating in Table 3 is paired with the most appropriate varietal resistant rating in Table 1: very low likelihood—resistant/moderately resistant; low likelihood—moderately resistant; moderate likelihood—moderately susceptible; high likelihood—moderately susceptible/susceptible; very highly likely—susceptible.

The study uses two maximum potential yield loss values—a higher value without mitigation and

a lower value with mitigation—resulting in two sets of average expected yield losses at agro-

ecological zone level.

ABARES undertook a simple partial budgeting analysis to determine, for each region, whether

the average gross revenue saved from mitigation would be greater than the increased costs of

production (from surveillance and fungicide costs). Where this was the case, the expected wheat

yield loss with mitigation and corresponding increased production costs were used to determine

the supply shock for that region.


13

This approach helped avoid the potential overestimation of the consequences of Ug99—by

accounting for the yield losses avoided through the profitable use of mitigation inputs in

estimating the supply shocks.

Table 4 presents the state level average impacts of Ug99 in lowering yield and increasing the

cost of production. The per-hectare yield losses and cost increases estimated provide the supply

shocks needed in simulating the impacts of Ug99.

Table 4 Average supply shocks estimated for key wheat growing states for the hypothetical Australia-wide outbreak, at 2014–15 prices

Average yield Yield decline Mitigation costs

Region (t/ha) (t/ha) ($/ha)

NSW 2.08 0.21 12.63

QLD 1.74 0.04 0.00

SA 2.10 0.10 8.58

VIC 1.87 0.08 7.75

TAS 5.31 0.13 0.00

WA 1.75 0.15 10.00

Australia 1.92 0.14 9.72

Note: Mitigation costs comprise surveillance and fungicide costs. Source: ABARES modelling

ABARES assumed that additional fungicide input is required only in medium to low rainfall areas

as fungicides normally used in high rainfall areas to control other fungal diseases would act as

an effective control for Ug99 as well. The cost of fungicides in medium to low rainfall areas is

assumed to double. Fungicide cost estimates were based on those reported in wheat enterprise

budgets published by the state Departments of Agriculture. ABARES also assumes that farmers’

efforts in monitoring the spread of Ug99 within their wheat paddocks over the outbreak

duration would add up to two days. This two-day monitoring cost was estimated using standard

agricultural wage rates.

ABARES also estimated the cost of switching to Ug99 varieties, which included a one-off seed

cost and the end-point royalty payment on the output produced in each year the new variety is

grown. The Ug99 resistant variety is assumed to produce the same yield as the susceptible

variety that it replaced, however, the increased seed cost still constitutes a supply shock as

farmers are expected to cut back production at the margin to accommodate it.

Demand shocks

Demand shocks are the potential reductions in Australian wheat exports arising from overseas

bans on Australian wheat imports in response to an Ug99 outbreak. ABARES sought the views of

experts in the Department of Agriculture and Water Resources, GRDC and consultants to identify

the countries that would ban Australian wheat imports. The experts were unanimous that hardly

any country would do this. They gave the reasons that:

the fungus is not seed-borne, so wheat grains pose no threat as carriers

the spores have a relatively short life, so any mixed with exported wheat would not survive long enough to reach wheat growing areas in overseas countries.


14

Although there is a negligible risk of exported wheat grains carrying the fungus, the study

assumes China (also a wheat growing country) might consider banning Australian wheat as a

precautionary measure. ABARES assumes Australian wheat exports which were denied access to

China, would be subsequently sold to other overseas markets at a lower price.

ABARES assumes affected states would lose their wheat sales to China. Estimated as a

percentage of Australian exports, West Australian exports to China accounted for 1 per cent

(Scenario 1), all eastern state exports 5 per cent (Scenario 2) and therefore Australian exports 6

per cent (Scenario 3). It also assumes that Australia will regain access to Chinese markets once

the current Ug99 strain was eliminated from all wheat growing areas.

Development of Ug99 spread scenarios

The economic impact of Ug99 on the Australian wheat industry was estimated for three disease

spread scenarios, based on the extent of spread of the Ug99 fungus. It is assumed that the

outbreak simulated in all three scenarios would only last one year as all affected farmers would

plant resistant varieties in the following year. It is possible that some affected farmers would

plant other crops, however, this is not considered in this analysis for simplicity.

Spread process

The study assumes Ug99 enters either Western Australia or South Australia through one of the

human-mediated pathways (via clothing or infected plant material) or from fungal spores

carried by wind from an infected country. The fungus is transported to Esperance if it enters

Western Australia or Ceduna if it enters South Australia, where it establishes populations in

suitable habitats provided by all potential host species, including wheat. Historically, Esperance

is an area prone to wheat stem rust (Beard et al. 2006), while Ceduna was identified as the

starting point of the 1973 outbreak. For simplicity, the study assumes that once detected, Ug99

has already spread beyond the point of eradicating it from all host species. The fungus continues

to spread progressively to neighbouring wheat growing areas further afield, transported by

wind and human-mediated means (such as movements of farm equipment).

Adoption of Ug99 wheat resistant varieties

Some Australian grown wheat varieties that are resistant to the current endemic strains of stem

rust are also resistant to Ug99. The 2014–15 wheat receivals data shows that around 22 per cent

of Australia’s wheat crop in that year came from varieties showing moderate to full resistance to

Ug99 (see Figure 5) (GRDC 2017b).

Non-adoption of Ug99 varieties may be due to a number of reasons:

resistance to Ug99 by itself may not be a criterion in choosing a wheat variety as this fungus strain is not yet present in Australia

in addition to pest and disease resistance, factors such as potential yield, protein content and other marketable attributes of the grain may affect choice

adopting a new variety costs the farmer in terms of the one-off seed cost and annual end-point royalty payments—farmers are expected to switch variety only when expected benefit exceeds the cost.

In responding to an outbreak, the study assumes all wheat growers would eventually replace

susceptible varieties with resistance varieties, leading to the elimination of Ug99 from their

wheat paddocks. This adjustment process is assumed to take just one year and involves the use

of fungicide inputs as an interim measure to mitigate yield losses from the growing crop. An


15

ongoing incursion of Ug99 would likely provide a strong economic incentive for those growers

still planting susceptible varieties to switch over to resistant ones in the following season. That

incentive is expected come from avoided losses from all future outbreaks of Ug99 exceeding the

cost of switching.

Ug99 resistant varieties are currently available and in use in Australia (GRDC 2017b) and

adequate stocks of seed are available for all growers to plant them in the next season. In 2016–

17, about 6 per cent of wheat produced in Australia was fully resistant to Ug99 and around 16

per cent were moderately to fully resistant (GRDC 2017b). Combined, Ug99 resistant varieties

produced 1.6 million tonnes of wheat in 2016–17 which is significantly more than the wheat

seed required (around 1.0 million tonnes annually), if Australia’s entire wheat area was to be

planted with Ug99 resistant varieties (GRDC 2017b). Seed usage is one of several uses of wheat

produced from Ug99 resistant varieties. Although not modelled in this study, a large-scale

increased demand for seed use following a Ug99 incursion is expected to drive up the price of

seed and therefore the one-off cost of Ug99 resistant seeds for those farmers switching over to

these varieties.

Spread scenarios

When Ug99 establishes in Esperance, the physical separation of wheat growing areas in Western

Australia from those in the rest of Australia generally lends itself to containing and then

eliminating the outbreak from wheat growing areas in that state. By contrast, when Ug99

establishes in Ceduna in South Australia—with no such physical barrier—the fungus could

spread unhindered to all wheat growing areas in southern and northern regions. The study also

considers the possibility of long distance dispersal of the fungus from Western Australia—with

the Esperance outbreak also spreading to wheat growing areas in the rest of Australia (Park and

Cuddy 2015), resulting in an Australia-wide disease event. For all outbreaks, as explained in the

last section, the study assumes one year would be long enough for all affected wheat growers to

replace susceptible with resistant varieties—leading to the elimination of Ug99 from all affected

wheat paddocks by the following year.

ABARES considered three possible disease spread scenarios:

Scenario 1: An outbreak originating in Esperance, spreading rapidly to all wheat-growing areas in the western region and lasting one year before complete elimination from paddocks

Scenario 2: An outbreak originating in Ceduna, spreading rapidly to all wheat-growing areas in the southern and northern regions of Australia and lasting one year before complete elimination from paddocks

Scenario 3: An outbreak originating in Esperance, spreading rapidly due to westerly winds, developing into an Australia-wide outbreak and lasting one year before complete elimination from paddocks.


16

4 Economic impacts The study estimates the economic impacts of Ug99 on the Australian wheat industry in terms of

the reduction in gross revenue plus increased cost of production over a 10 year period. For each

scenario and year, reduction in gross revenue is equal to the difference between the gross

revenue for that scenario and the gross revenue for the ‘do-nothing’ (or base-case) scenario. In

the year of outbreak, costs of production for Ug99 infected crops, are expected to increase as

farmers increase the use of fungicides to treat the fungus and labour for increased surveillance.

Adoption of resistant varieties over the subsequent years involves the one-off seed cost in the

year immediately following the outbreak, and the payment of end-point royalty in all years the

new variety is planted.

Changes in quantity produced and price received

The quantity of wheat produced in the outbreak year decreased in all scenarios modelled

because of the effect of simulated supply shocks (Table 5). The estimated decreases were larger

(up to 6 per cent) for a larger outbreak. In Scenario 1 and 3, wheat price increased even with the

trade ban as the effects of supply reduction more than offset the effects of reduction in Chinese

demand for Australian wheat. The two offsetting effects worked in opposite direction in

Scenario 2 and wheat price decreased with the trade ban. Estimated wheat price increases were

slightly larger (up to 0.84 per cent) for a larger outbreak but smaller with a trade ban included

(Table 5). Farmers had already implemented their production decisions when wheat destined

for export to China was diverted to lower price markets—and therefore production remained

unchanged at without trade ban levels.

Table 5 Effect of hypothetical Ug99 outbreaks on equilibrium wheat production and price

Without trade ban (% change) With trade ban (% change)

Scenarios Price Production Price Production

1 0.35 -2.45 0.25 -2.45

2 0.47 -3.23 -0.04 -3.23

3 0.84 -5.70 0.23 -5.70

Notes: Equilibrium wheat production and price represents the price and quantity at which the market cleared. Scenario 1 is the Esperance outbreak, which spreads quickly to all wheat growing areas in the western region. Scenario 2 is the Ceduna outbreak, which spreads quickly to all wheat growing areas in the southern and northern wheat regions. Scenario 3 is the Esperance outbreak, which, aided by westerly winds, spreads quickly beyond Western Australia to cover all Australian wheat growing areas. Source: ABARES modelling

The economic impact on the wheat industry

Revenue losses

Gross revenue losses are not limited to the Ug99 outbreak year. Additional costs associated with

Ug99 resistant seeds used from the following year (one-off seed cost and annual end-point

royalty payments) mean farmers are expected to cut back production at the margin until the

cost of producing the last tonne of wheat (marginal cost) equals its price (marginal revenue).

The reduction in revenue attributed to reduced production (arising from higher seed cost) over

the following nine years is also estimated—in present value terms using a 7 per cent discount

rate.


17

In the year of outbreak, gross revenue losses increase with the size of the hypothetical outbreak, and to a lesser extent, with the trade ban on wheat (Table 6). Estimated losses in industry gross revenue were $150 million for the Western Australia outbreak, $198 million for the south-eastern Australia outbreak and $350 million for the Australia-wide outbreak (Scenarios 1, 2 and 3, respectively)—all without an import ban being imposed on Australian wheat by other countries. With an import ban by China, estimated gross revenue losses in each scenario were slightly higher.

Over the following 9 years, estimated total losses in industry gross revenue (arising from production cutback to accommodate increased cost of production of Ug99 varieties) were $202 million for the Western Australia outbreak, $295 million for the south-eastern Australia outbreak and $487 million for the Australia-wide outbreak (Scenarios 1, 2 and 3, respectively)—both with and without trade ban.

In total, estimated losses in industry gross revenue were $352 million for the Western Australia outbreak, $493 million for the south-eastern Australia outbreak and $837 million for the Australia-wide outbreak (Scenarios 1, 2 and 3, respectively)—all without an import ban being imposed on Australian wheat by other countries. With an import ban by China, estimated revenue losses in each scenario were slightly higher.

Table 6 Revenue losses from hypothetical outbreak scenariosa, at 2014–15 prices

Scenarios Extent of spread Without trade ban ($m) With trade ban ($m)

First year – the cost of the outbreak



3 Australia 350 391

Next 9 years – with Ug99 resistant varietiesa



3 Australia 487 487

Total over 10 yearsa



3 Australia 837 878

Note: a in present value terms estimated at a 7 per cent discount rate. Source: ABARES modelling

Increased cost of production

In the year of outbreak, the cost of production increases as farmers increase the use of

fungicides to treat the fungus and labour for increased surveillance. The subsequent planting of

Ug99 resistant varieties incurs one-off seed cost in the following year and end-point royalty

payment for each year the new variety is planted. The contractual arrangements with the plant

breeder right (PBR) holder for the Ug99 resistant variety allow farmers to use saved seed in all

following years as they pay end-point royalty on each year’s production. Table 7 presents

increased cost of production in the year of outbreak (column 3), present value of one-off seed

cost incurred in the following year (column 4) and the present value of all annual end-point

royalty payments made over the 9 years following the outbreak (column 5). All present values


18

are estimated using a 7 per cent discount rate. Estimated increases in total cost of production

over 10 years were $215 million for the Western Australia outbreak, $310 million for the south-

eastern Australia outbreak and $525 million for the Australia-wide outbreak (Scenarios 1, 2 and

3, respectively)(Table 7).

Table 7 Increased cost of production over 10 yearsa, at 2014–15 prices

Scenarios Extent of spread

Increased cost for the current

crop ($m)

One-off seed cost of the

following cropb ($m)

Additional plant breeder

royalty paymentsc over

9 years ($m)

Total

($ m)

1 Western Australia

50 85 80 215

2 south-eastern Australia

70 114 126 310

3 Australia 120 199 206 525

Note: a in present value terms estimated at a 7 per cent discount rate. b estimated assuming a seed rate of 40Kg/ha, a price of $450/tonne and that all varieties other than those fully resistant to Ug99 will be replaced. c assumes all varieties other than those fully resistant to Ug99 will be replaced, an 80:20 percent split between wheat produced with and without end-point royalty, all varieties without end-point royalty (accounting for 20 per cent of wheat produced) are susceptible and will be replaced with Ug99 resistant varieties at an end-point royalty of $3 per tonne and the replacement of other susceptible varieties currently under end-point royalties with Ug99 resistant varieties incurs an additional plant breeder royalty of $1/tonne. Source: ABARES modelling

Total economic costs to the wheat industry, after adding the total increase in cost of production

to the revenue losses, are given in Table 8. Estimated economic losses were $567 million for the

Western Australia outbreak, $803 million for the south-eastern Australia outbreak and $1,362

million for the Australia-wide outbreak (Scenarios 1, 2 and 3, respectively)—all without an

import ban being imposed on Australian wheat by other countries. With an import ban by China,

estimated economic losses in each scenario were slightly higher.

Table 8 Total economic cost (revenue losses and increased cost of production) from hypothetical outbreak scenarios 10 yearsa, at 2014–15 prices

Scenarios Extent of spread Without trade ban ($m)b With trade ban ($m)b



3 Australia 1,362 1,403

Note: a present value estimated at a 7 per cent discount rate. b total revenue losses over 10 years (Table 6) plus total increase in cost of production (Table 7). Source: ABARES modelling

Benefits from prevention

If Ug99 enters, establishes and spreads, it is estimated to cost the wheat industry between

$567 million and $1,403 million over 10 years, depending on the point of entry, outbreak extent

and whether an import ban is imposed (Table 8). This cost includes the cost of an outbreak

lasting one year immediately after the entry of Ug99 plus the cost of adopting resistant varieties

over a 9 year period. As Ug99 is not present in Australia and given the uncertainty around its

entry to Australia, the expected (probability weighted) value of these costs have been used to

approximate the gross benefits of prevention.


19

To take into account the likelihood of incursion and establishment, ABARES took into account

previously reported wheat stem rust incursions in Australia. There have been three exotic wheat

stem rust incursions over the 63 years to 2017—which is equivalent to a one in about 20 year

event (or an annual incursion probability of 0.05). Applying this probability to the estimated

total economic cost for the three scenarios in Table 8, and assuming 100 per cent likelihood of

establishment and spread, the expected gross benefits of investment in activities to continue to

prevent the entry of Ug99 are estimated to range from $28 million to $70 million a year.

Benefits from adopting Ug99 resistant varieties

Were it to enter, Ug99 would likely become endemic in Australia. If not for resistant varieties,

the fungus would likely cost the wheat industry considerably more, as farmers that continued to

grow susceptible varieties would continue to be affected, whenever seasonal conditions were

favourable for the Ug99 fungus to cause an outbreak.

This section compares the cost of a Ug99 outbreak lasting one year (whereby farmers do not

change wheat varieties planted that year) against the annual cost of adopting Ug99 resistant

varieties by all farmers in the outbreak area. Again, the three hypothetical scenarios were

modelled—except in this case, each outbreak was assumed to last one year as seasonal

conditions are assumed to be unsuitable for the virus in the following year.

The total costs of the outbreak (gross revenue losses plus the increased cost of production) are

given in Table 9. Estimated costs were $200 million for the Western Australia outbreak, $268

million for the south-eastern Australia outbreak and $470 million for the Australia-wide

outbreak (Scenarios 1, 2 and 3, respectively)—all without an import ban being imposed on

Australian wheat by other countries. With an import ban by China, estimated economic losses in

each scenario were slightly higher. These costs could be overestimates as some affected farmers

may have replaced the susceptible wheat crop with another non-wheat crop more profitably

than switching to an Ug99 resistant variety.

Table 9 Total cost of hypothetical outbreaks lasting one year

Scenarios Extent of spread Without trade ban ($m)a With trade ban ($m)a



3 Australia 470 511

Note: a gross revenue losses in the year of outbreak (Table 6) plus the increase in cost of production in that year (Table 7 Increased cost for the current crop-column 3). Source: ABARES modelling

Switching to resistant varieties would involve costs incurred on a yearly basis: the annual

equivalent of the one-off seed cost; end-point royalty payment (made for each tonne of grain

produced) and the gross revenue losses arising from production cut back to accommodate

increased cost of production of Ug99 resistant varieties. These annual costs are given in Table

10.


20

Table 10 Annual costs of adopting Ug99 resistant varieties

Scenario Extent of spread Seed costa ($m/year)

End-point royaltyb

($m/year)

Revenue lossesc

($m/year)

Total cost ($m/year)

1 Western Australia 14 12 31 57

2 south-eastern Australia

19 19 45 83

3 Australia 33 31 75 139

Note: a One-off seed cost (in Table 7) annualised, using a 7 per cent discount rate. b estimated assuming that all varieties other than those fully resistant to Ug99 will be replaced, an 80:20 percent split between wheat produced with and without end-point royalty, all varieties without end-point royalty (accounting for 20 per cent of wheat produced) are susceptible and will be replaced with Ug99 resistant varieties at an end-point royalty of $3/tonne and the replacement of other susceptible varieties currently under end-point royalties with Ug99 resistant varieties incurs an additional end-point royalty of $1/tonne. c Total revenue losses associated with the adoption of Ug99 varieties (in Table 6) annualised using a 7 per cent discount rate. Source: ABARES modelling

The estimated cost of switching to Ug99 resistant varieties were $57 million for the Western

Australia outbreak, $83 million for the south-eastern Australia outbreak and $139 million for the

Australia-wide outbreak (Scenarios 1, 2 and 3, respectively). These costs were much smaller

than the total cost of corresponding outbreaks given in Table 9 ($200 million, $268 million and

$480 million, respectively even without the trade ban) that were avoided by switching to Ug99

resistant varieties. However, an Ug99 outbreak would not occur every year even if farmers

continued to grow susceptible varieties despite the fungus becoming endemic to Australia. An

outbreak would occur only when seasonal conditions are conducive for the fungus.

For switching to resistant varieties to be profitable in the long run, the annual expected benefit

(the cost of Ug99 outbreak that is avoided times the annual probability of an Ug99 outbreak

under endemic state) should exceed the cost of switching. In the absence of information on

annual probability of an outbreak under endemic state ABARES estimated the critical

(breakeven) annual probability of outbreak that equates the expected benefit to annual cost of

switching (Table 11). Critical annual probabilities are estimated by dividing the cost of switching

(given in the last column of Table 10) by the corresponding avoided losses estimated for an

outbreak lasting one year (given in the last two columns of Table 9).

Table 11 The critical probability that equates the annual cost of switching to Ug99 resistant varieties to benefits

Scenario Extent of spread Critical probabilitya

(without trade ban)

Critical probabilityb

(with trade ban)

1 Western Australia $57m/$200m = 0.285 $57m/$207m = 0.275

2 south-eastern Australia $83m/$267m = 0.309c $83m/$303m = 0.274

3 Australia $139m/$470m = 0.295 $139m/$511m = 0.272

Note: a estimated by dividing the switching cost given in the last column of Table 10 by the avoided losses estimated for an outbreak lasting one year given in the third column of Table 9. b estimated by dividing the switching cost given in the last column of Table 10 by the avoided losses estimated for an outbreak lasting one year given in the fourth column of Table 9. c compared to Scenario 1 the critical probability increased because the estimated avoided losses increased proportionately less (33 per cent) than switching costs increased (46 per cent), however the critical probability decreased when trade impacts were included as 83 per cent of Australian wheat exports to China are sourced from south-eastern Australia. Source: ABARES modelling


21

The estimated critical probabilities suggest that the cost of switching to Ug99 resistant varieties

would be worthwhile—if there is at least one Ug99 outbreak within (on average) every three to

four years (equivalent to a critical annual probability between 0.33 and 0.25) while farmers

continue to plant the susceptible varieties.

Key limitations

The economic impacts discussed in this chapter are measures aggregated to national level from

those resulting from a bottom-up approach. The process started with the Ug99 likelihood

estimates made at a small geographical scale (1km x 1 km) feeding in to estimates of economic

impacts first made at an agro-ecological zone level and then at a state level and finally at the

national level. The estimates could be sensitive to various parameter assumptions made and

methods used at different levels. The results could be most sensitive to the somewhat arbitrary

method employed in combining interval scale measures of varietal susceptibility and climate

suitability in the derivation of ordinal measures of Ug99 likelihood—and the subsequent

mapping of these ordinal likelihood measures to cardinal measures of supply shocks used in the

partial equilibrium model. The geographical distribution of the likelihood of a Ug99 outbreak

obtained in this study may have been influenced by the particular method chosen (as illustrated

in Table 2) to combine the varietal susceptibility ratings with climate suitability ratings. This

means, were an alternative method used a different geographical distribution of Ug99 likelihood

and a different set of economic impact estimates could have resulted, and therefore it is

desirable to conduct sensitivity analysis. Further research is needed to develop a robust method

to map variables measured on an ordinal scale to a variable measured on a cardinal scale. This

has a particular relevance to research employing a bottom-up bio-economic modelling approach

like the estimation of economic impacts of biosecurity threats.


22

5 Conclusions The release of wheat varieties resistant to a broad spectrum of virulent strains of the wheat stem

rust fungus, has contributed to Australia remaining free of major outbreaks of wheat stem rust

since 1973. However, this is likely to change if Ug99 enters, as the level of protection provided

by the current mix of varieties with varying level of resistance is expected to fall.

The availability of adequate seed stocks of resistant varieties could limit the economic impact of

an outbreak to just one season, as growers still planting susceptible varieties would have a

strong economic incentive (avoiding potential losses from future outbreaks) to replace them

with Ug99 resistant varieties the following season. If resistant varieties are not substituted,

Ug99 is likely to cost the Australian wheat industry much more from recurring future outbreaks.

Ug99 is not present in Australia. The ABARES study identifies significant benefits in continuing

to invest in prevention activities—estimated at between $28 million and $70 million a year.

The Ug99 proofing of Australia's wheat growing areas, by planting varieties resistant to the

current strain of this pathogen, could protect the industry from future stem rust related yield

losses only until a newer and more virulent strain emerges. A number of new strains of Ug99

and other wheat stem rust species (both exotic and endemic) could arrive in Australia, at any

time in the future. To minimise the wheat revenue losses resulting from wheat stem rust, it is

important that government and the wheat industry continue to invest in varietal improvements

which provide resistance to emerging strains.


23

Glossary ABARES Australian Bureau of Agricultural and Resource Economics and Sciences

ABS Australian Bureau of Statistics

ACRCP Australian Cereal Rust Control Program

AEGIC Australian Export Grains Innovation Centre

CIMMYT International Maize and Wheat Improvement Centre

CLIMEX Software to predict the effects of climate on species

CSIRO Commonwealth Scientific and Industrial Research Organisation

EPR End-point royalties

GRDC Grains Research and Development Corporation

GVP Gross Value of Production

FAO Food and Agriculture Organisation

IP Intellectual Property

MCAS-S Multi-Criteria Analysis Shell for Spatial Decision Support

Oversummering Process by which some rust fungus can wait out a dry summer season in

the absence of its host, by alternately infecting an annual and perennial

host, or by continuous infection of host plants grown throughout the year

(such as wheat and barley)

Pathotypes A disease-causing variant or a strain of a microorganism

PBR Plant Breeders Right

SNP A single-nucleotide polymorphism

SA4 Statistical Area Level 4

Ug99 A pathotype or strain of the wheat stem rust fungus

USDA United States Department of Agriculture


24

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