The Australian Government says a continuing drought will cut the winter grain harvest by more than half last year's figures, and reduce economic growth.
Australia is a leading exporter of agricultural products and the drought has cost more than 40,000 jobs in recent months.
Weather conditions are also being blamed for a jump in inflation as retail prices for farm produce begins to rise.
In the city of Melbourne, water restrictions have begun for the first time in 20 years.
Residents are being asked to curb their use of water in washing their cars, their gardens and filling swimming pools for at least six months.
Many areas in the eastern states of Queensland and New South Wales have not seen rain for two years. Some parts have experienced the lowest rainfall since records began in 1900.
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