NZ Farmer - Taxing farmers for water has many hidden costs

In an opinion piece for NZ Farmer Pita Alexander, an agribusiness consultant writes:

Some hard numbers are needed before we rush into placing a water tax on farmers, or for that matter, any other water user.

In the interests of weighing up the pros and cons and the costs and benefits, let's try and keep away from the politics and just focus on some facts, comments and suggestions.

One of the first rules of good planning and policy reform in any government is to ensure it does not impact badly on parties being asked to pay for the policy. The jury is well and truly still out on this point and there is almost certainly a hung jury.

Usually it is hard to argue against a user pays policy - but when we are going to possibly impact the second largest industry in a country, and probably affect 100,000 people and a big slice of a country's export earnings, we need to think, plan, and communicate the issues clearly, slowly, fairly, and simply. Let's get the direction right and worry about the speed later.

Don't start thinking that the user pays principle answers everything. Often user pays works well in theory but in practice it is another story. In New Zealand there are well-accepted strong cases when it doesn't apply and is never going to apply such as hospital, police, education and welfare services.

If we worked on a broadbrush estimate of two cents a cubic metre to buy water throughout New Zealand on a user pays basis, we would end up in the following ballpark area - and I emphasise the word ballpark - a yearly rate for these typical operations:

- A residential water cost of $73 a household (two cents is less than many people are paying now).

- An irrigated dairy farm cost of $43 a cow (9.6 cents a kilogram - $140 per hectare).

- A cropping farm cost of $120/ha irrigated.

- A sheep and beef farm cost of $100/ha irrigated.

Don't get too hung up on the specifics - it's the principles that will count - as the differences from farm to farm and soil type to soil type would be enormous.

The issue of exporting fresh water from New Zealand is a separate one. It seems logical to sell this water at the current market price and the cost for that water would be well above two cents per cubic metre.

Only about 6-9 per cent of farmers are actually involved in irrigation, but we can see that they would represent much more than 6‑9 per cent of the total output.

It seems to be forgotten that before the first litre of irrigation water is applied, farmers have spent at least $1 million on infrastructure to use the water.

The ongoing annual costs involved with farm irrigation also never end. The true cost of irrigation water so far does not, at this point, include an actual water cost and thank goodness it doesn't as just getting to turn the irrigation tap on for the first time almost swamps some farmers financially.

Anybody deep in dealing with financial issues with farming couples will tell you that the costs of putting in and operating an irrigation system for sheep and beef farming are quite marginal. Then couple that with the constant increase in costs such as rates and insurance, and in many cases they don't have a business - what they do have is an expensive hobby.

There will be wars around the world over fresh water and whole countries will be involved. Water is the equivalent of oil some 50 years ago. Local councils have done their best on water issues, but some key future decisions need to be made by government and only after a lot of thought and consultation. Forget about this this talk of 100-day key decisions and outcome projection.

Will a user pays system for buying water reduce the amount of irrigation water applied? Maybe a little, but not much I suspect, simply because  the soils in many cases are already being tested for how much water they need before irrigation begins. Many New Zealand irrigation systems are efficient and are getting more efficient.

It is so easy to spend money particularly if it is not yours in the first place. The real ability though is in earning it in the first place and the Government must not lose sight of this. Sometimes a helicopter view is the best view for making key decisions.

If the gross annual receipts for government from a water tax worked out to be about $100 million then our Treaty of Waitangi group would perhaps apply a minimum of 10 per cent investment factor to this and there would possibly be a capital purchase cost for government of about $1 billion before they even got started. There would be several approaches Government could take to deal with this, but one way or the other it will bring about another layer of costs. Do your own homework but my advice is to use your largest calculator.

During my talks to farming conferences in New Zealand and Australia, I am often asked what the true return for a farming couple on their farming investment is after all expenses, including a fair management salary. The answer on average is 1-4 per cent depending on their farm type, ability and scale.

What is the point here? The point is that farm profitability is limited and the ability of farmers to keep absorbing business cost increases is also limited.

A water tax is not the only risk our agricultural industry faces over and above normal non-agricultural businesses. Among others are environmental regulations for nitrates/effluent, climatic changes, the Emissions Trading Scheme, synthetic milk and meat, interest rate increases because of low profits and high debts, farm labour issues, the collapse of the strong wool industry, price volatility in China and the after effects of Brexit.

But a water tax is up among them for the big challenges farmers face.

Agriculture has laid many golden eggs for New Zealand for a long time. User pays is in theory a sensible approach, but don't put in place something where the operation is successful but the patient dies.

Pita Alexander is an accountancy and agribusiness director at Alexanders.