Wednesday, 29 April 2015

Dairy costs?

No, the external costs of dairying in New Zealand are nowhere near either dairy's export earnings or dairy's contribution to GST GDP [my typo, sorry].
A peer-reviewed study authored by Massey University scientists has claimed that worst-case scenario costs to society from environmental harm caused by farming could equal the economic benefits of the dairy industry, creating a "zero-sum" situation for the country.

However, the paper, titled NZ Dairy Farming -- Milking Our Environment for All Its Worth, has come under heavy criticism by economics academics approached by the New Zealand Herald today.

Their analysis stated that in a worst case scenario, using the limited number of impacts valued, the costs to society were approximately equal to the export revenue and GDP.

"In other words, the industry is a zero-sum gain for New Zealand if the costs are included," Dr Joy said.

The authors reported that the estimated cost of some environmental externalities surpasses the 2012 dairy export revenue of $11.6 billion and almost reached the combined export revenue and dairy's contribution to GDP in 2010 of $5 billion.

But academics have questioned the study's methodology and findings.

"The report does a good job in identifying some of the environmental harms from dairying, but, at least on a first reading, does not provide a reliable estimate of the value of those harms," said Dr Eric Crampton, head of research at the New Zealand Institute Initiative [correction added].

He believed some of the tallied costs used in the calculations -- such as harm a farmer might do to his or her own pasture through soil compaction where stocking rates were too high -- should have never been considered "external" costs, while other costs appeared "over-estimated".

"The high-end estimates of the costs of nitrogen leaching, estimated at over $10 billion, seem to assume we would need to remediate all water in New Zealand to a drinking water standard -- however, very few sites currently exceed nitrogen standards for drinking water."

Dr Crampton also took issue with the upper-bound cost of the second largest cost component factored into the report, national dairy greenhouse gas emissions, which was put at over $3 billion.

"But that figure cannot be relevant for policy without considering relative greenhouse-gas intensity of dairy production in different countries and without considering the alternative uses to which dairy land would be put if it were not in dairying -- and especially where the paper notes that dairy makes up half of New Zealand's agricultural emissions," he said.

"If every dairy cow in New Zealand disappeared, we would see more cows elsewhere and more beef and sheep production here. The net effect on greenhouse gas emissions is not particularly clear.

"Finally, the paper suggests that demand for New Zealand dairy product could be cut in half were New Zealand's agriculture viewed abroad as being less than clean and green.

"But estimated high-end costs of over $500 million should be accompanied by a clearer picture of how much worse things here would need to be before exports were really at risk."

Professor Frank Scrimgeour, director of the Institute for Business Research at Waikato University, slammed the research as "sloppy" and argued its bold claims could not be substantiated.

"The authors do not do any original data collection, estimation or modelling," he said.

"They synthesised existing data without ensuring that measurements are consistent through space or time.

"Foote, Joy and Death are right that there needs to be holistic conversation in New Zealand regarding performance of the dairy industry but papers like this do not enhance the conversation."

University of Waikato professor of agribusiness Jacqueline Rowarth said it was "naive" to expect water quality in waterways could be restored to drinking water standards, and she noted people reading the study needed "to consider alternatives and relativities".

"This sort of research doesn't actually get us anywhere, and that's disappointing."
It's nice when news outlets ask economists for comment on "cost of" studies rather than just copying the initial press release.

I expect there's a good case for further investigation of nutrient management regimes like the one in place around Taupo; working out a pricing regime for water extraction rights could also be well worthwhile. But $15 billion in external costs, including costs dairy farmers might impose on their own paddocks through soil compaction? Nah.

Update: the study is here.


  1. The article suggests that the authors added export revenue to the contribution of dairying to GDP. That sounds like double counting, but the numbers don't add up. I assume they meant the contribution to GST? But exports plus GST is not the answer to any sensible question. There must be some mis-reporting here, no?

  2. Then I'm totally confused. Exports is a part of GDP.

  3. They were saying "It's bigger than dairy-exports. It's bigger than dairy-GDP. It's really really big."