Agricultural GDP catches well under one quarter of the agribusiness system. As such it fails to capture the importance of agribusiness to the economy

Agricultural GDP catches well under one quarter of the agribusiness system. As such it fails to capture the importance of agribusiness to the economy
Rural GDP doesn't include any services, processing, distribution or marketing done outside the farm gate.

One of the problems facing New Zealand’s agriculture is a widespread urban perspective that agriculture is not important to the New Zealand economy. To a large extent, this perspective is built around the fact that agricultural GDP, as officially measured, is only between four and five percent of GDP.  

What few people understand is that the definition of agricultural GDP depends on historical notions of what a farm was and is. The notion goes back to the days when agricultural output was largely the output of what the farmer himself did. And in those days, it really was a ‘him’ who relied on his own muscle power and that of his horse.

To cut to the chase, agricultural GDP excludes all farm inputs as intermediate goods. Those exclusions include, for example, all animal health inputs including veterinary services, plus the value of fertiliser inputs. (Update: Stats NZ now advises that sharemilkers do indeed have their contribution included in dairy farming and hence agricultural GDP, but contract milker contributions lie in support services and are therefore excluded from agricultural GDP.)

Agricultural GDP even removes the economic contribution of shearers and every other contractor that comes on to the farm. These contributions go into a ‘support services’ category that sits outside of agriculture.

My interest in the issue of agricultural GDP and how it is mis-used was piqued by a recent report by the New Zealand Institute of Economic Research (NZIER). This report was written under a contract carried out for Fish and Game, Forest and Bird, and Greenpeace.  

NZIER used figures for dairy’s GDP contribution to develop their claim that “New Zealand's new fresh water regulation rules will have no major impacts on the national economy”. Yeah, right, I said.

With statements like that, it is no wonder that there is a huge urban and rural divide. How can such a statement be correct?

The NZIER headline claim, supplied by NZIER itself, was not specific to dairy, However, the report itself did focus totally on dairy. That in itself is intriguing. Many sheep, beef and arable farmers would be more than a little put out that their own issues are not worthy of mention as being relevant to such a broad-ranging claim.

The answer to the extraordinary NZIER claim is that it is based on using a very narrow definition of GDP. That definition assumes that all the rural contractors, consultants, truck drivers, rural vets, fertiliser company workers, and so on could find other things to do if there were no agriculture industries, and would suffer no loss of income.

In economic language, these resources are assumed to be transferable across the economy.

As for the current value that these people are providing, that is already allocated to other sectors such as manufacturing and professional services. Some are even allocated to agricultural support services, but this does not then make its way back into agriculture itself. 

I have even been advised by Stats NZ that sharemilkers belong to the agriculture support category and are not within agriculture itself, although I have been seeking further confirmation on that. If correct, that would be truly remarkable.  (Update: Stats NZ now advises that sharemilkers do indeed have their contribution included in dairy farming and hence agricultural GDP, but contract milker contributions lie in support services and are therefore excluded from agricultural GDP.)

NZIER does acknowledge that dairy’s importance extends beyond the farm gate. Accordingly, it does bring back into its overarching figure the value-add associated with dairy processing. But it is only the core of processing that is added.

On this basis, NZIER calculates that between 1991 and 2017, the average combined direct contribution of dairy farming and dairy manufacturing was 3.09 percent of GDP.  

I have checked this figure for the most recent available year which is 2017 and I have no question in relation to its technical accuracy. If I calculate the numbers on the same greatly flawed basis, excluding all inputs to the farm, excluding transport to the processor, and also excluding anything after the processor as being part of the separate food and beverage industry, then I come up with a similar number.

The problem is that it is based on concepts that belong back in the dark ages.

Way back in 1957 two academics at Harvard University, John Davis and Ray Goldberg, came to the realisation that agriculture was so much more than the net value of what was added on the farm. As a consequence, they wrote a book called ‘The Concept of Agribusiness’.

Davis and Goldberg realised that agriculture and agribusiness were really a network of interdependent activities spanning farm inputs, farm production, product processing and marketing. If we want to measure the value of this interdependent system then we have to look at the total value of output.

In New Zealand we have been slow to embrace those notions of an agribusiness system. It is as if there is still a firm divide between what happens inside and outside the farm gate.

When I was considering coming back to Lincoln University in 2000, following 20 years of working internationally, I was only interested in coming back to Lincoln if my professorial title spanned the agribusiness spectrum. 

At my interview, I said that I wanted to knock down the psychological importance of the farm gate, and if that was not consistent with the Lincoln vision of the future, then don’t appoint me.  

When I retired from Lincoln at the end of 2014 and moved to an honorary position, I negotiated a new title as Professor of Agri-Food Systems.  There were two reasons for this.

One reason was that I wanted to create space for whoever was the new professor of farm management and agribusiness. As it turned out, Lincoln decided to revert to the to the old title of ‘farm management’ as held by my predecessors.

The second reason I chose ‘agri-food systems’ was because it seemed to me to be very important that recognition be given to the notion that agriculture fitted with a system that was much broader than just business.  There was a need to look at the whole agri-food spectrum as something that integrates the biological, ecological, social and business spectra.

Linked to this is the notion that although farm managers manage within the farm gate, nearly all of the big decisions are a function of what happens outside that gate.

Calculating the total value of the agribusiness sector is not easy. But here is a start using Stats NZ data for 2017.

The value of all agricultural inputs in that year was $13.7 billion.

The added value on-farm (what Stats NZ calls agricultural GDP) was $11.3 billion.

The farm-gate value of production was therefore 25 billion.

The value-add of basic processing of agricultural products (excluding sea-food) was $8.4 billion.

These all add to $33.4 billion, comprising 12.4 percent of traded GDP.

This still does not include any of the marketing contribution.

In contrast, most of GDP is made up of services that we sell to each other. Examples are financial services ($15 billion), professional services ($25.5 billion), retail trade ($12.3 billion), media and telecom ($6.7 billion), rental and real estate ($19.7 billion) and government services (> $40 billion)

Starting from a different point, and looking at exports, I note that pastoral exports in the June 2019 year were $28.6 billion and total primary-industry exports were $46.4 billion.  These comprise 48 percent and 78 percent respectively of total exports.  I also note that it is exports that drive the New Zealand economy.

Now, as someone who has actually spent periods of his life working as an economist, I also know that some economists will want to argue with me. Their key point will be to go back to the notion that if dairying or other parts of our agribusiness system were to go away, then that would liberate resources to be allocated elsewhere.

My counter is that most of the resources currently allocated to agriculture and in particular pastoral agriculture do not have a lot of value elsewhere.

Most of our pastoral soils are totally unsuited to arable farming.   Yes, we can grow trees on a lot of them and then sell the carbon credits to the urban folk so they can continue their current lifestyles. But that won’t earn export income. The credits will be just monetary transfers within New Zealand to help avoid having to purchase carbon credits overseas.

So, I want to hear from the urban folk (of which I am one) as to where we are going to earn export income to pay for all of those items we use in our daily life (cars,  trucks, buses, planes, computers, smart phones, pharmaceuticals, overseas travel, and so on) but for which we have no international  competitive advantage, and which we do not produce ourselves.

And I do say, how dare you ignore that challenge.

I trust that in answering that challenge the focus will not simply be that ‘there has to be change’. All serious participants in the debate accept that change has to occur. Some of us are actually working on what that change could look like.

The NZIER report I referred to can be found here.


*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. Previous article on Fonterra’s challenges can be found at https://keithwoodford.wordpress.com/category/fonterra. You can contact him directly here.

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Professor is correct but sadly the current one in charge of NZ does not understand.

The only PM who knows NZ's rural sector and its importance recently was Bill English.

Sadly, under the current political system, the change of electing such a leader is next to none.

NZ's economic reliance is slowly shifting to importing people and absorb their wealth directly.

On average, there are 50k net migrants to NZ with a very conservative assumption of each bringing 200k into the economy. That equals to 10 billion each year.

Good Article. Biggest problem agricultural industry faces is deep ignorance of agricultural industry by our highly urbanised (more than USA or UK or Germany or Australia...) voters who learned everything they think they know on the subject from various anti-agriculture and anti-industry campaigners spouting deceptive and misleading half truths without any of the essential nuance or context. Even 'educated' urban voters don't see value in agriculture, and are clueless about the economy and their importance takes more than a sound-bite to explain.

Eaxclty those urban depolareables complain about chlorine in the water - or a bit of e coli. Its a small problem and the expert agri industry know what they are doing.
Supermarket shoppers hunt down plant-based proteins
https://www.stuff.co.nz/business/farming/116565410/supermarket-shoppers-...

As useful an accurate a caricature of urban folk as are caricatures of rural folk, this.

Anyone who uses Agriculture GDP a relevant measure of importance of agriculture to NZ livelihood is either clueless or dishonest.
NZ export is so totally dominated by agriculture products, that nothing even come close as replacing it.
It is absolutely vital to have a very strong, very feasible case for an economic alternative for agriculture that bring at least comparable export income.
That is why it is so difficult to sort out NZ fresh water. Who does not want clean ,fresh water? but sorting it out means that NZ becomes a thirdworld country from an economic perspective, and who really wants that? such a huge problem. I hope that a good solution can be found that we can save NZ precious fresh water without totally destroying NZ economy (we have to accept becoming poorer as it is crazy to replace our freshwater with cow urine, but just how much poorer we can stomach?)

What you are referring to is intensification, and this debate should be around how much intensification can the land handle without destroying the environment. Your comments about water should be tilted towards the concept that water has become too dirty for urban dwellers (the majority of NZ'rs), how dirty can get before it is too dirty for agriculture? I'd suggest the levels are the same. Despite the rhetoric from farmers we need to learn from history. We know that excessive industrialisation leads to destroying the local environment, so how much industrialisation can farming do before the environmental collapse is unstoppable?

I heard an interview some years ago where a world recognised archaeologist identified that thousands of years ago much of the land in the middle east was used for 'high tech, intensive agriculture'. He identified that the result was effectively poisoning the land so much that it largely remains unusable today. I cannot speak to how accurate he is, but my question is do we want to do that today?

NZ water, rivers etc have mostly been getting far cleaner in recent decades, not dirtier. The thing that changed is that we now measure water quality, where in decades past we didn't - and didn't know about all the sciencey sounding bogey men that our ancestors lived with in ignorance for the last few 1000 years when stock in waterways and omni-present animal dung were the norm. Things like the natural arsenic levels in the Waikato river that make it 'unsafe' for human consumption or naturally high nitrate levels in some rivers flowing out of conservation areas far above suggested 1mg/L nitrate limits. Rivers in bush areas are very far from clean in their natural state. Efforts to make NZ water conform to some idealised (and unnaturally pure) standard have to be balanced against the economic damage that such extreme regulation will do.

NZ water, rivers etc have mostly been getting far cleaner in recent decades, not dirtier.

Got any data on that?

Given dairy farmers have now invested significantly in fencing waterways, you would expect some recent improvement with regards to that source. Would be good to see some data on the specific areas, if you have it?

As most media coverage highlights issues of declining water quality over the last twenty plus years, e.g. around areas of deforestation and intensification of farming, including previously clear rivers changing their appearance in that time (despite birds also pooping in them in the past, to Judith Collins' chagrin).

A part of the issue is that many if not all farms are set up requiring more water than is naturally available. How many farms could continue to operate as viable business's using only the water that is delivered by rainfall? The screams from these comments will reverberate, but that is what dirty water is all about. Farmers draw water from streams, rivers, bores and pump more and more effluent onto their land, having ensured there is less water to dilute and filter it through the land. Planting more trees will not fix the basic problem. Current farming practices are fundamentally unsustainable.

You should go onto an actual farm, that has been farmed for generations and observe that productivity and production has been increasing for the entire time it has been farmed, before you suggest that current farming practices are unsustainable. Not only are they sustainable, but they are in fact increasing due to being farmed scientifically by skilled experienced farmers and not by theorists.

Yet instead of spending money on research to find alternative ways of using our land and resources, we instead pour our cash into the overpriced property market for capital gains. We need a change in the way we create wealth by investing in business activities that create jobs and hence have flow on effects in other businesses rather than holding each other ransom over real estate

GDP and 'export earnings' are false ways of measuring what we do.

Counting 'stocks remaining' - including the fossil energy stocks that agribusiness is busily turning into food energy, in an incredibly short-term manner - would be the better measure. Norway is the classic example of this - turning real energy stocks into digits which it 'invests' in a share-market, worth nothing when the real energy runs out.

The real question is whether agribusiness, as practiced. can be made long-term-maintainable, and can it feed NZ long-term? The rest of the discussion is increasingly temporary, as we can see when we trace the increasing amount of debt being used to 'pay' for those exports.

“New Zealand's new fresh water regulation rules will have no major impacts on the national economy”.

Even if they do have an impact, it is justified. Why should the rest of NZ continue to subsidise (bear the effects of) the externalities created by the farming sector?

Also NZ farming has much bigger things to worry about - synthetic meats & milks

At the moment, synthetic meats are an over processed convenience food of dubious nutritional value. I suspect our grass-fed meat will find a market for years to come. Dairying, not so sure. But if plant based 'meat' becomes the go, where better to grow it than our country with generally well watered lowlands? Leave the hills to beef, sheep and timber. Of course, we could just burn off more rain forest to grow enough to feed us all. Plant based foods are like electric cars. OK as a niche but if the planet's 8 billion and growing people want them we're going to need a lot more power and suitable land. I like Prof Woodford's article. We in the country live on the land and mostly respect it and are sick of the lack of respect we get. NZ needs to get real about its meal ticket, aka economy. To paraphrase the real estate mantra, it's agriculture, agriculture, agriculture.

In energy terms, meat is already plant-originated.

Given that evolution moves in the direction of efficiency, it is unlikely that artificial plant-sourced, energy-processed meat substitutes will outperform animals. Same way our ultimate society - post fossil fuels - won't be much more efficient in it's use of solar energy, than photosynthesis.

Great article Keith,being a Southland Dairy Farmer- cannot remember a time when we have so many having a go at us over, waterways,wintering,bovis,etc etc.We have had a tough spring,let alone what's happening at Fonterra- you urbanites need to back off & realize that there are alot if farmers struggling mentally over these issues.We are all doing our best for the NZ economy & environment & would appreciate some acceptance of the NZ public of what the agriculture sector means to the standard of living we all enjoy.We are not a sunset Industry & NZs future prosperity relys on it,as it has in the past.

We're does protein come from.....plants.

Virtually no human activity is without environmental effect. There has always been a trade off of adverse effect for benefit.
I agree change has to happen. But in analysis of change impacts, make the analysis broad to include the extended impacts across society - urban and rural.

Fair enough. Here's where I think it goes. Global debt is increasing faster than repayment possibilities, so will therefore remain unpaid. The growth system will probably not out-survive that denouement. At that stage, food becomes priority no1, and local is the only thing going. We also will see most of the parasitic (on the energy/extracted-resource/waste system) city-domiciled activities will suddenly appear somewhat less in-demand. Read: will become irrelevant, obsolete and therefore nonchargeable-for. And the global just-in-time agri-food model will be in tatters.

So we will see an exodus from cities to cultivatable rural land, probably also a resurgence of rural hub-towns. We'll need to establish a workable way to feed the remaining city-domiciled cohort too. I'm guessing that if Govt remains intact, then we'll see forgiveness of (rural) debt, accompanied with enforced sharing of productive land. If not, we'll be back to feudalism - remind me to be somewhere else :)

I think we'll triage currently-desirable things like pest-eradication - merely due to having not enough energy available and too many things more urgent. Urban infrastructure triage - there's not a road or a pipe isn't made from fossil-fuel feedstock - will be massive. Cuba is the model - but few in our current society appear capable of contemplating the possibility.

We are about to live through some very interesting times.

"few in our current society appear capable of contemplating the possibility"

Indeed.
While townies scream about the state of the environment and those beastly farmers, EVERY candidate in the local election was promising ECONOMIC GROWTH as a priority for the region and nobody queries it..... They just cant make the link .... all purchasing power/growth comes from leverage of the environment. Cities /townies are trapped mentally and physically in a fossil fuel / debt leverage bubble that their lifestyle is a given ...
Farmers on the other hand are increasingly struggling to see a feasible way to have both tighter environmental controls & financial viability

Great article Keith, currently I’m sitting on train travelling underneath the English Channel to Europe! Having spent a number of weeks looking at dairy farming systems in England and Europe it’s clear that loose government actions can have a huge damaging effect on the rural sector.
England’s dairy sector has all but disappeared with farmers now growing Maize type crops for the power bio generation industry which in turn is now in trouble as they as work out the environmental cost of this, whereas in Germany in the dairy farmers all have bio digesters using the dairy effluent to produce a great off farm income that they can regulate based on their dairy price eg feed the digester more maize when dairy price is low!
My point here is that the German dairy systems is based around govt incentives to change their systems, sure the cows are housed all year round & they are milked by robots but all cows I’ve seen were in excellent condition & happy, extremely high production, staff only work 40 hr weeks and very happy and stress free, owners happy even in a low payout environment as their bio digesters are churning out a great off farm income.
Our dairy systems are going to have to change from an environmental and staff point of view but the current governments change process for the industry is fundamentally flawed due to their lack of knowledge as you’ve been pointing out.
We need to change but this needs to be orderly and financially feasible to do so. My bet is that the best way to go is the 500-1200 housed cow hybrid type system with robotic milkers and milking all year round using the effluent in a bio digester to control green house gases and produce electricity is the best way to go!
Compost barns are the best for the cows but not sure they will comply re green house gases?!?
If we all changed to this type of system I’m not sure what we would do with all the milk but at least it would be a flat production curve that may bring some efficiency back into Fonterra?!?
To lead this change the government needs to incentivise us to do so from an economic point of view rather than the “big stick” it’s currently using!!

As far as dairy farming goes, what's NZs competitive advantage? Wouldn't a system you're advocating for be best located near the consumers?

From what I can see if all these new rules force us to go to freestall barn style farming we won’t have any competitive advantage apart from the Fact we have a huge surplus of product that countries that aren’t self sufficient want. I hear the Russians are building big dairy farms at the moment and the USA are converting their big dairies to robots due to the illegal immigrant issues.

And NZ farmers should get government subsidies like they do in the EU. So they can afford to farm in a way that pleases the bureaucrats.

Given the current debt status of the NZ industry subsidies may be the only way forward. A lot of rural change overseas is initiated by government to encourage change and not damage their desirable industries. Eg subsidies to build power generation farms with windmills , solar or biogas. Self sustainable in food is a big one in most countries as is industry pollution, for example in Germany the dairy farmers legally can only milk x number of cows per hectare so they make sure they fully feed their cows (40litres/day for 400 days), they capture all of the cows effluent and run it through a bio digester (subsidised) to produce power and sell this back into the grid. The waste from the digester is returned to the farm to grow the next seasons crops for the cows. The Ling and the sort is that these farms are very environmentally and labour friendly. The cow barns are all built within 300m of small villages so the staff don’t live on the farms, there are no smell issues or animal health issues, in fact I’d say the IQ of the farm staff is far higher than what we’ve got in NZ.

Here's a recipe for change written in 1929 http://my.waldenlabs.com/tree-crops/ by J Russell Smith - free download and a thought provoking read.

kiwi overseas - you do realise that the regulations also applies to every urban stream that meets the definition of a waterway - there are hundreds if not thousands of them that will have to meet 'material improvement' in five years. There are a tsunami of costs coming to urban NZ and they are, in the main, asleep through ignorance, while it rolls on in.

Yes sure do, the current governments in fairy land as is local government and regional councils, due to lack of understanding and control. We r currently working through the hearing process with a local district plan change and focused on getting council to incentivise riparian margin, bush enhancement and revenge ration planting, so that the farmer doesn’t have to pay for this as “his license to continue to farm”. Let’s hope we win as it will set a precedent for the rest of the councils!

dp

Keith. Two questions. First, are there any primary or other sectors that are measured in a 'better' way? For example a more recent industry such as aquaculture. Secondly has Stats NZ ever done a major revision of how it measures a sector and if so why? Thanks. Good article.

Gatoperro
Perhaps the best example is tourism as measured by NZIER.
In the report that I referred to they point out that toursm actually has a zero GDP because everything is allocated to other industries.
So they estimate the total contrbution of toruism by estimating what all of those components are and then comparing this total for the sector to the contribution of agriculture using GDP - a totally misleading comarison.

Yes, I think Stats NZ should indeed undertake a reassessment as to how they measure agriculture and agribusiness.
Keith W.

Great article, Keith, as always. It is indeed sobering to have highlighted the notion that some think that the highly specialised yet mobile gear used in agriculture is 'fungible' - easily transferred to other economic activities.
A short but by no means exhaustive list of some common ag mobile machinery which is utterly unable to be used in alternatives:

  • Slurry tankers with GVM so high they cannot be used on highways but extensively used for crop irrigation input
  • Harvesters of all stripes - often so specialised that they are suitable only for one crop e.g. grapes or maize
  • All-wheel-drive fert spreaders (all right, the military might be able to use 'em)
  • GPS planter rigs which vary seeding density according to recorded harvest yield, itself derived from harvester throughput measurement from companion machinery

Most of this gear carries price tags in excess of median house prices.....so the asset base is by no means negligible, yet won't be counted as 'Agriculture' because of this crazy 'fungibility' theory.......

Its a real shame Keiths article is now relegated to the rural file. I do hope this is published more widely where the urban readership can peruse at their leisure.

Sadly, all the so-called "green" nut jobs are leading the charge and it's all about creating the false perception that our farmers are evil polluters, etc. With well over half of our population living in cities and polluting our environment on a daily basis with toxic household and industrial chemicals, nitrates, detergents and various other ecotoxic compounds, we are clearly in the realm now of divide-and-rule politics as science takes a backseat to political agendas. Of course, if the powers-that-be choose not to measure it then it is not a problem! What a joke...

I tend to disagree, the agribusiness sector isn't omni directional, nothing ever is. It can't exist with out other sectors which may be wholly or severally dependent upon it. Not unlike farmers who say they don't need Fonterra. Umm OK, sure you can milk a cow but can you organise foreign exchange positions from your 20 bail herringbone?

Farmers are under fire, but the trouble is some of them let the rest down: https://www.rnz.co.nz/news/country/400980/surge-of-complaints-over-efflu...

Two wrongs don't make a right, I know. But it'd be interesting to count how many sewerage discharges happen each year by councils, whether consented or breaches.

Compare that with this.
https://i.stuff.co.nz/dominion-post/news/wellington/114950699/alarms-ris...
Note there are no individuals being prosecuted as opposed to individual workers on farms being open to prosecution.
https://www.boprc.govt.nz/your-council/news/news-and-media-releases/medi...