Saturday, 28 June 2014

Taxing cows

The Feds seem quite chuffed with their argument against the Greens' carbon tax proposal. They need to revise that position I reckon.

Stripping away the smoky trimmings, the argument can be summed up in this set of quotes
"even the Greens' report acknowledges 10 per cent of our dairy farms would be vulnerable, making our dairy industry less competitive"
"we would need to slash production. With current technologies, that is achievable only by cutting livestock numbers" but "our lost production would be replaced by others"
"the United Nations Food and Agriculture Organisation (FAO) believes we have the most carbon-efficient dairy farmers on Earth"
so "Given our carbon efficiency in dairy is almost twice the world average, if we transferred our dairy production overseas, net global emissions would increase by a staggering 13 million tonnes per year."
If you hated the carbon tax already you might quite readily fall for this argument, so the Feds love for it is perhaps understandable.

But look: those dairy farmers (10% of 'em) are financially vulnerable, so a carbon tax is (from a vulnerability angle) no different to a hike in interest rates or fertiliser prices.

A big enough cost increase might cause some kind of financial restructure at some farms, but would dairy farming stop altogether at those locations? I reckon it'd be far more likely to continue under new ownership. And this is the central question: would this financial impost on dairy farmers actually lead to less dairy farming than we have now?

The Feds assume so - that's their mirror/twinkle/twist, the key to their killer argument. This is the assumption they need to believe in order to claim that a carbon tax will increase emissions.

So the Feds underlying claim is that the proposed carbon tax will cause a material change in land-use in New Zealand: a moderately large number of dairy farmers will look at the tax, look at their dairy operation, and say: "yeah, nah, lets do sheep and beef instead".

This is just not going to happen. The proposed tax is far too small to force many farmers to convert from dairying to sheep & beef.  A top performing sheep beef farm is said to have similar returns on capital to dairy, but there is a lot more capital in the dairy farm. Reverting to the lower value land use strands the capital you are abandoning such as the cowshed - it won't be earning anything at all.

I reckon the Feds should take themselves off somewhere quiet, have a good long think, and then dispose of this silly argument in a suitable receptacle.

Thursday, 26 June 2014

Just how badly are we being screwed?

Those of us who live outside the main cities get royally screwed by Air New Zealand. We all know this even though it's difficult to document properly - complex pricing doesn't only suit mobile phone companies.

Things are different on the main routes because they have enough travellers to support competition
from Jetstar. On those routes, the airports have stronger bargaining positions than airlines, to the point that three of them are regulated, albeit in a pretty light-handed way: they are required to publicly disclose detailed information about their costs and prices.

The boot is on the other foot for regional airports, who are keen to retain and increase airline capacity, but there are no corresponding disclosure obligations on the only nationwide carrier: Air NZ.

It is not unreasonable to suspect that AirNZ is using super-profits from regional travel to help it compete harder on competitive routes. That might be a good thing overall, but there is an obvious risk: that rivals get driven out of some routes which revert to monopolies.

The really interesting question though is what, if anything, could/should be done to promote competition on regional routes. I'm not sure of the answer, but I wonder if a carefully designed information disclosure regime might be helpful. Australians have way better public data on such things, including detailed airport-level data on plane movements and passenger counts. Copying this would be a good start, but there might also be a case for requiring the dominant carrier to disclose average fares. The benefits would be a better understanding of the scale of the problem and of where the dollars are for entrants. There would also be costs, but surely this is at least a question worth asking?

Saturday, 21 June 2014

Two monsters

The urban/rural fault line was exposed yesterday when farmers became protesters, parading through downtown Waipukurau under the slogan "Don't damn the dam", an upside-down remix of the classic 1973 slogan.

Who were they shouting at? Surely not the big dollar investors - those dudes pulled out ages ago for purely financial reasons. You might have thought that a crap business case would kill the whole idea stone dead, but you'd be wrong. Because this is a pet project of the Council, so the costs of pushing ahead are being socialised throughout Hawkes Bay, which has some pretty poor residents.

No, the more likely villains for the protesters were the members of the Board of Inquiry established by the EPA acting under modern legislation.

You'll never guess what these Board of Inquiry twits did. They didn't just listen to scientific evidence about the impact of nitrates on water quality, they took it seriously. Result: nitrogen leaching caps that will devastate farming, according to Irrigation NZ, a lobby group.

So the dam has been killed twice. Once because the numbers didn't stack up even before the environmental issues were determined, and then again a second time to preserve water quality.

Its pretty odd that a twice-killed dam is still not quite dead. Must be some kind of zombie.

Since this is Ruataniwha, maybe there are two monsters involved somewhere. If so, one of them is surely the urea business, which has gulled farmers into thinking that nitrogen can only arrive on the back of a truck. These farmers say "We can't farm under those leaching limits". And its true: they can't. But the real limit is in their minds - others can and do farm successfully and profitably with minimal nitrogen leaching.

I'm not sure what the other monster is. Maybe those laying the astroturf for this protest?

Friday, 20 June 2014

Milk price volatility

Commodity markets have volatile prices, and its natural to seek ways of hedging the resulting risks. But you can't hedge without a counter-party. This is why retail electricity competition is weak in NZ - none of the big guys want to hedge because they are already on both sides of the market (vertically integrated, with generation and retail divisions).

What about milk? These prices don't move so quickly, but they're still very volatile as the chart shows (using GDT data). These global prices feed into the wholesale prices paid to farmers in New Zealand, and of course into the prices paid by domestic dairy processors.

Fonterra's milk price manual is set up this way. The farmgate price is (very roughly) the global price minus the cost of processing in NZ, with the calculation being made after-the-fact.

All milk is paid the same price in a season, but expectations about that price change through the season.

The obvious hedging mechanism is one I was promoting a few years ago. It involves hedge contracts between farmers and domestic dairy processors. A simple market would discover the price that suited most people: lots of parties & counter-parties would basically help each other out - end of story. I'm not going to blame Fonterra for killing off this plan, but they certainly made it clear that they wouldn't help in any way.

Now Fonterra has its own scheme, called the Guaranteed Milk Price (GMP). I don't like it because Fonterra is the only counter-party. This has two big weaknesses.

  • One is that Fonterra's executives are basically gambling with shareholder funds. As a shareholder, I'd much prefer them to be busy finding new ways to add value to our product. If they want to gamble, they should do it in their own time with their own money.
  • But also, this approach shuts out lots of other innovative smaller scale domestic processors who might greatly benefit from a fixed price.

Now I can see why Fonterra might want to make life hard for smaller scale domestic processors, but its less obvious that this is consistent with other goals one might have. Small scale dairy processors could add a lot to New Zealand's culture and economy. We do have some, but it looks like a small and marginalised sector when compared with the dominance of dairy in our agricultural production.

So maybe this is an agenda item for the upcoming review of the legislation governing Fonterra?

Wednesday, 4 June 2014

Soil carbon links

A few links for anyone interested in how farmers can sequester carbon in their soil.

First, some recent NZ research that found that stocks of carbon and nitrogen in the soil vary with land use. In their paired samples, dairy farming was found to deplete these resources while other pastoral grazing had no significant effect over time. This is the kind of work that I reckon should be used to compare "normal" dairying with the biological farming that is being steadfastly ignored by DairyNZ and by those receiving large research grants from the public purse.

A well-documented investigation by the UK Soil Association in 2009 supports the view that farming practices can sequester large amounts of carbon dioxide. Their meta analysis of matched comparison studies across many countries suggests carbon stocks are around 20 - 25% higher in biologically farmed soils.

Finally, Soil Carbon Cowboys is a short (12min) video outlining the practices of three USA farmers. Kiwis might smirk at the radical concept of "paddocks" but these guys are building soil rapidly (h/t John King).

Monday, 2 June 2014

Carbon farming

There will surely be gasps as people read the Greens' carbon tax proposal, especially from those who emit lots of bad air.

The first-resort counter-argument is that NZ's emissions are a drop in the ocean so we don't matter, so we don't have to do anything. Or in plain English "this is a global problem - we don't give a shit".

Fair enough, but there are counter-arguments. Relative to a carbon tax, the benefit of doing nothing is that everyone gets a quiet life - business as usual if not more so. Costs include...
  • Less innovation in low-carbon technology. The proposed taxes certainly would stimulate innovation in New Zealand and that innovation might end up having value in some international market.
  • Demand-side risk, such as the possibility that some valued trading partners might one day stop buying from us because they don't like our production methods.
I look forward to hearing views on this trade-off/social-choice (evidence would be even better!). But my current view is that I'd prefer the proposed tax even though (as dairy farmers) we'd be paying it. Here's why. 

Firstly, the level seems about right. The proposed tax works out to a bit under 2% of revenue depending on how efficient (pdf) dairy farmers are. 

That's about $12,500 for a 100,000 kgms farm. Far from crippling, but certainly enough to notice and worth responding to, so a fairly sensible tax rate I reckon. Others will no doubt argue: "we can't do anything about it". But that's just a truism, isn't it? Anyone who says they're helpless is in fact helpless, by definition. 

Last week we put a mob of cattle onto a hill block containing literally tonnes of feed. We were back there yesterday, and 3/4 of the mob were away off over-the-back, stuffing themselves full. The rest were hanging around the gate mooing and making out they were starving. We tried to help them by coaxing/shooing them up towards the food. My point is that even if there is a lot of mooing at the gate, there will also be quite a few innovators looking for opportunities.
What would such dairy farmers do if faced with a carbon tax? That's easy: we'd ask DairyNZ* how to reduce emissions and whether we could get paid to sequester carbon in the soil. DairyNZ won't have a clue of course, but they'll be obliged to find out. So we'll start to get research funds directed that way, which will lead to innovation, etc.

Directing effort this way is broadly efficient unless you are a climate change denier. It seems a huge improvement on the current practice for allocating research funds at the agriculture/climate nexus, which looks more like corporate welfare to me.

Also, the mooing-at-the-gate-mob might eventually realise that there is actually food out there. Higher farming profits are available from a more nature-centric way of farming, and it will also help with that whole "townies-hate-us" issue. Here for example is what the Soil Science Society of America says about the wider benefits of sequestering soil organic carbon (SOC).
Soils gaining SOC are also generally gaining in other attributes that enhance plant productivity and environmental quality. Increases in SOC generally improve soil structure, increase soil porosity and water holding capacity, as well as improve biological health for a myriad of life forms in soil. In general there is a favorable interplay between carbon sequestration and various recommended land management practices related to soil fertility (e.g., adding mineral fertilizers, manures, sludges and biosolids), tillage, grazing, and forestry.
Recommended agronomic, grazing land and forestry practices also enhance land sustainability, wildlife habitat and water quality. In most locations, especially environmentally sensitive settings, these practices also result in decreased water and wind erosion that degrade soil carbon stocks. The same positive relationship that exists between carbon sequestration and recommended land management can, in some settings, improve water quality and aid wildlife habitat restoration.
In saying all of this, I am of course assuming goodwill on the part of the Greens and any government they are part of. They could just impose the tax and do nothing about the potential upside with sequestration. 

* I've been monitoring DairyNZ for the number of results for searches on "legume" and "urea" on their website. This is an indicator of whether DairyNZ cares much about alternative ways of delivering nitrogen. The search function has now been removed from the DairyNZ website (gee thanks) so I had to use google to search within the site this time. Results followed the time-honour pattern though: Legume = 73 hits, Urea = 1520 hits. This shows just how much DairyNZ's work is captured by or at least just strongly sympathetic to the fert industry. They seem to have zero interest in other farming systems.