Comment: Water quality needs to improve, but don't pretend it won't come at a significant economic cost, nationally, regionally and to our own back pockets, writes Federated Farmers principal advisor David Cooper.

A recent Fish & Game report argues the government's proposed freshwater reforms won't cost New Zealand. In my opinion, the conclusions don't present the full story. We'll certainly feel it.

The report, "Getting the balance right", was authored by economic consultants NZIER and commissioned by Fish & Game, Forest and Bird, and Greenpeace.

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It made a number of conclusions, some of which provide useful input into the debate around water quality regulation.

The finding heralded by Fish & Game (F&G) was that the economic impacts of freshwater reform will be small "due to the relatively small size of the dairy industry".

There are shortcomings to this conclusion, likely because of the questions NZIER were asked to answer.

Comparing the F&G report to another recent NZIER economic assessments on the dairy sector underlines this point.

The Dairy Companies Association of New Zealand (DCANZ), commissioned NZIER to write two other reports, "Dairy trade's economic contribution to New Zealand" published in 2017, and "How does the dairy sector share its growth?" published in 2018.

You've likely guessed the punch line.

The DCANZ reports had a broader scope, answered slightly different questions and provided differing headlines. The NZIER was the author of all three, using the same base data, similar methods. Each report answered a different question.

The 2017 DCANZ report used 2016 data, concluding the dairy sector contributed $7.8 billion or 3.5 per cent to New Zealand's GDP, including both dairy farming and dairy processing.

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The F&G report concluded the sector contributed 3.09 per cent to GDP. The F&G report did not refer to the dollar value contribution at all.

Same author, different results. Why?

The first is the timeframe. The F&G report relied on the average contribution to GDP between 1991 and 2017, while the DCANZ report focused on 2016.

The F&G rightly points out that dairy returns are volatile. But things have changed a little since 1991.

Aside from the timeframes, both reports use GDP as a measure of importance to the national economy.

Federated Farmers principal advisor David Cooper. Photo / Supplied
Federated Farmers principal advisor David Cooper. Photo / Supplied

The GDP used takes the value of output from that sector, less the value of the inputs used. The result, outputs minus inputs, is the sector's contribution to GDP.

This makes sense on one level. Counting the value added by each sector compartmentalises and allows for the value added by that sector to be researched and analysed.

However, it does not recognise the separate components are interconnected.

Less dairy means less demand for services and goods sold to that sector. Although there may be some offsetting through a switch to alternative land uses, the demand from those alternatives may be significantly different. Besides, the implications of the freshwater reforms proposed will be less land used for production overall.

So, how important is dairy to the other components of our economy?

The 2018 DCANZ report attempted to answer this question, concluding dairy farming is the largest purchaser in the economy of primary sector support services; building cleaning, pest control, basic material wholesaling; veterinary and other professional services.

The 2018 DCANZ report attempted to connect the importance of dairying to the rest of the economy, estimating that dairy farming is among the top 10 purchasers of 40 industries' output while dairy processing is amongst the top 10 purchasers of 33 industries' output.

While estimating downstream economics is as much an art as it is a science, the DCANZ reports attempt to make these connections while the F&G report skirts them.

Another important difference is the role of dairying in employment.

The F&G report concludes that the total number of people employed in the agriculture sector has stayed largely stable since 1945. The 2017 DCANZ report shows that over the past 15 years, dairy sector employment has grown by an average of 3.7 per cent per year, over twice as fast as the 1.7 per cent recorded for total employment.

Again, same author, presumably the same data, different results. The difference is again in the timeframes, but there's also a little wrinkle in terms of the wording. While the F&G report focuses on agriculture as a whole, the DCANZ report focuses specifically on dairying.

The F&G report makes some valid points, for instance outlining that environmental impact is not accounted for in economic assessments, which is why we're having the discussion around freshwater reform as a country.

These economic assessments are not mutually exclusive. They are pulled together by the same author using the same base of data. But they provide different responses. The choice of what is measured is a key determinant of the outcomes, and what is measured is a response to the questions asked.

Let's not fool ourselves. Water quality needs to improve and the dairy sector has a key role to play in delivering those improvements. Farmers can adjust and innovate as they have done since the 1980s, but they need time and certainty.

Let's also be clear that these reforms will come at a significant economic cost, nationally, regionally and to our own back pockets. Pretending otherwise does no-one any favours.