Heaps of grass has helped agriculture grow three times as fast as the overall economy. Doug Steel wonders if this may even understate how well the rural sector is doing, given how the numbers were analysed in 2007/08

By Doug Steel

Like blood to the body, agriculture is critical to the NZ economy.

The sector makes economic contributions in direct and indirect ways, although measurement of such can be a tricky business.

The latest national accounts show agriculture GDP growing 7.5% through the year to March 2012. This supported the 2.4% expansion in the New Zealand economy over the same period.

This is good growth to have. And, it was no surprise to see the lift in agriculture production along with the associated processing received considerable coverage from the various economic commentators (including us) when the figures were releases a few weeks ago.

Good growth, yes, but we wonder if agriculture’s contribution to economic growth over the past year has been understated. By most accounts, including our many conversations with farmers, last season’s grass growth was exceptional. Moreover, aside for the odd issue here and there, the good conditions were widespread across the country. This would have helped contain supplementary costs and improve the bottom line.

Sure, grass growth is not the be all and end all for New Zealand agriculture with some clear issues in non-pastoral industries over the past year or so. But grass does play a significant role and there was plenty of it last season.

And yet all that showed up in the national accounts for agriculture GDP growth in the year to March was not much more than a bounce back from the previous year’s 5.6% decline.

Would it have shocked anyone to see agriculture GDP, say, 5%, or even 10% higher than that in the current official figures for the past year?

To be clear, we do not know if agriculture GDP has been understated or not over the past year. Our musings essentially stem from the reverse situation that occurred during the 2007/08 drought.

Many will remember (and no doubt like to forget) the drought that affected most areas of the country back then. A 2009 Ministry for Primary Industries (then MAF) report titled ‘Regional and National Impacts of the 2007-2009 Drought’ noted the only regions not to be significantly affected were Northland, Gisborne and Westland.¹

As recently as March this year, the official agriculture GDP figures reflected a downturn, but not a particularly harsh one for such a widespread event. For example, in March this year agriculture GDP was considered to have fallen by 4.5% between March 2007 and March 2008.

Statistics New Zealand has since completed a major overhaul of the national accounts. There were many aspects to it. Without getting buried in the detail, suffice to say that the history of New Zealand agriculture has been substantially rewritten, especially for the late 2000s drought period.

For example, according to the new data, agriculture GDP between March 2007 and March 2008 now shows an 18.6% decline. That is a significant 14 percentage point difference from the previous estimates. In fact, at one point, the gap between the new and old agricultural GDP growth series extends beyond a massive 20 percentage points.

Put another way, during this period the level of agriculture GDP dropped by a fifth more than previously estimated. Yes, a severe drought occurred in 2007/08. Who knew?

We suspect the bulk of these major revisions resulted from the inclusion of new annual benchmarks to 2009, from 2007 previously.

This raises the question of where agriculture GDP growth might sit for the 2011/12 season when the annual benchmarks for that year are eventually included over the coming years.

We have long argued that it was the severe drought of 2007/08 along with the correction in the domestic housing market that initially pushed New Zealand into recession in 2008. The new history only adds to the case. The worsening global financial crisis through that year amplified the domestic downturn that was already underway.

This is important and could have implications for the current economic cycle. If indeed agriculture is a lot stronger than currently shown in the national statistics, New Zealand as a whole could prove more resilient or stronger than the current national figures would have you believe. Maybe the indirect effects of this are part of the reason why overall economic growth in the first quarter of this year was much stronger than all and sundry thought.

But even if this were true, the problem is that things can change pretty quickly in agriculture. We say this as we watch the weather risk to the coming season rise. Climate indicators continue to trend towards El Nino conditions (the Southern Oscillation Index even dipped its toe into the El Nino zone in late June / early July). El Nino conditions are often – but not always – associated with lower agriculture GDP in a few quarters’ time.

Speaking of weather, drought conditions in the US have caused havoc with crops and put a rocket under prices. For example, corn prices are up more than 50% in a month. Wheat prices have also moved markedly higher. This will put further pressure on US dairy / livestock producers as feed costs rise, ultimately crimping supply and providing support to international prices for NZ products.

Lots to watch and ponder, even without the European debt crisis. It is shaping up to be another interesting year for agriculture, whatever the records initially show.

A quick look at productivity

The GDP revisions will flow through to official productivity calculations. That is, how much GDP do you get per unit of input.

At this point, the latest industry productivity statistics, released in March, only extend to 2010 and do not yet include the revisions to the GDP component discussed above. While productivity growth rates for March years 2007, 2008, and 2009 will be most affected, we think the strong positive trends in agricultural productivity are likely to remain.

As the productivity figures stand, they show agriculture has been a standout performer. Multi-factor productivity in agriculture expanded more than 170% between 1978 and 2010, or 3.2% per annum on average. This is some 5 times the performance of the wider (measured) economy.

Agriculture significantly outperformed the wider (measured) economy through each of the 1980’s, 1990’s and 2000’s.

We think these trends would support what most in the industry would consider to have occurred: considerable progress has been made over the years. The industry has been doing things better, smarter, and more efficiently through time.

Multi-factor productivity growth essentially represents the change in real GDP that cannot be accounted for by changes in measures of labour and capital inputs. It has many aspects and drivers and particularly so in agriculture over recent years as farm systems change and output becomes less homogenous, to name a couple of factors.

A recent report by the Ministry for Primary Industries (MPI) titled ‘Pastoral Input Trends in New Zealand: A Snapshot’ highlighted some challenges of measuring such things as productivity, intensification and resource use in the dairy, beef and lamb industries.²

While a number of datasets were examined in that study and it illustrated productivity growth, MPI fully acknowledged that ‘data relating to the area of interest were limited.’ For example, crucial inputs of water and energy were excluded and the data only spanned 8 years, hardly enough to be confident of a trend in the notoriously volatile agricultural price / production / input setting. Again, the authors are well aware of the issues and hope that the ‘... paper stimulates debate not only about how to interpret the data we have, but also how to build a richer bank of information to help us understand the performance and the potential of the pastoral sectors in years to come’.

Fair enough. But this paper along with the national GDP revisions just goes to show how difficult it is to measure what has occurred overall in such an important sector of the NZ economy. This is true even a few years after the fact let alone for those of us trying to understand it in real time.

Indeed, it seems at least as difficult to pin down where we are at present, let alone where we are going.

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1 See http://www.mpi.govt.nz/newsresources/publications.aspx?title=drought

2 This report can be found at http://www.mpi.govt.nz/newsresources/publications

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Doug Steel is a senior economist at BNZ. You can contact him here »