A MPI boondoggle subsidy for Wairarapa land speculators?

Written By: - Date published: 9:17 am, September 21st, 2016 - 23 comments
Categories: benefits, Economy, farming - Tags: , , , , ,

You have to wonder about the quality of some of the economic process control that goes on for National’s politically important subsidies to the farming industry. Idling through the email this morning, I ran across an economic review of a Wairarapa Water application for second stage feasibility funding from the Irrigation Acceleration Fund for the “Black Creek” and “Tividale” irrigation schemes.

The review was commissioned by Fish & Game and came to me via Greenpeace.

It is a proposal to irrigate 10,000 hectare area, a process that would cause ecological and environmental damage to a significiant area and its waterways (something that this analysis doesn’t cover). I’m not particularly a conservationist, however any degradation in the environment, especially one funded by taxpayers should carry significiant and obvious economic returns. This one clearly does not, and never did. The executive summary states (the review authors bold)…

The economic assessment in WW’s IAF funding application is based on analysis from a 2014 report by Butcher Partners1 (the ‘Butcher Report’). This report assumed a long run farm gate milk price of $7.07 per kilogram of milk solids (kgMS), which leads to a further assumption that 55% of the irrigated area will be intensive dairy farms or dairy support. Whilst a long run milk price above $7.00 kgMS was questionable in 2014, given changes in international dairy markets it is a completely unrealistic basis for decision making in 2016.

fonterra-payout-aug-25-16Say what! They are planning this project on the basis of a sustained sale return that is far higher in real terms than any that has ever been attained by the international dairy industry. That is an assumption that can only be described as being crackpot!

A few years ago we had a couple of farmgate spikes in milk solid payouts (see graph from interest.co.nz) because of the drought and a later rapid uptake in China. But there has is hardly sustained growth over the last 15 years especially after you factor out the accumulated inflation and currency fluctuations.

The review author’s analysis is deadly accurate. It focuses on the dairy because even the WW’s analysis indicates that the irrigation for horticulture would be of minimal use in expanding horticulture in the region.

WW provide the following land use table showing approximate existing and prospective land uses in the absence and presence of irrigation.
landusetable

The crux of economic viability is in the milk solid prices, and the prospects for that are quite limited.

21. Over the past two years there has been significant turbulence in international dairy markets, with near record low prices. It is my view there has been a structural change in international dairy prices, driven the following:

a. The end of EU milk quotas, which means Europe is now an unconstrained dairy exporter with the intention to ‘grow with the market’

b. The emergence, over the past decade, of the US as a formidable dairy exporter – especially in terms of skim milk powder (SMP)

c. China promoting import substituting domestic production

d. Very low stock feed costs making feedlot production internationally competitive.

22. In terms of the long run farm gate milk price, an industry consensus on the ‘new normal’ is yet to emerge. My best professional estimate of a credible medium to long milk price assumption is $5.00 kgMS +/- $1.00. Whilst there is an exchange rate issue to consider, the intuition is a product mix price below $4.00 is unlikely to be economic for the majority of dairy producers internationally (so represents a market ‘bottom’) whereas prices in excess of $6.00 will attract ‘swing’ producers (such as the USA) into the market (thereby providing a ‘top’ – because at that price feedlots are internationally competitive and production can be quickly expanded).

23. Whilst prices will occur outside of this range, they are most likely to be examples of markets under or over shooting due to exogenous shocks (i.e. a drought in a pastorally-based supplier such as Australia or New Zealand). It is therefore foolhardy to assume sustained farm gate milk prices outside of the $4.00-$6.00 range.

24. The corollary is continuing to employ a 2013 milk price assumption of $7.07 kgMS in 2016 is simply not credible. This problem becomes even more pronounced as the entire proposal is critically dependent on that very assumption. The result is a highly misleading portrayal of the scheme’s economic feasibility.

This is pretty much what informed observer looking at the economics on the international dairy trade tends to think (with the probable exception of sustaining cheap feedlot feed costs). NZ is unusual in that we produce a very large exported surplus of milk based largely on cheap grass. That is why Fonterra tends to dominate the international dairy trade. However

As the review points out, for the soil types in the region this means that for most of the price range, even if the irrigation water was free, dairy would simply not be profitable.

profit1

Applying even minimal costs to water just make that far worse.

40. Given a water price of 25 cents per m3 is uneconomic, it is instructive to undertake
sensitivity analysis by discounting the water to 10 cents per m3; thereby changing the
midpoint water cost from $1,000 per hectare to only $400.

profit2

As the author of the review points out, it is damn hard to see why the Ministry for Primary Industries are even considering this request (or any previous ones).

This scheme just looks to me like a boondoggle because it is there to cause the creation or expansion of a dairy industry in the Wairarapa. Which kind of defeats the purpose of the Irrigation Acceleration Fund

Nathan Guy, the Minister for Primary Industries explained it in a press release for Budget 2015:-

“The need for more water storage projects is obvious given that nearly every part of the country has suffered through drought at some stage over the past three years.

“Providing a reliable water supply for farmers and growers has massive potential to boost growth, creating jobs and exports in provincial regions.”

Around 100,000 hectares of new irrigated areas are expected from IAF-funded projects to date, with around 36,000 hectares of that commissioned or currently being constructed.

The IAF helps support the development of irrigation infrastructure proposals to the stage where they are investment ready, which means they must be commercially robust and demonstrate a high level of community support.

The Government also supports these projects through the Crown Irrigation Investments Ltd (CIIL), which acts as a bridging investor for regional water infrastructure development. $120 million has been allocated to CIIL over the last two years with the potential to provide a further 125,000 hectares of new irrigation.

But with the ridiculous inflated assumptions for milk solid prices in this case that isn’t the case. Firstly because there isn’t a large dairy farming there in the first place, and most of that is on river flats. And to make it profitable at even moderate water prices, you’d have to assume grossly inflated returns. At those prices the resulting dairy farms will be competing directly with feedlots which don’t have the setup costs of irrigation.

This particular scheme looks to me to be a subsidy being pushed into the Minister’s neighbouring electorate, and the only benefit will be to land speculation and a few consultants hired by Wairarapa Water. It hardly fulfils the stated economic intentions of the irrigation fund. It just looks like ineffective and uneconomic boondoggle pork by National.

23 comments on “A MPI boondoggle subsidy for Wairarapa land speculators? ”

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  1. RedLogix 1
    21 September 2016 at 9:34 am

    The Wairarapa could use a reliable source of water for all manner of valuable purposes; the place could be transformed. We lived there for five years and I often imagined all the possibilities this scheme could be put to.

    But literally siphoning it off into more dairy is just plain bone-headed.

    • lprent 1.1
      21 September 2016 at 10:44 am

      Scattered topography and varied soils mean that micro-schemes make a whole lot more sense. Target local exiting dairy areas for security of water supply and areas capable of doing horticulture. Charge for the water to let local owners make a realistic choice. Use the state to put the schemes in without significant operational subsidy.

      That looks viable. This 10k ha (and further 20k Ha later) looks pretty useless

    • Draco T Bastard 1.2
      21 September 2016 at 11:53 am

      Looking at the report the best thing we could do is re-plant the whole lot as native forest and leaving it as wilderness. In a few hundred years we’d have a great supply of native timber.

  3. ropata 3
    21 September 2016 at 9:54 am

    All of NZ’s careful water management and saving for a not rainy day, subverted by the usual suspects.

    if prosperity for a few farmers = death for ecosystems and communities, it's not worth it https://t.co/bZj0vDUyrz— ɥɔsǝdɐd qoɹ (@ropata) September 19, 2016

    An abandoned rope swing next to a polluted river shd be new logo of Fed @FedFarmers #Selwyn https://t.co/sqnrKvDQAA pic.twitter.com/h3s52rAxb2— Russel Norman (@RusselNorman) September 19, 2016

    • RedLogix 3.1
      21 September 2016 at 9:59 am

      Yes … like many kiwis my age I can recall summers swimming in our creeks and streams. You’d be in and out like an eel for hours, and that night your hair and skin would be soft and smooth like a baby’s. A few years back as we drove past one spot, I got out of the car, sneaked across the paddock and took a look.

      I probably should have known better.

      • joe90 3.1.1
        21 September 2016 at 10:12 am

        A few weeks ago I stopped at the Moutoa sluice gates and had a squiz at the Manawatu. Admittedly it was in flood but the water was absolutely putrid.

  4. Lanthanide 4
    21 September 2016 at 10:54 am

    I suspect that the milk and beef markets are going to be decimated inside of 10 years with lab-grown milk and beef anyway.

    • dukeofurl 4.1
      21 September 2016 at 11:20 am

      Oh really ! This takes the cake for blue sky dreaming

      • Andre 4.1.1
        21 September 2016 at 11:28 am

        Jeez I hope Lanth is right. I love me my burgers and sausages, and I’d prefer they came from something a bit better than e.coli ridden abbatoir floor sweepings and the bits of animal that can’t be sold any other way. Plus, for my dairy I’d rather it was a bit more hygienic than something squeezed out of of a cow just downhill from the sewage outfalls. Steaks and roasts will be quite a trick, tho.

      • Draco T Bastard 4.1.2
        21 September 2016 at 12:00 pm

        http://gizmodo.com/the-future-will-be-full-of-lab-grown-meat-1720874704

        In 2013, the world’s first lab-grown burger was unveiled to the world. It carried a $330,000 price tag, and apparently, it wasn’t all that tasty. But the scientists behind the idea have been hard at work, and artificial meat that’s both cost-effective and palatable may arrive sooner than we think.

  5. Richard Rawshark 5
    21 September 2016 at 12:17 pm

    Were talking Nathan Guy here, Mr Business.

    never mind the fishing rules, nothing applies to Nathan when he’s in charge. Banana republic minister?. No offence to some corrupt African country, but even they wouldn’t hire him.

  6. b waghorn 6
    21 September 2016 at 1:10 pm

    All irrigation should owned and run by the government so they can dictate what the water is used for.
    When the greens and others come at irrigation from a 100% no way perspective they completely cut themselves out of having any positive input into how schemes can be run, they may win a few battles but in the long run they will lose the war with their attitude .

  7. gsays 7
    21 September 2016 at 1:20 pm

    It is not that long ago that lots of the wairarapa was considered ‘summer safe’.

    Perhaps the felling of the trees in the district is coming back to bite farmers in the bum.

    However if you have a once-ler attitude and must keep on biggering then dam away.

  8. DH 8
    21 September 2016 at 4:25 pm

    I can recall reading some similar data on the Canterbury irrigation scheme. If I recall correctly the irrigation cost per hectare was only viable for dairy and only at the high prices they were getting for milk solids at the time. Sheep & beef weren’t economic.

    I haven’t been able to find any recent costings, would be interesting to see if the figures have changed or been massaged.

  9. save nz 9
    21 September 2016 at 5:13 pm

    Great post.

  10. Esoteric Pineapples 10
    21 September 2016 at 9:56 pm

    Almost the entire population of the Wairarapa is asleep on this, especially the three councils. Masterton councillors questions to Bob Francis, head of the project when he asked for $20,000 toward a report to show how good the dam would be for the region were banal. There is a general acceptance in the comnunity that the dam is a good thing and while there is a lot of talk from everyone about wanting to improve the health of the rivers, there is not the slightest awareness or acknowledgement of the harm more dairy will do.

    Aside from that,Greater Wellington has had a practice for the past 10 years of cross blading all the major rivers in the Wairarapa for erosion control and flood management. This involves bulldozing the rivers which removes all the pools and eddies fish need to rest and survive in. The two likely contenders for the Wairarapa seat on Greater Wellington -Adrienne Staples and David Holmes – both support the dam. Staples says she would consider a review of cross blading. The media in the Wairarapa have been almost asleep on both issues.

  11. Ad 11
    22 September 2016 at 10:01 am

    Outstanding post Lyn.

    You might want to have a look at Proifessor Paul Spoonley’s new book on

  12. Ad 12
    22 September 2016 at 10:01 am

    Outstanding post Lyn.

    You might want to have a look at Proifessor Paul Spoonley’s new book on

  13. Ad 13
    22 September 2016 at 10:01 am

    Outstanding post Lyn.

    You might want to have a look at Proifessor Paul Spoonley’s new book on

  14. Ad 14
    22 September 2016 at 10:04 am

    Outstanding post Lyn.
    Kinda have to wonder why Horizons Regional Council still exists.

    You might want to have a look at Proifessor Paul Spoonley’s new book on New Zealand rural centre depopulation and depopulation.

    Getting to accept that in many rural places, economic stasis is there to stay and so are its related social dynamics.

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