5 Value of potential new irrigation to add to economic growth

The irrigated area continues to grow from private individual development. In addition, there are currently approximately 30 community scheme proposals at various stages of invest­igation and several more being considered by community groups. This section examines the potential of both the private and community proposals to add to economic growth, the production and price implications of these, and discusses the ways in which this economic growth may be achieved.

5.1  Method

The same methodology used in section 4 was applied to different irrigation development scenarios to derive an estimate of the contribution to farmgate GDP from future irrigation development in 10 years.

The scenarios investigated are:

Scenario 1       Private development continues at the present rate and some community schemes are developed (the “likely” scenario).

Scenario 2       Private development continues at the present rate and community schemes that were assessed by their promoters as being possible to have operating by 2013 are developed (the “possible” scenario).

Scenario 1 was based on a recent report for the Ministry for the Environment. Scenario 2 was partially based on the same report in that it used the increases assumed in private irrigation development of 84,000 ha. Added to this was information obtained directly from community scheme promoters by MAF Policy regional staff during July/August 2003. The information includes estimates of area to be irrigated in 10 years, the land uses of the scheme area now and an estimate by the scheme promoters of what that land will most likely be used for under irrigation.

5.2  Area, land use and price assumptions

The areas estimated and assumptions are included in Appendix 3. Scenario 1 suggests irrigated area will increase by 201,000 ha by 2013, made up of 84,000 ha from private development and 117,000 ha from community scheme development in the South Island[1]. Scenario 2 uses the same rate of private development as Scenario 1 (84,000 ha) and adds 386,000 ha of community scheme development to give a total possible increased irrigation area of 470,000 ha by year 2013. The 386,000 ha of possible community irrigation develop­ment was obtained from a survey of the 21 community schemes currently in various stages of investigations by community based groups.

Tables 5 and 6 shows the current dryland land uses for Scenario 1 and 2, and the land uses assumed for the same land with irrigation in 10 years time for the whole of New Zealand. In the case of the community schemes, the land use with irrigation was estimated by the scheme promoters.

Table 5: Land use assumptions for likely future irrigation (Scenario 1)

Note numbers may not add due to rounding

Table 6: Land use assumptions for possible future irrigation (Scenario 2)

The revenue and costs used are the same as used in the estimate of current value from irrigation, and are shown in Table A3.1 in Appendix 3.

5.3  Results

At 2002/03 prices and production levels, the calculation showed that by 2013 annual farmgate GDP could be increased in the order of an additional $330 million ($1,640/ha) under Scenario 1 and $660 million ($1,400/ha) in Scenario 2. Appendix 3 has these results by region and land use.

These gains do not include flow-on effects from either the use of more inputs or the processing of more product. These impacts are real but difficult to quantify, as the flow-on impacts depend on many factors, for example whether the extra production will be able to be processed with existing capacity, so flow-on effects will be minimal. In others, new industry may be attracted to the locality or indeed be required along with investment for the gains to be realised. More detailed assessment of specific proposals would be required to quantify this.

5.4 Discussion

The calculation of additional farm gate GDP outlined above is conservative because average 2002/03 production levels are used in the calculations. Given the investment that farmers will have made in developing irrigation (assuming no change in current government policy) they will need to generate significantly greater returns than the averages used in these calculations to generate an acceptable return on their investment. However, it is a reality that in the past farmers have tended to accept a very low return on capital particularly relative to the risks they face.

The key benefit of irrigation for economic growth is the greater range of possible land uses that can be undertaken on any particular piece of land. However, the provision of irrigation is only one factor of production, and therefore its presence does not necessarily mean all land use options are therefore possible or viable. In particular, investment in downstream processing and marketing of the produce will determine the success or otherwise of the land use change more than the provision of irrigation.

There is a widely held belief that further development of new higher value land uses, such as process vegetables and vegetable seeds, will be constrained by lack of irrigation availability in the next decade or so. At this point there is believed to be sufficient suitable land, labour and capital available to support expansion of these industries through the substitution of existing land uses (pers com, Stuart Ford, The Agribusiness Group). However, it is reasonable to believe at some point a constriction on irrigation development will constrain further growth of process vegetables and vegetable seeds, industries in which New Zealand has a comparative advantage. Those reasons are;

• Other physical production factors e.g., soils and climate restrict the potential production area of these land uses;
• Crop rotation and isolation requirements restrict the annual utilisation of land for these crops[2] ;
• The efficiency of servicing and processing the output from these land uses considerably improves where production areas are in close proximity to processing plant.

Other factors such as lack of farm management expertise with irrigated production systems, or unwillingness to change land use for some reason, can also serve to effectively constrain production from irrigated land. In a perfect market, these people would, in response to the declining return on investment, sell their farm to someone else who was able to more effectively realise the potential via higher value land uses. However, in reality this change takes time to occur[3]. There are many reasons for this such as stage of life, family history or determination to continue as they have before. Institutional arrangements, such as resource consent requirements, may also create barriers to the smooth operation of market forces, again giving the impression that the availability of irrigated land is constraining production in the short term.

As the results of this study show, there are considerable areas of irrigated land that remain in land uses with less than optimal productive and financial returns. On the face of it, this appears to directly contradict the view that economic growth is constrained by limited irrigation. Theory would suggest that rather than develop more irrigation, the national interest would be better served by altering/changing land uses on land which is currently irrigated or which is within the purview of an existing irrigation scheme. However, when the constraints identified above are considered and accounted for it is apparent that the amount of irrigation available in some locations is in fact the limiting factor.

From the perspective of a company developing a new processing activity in New Zealand, irrigation is essential to ensure a consistent and known level of supply of product through the plant to ensure it is operating at peak efficiency, and to service markets. It is also essential that the price of the raw material is competitive into the future with other sources, both within and outside New Zealand, before the processor would commit to investing in the necessary infrastructure. One way to achieve this is to have a “surplus” of irrigated land available to grow the produce.  This will depend on the profitability of other land uses as well as the supply of land and farmer expertise and willingness.

Future irrigation development and land uses will be determined by market led decisions, particularly for individual developments. However, in many locations, individual irrigation development is not practical due to water resource constraints and economies of scale. There are market failures identified in section 9 that prevent community development proceeding. This leads to the widely held view that without increased community irrigation development, further economic growth from large parts of New Zealand will fall short of its optimal level, although it is impossible to say with certainty what the farmers in these areas will produce.

Another important consideration is the state of current production levels without more irrigation development. In some cases, most notably in dryland grain and seed production in Canterbury, the maintenance of current crop contracts increasingly requires irrigation. This is the substitution effect in practice, with buyers of crops traditionally grown without irrigation such as ryegrass seeds, now requiring the farmer to guarantee the amount and quality of the produce. This further adds to the pressure on irrigated land and the potential for economic growth to be constrained. Furthermore, for some of those regions where mainly dryland farms exist, the potential for more diverse farm systems is limited with flow-on consequences for the stability of the community during climatic or market downturns. As described in section 7 on social impacts, there is an impact on the national interest from this phenomenon.

[2] For example, high value vegetable seeds can only be grown every tenth year in the same field, and can have isolation requirements of 2km or more. Since irrigation is essential for production of these crops, a large area of irrigated land is necessary.

[3] Although during the last 10 years there appears to have been an acceleration of land use change in the irrigated area of Mid Canterbury.