Economic Impact of the 2007 East Coast Drought on the Sheep and Beef Sector
Economic Impact Analysis Methodology
This section describes the methodology that was used to generate the drought economic impact results presented in Section 5 of the report.
Analysis Principles
The key underlying principles guiding the methodology used were as follows:
(i) Use of a ‘bottom up’ approach with the economic impact results reflecting the range of broad farm types and actual ‘on farm’ impacts of the drought in the East Coast region, as well as MAF model farm financial results.
(ii) An economic impact assessment approach using both ‘without drought’ and ‘with drought’ scenarios and drawing comparisons between the two, where appropriate.
(iii) Incorporating a time dimension in the economic impact analysis, in order to reflect the diversity of ‘on farm’ impacts of the drought, over time.
(iv) An analysis incorporating both the revenue and expenditure effects of the drought (in the economic impact assessment).
(v) A primary focus on the East Coast region impacts of the drought.
(vi) Analysis of the economic impacts of the drought in terms of the sheep and beef farming sector itself, the flow-on multiplier impacts to the regional industries servicing the sector and also those utilising its outputs, and the total impacts for the East Coast regional economy.
Modelling Steps
The main steps in the economic impact modelling process were as follows:
(i) Analysis of MAF, Statistics New Zealand and University of Waikato Economics Department data, in order to generate a 2005/06 base year Gross Output figure for the East Coast sheep/beef farming sector. The figure was then apportioned amongst the three main farming type categories in the region, on the basis of their share in that year of total Net Cash Income earned by the sector. The total Net Cash Income figures for the region were calculated using MAF farm monitoring/model farm (‘average farm’) results for each farm type and the total number of farms in the region within each farming category.
(ii) The MAF farm monitoring/model farm results for the Net Cash Income indicator for Years 2006/07, 2007/08 and 2008/09 were used to determine the changes over these years in the Gross Output of the East Coast sheep/beef farming sector, for the ‘without drought’ and ‘with drought’ scenarios. Table 4 below provides details of the Net Cash Income situation for the sector, for the period 2005/06 to 2008/09, based on figures in Table 2. It is noted that in the use of the Net Cash income indicator to determine the annual changes in Gross Output which in turn ‘drive’ the economic impacts of the drought, assumes that the drought is the primary determinant of the MAF forecasts for Net Cash Income over the period.
Table 4: East Coast Region Sheep/Beef Farming Sector – Total Annual Net Cash Income Levels 2005/06-2008/09
| June Year | Net Cash Income ($M) | |
|---|---|---|
| Without Drought | With Drought | |
| 2005/06 (Base Year) | 831.9 | 831.9 |
| 2006/07 (Drought Year) | 867.8 | 986.2 |
| % Change 06/07 | +4.3 | +18.5 |
| 2007/08 (Post Drought Year 1) | 899.1 | 663.1 |
| % Change 07/08 | +3.6 | -32.8 |
| 2008/09 (Post Drought Year 2) | 975.0 | 733.3 |
| % Change | +8.4 | +10.6 |
If the drought had not occurred, MAF’s farm monitoring work forecasted total Net Cash Income to increase over the period by some $143 million or 17%.
However, the ‘forced’ sale of livestock during the drought period resulted in an ‘unbudgeted’ increase in sector income in 2006/07 of $154 million or almost 19% at the regional level. This income level was also 14% above the ‘without-drought’ forecast for the 2006/07 year. The significantly reduced livestock production base in the current 2007/08 year results in a $323 million or 33% fall in total Net Cash Income for the year. In 2008/09, total Net Cash Income is forecast to recover back to in excess of $730 million or some $70 million (11%) above the 2007/08 outcome. However, the income level for the sheep/beef sector in 2008/09 is still some $242 million or 25% below the pre-drought forecast for the year.
It is noted that the MAF farm monitoring revenue figures used for the analysis are based on an exchange rate of $1.00NZ = $0.70US.
(iii) Tables 2 and 3 of the report present results for the total Farm spending changes during the drought and subsequent years. The impact of the changes are also incorporated in the economic impact analysis in Section 5 of the report.
(iv) As noted at the outset of this section, the combined impacts of the various ‘on the ground’ effects of the drought on annual total Net Cash Income levels over the assessment period (2005/06-2008/09), are used to determine the movements over the interval in Gross Output from the East Coast sheep/beef farming sector. The changes in Gross Output are, in turn, used through the modelling process to establish the direct and multiplied impacts of the drought. The annual levels of total farm working expenses are taken into account in establishing the final Value-Added impacts of the drought for the sector. The change in stocks of on-farm feed due to the drought are taken into account within the actual economic impact modelling process itself.
(v) The economic impact modelling work was undertaken by Dr Warren Hughes, Visiting Professor and economic impact specialist at the University of Waikato. Dr Hughes used an updated (Year 2006) 112-industry linear economic impact model of the East Coast economy, for the purposes of the analysis. This model provides annual nominal values for the total multiplied impact of the drought on East Coast region Gross Output, Value-Added/GDP and Net Household Income. Employment impacts are not specifically included in the economic impact analysis because it is difficult to separate out the impacts of “under-employment” particularly on farm. Employment is not expected to have increased in 2006/07 (in terms of numbers employed) despite the increase in Gross Output. Employment may drop in 2007/08 and the following year in affected sectors but may result in under-employment rather than increased unemployment.
(vi) Gross Output refers to the total value of production impact within a given region of a revenue or expenditure change generated by a particular occurrence or event, including the value of goods and services imported into the area to support the change. When imports are excluded from the ‘equation’ (as payments for them flow outside the area and do not add to economic activity locally), the result is the concept of Value-Added or regional/local GDP which measures the true impact of a particular revenue or expenditure change in an economy. Net Household Income refers to the total additional household income generated in the economy by an income or expenditure change, after allowing for taxation and savings.
Contact for Enquiries
Manager
North Island Regions
Sector Performance Policy
MAF Policy
Hamilton
NEW ZEALAND
Phone: +64 7 957 8313
Contact this person
