How Much Will the Government's Freshwater Proposals Cost?

Moments after the Government and farmers reached a cosy agreement on emissions reductions proposals, the two camps were back at war over freshwater. On Thursday afternoon, Dairy NZ published an economic analysis of the Government’s freshwater proposals. Predictably the tone was of doom and gloom. So how much truth is there to their claims? 

Dairy NZ report

The Dairy NZ report estimates that the reforms would drop milk production by about quarter and cost our economy $6b per year by 2050. That sounds like a big, scary number, but – for context – in 2050 that is predicted to be about 1.1% of GDP. Given that Kiwis will be much richer by then, we might well respond that paying 1c in the dollar for swimmable rivers is a pretty good deal. That’s certainly how I feel. 

The Zero Carbon Bill is predicted to add a further cost of $1b per year by 2050. I have to say up front that I don't buy this. If we implement the freshwater reforms and milk output falls by a quarter, farmers will make mincemeat of our methane targets. 

Here’s the hidden kicker in Dairy NZ’s modelling: the average Kiwi will be slightly better off overall in 2050 with these freshwater reforms. That is just in terms of their back pocket, before we even consider the benefits of having swimmable rivers. Why? Because reducing milk production means reducing our dairy herd, which means lower greenhouse gas emissions. And this means our government can buy fewer carbon credits from overseas, which means we are actually better off as a country. So Dairy NZ’s modelling says that overall this reform is a win for everyone – except farmers. You won’t hear Dairy NZ shouting that from the rooftops. 

Dairy NZ have used the modelling to point out that farmers can make changes to improve water quality without having a massive impact on the economy. Its list of changes pretty much reflects what they should already be doing.

I'm not sure about the value add of these additional scenarios that Dairy NZ has modelled. Does it really expect Kiwis to accept the status quo when it comes to freshwater quality? Sure, some regions might be prepared to negotiate the pace of change with farmers, but are we really going to say it’s okay to pollute our rivers as part of doing business? I don’t think so. 

Critiques

The Environmental Defence Society (EDS) has published a critique of economic costings, claiming that the total costs of freshwater reforms will not be that high. It was obviously written in anticipation of Dairy NZ publishing a report like this, because many of the critiques EDS raises are actually included in the Dairy NZ modelling. This is dynamic stuff that most economic models miss, like the fact that if people lose their job in dairy most will go get another job and the economy won’t be that much worse off overall. In summary, dairy isn’t that big a deal to our economy, and besides economies adjust. 

EDS’s main critique of note is that the Dairy NZ economic modelling relies on previous modelling which estimates how farmers will respond to the changes. EDS argues that this underestimates the possibility for good farmers to find win/wins – i.e. reducing intensity, cutting input costs, and maintaining profits while reducing their environmental footprint.

The counter argument is that this sort of adaptation requires skill, and not all farmers will have the capability to do it. My counter to that counter is that if we use market-based mechanisms, capable farmers will expand and buy out farmers who perform poorly. Again, individual farmers may fail as a result of the reforms, but that doesn’t necessarily mean that dairy production will fall. The crucial point is that we need to give farmers incentives to improve their environmental performance. Sadly, this is something that the likes of the Green Party oppose because of their left-wing tendencies.

There Will Be an Impact

On the other hand, the Government is clearly Pollyanna-ishly playing down the impact of these reforms. It is clearly mistaken in claiming that there will be no cost. The drop in dairy production may not be as high as the quarter suggested by Dairy NZ, but there will definitely be an impact. 

EDS estimates that around 10% of farms lie in catchments where real restrictions will bite. That doesn’t mean that all those farms will shut down, but some in those catchments will. 

Massive changes seem unavoidable in Southland and Canterbury, but the fact that the Dairy NZ modelling also pointed to Taranaki and West Coast (where there aren’t massive freshwater quality problems) again suggests it is exaggerating. 

The size of the eventual bill depends on how this is implemented - as mentioned above market based mechanisms will cushion the blow. It also depends on whether farmers can find some other profitable thing to do with that land. Again this was a major limitation in the model of how farmers will respond, which only switched farms between dairy, drystock, and forestry. What about organic dairy, manuka honey, pip fruit, or wine? There are so many options to explore, especially in the context of a changing climate. This is where research is urgently needed to help farmers adjust. 

As I have pointed out before, the big impact here will be the hit to land values rather than the economy. Farmers have been farming for capital gain rather than yield, and this has driven intensification even when it makes little sense profit-wise. Banks seem to have recognised this, which is why they have pulled back from funding farmers to reduce their risk. Farmers will have to start farming for profit rather than hoping for a bumper payment when they retire and sell up. 

Summary

In short, the $6bpa cost quoted by Dairy NZ looks very much like a worst-case scenario. Sure, ineffective farmers everywhere will need to exit the industry, but those who adopt new best practice will be able to continue farming profitably and maybe even expand. 

But the Government can’t get away with claiming that this will have little cost. A lot depends on how the reforms are implemented, and this is where the Government proposals have been woefully short on detail. In a few areas, farmers will almost certainly take a hit if we can't find profitable alternative land uses. This is where the research needs to happen, and urgently. 

Overall, I don’t think Dairy NZ’s case will persuade the Kiwi public to accept polluted rivers. At best, it might just buy them some time.