For almost three years, large parts of NSW, Queensland and South Australia have faced extreme drought conditions, with some of the hardest hit regions experiencing their lowest rainfall on record.
As well, bushfires are delivering a double-whammy for many of those communities already affected by drought.
The three per cent fall in farm GDP is expected to slice about 0.1 percentage points from real GDP growth in 2019-20, following a detraction of 0.2 percentage points in 2018-19.
On the positive side, Treasury said higher prices and a lower Australian dollar were helping some farm incomes and it was forecasting an improvement in conditions.
“We're just ... praying and hoping that the drought breaks,” Treasurer Josh Frydenberg said, when asked why Treasury was forecasting a return to average seasonal conditions in 2020-21.
Meat export prices are high due to the effects of African swine fever and growing demand from developing economies.
Grain prices have been high but are expected to fall in 2019-20 as global supply increases.
“Overall, the drought has had a negative effect on the income of Australian farmers with farm unincorporated business income around 15 per cent lower than it was a year ago,” the mid-year budget update said.
Treasury said it was too early to tell what effect severe fire conditions around Australia would have on farming land and production.
Regional fires in NSW late last year resulted in some rerouting of livestock feed as well as possible delays to harvesting, which may lower farm production, while fires in central Queensland affected horticultural crops.
The full cost of damage to public infrastructure and private property, as well as business, from these fires — as well as the devastating blazes in NSW and Victoria at the start of 2020 — would not be known for some time.