Risks and benefits to New Zealand agriculture of increasing organic production

Abstract

This thesis has examined a means of increasing returns to the agricultural sector of New Zealand. This is through specialising in high value production and the example this study uses is organics. The organic sector is growing both domestically and internationally and has potential to raise New Zealand producer returns. The thesis addresses a major issue to producers who may want to convert to organics, what the likely costs and benefits of organic production are, and what are the risks associated with conversion. The influence of the conversion period that is required before produce can be sold as organic, is important for during this time returns may well be lower due to possible higher production costs without the higher returns that can be attained for organic products.

The thesis evaluates historical, current and potential market opportunities in New Zealand and overseas associated with organic production. In addition the differing costs and quantities of production associated with organic techniques are assessed, and the resultant impact of these on producer returns. As well as examining the risks of potential increased production costs, the history of market premiums and their likelihood of continuance is also assessed. This information is used to assess potential scenarios relating to future development of the sector.

Twelve model simulations were carried out to reflect current and potential trade conditions, as well as a worst case scenario for New Zealand. The simulations were then analysed to assess the costs and benefits by identifying producer returns. The simulations were carried out on the Lincoln Trade and Environment Model (LTEM), a partial-equilibrium trade model that includes the main countries and commodities relevant to New Zealand.

Results from the modelling have shown that New Zealand is well placed to increase producer returns through increasing organic production - in the simulations, production shifted from 1% to 7%. However, the value of these returns was greatly influenced by the presence of a price premium for organic goods, and that this premium was generally existent through international markets. Secondly, increased production costs for organic produce increased returns to organic growers if all growers' face relatively similar increased production costs. If increased costs are borne by only a small fraction of producers, then those growers' returns decline due to a lowering of competitiveness.

The organic sector needs to be at a proportion near to 7% to positively influence producer returns for the agricultural industry. At 1% its contribution is too slight to influence the total industry's returns. In the worst case scenario where New Zealand increases production and the world remains at a low level, combined with price premiums for organic produce only being available in New Zealand, gave relatively static results, indicating that the risks of increasing organic production to New Zealand producers are low.