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Regional Economic Analysis - Uses of Water in the Waitaki Catchment

Acknowledgements

Executive summary

1. Background

2. Study objectives

3. Methodology

4. Cost benefit results

5. Regional economic impact results

6. Conclusion

7. Bibliography

8. List of interviewees and other contacts

Appendix A Technical discussion of the differences between CBA and EIA

Appendix B Agricultural assumptions used - base case

Appendix C Agricultural Assumptions Used - High Regional Development Scenario

Appendix D Regional economic model results

Appendix E Economic results sensitivity testing

Appendix F Methodology for regional economic impact analysis

Appendix B Agricultural assumptions used - base case

These figures represent the assumptions used in the calculation of costs and benefits to the primary production sector. These calculations occur both as part of the irrigation scenarios, and as part of the costs of the New Hydro proposal. A number of changes were made to the approach used by SKM, and these are discussed after the assumptions.

Table 28. Gross margin assumptions ($/ha)

View gross margin assumptions (large table)

Table 29. Water use assumptions (mm/ha/year)

View water use assumptions (mm/ha/year) (large table)

Table 30. On-farm capital costs ($/ha)

View on-farm capital costs (large table)

Table 31. Off-varm O&M costs ($/ha/annum

Table 32. Off-farm capital estimates ($/ha)

Table 33. Scheme description and land use assumptions

View scheme description and land use assumptions (large table)

B.1 Changes to SKM agricultural contribution ($/ha gross margin, EBITDA)

Mackenzie dryland grazing

SKM used 0.4 - 1su/ha. The range has been altered to 0.2 to 3su/ha. The SKM figures used amount to $35/su, but this appears high, with the current average for the Mackenzie closer to $25/su. However the mid point is a low number and the differences at this level will be less than the margins of error.

The 'Mid' scenario is not a mid-point in this set of assumptions as it is for many of the others. There are two reasons for this:

• We have accepted the argument that in the Mackenzie landholders will tend to irrigate the lowest producing land, since this returns the highest net gain to them from the investment.
• While it is true that with development the dryland is capable of returning more than the mid point, the risks of such development appear high and they are unlikely to be undertaken on the subject land without irrigation.

Irrigated arable Mackenzie

The range has been brought in line with stakeholders' assumptions.

Irrigated dairy support

The SKM estimates are substantially higher than the returns from grazing. It is unlikely that dairy support returns would be significantly higher than grazing, and for this reason the returns are set as equivalent to the grazing returns.

Mackenzie irrigated grazing

The range for the high gross margin assumption has been moved to $900/ha to bring it in line with stakeholder assumptions. This is based on a very high pasture production assumption (14,000-15,000kg/ha) and a finishing system which appears very high relative to other pasture production estimates. The mid-point estimate has been moved to $565/ha.

All other changes are for 'Elsewhere' in the region.

Dryland grazing

Change brings low and high estimates in line with stakeholder assumptions.

Dryland arable

Change brings low and high estimates in line with stakeholders' assumptions. SKM's estimate appears reasonable for a mid-point.

Irrigated grazing

The estimate of $300/ha for sheep and beef was too low and no irrigation would proceed at that level.

The issue of inclusion of impacts from dryland associated with irrigated agriculture is difficult. We accept that there is some impact, largely associated with a reduction in transaction costs, improved management decision making, and a reduction in risk associated with operating in two markets (irrigation allows the operator to move out of the store market and be exposed only to the finishing market risk. A store seller experiences the variability in both the store and finishing market).

However it is not accepted that the entire benefit from dryland should be attributed to the irrigated property. This is because:

• Many of the difficulties can be overcome by contractual arrangements.
• There are dryland operators who are developing their properties in the absence of irrigation, so the willingness to accept risk is individual rather than universal.
• There are properties where the dryland and irrigated blocks are operated as essentially two different systems, and synergies are largely not realised.
• The capital costs of dryland development have not been included in the transition costs.

The SKM figures have been adjusted so that the 'high' revision takes into account all the impact from irrigated on dryland, and the mid-point is weighted toward the low and has some but not all of the impact from irrigation on associated dryland management.

Irrigated dairy

Change brings range in line with stakeholders' assumptions. Weighted toward the 'low' side estimates as this is more in line with MAF Farm Monitoring estimates.

Dairy support

Revision brings range in line with stakeholders' assumptions.

Irrigated deer

Revision brings range in line with stakeholders' assumptions.

Irrigated arable

Revision brings range in line with stakeholders' assumptions and includes trading livestock in the autumn which appears more realistic for a typical arable irrigation scenario. High figure includes approximately 10% in process crops. However information from processors in the area indicates that this level is unlikely across the board. The mid-point is therefore weighted toward the 'low' estimate.

B.2 Off-farm capital costs

This comprises costs for establishment of the irrigation infrastructure. In the Mackenzie Basin the SKM estimate is $1,500/ha, which is the standard cost for off-farm infrastructure. The evidence is limited in regard to costs in this area, but there are likely to be a number of options in the Mackenzie Basin for very inexpensive delivery systems associated with the canal system. Ian McIndoe (Aqualinc, pers. comm.) has indicated that a more appropriate average cost for this area would be in the order of the 'mid hundreds', and a figure of $500/ha has accordingly been adopted. It should be noted that this will only be applicable where limited areas are proposed to be irrigated - the cheaper development options. Where very large scale irrigation is proposed (ie beyond the 10,000ha indicated in this report) these costs are likely to increase as more expensive delivery systems are required.

Above Ohau, off-farm capital has been changed to $500/ha based on estimates which have been made by Aqualinc (Ian McIndoe, pers comm.). The 'Above Ohau off-farm O+M' has been changed to the same estimates for the AWT scheme, on the basis that they are similar scheme types ($45/ha/year). Note that these costs are based on relatively small total area within the Mackenzie being irrigated, and the cheaper options such as direct takes from canals being implemented. As more area is assigned to irrigation in the Mackenzie we would expect the costs to increase.

B.3 On-farm capital costs

This comprises costs for establishment of the irrigation system only. The SKM figures were increased to reflect the fact that irrigation development costs appear to have moved up considerably in the last year. For example a typical recent centre pivot development with no additional complications had an actual cost of $2,700/ha.

Potential irrigators in the Mackenzie area have indicated that most irrigation development is likely to be centre pivot. However the assumptions for the main land use type, irrigated grazing, have tended to assume lower cost approaches to irrigation. On this basis the on farm capital costs for the Mackenzie are lower than they should. Unfortunately the model is unable to accommodate changes to on farm capital costs by area, and this remains unresolved in the final results.

B.4 Transition costs

The dairy estimates of transition costs were adjusted to include Fonterra shares. These had been excluded on the basis that they were transfer costs. However investigation revealed that:

• The payout to dairy farmers effectively includes a return to production and a return to the shares from processing and marketing activities. To include the full payout but not the capital charge to achieve the payout is not correct.
• The share purchase does not represent a transfer payment - the capital is used for expansion of processing plant and other capabilities. In a static pool of growers it may represent a transfer if the entrant were matched by a departing operator, but this does not appear to be the case at present.

The transition costs of Dairy Support were altered downward to reflect the small capital requirement without stock and machinery.

The transition costs for arable are low on the basis that they would typically represent a movement from dryland arable to irrigated arable production. However in the case of the Waihao Downs area and North Bank/Elephant schemes the irrigated arable areas are significantly higher than the dryland areas following the changes made below. Unfortunately the model is not able to accommodate different transition costs by scheme, and so this represents an under costing of the costs of transition for those schemes which has not been resolved.

B.5 Land use areas

SKM use a figure of 70% dairying in the Waihao Downs area and North Bank/Elephant Hill. A copy of the North Waihao Irrigation Scheme Prefeasibility Study was obtained which indicates that this figure should be closer to 27% as there are drainage constraints on achieving that level of dairying (Stu Ford, pers.comm. 2004). A revised estimate of land use in these areas is shown above in Table 33.

B.6 Water use assumptions

Irrigation demands for arable have been adjusted to increase water use up to 5/6ths of an equivalent dairy support property. It is possible that as production systems become more intensive, that arable demands will equivalent to those of pastoral land uses.

All pasture-based livestock systems have been changed to the same water use requirements based on irrigated grazing estimates. There is no obvious reason why these should be differentiated.

In common with the SKM approach the estimates do not address the issue of net water use. This is potentially significant in catchment, because any water which passes to groundwater or surface run off would potentially re-enter the surface system and pass through at least part of the hydro generation system. It is appropriate to use gross water use for allocation purposes because any increases in efficiency would mean that a net water use approach would lead to over allocation. However in a cost benefit approach, while increases in efficiency would result in less water re-entering the hydro system, they would involve concomitant increases in agricultural production benefits. Assessing net water use in relation to energy losses is a complex issue, but one which deserves at least qualitative consideration by decision makers.