Economic Impact of the 2007 East Coast Drought on the Sheep and Beef Sector
Executive Summary
1. Purpose of the Report
This report provides an analysis of the medium-term economic effects within the East Coast region of the major drought which impacted the sheep and beef farming sector, during the first half of 2007.
2. Key Results
Table A: Key Sheep/Beef Sector and Regional Impacts of the 2007 East Coast Drought
| Year | Value-Added/GDP Impacts ($M) | |||||
|---|---|---|---|---|---|---|
| Without Drought | With Drought | Difference | ||||
| Sector | Region | Sector | Region | Sector | Region | |
| 2005/06 | 797.1 | 2,195.2 | 797.1 | 2,195.2 | - | - |
| 2006/07 | 831.5 | 2,289.9 | 917.8 | 2,527.5 | +86.3 | +237.6 |
| 2007/08 | 861.5 | 2,371.5 | 721.7 | 1,975.8 | -138.8 | -395.7 |
| 2008/09 | 933.2 | 2,570.0 | 636.3 | 1,869.0 | -296.9 | -701.0 |
| Overall Change 2005/06-2007/08 | +136.1 | +374.8 | -160.8 | -326.2 | - | - |
Without the drought, MAF forecasts based on results from its farm monitoring programme were for East Coast region sheep/ beef farming sector Value-Added/GDP to increase by some $136 million over the 2005/06-2008/09 period. The associated region-wide multiplier impact of this is a $375 million increase in total Value-Added over the period.
With the drought effect and taking into account both revenue and expenditure impacts, sheep/beef sector Value-Added increases sharply in the drought year (2006/07) but falls over the next two years. The size of the overall sector Value-Added decline for the 2005/06-2008/09 period is $161 million. This represents a 20 percent fall in sheep and beef farming sector Value-Added over the three-year period. The multiplier impact of this on the East Coast region is a $326 million fall in total Value-Added. This is equivalent to a 15 percent decline in the sector’s contribution to regional Value-Added or GDP.
Comparing the drought impact with the ‘without drought’ impact, the overall results for the three-year period are a $297 million loss of Value-Added from the sheep/beef sector itself (representing an estimated Value-Added loss of $27 per stock unit on average for the whole East Coast region) and a region-wide Value-Added loss of $701 million.
The overall impact of the drought on the East Coast economy is indicated by expressing the losses (resulting from the drought) over the 2005/06-2008/09 period, as a proportion of the 2005/06 base year figures. The results are that:
- Total Gross Output for the East Coast economy falls by 2.3%
- Total Value-Added/GDP falls by 3.2%
- Total Net Household Income falls by 1.8% overall
3. Matters Covered
The themes covered in the report include a background economic profile on sheep and beef farming in the region; the range of on-farm impacts of the drought; the methodology that was employed to undertake the economic impact analysis of the drought; and the actual economic impacts of the drought in terms of the sector itself, regional industries linked to sheep/beef farming, the East Coast economy and the national economy.
4. Information Sources
The main base information sources for the analysis are the Ministry of Agriculture and Forestry’s farm monitoring and forecasting programme for the region, Meat & Wool New Zealand documentation on the drought, Statistics New Zealand agricultural and employment data, and University of Waikato Economics Department economic impact modelling results for the East Coast sheep/beef farming sector and region.
5. Sector Economics
The East Coast region is a key component of the New Zealand sheep/beef farming sector, accounting for approximately 20% of all sheep/beef farms in the country, a quarter of national sheep/beef livestock numbers, 20% of the sector’s national GDP and 23% of employment in the country’s sheep/beef farming sector. Sheep/beef farming and meat processing together account for 12% of current ‘all industry’ direct Value-Added in the East Coast.
6. Drought Effects
The key on farm effects, farmer responses and associated financial implications of the drought, which form the basis for the economic impact assessment of the event, were as follows:
• Drought period January-June 2007: Deteriorating pasture growth and livestock quality; use of supplementary feed, significant livestock sales, reduced purchases of replacement stock and deferred second sharing. Total regional Net Cash Income of the sheep/beef sector increased by 19% on the 2005/06 figure in nominal terms, whilst total farm working expenditure fell by almost 4%.
• 2007/08 Production Year: Significantly reduced production base of livestock numbers due to the previous year’s de-stocking, reduced lambing and calving rates, reduced wool clip, increased cost of stock purchases and livestock feed; livestock purchases for re-stocking, reduced sales of livestock, reduced frequency of shearing, and further expenditure containment and reduction. East Coast Net Cash Income is forecast to fall by $323 million or 33% from the 2006/07 level whilst total farm working expenditure falls a further 7%.
7. Economic Impact Methodology
The main elements of the methodology used to undertake the economic impact analysis of the 2007 drought were:
- Use of MAF farm monitoring/model farm financial figures as a basis for establishing the annual income and expenditure results of the drought. The results were used for the subsequent economic impact modelling process.
- Adoption of a medium-term time-frame for analysing the economic impacts of the drought, that is, the period 2006/07-2008/09.
- The Economics Department of the University of Waikato (Dr Warren Hughes, economic impact modelling specialist) undertook the base economic impact analysis, using a Year 2006 based 112-industry linear economic impact model of the East Coast economy.
- The economic impact of the East Coast drought was assessed at four different levels, namely the East Coast sheep/beef farming sector itself; the added multiplier impacts on ‘backwards’ (supplier) and ‘forward’ (user) linked industries in the region; the overall East Coast economic itself and the national economy.
- The comparative economic impacts of the drought were derived for two base scenarios, namely a ‘without drought’ situation (as forecast by MAF farm monitoring in 2006) and a ‘with drought’ situation.
8. Economic Impacts
Table B below presents the detailed economic impact results of the drought for Year 2006/07 and forecasts (200708 and 2008/09 years) for the East Coast region. The direct impacts refer to the impact of the drought on the sheep/beef farming sector only. The direct Value-Added impacts incorporate the impact of the drought on sector revenue/income and expenditure. The industry linkage impacts cover the drought’s impact on ‘backward’ and ‘forward’ linked industries in the region. The total impact refers to the overall impact of the drought on the regional economy. The key impacts of the drought are noted below the table.
Table B: East Coast Region Economic Effects of the Drought Impacting the Sheep and Beef Farming Sector 2005/06-2008/09
| Economic Impact Variable | Period | ||||||
|---|---|---|---|---|---|---|---|
| 2005/06 | 2006/07 | 2007/08 | 2008/09 | ||||
| Base Year | Without Drought | With Drought |
Without Drought | With Drought |
Without Drought | With Drought | |
| Gross Output ($M) | |||||||
| - Direct Impact | 1,685.0 | 1,757.7 | 1,996.7 | 1,821.1 | 1,342.5 | 1,972.4 | 1,484.6 |
| - Industry Linkages | 3,530.9 | 3,683.4 | 4,185.9 | 3,816.2 | 2,813.2 | 4,133.1 | 3,110.0 |
| - Total Impact | 5,215.9 | 5,441.1 | 6,182.6 | 5,637.3 | 4,155.7 | 6,105.1 | 4,595.6 |
| Value-Added/GDP ($M) | |||||||
| - Direct Impact | 797.1 | 831.5 | 917.8 | 861.5 | 721.7 | 933.2 | 636.3 |
| - Industry Linkages | 1,398.1 | 1,458.4 | 1,609.7 | 1,511.0 | 1,258.3 | 1,636.8 | 1,232.5 |
| - Total Impact | 2,195.2 | 2,289.9 | 2,527.5 | 2,372.5 | 1,980.0 | 2,570.0 | 1,868.8 |
| Net Household Income ($M) | |||||||
| - Direct Impact | 357.0 | 357.0 | 357.0 | 357.0 | 357.0 | 357.0 | 357.0 |
| - Industry Linkages | 452.4 | 491.5 | 536.3 | 525.9 | 362.8 | 530.2 | 398.8 |
| - Total Impact | 809.4 | 848.5 | 893.3 | 882.9 | 719.8 | 887.2 | 755.8 |
- Sector Impact – The true economic impact of the drought on the East Coast economy is measured by Value-Added or GDP. With the forced sale of livestock during the drought period, total Value-Added by the sheep/beef farming sector increased during 2006/07 by $121 million compared to the forecast increase of $34 million without the drought impact. For the full production year following the drought (2007/08), the significantly reduced livestock production base and quality results in a $196 million decline in total Value-Added of the sector, compared to the forecast gain of $30 million without the drought effect. The 2008/09 period sees a forecast further fall in sector Value-Added of $85 million as expenditure increases back to near maintenance levels. Over the 3-year period 2005/06-2008/09, East Coast sheep/beef farming sector Value-Added falls overall by $161 million or 20%, compared to the forecast gain of $136 million or 17% without the drought effect. The overall impact of the drought on the sheep/beef sector at the end of the three-year period, compared to the “without drought” situation, is a Value-Added loss of $297 million.
- Regional Economy Impact – When ‘backward’ and ‘forward’ industry linkages/multiplier effects are also taken into account, the overall impact of the drought on the East Coast economy is a $326 million or 15% fall in regional Value-Added or GDP. This compares to the forecast increase of $375 million or 17%, prior to the drought occurring. Regional Value-Added increased by $332 million in 2006/07 but then falls overall during the next two years by $659 million, in contrast to the forecast gain without the drought of $280 million over those two years.
- The overall impact of the drought at the end of the three-year period, compared to the ‘without drought’ situation, is a total regional Value-Added decline of $701 million.
- Table C below summarises the overall annual Value-Added impacts of the drought in the East Coast region, for the sheep/beef farming sector and for the region (including multiplier/industry linkage effects), over the period 2005/06-2008/09. The results take into account sector income and expenditure changes during the period. The overall sheep/beef farming sector impact of the drought is a $161 million reduction in Value-Added/GDP over the three-year period, compared to the forecast of a $136 million gain without the drought. At the wider regional level, the overall economic impact result is a $326 million reduction in Value-Added, compared to a forecast gain of $375 million without the drought.
Table C: East Coast Region 2007 Drought Impacts on Value-Added 2006/07-2008/09
| Year | Sector Impact based on MAF Pre-Drought Forecasts ($M) | Sector Impact ‘With Drought’ Effects ($M) | East Coast Region Impacts based on MAF Pre-Drought Forecasts ($M) | East Coast Region Impacts ‘With Drought’ Effects ($M) |
|---|---|---|---|---|
| 2005/06 | 797.1 | 797.1 | 2,195.2 | 2,195.2 |
| 2006/07 | 831.5 | 917.8 | 2,289.9 | 2,527.5 |
| 2007/08 | 861.5 | 721.7 | 2,371.5 | 1,975.8 |
| 2008/09 | 933.2 | 636.3 | 2,570.0 | 1,869.0 |
| Overall Change 2005/06-2008/09 | +136.1 | -160.8 | +374.8 | -326.2 |
| Total Value-Added Loss ($M) | 296.9 | 701.0 | ||
9. Other Results
Other points to note from the main report include:
- The Napier-Hastings / Central Hawke's Bay area was hardest hit by the drought and accounts for over half of the decline in East Coast Value-Added caused by the event, over 2005/06-2008/09.
- The impact of the drought on the East Coast sheep and beef farming sector over 2006/07-2008/09, results in a 3.2% fall in total East Coast region ‘all industries’ Value-Added, from its 2005/06 level.
- At the national level, the overall impact during the above period of the East Coast drought is a $588 million or 15% drop in in the sector’s contribution to national Value-Added/GDP. This represents an approximate 0.4% of total New Zealand nominal GDP for the year ending June 2006.
Contact for Enquiries
Manager
North Island Regions
Sector Performance Policy
MAF Policy
Hamilton
NEW ZEALAND
Phone: +64 7 957 8313
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