Dam economics revisited

The Ministry of Primary Industries (MPI) has released a new case study report (called “Waimea Plains: A freshwater quantity management case study”) on the Waimea Community Dam. This report (and all other reports from MPI) are located at http://www.mpi.govt.nz/news-and-resources/publications/.

The reports key finding are:

  • Transferable water permits (if the dam does not proceed). MPI’s economic analysis suggests an increase average annual profit of $1.2 million (or 8.6%) for the catchment, after over-allocation is phased out. These benefits relate primarily to short-term transfers in dry years, with profit being 46% higher than profit without transfers in one particularly dry year. If the dam goes ahead, there would no longer be a shortage of water and, consequently, water permit transfers would have minimal impact until the additional water is fully allocated.
  • The Waimea Community Dam. MPI’s economic analysis suggests an increase average annual profit of $2.9 million (or 20%) for the catchment. Increasing to around $15 million for the catchment (using average product prices from 2010-14), after an expansion of available irrigated land, and the conversion of unirrigated low value pasture to irrigated higher value apple crops.

The Minister of Primary Industries, Nathan Guy, has stated that the report “shows the proposed Waimea Community Dam near Nelson would deliver major economic and environmental benefits” (see https://www.national.org.nz/news/news/media-releases/detail/2015/10/08/Report-shows-major-potential-for-Waimea-dam). Adding that:

the dam would enable unirrigated pasture to be converted to higher value crops like apples and improve water quality at the same time. The report shows that building the dam would more than double the average annual catchment profit from $14.5 million to $29.5 million. This value includes an average annual benefit of $2.9 million, and up to $9.5 million in an individual year for existing irrigators from the reliable water supply the dam would provide.

The report identified the current land use mix on the Waimea plains as:

WaimeaPlainsLandUse2015

This economic analysis provides an interesting contrast to MPI’s earlier analysis of the Nelson-Tasman pip fruit industry’s financial performance between 2008 and 2012. At present, there is no 2015 analysis. The horticultural monitoring report (called “Farm Monitoring Report 2012 – Horticulture Monitoring: Pipfruit), see above link for location, stated (at page 10) that:

The Nelson pipfruit model experienced a loss before tax of $79 600 in 2011, despite increases in both gross and export yields and efforts to constrain expenditure. Low market returns for the main apple and pear varieties constrained most growers’ revenue. This negative financial result is the third consecutive year of financial losses for the Nelson pipfruit model.”

Adding (at page 12) that:

The Nelson pipfruit model is budgeted to achieve a small orchard profit before tax of $13 300 in 2012, driven by an anticipated improvement in export prices for all apple and pear varieties. Should this financial outcome be realised, it would be the first profit the model has achieved since 2008.

Pip fruit orchard model profitability for the 2008 to 2012 period (at page 14) is illustrated below:

PipFruitModelTrends2008-12

Added to the above observations on profitability, is the dependency of apple crops on exchange rate performance.

In my opinion, MPI’s economic analysis is probably more realistic than other economic assessments done on the dam (see http://www.eda.co.nz/edanew/wp-content/uploads/2014/10/NZIER-Waimea-Dam-Economic-Assessment-Report-21-October-2014.pdf). Although the significant economic benefits appear to be dependent on converting  unirrigated pastures (21% of the plains) to apples, and an expansion of available irrigated land. Hardly a significantly compelling argument for ratepayers to invest $25 million. However, an investment of $8 million to protect urban water supply, should still be given some consideration.

What I do find interesting is the analysis of transferable water rights. Something that has been lacking. The picture provided by MPI is a positive one, albeit not as positive as the gains derived from the expansion of  irrigable land. It makes me wonder if providing a mechanism to charge for water consumption on the plains as well (as has been done for urban water consumers) would ensure more efficient use of water, if the dam irrigators are unable to finance the project.

Media

(Nelson Mail) http://www.stuff.co.nz/business/farming/cropping/72832507/waimea-dam-will-benefit-apple-growers-says-primary-industries-minister

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