ECONOMICS Who’s Fleecing Who?

The farm sector was remarkably phlegmatic when the Ministry of Agriculture and Forestry published its twice-a-year set of forecasts in the Situation of New Zealand Agriculture and Forestry report last month. The report, in essence, said farmers were facing decline in their incomes.
MAF’s experts – who feed their numbers to the Treasury for incorporation in budget forecasts – reckon agriculture’s contribution to GDP will rise by just 0.4 percent between March 2003/04 and 2006/07. They measure gross agricultural revenue at the farm-gate, then subtract intermediate consumption, or spending on farm and orchard inputs such as fencing wire and fertiliser.
Over the 2004-2007 outlook period, gross agricultural revenue is projected to decline by $112 million (0.8 percent) from $14.8 billion in the year to March 2004 to $14.7 billion in 2006/07. Yep, that’s right. Decline. Dwindle. Shrink.
Intermediate consumption is projected to fall by two percent, from $7.24 billion to $7.10 billion, an even bigger decline.
The net effect is negligible increase in agricultural sector contribution to GDP, from $7.54 billion to $7.57 billion over those three years. The dairy sector’s contribution is forecast to decline $394 million or eight percent, while the decline for cattle farmers is $372 million, or 23 percent. Positive contributions are expected from sheep meat (up $358 million, or 21 percent) and fruit and nuts (up $287 million, or 26 percent).
But Rob Davison and his team at the Meat and Wool Economic Service say those figures under-state the significance of the farm sector.
“We define agriculture for GDP like the tourist industry, which counts hotels, restaurants and so on,” he said. “In other words, we take added value into account. The estimate we have been working on therefore shows agriculture’s contribution to GDP includes the input industries, like the fertiliser industry, and intermediate industries like transport.
“We also include downstream manufacturing – the dairy factories, meat processing plants, carpet manufacturers and so on.”
Using this measure, the farm economy accounts for about 17 percent of GDP.
Davison’s rationale: intermediate consumption and processing are all part of the net added value – “you wouldn’t have those industries if you didn’t have agriculture”.
He cites wool to illustrate his point. kilogram of wool on the sheep’s back is not worth much to the consumer in Europe, Japan, the US or wherever. When you add value to the sheep by shearing it, then transporting it, scouring the wool, and manufacturing carpet in New Zealand, value is being added – and let’s not forget the top-dressing company which put fertiliser on the farm.
Davison recalls how deregulation of the farm economy began with the government’s budget in November 1984. By 1990/91, government supports for farmers had gone.
The total agricultural sector, including on-farm, the input supply sectors and downstream processing, transport and marketing sectors, was contributing 13.5 percent to GDP at that time. By 2002/03, the contribution had risen to 17 percent
From 1990/91 to 2002/03, the country’s GDP grew by 43 percent from $79.59 billion to $113.85 billion. Agriculture grew by 80 percent in that period – around twice the 37 percent rate of the rest of the economy.
Adding value largely explains this growth. Chilled exports, for example, increased from 5.2 percent in 1992/93 to 17.7 percent of total export lamb in 2002/03. But there were land use changes, too, from sheep and beef to higher value dairy production on some land plus significantly improved levels of animal productivity.
But hold on mo’, says economic consultant Brian Easton. If you measure sectors as Rob Davison has done, then every other sector is entitled to do the same thing.
Thus the manufacturing sector, let’s say, can include its gross inputs (including those from farms) as well as the sectors it nurtures further along the economic food chain (like transport). This would greatly enlarge its contribution to GDP from the measure used by the Government Statistician. The construction industry – and all the others – would be entitled to do the same.
Before we knew what was what, we would have GDP roughly 400 percent bigger than it is now, Easton points out.
Mind you, sticking with this line of thinking does have its merits. We would be well on the way to outpacing the GDP per capita of all other countries at the top of the OECD ladder.
The trouble is, when one sector insists it is bigger than the measurements show, by implication the others should be smaller.
Farmers are apt to regard themselves as the backbone of the economy and say “without us, there would be no further processing beyond the farm gate”. But meat-plant workers can argue the same thing. “Without us, there would be no meat industry.” Both claims overlook the importance of inter-dependencies and cooperation in the whole of an economy.

Bob Edlin is Management’s regular economics writer.

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