What's in store for ag sector?

The changes to recommendations initially put forward by He Waka Eke Noa are largely aligned with the Climate Change Commission (CCC) recommendations.

The Government proposal is less favourable to agriculture than the proposal initially put forward by He Waka Eke Noa as it provides less certainty for emissions price levels, it does not allow for the industry to be directly involved with the process to recommend emissions pricing to Government, and rewards less on-farm sequestration.

The methane price is very dependent on how quickly emissions can be collectively reduced by the agricultural industry.

Unfortunately, this does not provide individual agricultural businesses with much certainty as to what their future liabilities will be.

If emissions are quickly reduced, the price will not need to be ratcheted up.

It is clear the proposal is less favourable for our sheep and beef farms. This sector tends to generate greater methane emissions relative to the value of the production than the dairy industr and the level of profitability in this industry tends to be lower.

The sheep and beef sector stood to gain the most from the proposal to reward a wider range of on-farm vegetation as these farms tend to have unproductive areas, such as gullies, which could be planted in trees.

These factors, combined with the high carbon prices, will continue to incentivise land-use change towards planting trees that can generate carbon credits, particularly pine trees.

Unfortunately, we are yet to see any policies that encourage small areas of land to be planted in trees, which could help to keep the more productive parts of farms producing food and fibre.

The Government proposal for pricing is agricultural emissions is now due to be approved by Ministers in early 2023, rather than late 2022 as initially proposed. The Government has also put in place back-up measures should the systems to price emissions at the farm level not be ready by 2025.

This involves pricing emissions at the processor level, which again is likely to be less favourable for the sheep and beef sector.

A blanket reduction in farmgate prices is likely to occur, which would do little to incentivise changes in on-farm practices.

Pricing emissions at the processor level is expected to have a greater impact on both farm profitability and land-use change than pricing emissions at the farm level. Under a processor level levy there is expected to be a 20% decrease in land used for sheep and beef farming, and up to a 5.7% decrease in land used for dairying according to the modelling by MPI.

Government modelling indicates there will be significant decreases in agricultural production. Depending on the scenario, the decreases expected could be as great at 9.8% for milksolids, 23.6% for lamb and 65.4% for beef.

The arable, horticulture and forestry sectors are expected to benefit from the proposals due to land-use change.

In summary, the Government proposal was largely as expected. There will be significant change in our primary sectors as the impacts of pricing agricultural emissions are taken into consideration.

Dairy and meat production will decrease, but this will provide some opportunity to increase the average value of these goods. Production of horticultural goods and arable goods is expected to increase, but this will require significant additional investment.

Susan Kilsby is an ANZ agricultural economist.

Article first appeared in ANZ Agri Insight.