Primary sector starring at cost of farmers, growers

COMMENT:

Food prices in New Zealand decreased 0.1 per cent in the year ending May 2018.

StatisticsNZ reported this month that although ready-to-eat meals, and eating at restaurants and cafes increased by 2.9 per cent, and non-alcoholic beverages (coffee, tea, water, soft drinks and juice) increased 4.6 per cent, the 10 per cent decrease in the cost of fruit and vegetables compensated for the other increases.

Released the very same week, the Ministry for Primary Industries' Situation and Outlook for the Primary Industries (SOPI) also had good news.

The value of primary sector exports is forecast to increase by 11.8 per cent in 2018 in comparison with 2017.

With animal numbers decreasing, the forecast increase is due to prices going up, particularly for butter, whole milk powder, mutton and lamb.

The forecast for horticulture is based on increased yield in Kiwi-gold, apples and pears, but again, increased prices are mentioned.

The conundrum is the relationship between export revenue and domestic food costs.

The export revenue is new money coming into the country, circulating within the domestic economy and creating lifestyles.

The domestic side is the regular shock at the supermarket checkout. But while it does seem that the trolley-contents get more expensive every week, the dollars might reflect a change in purchasing, particularly for ready-to-eat food replacing preparation time.

Frozen pizza and microwave rice are solutions for busy people, but they add expense.

What rarely features in the food budget thinking is how much it costs the farmer or grower to produce the food.

As wages increase, production costs increase. Add the cost of fuel and power, plus chemicals and equipment which is mostly manufactured overseas, and profitability is a moot point. This is despite efficiency gains.

Released in February this year by StatisticsNZ, the Multifactor Productivity data for the decade to 2017 show that agriculture increased 3.3 per cent a year and wood and paper increased 2.5 per cent.

These industries sell products offshore and are becoming ever more productive - more product per hour worked and per dollar of investment.

The primary production sector continues to be a star in the productivity gains New Zealand desires, but it is at the cost of the farmers and growers themselves.

Sometimes it is at a cost to the environment as well.

The devastation caused by the aftermath of forestry harvesting – termed 'slash' - in Tolaga Bay is a case in point.

The forestry industry has explained that slash is what is left behind when everything that can be harvested economically has been taken.

The Government has indicated that in future the industry will have to clean up more, but rather like the current mining case on the West Coast, if the costs go up further, the result could be that forestry becomes uneconomic for the industry.

The same could happen to food.

In order to prevent such difficulties, other countries subsidise their agricultural sector.

In the United Kingdom, only the top 25 per cent of farmers actually make money from farming. The next 25 per cent break even on farming but make money from subsidies.

The next 25-50 per cent make a loss on farming that is more than compensated for by subsidies, and the bottom 25 per cent simply lose money.

The UK subsidies include direct payments based mostly on area of land, but with a third on 'Greening', in particular for the creation of permanent grassland.

The EU states that the 'Greening' payment "supports action to adopt and maintain farming practices that help meet environment and climate goals as market prices do not reflect the effort involved in providing these public goods".

Subsidy payments are also for diversification (non-agricultural on or off farm, but using farm resources), and agri-environment.

The latter is paid on an 'opportunity cost' or 'income foregone' basis, recognising that environmental initiatives might impact on profitability. The UK has recognised that it is hard to be green when you are in the red.

Permanent grassland forms the basis of New Zealand agriculture, but in New Zealand farmers have produced food without subsidies since 1985.

In order for them to continue doing so however, it might be that consumers will need to accept the increased prices that SOPI is already predicting. The benefit will not be at the checkout, but in the thriving economy and more funds for the greening of New Zealand.

- Jacqueline Rowarth CNZM CRSNZ HFNZIAHS has a PhD in Soil Science and has been analysing agri-environment interaction for several decades.