Cov­ered crops are thriv­ing un­der the eco­nomic radar

The va­ri­ety and qual­ity of cov­ered crops has in­creased dra­mat­i­cally over the past 10 years in New Zealand.

NZ Grower - - Contents - By Chris Nixon

Be­hind th­ese prod­uct im­prove­ments is a thriv­ing in­dus­try that has not only in­creased its scale but di­ver­si­fied its prod­uct range. Anal­y­sis by the NZIER shows that the in­dus­try is now worth ap­prox­i­mately $295 mil­lion and con­trib­utes $120 mil­lion to the econ­omy at the far­m­gate.

While larger in­dus­tries grab most of the head­lines (with good rea­son) they do not por­tray the full New Zealand story of a de­vel­oped econ­omy in ac­tion. The NZIER in a re­port to Toma­toes NZ and Veg­eta­bles NZ set out to il­lus­trate their im­pact on the New Zealand econ­omy of cov­ered crops by pro­vid­ing es­ti­mates of the eco­nomic im­pact of cov­ered crops. The re­port ex­am­ined toma­toes, cap­sicums, cu­cum­bers, egg­plant, herbs/mi­cro­greens/sprouts/other, and let­tuce.

Why is this im­por­tant to un­der­stand?

Those con­cerned with New Zealand’s eco­nomic, so­cial and en­vi­ron­men­tal progress are in­ter­ested in all forms of durable eco­nomic ac­tiv­ity whether prod­ucts are con­sumed do­mes­ti­cally or ex­ported. Fur­ther, we are in­ter­ested in in­dus­tries that are thriv­ing and sneak­ing un­der the eco­nomic radar. Why?:

• We need to un­der­stand how th­ese in­dus­tries in­ter­act with the reg­u­la­tory sys­tem. How in­dus­tries are reg­u­lated im­pacts on their abil­ity to thrive

• This is oc­cur­ring in a sit­u­a­tion where the politi­cians, pol­i­cy­mak­ers, and the gen­eral pub­lic have lim­ited un­der­stand­ing of how th­ese in­dus­tries op­er­ate and the con­tri­bu­tion they make to so­ci­ety

• All in­dus­tries have the po­ten­tial to add to the de­vel­op­ment and con­tin­ued eco­nomic per­for­mance of New Zealand. This is par­tic­u­larly im­por­tant in the re­gions

• In­no­va­tion can come from any­where. Small in­dus­tries can be­come large in­dus­tries over time and tech­niques/pro­cesses de­vel­oped

in small in­dus­tries can have gen­eral ap­pli­ca­tion

• Smaller in­dus­tries can add va­ri­ety in terms of business prac­tice and types of prod­ucts pro­duced that en­hance con­sumer well be­ing

• It demon­strates that glob­al­i­sa­tion touches all busi­nesses. Pop­u­la­tion growth and in­creased tourists have boosted earn­ings of what is mainly a do­mes­tic in­dus­try.

Fig­ure 1 sets out the mar­ket­ing chan­nel for cov­ered crops. In the do­mes­tic mar­ket the su­per­mar­ket chains dom­i­nate the mar­ket­ing chain. Dif­fer­ent busi­nesses have re­acted with dif­fer­ent strate­gies to this mar­ket struc­ture. Some busi­nesses have grown and some smaller busi­nesses have ex­ited the in­dus­try.

Those smaller busi­nesses wish­ing to re­main in the in­dus­try are ac­tively di­ver­si­fy­ing into niche mar­kets and de­vel­op­ing prod­ucts that other big­ger en­ti­ties can­not repli­cate on a con­sis­tent ba­sis. The days of grow­ing small amounts of a bog-stan­dard prod­uct that oth­ers can eas­ily repli­cate on a big­ger scale are long gone.

With con­sumer growth, op­por­tu­ni­ties have also arisen for niche play­ers (some­times with fur­ther pro­cessed prod­ucts) who in some in­stances have de­vel­oped their own path to mar­ket. This type of mar­ket­ing strat­egy is based on cul­ti­vat­ing strong re­la­tion­ships be­tween buyer and seller.

Cov­ered crops are a vi­brant do­mes­tic in­dus­try

The first thing that strikes you about cov­ered crops is the vi­brancy of the in­dus­try. Fu­elled by pop­u­la­tion growth, in­creased con­sump­tion per head, and in­creased tourist num­bers the in­dus­try is in a buoy­ant state. Vol­ume growth for most crops has been be­tween 2% and 6% per an­num over the past five years. For some grow­ers, plans for ex­pan­sion are un­der­way. >

The first thing that strikes you about cov­ered crops is the vi­brancy of the in­dus­try. Fu­elled by pop­u­la­tion growth, in­creased con­sump­tion per head, and in­creased tourist num­bers the in­dus­try is in a buoy­ant state.

The fol­low­ing sets out a snapshot of cov­ered crops in­dus­try per­for­mance:

• The cov­ered crops in­dus­try con­trib­utes $120 mil­lion to the New Zealand econ­omy in GDP terms. This is based on in­dus­try turnover of $295 mil­lion at the far­m­gate1

• Other cov­ered crops (ex­clud­ing toma­toes), com­pris­ing cap­sicums, egg­plant, cu­cum­bers, let­tuce, and herbs/mi­cro­greens/sprouts/other, con­trib­ute $71 mil­lion in GDP terms, based on far­m­gate turnover of $175 mil­lion

• Toma­toes con­trib­ute $49 mil­lion to GDP, based on far­m­gate turnover $120 mil­lion

• The cov­ered crops in­dus­try gen­er­ates ap­prox­i­mately $35-$40 mil­lion of ex­ports to the rest of the world. This does not in­clude cov­ered crops sold to cruise ships or to tourists in New Zealand (a driver of niche prod­ucts)

• Cov­ered crops are a cap­i­tal­in­ten­sive business. As an ex­am­ple, de­pre­ci­a­tion on cap­i­tal equip­ment (a proxy for cap­i­tal con­sump­tion in the sec­tor) over the past ten years equates to ap­prox­i­mately $163 mil­lion.

This is an im­por­tant in­dus­try for New Zealand, at­tract­ing sta­ble jobs and skills in a grow­ing mar­ket for cov­ered crop prod­ucts. It makes im­por­tant con­tri­bu­tions to GDP and gen­eral well­be­ing through the em­ploy­ment it pro­vides, ex­ports it makes, and an in­creased use of tech­nol­ogy.

How the eco­nomic ben­e­fit rip­ples through the econ­omy

We have used an ap­proach that demon­strates how the in­dus­try in­ter­acts with the rest of the econ­omy. The real strength of this ap­proach Ta­ble 1: Far­m­gate, con­tri­bu­tion, em­ploy­ment (FTEs) and ex­ports March year 2017 Ta­ble 2: Con­tri­bu­tion of tomato and cov­ered crops in­vest­ment in New Zealand Per an­num ba­sis, March year 2017 is that it gives a re­al­is­tic view of the eco­nomic ac­tiv­ity that the cov­ered crops in­dus­try con­trib­utes to New Zealand.

The im­pact of the cov­ered crops sec­tor can be mea­sured by changes in, for ex­am­ple, the pro­duc­tion and its value. Th­ese changes have ef­fects that are felt all along the sup­ply chain and ‘rip­ple’ out­wards to af­fect the rest of the econ­omy.

The con­nec­tions be­tween the cov­ered crops sec­tor and ‘fac­tor mar­kets’ (land, labour, cap­i­tal, en­ergy) also need to be con­sid­ered. For ex­am­ple, cov­ered crops com­pete with other sec­tors to draw in labour from house­holds, and de­liver wages that will be spent by house­holds on a range of goods and ser­vices.2

If the cov­ered crops sec­tor ex­pands, it is likely to use more labour, cap­i­tal, and land, which re­sults in less be­ing avail­able for other eco­nomic ac­tiv­ity. Al­though, for cov­ered crops, lo­ca­tion and cap­i­tal are pos­si­bly more im­por­tant fac­tors than com­pe­ti­tion for other land types.

All of th­ese sup­ply chain, fac­tor mar­ket and rip­ple ef­fects need to be taken into ac­count when de­ter­min­ing the eco­nomic im­pact of the sec­tor.

The de­vel­op­ment of ba­sic in­dus­try facts

Ta­ble 1 sets out the im­pact of the cov­ered crops in­dus­try on the econ­omy. The econ­omy ben­e­fits from cov­ered crops by $120 mil­lion once you strip out the yearly run­ning costs. The es­ti­mates are set out in to­tal and be­tween toma­toes and other cov­ered crops.

Ex­ports are rel­a­tively small with the main fo­cus be­ing on the grow­ing do­mes­tic mar­ket. In value terms, the to­tal far­m­gate re­turns are ap­prox­i­mately $295 mil­lion, this in­cludes $35/$40

mil­lion of ex­ports de­pend­ing the year. Ex­ports vary de­pend­ing on the sup­ply and de­mand con­di­tions in New Zealand and over­seas. Strong do­mes­tic sales have made it hard to pre­dict likely ex­port volumes.

The num­ber of busi­nesses in the in­dus­try are in­creas­ing re­flect­ing a grow­ing in­dus­try. The in­dus­try cre­ates ap­prox­i­mately 2,400 jobs and pro­duces in­come of ap­prox­i­mately $53.3 mil­lion. This in­cludes grow­ers en­gaged in han­dling, pack­ing and trans­port to wharf or mar­ket.

As Ta­ble 2 shows, cov­ered crops is a cap­i­tal-in­ten­sive business. A one­hectare glasshouse can cost as much as $2 mil­lion dol­lars, while plas­tic cover­ing costs vary de­pend­ing on the tech­nol­ogy used e.g. the num­ber of lay­ers of plas­tic used. Th­ese cov­ers, de­pend­ing on the length, can be as much as $10,000 each. In a grow­ing mar­ket fur­ther ex­pan­sion comes at a sub­stan­tial cost. We es­ti­mate that to­tal in­vest­ment per an­num is ap­prox­i­mately $16.3 mil­lion per an­num for the whole in­dus­try or 0.06% of to­tal in­vest­ment in New Zealand.

For ev­ery ex­tra $1 in in­come gen­er­ated by the cov­ered crops in­dus­try, at least a fur­ther $1.50 is gen­er­ated for other busi­nesses. For ex­am­ple, the in­dus­try:

• Pro­vides work for com­pa­nies that sup­ply glasshouses and cov­ers, fer­tiliser, and main­te­nance ser­vices for cov­ered crops op­er­a­tions. They pro­vide jobs and in­come over and above the di­rect con­tri­bu­tion of the cov­ered in­dus­try

• Is a sta­ble and grow­ing in­dus­try which pro­vides a sig­nif­i­cant con­tri­bu­tion to­wards di­ver­si­fy­ing the New Zealand econ­omy

• Helps to di­ver­sify the rev­enue sources for com­pa­nies in­volved in agri­cul­ture and hor­ti­cul­tural in­dus­tries. We es­ti­mate the in­di­rect flows at $175 mil­lion (in­ter­me­di­ate con­sump­tion). This in­jects the fol­low­ing spend­ing into the New Zealand econ­omy:

• Pack­ag­ing ($17 mil­lion)

• Heat­ing, in­clud­ing elec­tric­ity, coal, gas ($34 mil­lion)

• Fer­tilis­ers and pes­ti­cides

($18 mil­lion)

• Sup­port ser­vices such as freight ($49 mil­lion)

• Other ser­vices in­clud­ing equip­ment hire, stor­age and ware­hous­ing, and other ($57 mil­lion).

Trans­port is also a sig­nif­i­cant part of the in­di­rect flows. The cov­ered crops in­dus­try is highly de­pen­dent on New Zealand’s trans­port in­fra­struc­ture. We also wanted to un­der­stand the im­pact of an ex­tra 10% in de­mand for cov­ered crops. We found that de­mand would in­crease New Zealand house­hold in­come by $17.3 mil­lion and na­tional GDP by $18.4 mil­lion.

A small vi­brant in­dus­try that as­sists in the di­ver­si­fi­ca­tion of the New Zealand econ­omy

The cov­ered crops sec­tor is a small but sig­nif­i­cant part of the di­ver­si­fied New Zealand econ­omy. Not only does it em­ploy sub­stan­tial num­bers of em­ploy­ees; the work­force is sta­ble. The in­dus­try pro­vides on­go­ing work for other busi­nesses and is an in­te­gral part of com­mu­nity.

The cov­ered crops sec­tor de­liv­ers sig­nif­i­cant on­go­ing ben­e­fits to the New Zealand econ­omy. Sig­nif­i­cant do­mes­tic de­mand has gen­er­ated value growth that has de­liv­ered ben­e­fits to a wide range of sup­pli­ers and has gen­er­ated im­prove­ments to liv­ing stan­dards. With­out the cov­ered crops in­dus­try New Zealand would have sig­nif­i­cantly re­duced em­ploy­ment, less va­ri­ety of fresh veg­eta­bles and a greater re­liance on over­seas mar­kets.

If past per­for­mance is any in­di­ca­tion, the growth in the cov­ered crops sec­tor is likely to con­tinue to be driven by fur­ther do­mes­tic per capita con­sump­tion, in­creased pop­u­la­tion growth and in­creased tourism.

Source: NZIER

FIG­URE 1 GROWTH HAS DI­VER­SI­FIED THE MAR­KET­ING CHAN­NELS

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