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Climate Variability and Risk Management in New Zealand Farming¹: A Policy Perspective

This is an abridged version of a paper given by Alan Walker at the New Zealand Institute of Agricultural Science Convention 2000: "Managing the Impacts of Climate Variability - The Noah Paradigm". In it he discusses the context of the Government policy framework, and the responses expected from Government.

The New Zealand economy is highly dependent on land-based primary production systems. In the year ended 30 June 2000, total exports of agricultural and horticultural products were $14.214 billion. This represented 57.8 percent of total New Zealand exports. In terms of GDP, agriculture and associated industry sectors contributed an estimated 15.7 percent of the national GDP of $103.86 billion in the year ended March 2000.

Data from Statistics New Zealand show that, after farming, the most value-added contribution comes from the processing industry for meat, dairy and animal fibre products. Agriculture can therefore be regarded as one of the driving sectors in the New Zealand economy, in the sense that if it did not take place, there would be no input supply to industry and no need for a processing sector.

Any influence of climate on the New Zealand primary production sector is therefore very important to the whole economy.

A number of examples serve to illustrate the point. Dairy production for the 1999/2000 season was up 14 percent owing mainly to climatic factors. Likewise, lamb production this season is expected to be up 2.5 percent due largely to increased lamb weights — a direct result of more grass growth under favourable seasonal conditions.

Conversely however, recent droughts in the Canterbury region have cost $330 million in 1997-99 (Butcher, 2000²). This is equivalent to approximately 20 percent of annual gross farm income in the regions and is estimated to have reduced employment by 905 person years in the Canterbury region alone.

Risk Management in Farming

Risk management is crucial to running a successful farm or orchard business. Managers must understand what the risks are and then plan to manage the negative implications of risks and maximise the positive opportunities.

While the focus of this paper is climate change and climate variability, they are not the only risk variables to be managed by farmers and growers. Other risks include: market, production, financial, technology, environmental, societal, management and sovereign (political and policy changes and trade/access restrictions).

Impact of Climate Change

Climate change is likely to have both positive and negative effects on land-based primary production systems. For example, risks may include loss of productivity and/or income and increased pressure of water resources. Benefits may include introducing new crops and related industries to New Zealand.

Whatever the effects, climate change is expected to increase production risks and require producers to change enterprises and management practices in the future.

Impact of Climate Variability

Successfully managing climate variability - and particularly drought - involves many interrelated factors, but can be characterised under four headings:

Business management

• Make decisions and set dates to implement decisions early.
• Plan for the whole season, and particularly the winter (following a drought).
• Update and revise plans regularly.
• Plan the recovery.
• Focus on profitability.
• Cut losses quickly.
• Plan conservatively - and have a retreat option.
• Communicate regularly with financiers.

Business structure

• Maintain a financial buffer in the farm business.
• Structure the business to maximise flexibility and minimise tax.
• Operate the correct business for the situation (physical, financial and social).
• Farm management.
• Use decision support management tools to plan ahead (e.g., Stockpol, Farm Tracker).
• Prioritise stock classes for destocking early.
• Sell stock early.
• Buy the best possible replacement stock.
• Focus on maximising income rather than reducing cost.
• Feed stock as well as possible.
• Address animal welfare considerations.

Human factors

Stay positive and maintain motivation and determination.

• Apply good decision-making skills.
• Seek information and learn from past experience.
• Work hard and smart.
• Record, monitor and prioritise.
• Be gracious with people and ruthless with money.
• Involve spouse or partner in decision-making, consultation and planning.
• A problem shared, is a problem halved.
• Experience has shown that Government's response influences farmer management of risk associated with adverse climatic events.

Government Policy Framework

Government has applied four sets of policy objectives to adverse climatic events policy. These are:

(a) to increase economic growth through freeing international trade access, domestic price stability, and minimal government intervention;

(b) to enhance social cohesion by providing reasonable family income, and fair access to basic services;

(c) to encourage sustainable management of natural resources, maintain biodiversity and protect areas of natural significance; and

(d) to maintain animal welfare to protect livestock, and maintain domestic and international credibility.

Only in times of extreme adverse climatic events or natural disasters does government intervene directly. The policy framework which has directed this intervention has two elements. The first is the Recovery Plan for Natural Disasters and Emergencies within New Zealand. The second is specifically targeted to recovery assistance for the rural sector - Emergency Relief Procedures Following Adverse Events and Natural Disasters Affecting the Primary Production Sectors .

Both these plans are based on the general principle that the primary responsibility for dealing with natural disasters rests with individuals, local communities and their industry sectors. The objective of any central government intervention is to provide the minimal level of central government assistance to restore to the community the capacity for self-help, with solutions which provide the most appropriate long-term result.

The reasoning behind this approach is that:

• farmers and growers have the best information to be able to minimise their business risks appropriately;
• most climatic events affecting farming fall within the category of "normal farming risks" and that such risks are not the domain of central government;
• markets will develop mechanisms to help farmers manage normal events better in the absence of central government intervention (crowding out);
• any assistance must be sustainable and minimise the potential for causing distortions; and
• assistance to the rural sector causes equity concerns among those being assisted, those not being assisted, and the rest of the economy.
• The result of applying these principles is that central government intervention is provided as a last resort and is provided only to augment local responses under exceptional circumstances following rare or extraordinary events. Central government intervenes only (excluding civil defence emergencies) when:
• the event is of national significance;
• responding to the event is beyond the capacity of the local community/industry to deal with the response and recovery;
  • recovery procedures cannot be carried out without central government help;
  • central government help will aid co-ordination of the recovery process to a significant extent;
• there is a statutory requirement for action, such as animal welfare; and
• the event is "rare" in meteorological terms. (The indicative criterion is that the event is a 1 in 50 year event.)

Government Role in Emergency Management

Government's role in emergency management - for example, an adverse climatic event or natural disaster - is based on encouraging individuals, communities and sectors to adopt the "four Rs":

(a) Reduction: this involves planning and acting before and after an event at the individual business and community levels to reduce the negative impact of a climatic event or natural disaster.

(b) Readiness: being prepared in a business and personal capacity to manage a risk event when it does happen.

(c) Response: knowing how to and being able to respond to a significant climatic risk event. Experience shows that this is particularly challenging for farmers and growers under the insidious development of a drought.

(d) Recovery: returning the farm or orchard business to a strong position in order to cope with future opportunities and risks (including adverse climatic events).

Addressing the "four Rs" is achieved by a process of identifying hazards (risks to the operation), assessing vulnerability to the hazard, and developing mitigating management strategies.

Government encourages, and sometimes facilitates, individual community and sector implementation of these principles, but has neither the resources nor the policy mandate to become directly involved in such activities. Implicit in this position is that government is less willing to become involved in Response and Recovery activities under circumstances where individuals, communities and sectors have not themselves previously prepared adequately.

The role of government agencies - and MAF in particular - under Adverse Climatic Events Relief policy is in the following six areas:

(a) Policy advice on the general framework for risk management in a pre-event situation, and the conditions and criteria for government response after an event.

(b) Co-ordinating and encouraging community and sector adoption of the capacity to undertake the four Rs.

(c) Reporting on the nature, scale and impact of significant climatic events when they happen.

(d) Advising on the appropriateness or otherwise of a government response after an event occurs. This is usually (but not exclusively) in response to an industry request for assistance.

(e) Administering approved government response programmes.

(f) (Sometimes) providing a direct operational input.

The current Government measures and criteria for government response are presented in the next section.

Government Response to Adverse Climatic Events & Natural Disasters

In June 1992, the Government phased out support aimed at directly restoring business viability and/or the physical integrity of farm or horticultural operations affected by an adverse climatic event or natural disaster.

In differentiating between support for the farm family and support for the farm business, the emphasis in government concern moved towards supporting the essential living expenditure of the farm family as the first priority where this is beyond the capacity of the farm business. Secondary concerns are for animal welfare issues and for addressing the public good element of the recovery process. Direct government involvement in a response phase is minimal and occurs only where there is a threat to human life and safety or there are animal welfare issues.

Government also provides some limited support to the local administration of response and recovery programmes.

The current (June 2000) measures following a major (but non-civil defence) disaster of national significance are briefly described below. These measures are only available to bona fide farmers and growers who earn more than 50 percent of their gross income from farming or horticultural operations. Government support for the servicing sector and other self-employed people, other than farmers and growers, is provided through standard welfare and benefit programmes.

Current Government measures, and the delivery agencies, are:

(a) Rural Sector Assistance (RSA): this provides assistance to families when the farm or orchard business cannot meet essential living needs. It is provided through the Department of Work and Income.

(b) Adverse Events Income Equalisation Tax Relief: this tax relief applies to the forced sale of capital livestock and is provided through the Department of Inland Revenue.

(c) Taskforce Green Labour: this is available for general cleanup and stock rescue operations after a flood, snow or hail. It has never been used for drought situations. It is provided through the Department of Work and Income.

(d) Technology Transfer Grants: these are one-for-one grants for public mass media extension activities advising on mitigation measures. Grants are not available for individual one-on-one consultancies. This measure is provided through the Ministry of Agriculture and Forestry.

(e) Grants to Rural Co-ordinators: these are one-for-one grants to Rural Co-ordinators to help with the financial and social counselling of farmers or growers who are affected by an adverse climatic event and to help with the assessment of eligibility for Rural Sector Assistance. These grants are provided through the Ministry of Agriculture and Forestry.

(f) Grants to Community Relief Funds: these are one-for-one grants to match the direct contribution made to community relief funds that can be used in the Recovery phase at the discretion of the local community organisation administering the relief programme. These grants are provided through the Ministry of Agriculture and Forestry.

(g) Programme Administration Grants: these are one-for-one grants to help fund the administration of local community response and recovery programmes (including Government relief contribution). These grants are provided through the Ministry of Agriculture and Forestry.

(h) Animal Welfare: support for local initiatives designed to alleviate distress caused to distressed livestock and as a last resort, to enforce statutory responsibilities under the Animal Welfare Act. This is provided through the Ministry of Agriculture and Forestry.

(i) Defence Force Assistance: has been provided to assist with stock water cartage and stock rescue operations.

The result of the changes in policy framework (since 1992) and the reduction in direct Government relief measures (since 1995) have been: better prepared farming communities; significantly improved risk management by individual farmers; and reduced government expenditure, which is down from approximately $90m in 1988/89 to approximately $2m for the 1998/99 year (both drought seasons).

The reduced level of direct government involvement increases the emphasis on individual, community, and industry responsibilities.

Community Responsibility

The current policy framework and Government response measures require individuals, communities, and primary production sectors to undertake responsibilities for:

(a) preparing community and individual risk management strategies;

(b) undertaking initial response activities;

(c) applying for Government assistance;

(d) managing response and recovery programmes; and

(e) implementing recovery programmes.

Conclusions

The days of wholesale government support are gone (and are not yearned for by New Zealand farmers). The current Government policy framework recognises that most climatic events are a normal part of farming. Government now intervenes only when the events are extreme and of national significance. The philosophy is to encourage a risk management approach to minimise the effects of these extreme climatic events and shorten the recovery period.

Government assistance after such significant events is primarily targeted at family support to alleviate the most extreme hardship and distress. Government no longer supports business operations, but retains a concern for animal welfare. Government remains a partner and is willing to play a part together with individuals, communities and sectors to ensure the ongoing profitability of New Zealand agriculture, the maintenance of the natural resource base, and concern for the people caught in the clutches of an extraordinary "natural event".

1 In this paper, the term farming refers to both agricultural and horticultural production systems. Although forestry is a land-based primary production system, it is excluded from consideration in this paper because:

(a) it is less directly affected by short-term climatic perturbations; and

(b) it is not included under Government Adverse Climate Events Relief Policy.

2 Butcher Partnership, February 2000: Regional Economic Impacts of 1997-99 Canterbury Drought; Report to MAF Policy, February 2000.

 

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Amber Duncalfe
Editor - RM Update
Ministry of Agriculture and Forestry
PO Box 2526
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NEW ZEALAND

Tel: +64 4 894 0710
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