[This is the third part in a series of four. Part one focuses on dairy, part two on sheep, beef and dairy support, and this part on horticulture, arable and processed crops.]
Introduction
New Zealand is a nation rich in renewable resources. In fact we rank number 1 for renewable resources (on a per capita basis) according to the World Bank’s Wealth of Nations report.
We have plenty of land and water whereas a host of other counties are a bit short.
How New Zealand unlocks these resource endowments is strategically important for the country’s long-term success. In many ways our renewable resources are New Zealand’s winning lottery ticket if GDP per capita aspirations are to be achieved.
A key component is irrigation.
As we highlighted back in June, over the last five years there has been a 17 percent increase in the land area in New Zealand under irrigation to 721,700 hectares, as well as a shift to more efficient irrigation systems.
Additionally there are currently plans in place for 16 new water storage and irrigation schemes around the country.
If completed, these have the potential to nearly double the total irrigable land to 1.38 million hectares, or 12 percent of New Zealand’s total agricultural land.
Horticulture
In the horticultural space there was a limited amount of analysis on the different options for the schemes we examined. Nonetheless, with irrigation many horticultural crops become a possibility in previous dry land areas.
Generally many of the main horticultural enterprises in New Zealand are adaptable to a range of soil types.
But climate variables such as the prevailing wind, the risk of frost, growing degree days, and rainfall during certain times of the year are often the more important factors for whether a particular crop or variety may be suitable for a specific area and the expected returns.
As such, trying to generalise the returns, or producing a standardised model for returns from a particular crop, is difficult.
Nevertheless the table below provides a summary of the Ministry for Primary Industries orchard models for the main horticultural crops to give an idea of what can be achieved.
But we stress these would need to be adapted to a particular site and variety to see how viable a change of land use might be. See appendix pages 12 and 13 for more details on these models.
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Arable and processed crops
For arable returns we followed a similar exercise to sheep, beef and dairy support by pulling out a couple of the different scenarios from the schemes we looked into, to show some of the possibilities.
Like livestock farming, there are many different crops that can be grown depending on market signals, expertise, and the physical and environmental aspects of a property.
The two modeled options we have chosen and their key production and price assumptions are below. See appendix, page 16 for the detailed Income and Production statements.
1. A fully irrigated 400ha farm with arable and processed crops under the Central Plains Water scheme.
A six-year crop rotation cycle, with some intensive lamb finishing at a margin of $20/head.
Produce grown includes milling wheat (9 t/ha, $440/t), feed wheat (12 t/ha, $380/t), potatoes (68 t/ha, $186/t), peas (7.0 t/ha, $300/t), grass seed (1.8 t/ha, $2,200/t) and clover seed (0.7 t/ha, $6,000/t).
2. A 90 percent irrigated 300ha farm with arable and processed vegetables under the Hawke’s Bay Ruataniwha water storage scheme.
A five-year crop rotation cycle and 30 ha of dry lucerne. Produce grown includes wheat (10 t/ha, $470/t), squash (15 t/ha, $700/t), potatoes (65 t/ha, $220/tonne), peas (8.5 t/ha, $400/t), beans (12 tonne/ha, $430/t), maize grain (12.5 t/ ha, $450/t), and ryegrass seed (2 t/ha, $1,700/t).
Ryegrass straw and Lucerne balage is sold. The system also includes intensive lamb finishing, with irrigated pasture production of 12.9 t/DMha gross.
Again while drawing conclusions across the different models and other analysis examined is difficult, there was consistency shown in the fact that fully irrigated arable and processed crop farms returned a net farm profit around the $1,500 to $2,000/ha mark.
The main benefit arable farms receive from irrigation is that reliable water enables farmers to move from commodity crops to specialist, higher risk, but higher EBIT crops.
To highlight some of the many opportunities we have included a table in the appendix on page 17 of the gross returns from a wide range of different crops, many of which require reliable water to be able to be grown.
These figures are from Roy Evans Limited who pull together an annual update of these gross margins and the cost of production for each based on their observations. It’s important to note the crop gross margins are a guide to comparative direct crop variable income, and variable expenditure and total farm profitability cannot be determined from the gross margins.
Consideration must also been given to other factors such as relative risk of alternative crops, crop rotations, irrigation requirements, labour and machinery availability, soil type storage requirements, and management skill.
As with our livestock comparison we also thought it might be worthwhile looking at the returns of irrigated and non-irrigated Class 8 farms in 2011-12 from the Beef + Lamb NZ survey to see what the differences are in farm performance.
The detailed Income and Production statements are included in the appendix on page 18. Again it is important to note the farms are only identified as having irrigation, not the area irrigated.
Unlike the earlier comparison between Class 6 farms there is quite a large gap in the bottomlines of $264/ha, or 45 percent. Higher gross revenue across all categories was the big driver.
The largest $/ha variation was for the cropping account, with a difference between the two of $619/ha.
Interestingly, a slightly smaller proportion (60 percent of effective area) of the farms that were irrigated were cropped compared with non-irrigated properties (69 percent of effective area).
However, the large difference in the revenue generated per hectare between the two indicates more specialised high-value crops were able to be grown on the irrigated farms because of more reliable water. As would be expected, farm working expenditure was higher on irrigated farms.
The main differences were high cash crop costs from more specialist crops being planted, irrigation charges, and feed and grazing.
The higher feed and grazing costs looks to have been a result of more dairy grazing, with higher per hectare dairy grazing revenue on irrigated properties.
Making comparisons between these results and the models examined is difficult. However, the per hectare results from the Class 8 irrigated properties were less than half those of the models we examined.
The difference seems to be largely due to the proportion of the farm used to grow crops, crop rotation, slightly higher crop price assumptions, and top performance.
Trying to carry out sensitivity analysis on the price, production and cost parameters of the livestock and arable models would be rather pointless in our view. This is due to the ability to substitute between different enterprises and change policy as returns alter.
However, one interesting aspect we examined was the assumed conversion costs for the different models from dry land to their new state, as well as the ability to debt fund this through the requirement of an interest cover ratio of 1.25 and interest rate of 7 percent. The table below provides a summary of the results.
Dry land conversion to livestock operations were generally assessed to cost $5,500/ha on average.
Where a proportion of a farm was irrigated, this lowered the overall per hectare cost, with the extent depending on the split between the irrigated and non-irrigated area. Arable and processed crops were slightly higher, usually in the $10,000-$12,000 range for dry land conversions.
Looking at the average existing debt loadings on non-irrigated Class 6 and 8 farms and the debt-servicing capacity of the returns when converted to either livestock or arable, it suggests most dry land operations with moderate-to-average debt could convert. Obviously once converted, the assumed physical and financial performance of the models would need to be achieved.
[The final concluding remarks will be published tomorrow.]
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This article was first published in the ANZ Rural Focus. It is reprinted here with permission. The full Report is here.
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