4 The value of current irrigation to the New Zealand economy

Irrigation alone does not provide an economic return, but can allow production and/or product quality levels to be lifted on any given piece of land, or the land use to be determined from a wider range of options. However, gaining an economic return on the irrigation investment usually requires increases in the use of other inputs. This leads to considerable increases in economic activity and usually, but not always, in profit per unit of employed capital or the margins of the agricultural enterprise.

Therefore it is important to be aware of the reference point in describing the value of irrigation. To an individual irrigator, irrigation may be the difference between being a viable business or leaving the industry. From a national point of view, the products that particular farmer produces may be produced by someone else in a different part of the country or under a different production system. Furthermore, there are costs associated with this increased activity. However, although there may be substitution of some production, the total output (volume and value) of production for the country will rise with irrigation.

This report builds on an earlier report (Robb, 2000) which made a preliminary estimate of the farm-gate value of irrigation. The current report improves on the 2000 estimate in a number of ways (described in section 4.6). The following calculation calculates the net value of irrigation to the New Zealand economy.

4.1 Method

Appendix 1 contains a full description of the methods considered and the reasons why the approach taken was adopted. Key assumptions by land use and region are described in Appendix 2.

The method adopted follows a “with minus without” irrigation approach, adjusted for changes in farm type and scale. The result is an indication of the contribution irrigation makes to farmgate GDP.

The formula is:

Farmgate GDP due to irrigation = GDP with irrigation – GDP without irrigation.

= (irrigated land use mix x (irrigated GM – fixed costs)) – (dryland land use mix x (dryland GM – fixed costs)).

The gross margins were determined for farm types and regions throughout New Zealand by regional MAF Policy staff and their contacts. The gross margins are those for the 2002/03 season. A single season was used because the irrigated land use data available related only to that year. Prices in this year were at neither particularly high nor low levels compared to preceding years and the forecasts for future prices7. The result is therefore for a single year, but can be considered indicative of the order of magnitude of farmgate GDP attributable to irrigation.

The “without irrigation” land use is that which would now exist if irrigation had not been developed, rather than if irrigation was no longer available for that particular land.

The revenue and cost information was derived from gross margins representing average current productivity levels by land use and region. These were adjusted to account for the different fixed costs associated with different farm types or scales, using primarily data from MAF’s Farm Monitoring models. To improve these estimates, for example to use at a sub-regional level, full budgets for irrigated and non-irrigated systems under each land use should be created, but this was beyond the scope of this study. The 2000 study (Robb, 2000) did not account for the likely increase in fixed costs associated with the change from dryland to irrigated production.

The differences in the adjusted net farmgate value were added within regions and aggregated up to the national level to give an estimate of the value added by irrigation at the farmgate. This approximates the contribution of irrigation to GDP at the farmgate in 2002/03.

Note there will be some additional flow-on positive impacts on GDP in other sectors of the economy (e.g., processing and servicing industries) due to irrigation. However, this flow-on impact is not included in this calculation. To do so properly would require the development of a model of the economy without irrigation. While approximations could be made from standard Input/Output tables, the results would be based on some very broad assumptions. Given the magnitude of possible errors associated with assumptions about land use, productivity, costs and returns inherent in this study, estimating the flow-on impacts through the economy, real as they are, would not provide useful information without more detailed modelling than has been undertaken in this study.

4.2 Irrigated area

Identifying the area irrigated has proved more difficult than anticipated, as data is scarce and what is available is incomplete and in some cases contradictory. The Statistics NZ/ MAF Agricultural Production Census (APC8) of 2002 asked a question about the area farmed during the year ended 30 June 2002 that were ‘under an irrigation system’? That is, how much of the farm was it possible to irrigate? The results from this census became available in June 2003 at a regional level, but are not yet available at the regional level by farm type. Therefore the project team sought the assistance of MAF regional staff and their contacts to identify irrigated land use for each region for this project.

Table 1: Irrigated area by region

	Area Under an Irrigation System (ha)
Region	MAF Estimate 2002/03 season	APC 2002
Northland	7,000	7,000
Auckland	7,900	6,300
Waikato	14,500	12,700
Bay of Plenty	11,400	8,800
Gisborne	5,600	1,300
Hawke’s Bay	18,100	18,100
Taranaki	2,900	2,900
Manawatu-Wanganui	8,000	8,000
Wellington	9,600	9,600
Tasman	10,000	10,000
Marlborough	20,200	20,200
West Coast	-	2,500
Canterbury	287,200	287,200
Otago	68,900	68,900
Southland	4,100	4,100
Totals:	475,700	467,500

The middle column of Table 1 shows the area under irrigation used in the calculation of the national interest, while the third column shows the regional total areas under irrigation systems from the APC 2002. The relatively small differences arise where regional MAF staff, through their contacts and local knowledge, believes that the APC estimates are lower boundary estimates of the area of land which was able to be irrigated during the year ended 30 June 2002, and therefore increased the area in those regions. For some regions, notably Canterbury, the APC area was used because there is no other basis on which to estimate the area under irrigation.

The exercise of obtaining an estimate of the current area able to be irrigated has raised questions about the accuracy of the APC figures. The estimates provided by MAF regional staff, confirmed with contact with industry and Regional Councils, indicate that the APC results for the area currently able to be irrigated appears to be understated. As an example of MAF concerns, Environment Canterbury has issued consents for water applied to 440,000 ha of land. The area able to be irrigated is likely to be somewhat less9, but is likely to be greater than the 287,000 ha from the APC. A simple comparison of number of farms with land able to be irrigated (from APC confidential information) compared to the number of consents issued is further evidence of the APC 2002 area being understated. The area able to be irrigated nationally used in the 2000 estimate was 510,000 ha and was based on consents information and previous surveys.

The 2002 APC was the first Statistics New Zealand agricultural production survey to include a question concerning irrigation since the mid 1980s. Wording presented difficulties to some respondents, particularly ‘under an irrigation system’, and data may have been omitted where it could have been expected. Wording was tightened for the 2003 survey to read “How much of the land you farm was able to be irrigated with an existing system?” A preliminary assessment of 2003 data indicates improved response (Guy Sanders, Statistics NZ pers com). This information will be available in the next few months.

4.3 Land use

Regional MAF staff and their contacts estimated the land use of currently irrigated land and its use if those areas were in dryland farming systems from a combination of Statistics NZ information and local knowledge. Table 2 shows the totals for New Zealand, aggregated up from the regional assessments. The assumptions applied are described by region in Appendix 2. In each case, the determination of land use without irrigation was a judgement based on physical factors such as soils and climate, but also on the commercial realities of current primary production in New Zealand. For example, while vegetable crops can be grown successfully on dryland, in most cases the market demands for consistency of yield and quality mean that without irrigation, that particular land use would not be commercially viable.

Table 2: Land use assumptions for current irrigated areas

Land use	Area with irrigation (ha)	Area without irrigation (ha)
Dairy	161,500	62,000
Other pastoral	159,100	279,500
Grain and seeds	57,300	80,400
Vegetables	37,200	-
Viticulture	11,200	7,400
Apples	10,800	9,600
Kiwifruit	9,400	8,900
Other	20,700	20,700
Stonefruit	2,000	-
Berryfruit	1,900	-
Flowers/Nurseries	1,800	-
Citrus	800	800
Other fruit	2,000	2,000
Lifestyle	-	4,400
Total	475,700	475,700

As a result, some land uses are likely to have occurred with or without irrigation in parts of some regions, although with lower Gross Margins e.g., dairy farming is assumed to have occurred on heavy soils in Canterbury where it currently exists. Likewise, grapes are assumed to be grown in some parts of Hawke's Bay and Marlborough even under dryland as the profitability is considerably higher than the next most valuable land use.

4.4 Prices and costs

The value of irrigated production and the value of production from the dryland use that would be most likely if there was no irrigation were derived from MAF regional staff and their contacts in agribusiness and industry. Details of gross margins are in some cases subject to commercial sensitivity constraints and have been given to MAF staff on that basis. A summary of gross margins and fixed costs appears in Table A2.3 in Appendix 2. The price assumptions are summarised in Table 3.

Table 3: Price assumptions used

Price assumptions used
Milk	$3.70/kgMS
Meat10	$3/kg average all grades
Venison	$5/kg average all grades
Apples	$17/TCE
Kiwifruit	$5.25/tray
Grapes	$1,500-$2,000/tonne depending on variety
Other crops (Hort & Arable)	Average grower returns last 3 years Average quality of produce

4.5 Results

The net contribution of irrigation to GDP at the farmgate is estimated to be in the order of $920 million in 2002/03. This is over and above GDP that would have been produced at the farmgate without irrigation. Total farmgate contribution of all primary production excluding forestry is estimated to be $8.1 billion in 2002/03 (SONZAF 200311), so irrigation contributed in the order of 11% of farmgate GDP in that year. This is produced from 475,700 ha of land, which is 3.9% of the12.1 million ha farmed (excluding forestry).

The calculation is a function of irrigated area, land use, productivity and value of production.

Table 4 summarises the results of the calculation. Appendix 3 contains these results by sector and region.

Table 4: Net contribution of irrigation to farmgate GDP

Region	Irrigated Area hectares	Net Value of irrigation $million per annum	Value per hectare irrigated $/ha per annum
Northland	7,000	29	$4,110
Auckland	7,900	54	$6,880
Waikato	14,500	56	$3,840
Bay of Plenty	11,400	39	$3,440
Gisborne	5,600	25	$4,530
Hawke’s Bay	18,100	99	$5,480
Taranaki	2,900	6	$2,070
Manawatu-Wanganui	8,000	21	$2,620
Wellington	9,600	21	$2,270
Tasman	10,000	47	$4,660
Marlborough	20,200	86	$4,250
Canterbury	287,200	335	$1,170
Otago	68,900	87	$1,270
Southland	4,100	13	$3,170
Totals:	475,700ha	$920M	$1,930

Note numbers may not add due to rounding

4.6 Discussion

This result is conservative for the following reasons:

Areas irrigated are likely to be larger than available data sources suggest by an unknown amount.
Gross margin analysis does not account for fluctuations in output over time. Downside fluctuations are likely to be greater under a dryland scenario than under irrigation.
The benefits of irrigated farms that flow to dryland farms are not accounted for (e.g., growing feed crops for dairy herds). If they were it would have the effect of further increasing the value of irrigation.

Of these qualifiers, the first is being addressed but may not be able to be resolved completely. The second has been taken into account to a degree in assuming that some land uses would not occur without irrigation. Even so, the fluctuations in dryland pastoral incomes are demonstrably larger than for irrigated areas (Butcher 200012). The third is difficult to demonstrate, although evidence of the value of having irrigated properties in reasonable proximity to dryland ones is contained in other studies.

As noted in section 4.0, this project updates the 2000 figures used in the study of Water Allocation in New Zealand (Robb, 2000). At that time, the value using similar methodology was estimated to be $1 billion. The main differences between that result and this one are:

The dairy payout used in 2000 was $5/kgMS compared with $3.70/kgMS in 200213.
The area irrigated was estimated without APC data in 2000 at 510,000 ha. As noted, for this project the irrigated area is estimated at 475,700 ha but is likely to be higher.
The horticulture value was very crudely estimated in 2000. In this study, the area and value from irrigated horticulture has been considerably refined.
n adjustment for fixed costs was made in this study to reflect different farm types and scales with and without irrigation.

4.7 Other national economic impacts

There are a number of parameters that could be chosen to report the national interest and no one parameter is able to reflect a complete picture. A study for MAF14 developed parameter values that recognised the need to assess both direct and indirect impacts and came up with the following assessment parameter values.

Profitability (measured by ROC)
Output
Employment
Value Added
Location of impacts

This project focuses on calculating the economic value added by irrigation at the farmgate. Other measures are described below.

The calculation of current contribution of irrigation to economic output has no assessment of the flow-on effects to the rest of the economy via increased inputs or products. These are not zero. But to calculate them accurately would require the development of a model of the economy without irrigation. While approximations could be made from standard Input/ Output tables, the results would be based on some very broad assumptions. Given the magnitude of possible errors associated with assumptions about land use, productivity, costs and returns inherent in this study, estimating the flow-on impacts through the economy, real as they are, would require more detailed modelling than the scope of this project allowed.

Irrigation increases economic activity and farm capital values. The latter allows more borrowing, which again increases economic activity. However, more economic activity per se does not necessarily benefit the country – although the perception of many irrigators is that it does. To illustrate by analogy, large construction projects undoubtedly raise economic activity during the construction phase, but some prove to be unprofitable, and some of the money invested would arguably have generated higher returns if it had been invested elsewhere in the economy. In the same way, if the money invested in irrigation results in lower net profit per hectare (despite higher gross revenues), or could be more profitably invested elsewhere, then New Zealand is not better off. However, for irrigation schemes currently proposed or which were developed in the last 20 years this is an unlikely scenario15. This is because those investing in irrigation since the mid 1980s have been doing so in a relatively undistorted investment market, with good information on the costs and benefits of the investment. Further work on return on investment could be undertaken as another measure of national interest.

Irrigation also increases foreign exchange earnings. Of the increased output resulting from irrigation, most, if not all, of the dairy, sheep, beef, deer, horticultural and seed products would be exported. Using 2002/03 FOB prices, these net increases in exports are worth $1.7 billion FOB, or 12% of total horticultural and agricultural export earnings in 2002/03.

Increased land use intensity results in more employment opportunities on farms. As discussed in Appendix 1, wages and salaries paid to employees remain within the calculation of GDP in section 4.5. Using the same land use assumptions with and without irrigation, and taking the salaries and wages paid to employees from Farm Monitoring models for each of these land uses can give an approximation of the employment created by irrigation. For the current irrigated area, $158 million of wages and salaries are generated from irrigated land uses net of that generated from the alternative dryland land use. At $30,000 per employee, this is the equivalent of 5,300 FTE’s. This estimate is corroborated by the study of irrigation impacts in the Lower Waitaki (Ford 200216) which calculated 10.4 extra FTE’s employed on farms per 1,000 ha irrigated. Extrapolating nationally over 475,000 ha also suggests around 5,000 FTE’s are employed on farms due to the presence of irrigation.

The key question is whether New Zealand as a whole is better off from an investment in irrigation or whether those funds are better invested in other ways. This study provides some information on the contribution of irrigation, but there needs to be a framework developed to compare this investment with alternative uses for the investment capital. Therefore, further analysis of alternative investments that can be compared in cost benefit terms with irrigation development is required to determine if indeed New Zealand is better off from developing more irrigation or from investing in other development opportunities. This is discussed further in Appendix 1.

7 Situation and Outlook for New Zealand Agriculture and Forestry 2003, MAF Policy

8 “Agriculture Production Census 2002

9 Due to some farms having more than one consent, and/or irrigation of a smaller area than described in consent database

10 In this calculation, sheepmeat and beef are combined together in a weighted price based on assumed stocking ratios and age classes. Base prices used are $3.50/kg for prime lamb, $1.70 for mutton and $3/kg for prime beef.

11 Situation and Outlook for New Zealand Agriculture and Forestry, MAF Policy Dec 2003. Source: www.maf.govt.nz/mafnet/rural-nz/statistics-and-forecasts/sonzaf

12 Regional Economic Impacts of the 1997-1999 Canterbury Drought, Butcher Partners Ltd and Agriculture NZ, Feb 2000, MAF Technical Paper 00/18.

13 Inserting $5/kg into the gross margins increases the net value by $150m. However, it must be remembered that spending tends to increase as well so not all of this increase would contribute to farmgate GDP.

14 Economic and Social Assessment of Community Irrigation Schemes, Ford S., MAF Technical Paper 2002/13

15 MAF Technical Paper 2002/13 reports the Lower Waitaki Irrigation Scheme returns 14% per annum on capital at the farmgate.

16 Economic and Social Assessment of Community Irrigation Projects, S Ford, Dec 2002, MAF Policy Technical Paper 2002/13.

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