by frog
With Labour’s announcement about bringing forward the ETS there has been a bit of hype about what that means. John Key talks about it as if the ETS is like throwing our dairy industry to the wolves with similar comments by others.
There has been a lot of rhetoric but few hard figures. How much impact will this have on the dairy industry?
Luckily for the quality of debate in this country, the Ministry for the Environment knows the answer to that:
The cost of emissions for farmers will depend on a range of factors including the size of the farm, the farm type, and the intensity of operations. Initial analysis suggests that in 2015, at a carbon price of $25/tonne CO2-e, farmers will face the following costs on average:
around 2.5 cents per kilogram of milk solids
Yes, you read it right. 2.5 cents. How much does a farmer get for selling a kilo of milk solids? $8!
The first person to tell me what percent 2.5 cents is of $8 gets a green star.
Published in Environment & Resource Management | Featured by frog on Tue, May 24th, 2011
Tags: climate change, ETS
on the trolls and those who are unable to keep on topic
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@DracoTBastard says “Better question: How much will it save us?”
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@Steve W: agreed.
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I’ve proposed before an enviro star rating system that grades each farm. they must display their rating at the gate for all to see and those with a 5star rating get their goods marketed and sold at a premium.
The current system gives zero incentive to do any better than the minimum and seems to do little to penalise those who don’t even bother with that.
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Samiam, good idea, Fonterra claim they do something like this already http://www.fonterra.com/wps/wcm/connect/fonterracom/fonterra.com/Our+Business/Sustainability/Water/ but judging by the disastrous record in Southland when almost half of those checked recently were found to be seriously non compliant http://www.stuff.co.nz/southland-times/news/5011760/Farms-face-legal-action-for-effluent they are not very effective. Fonterra also claim they are working towards carbon neutrality but don’t seem to have factored in their use of lignite to power their largest factory in Edendale.
The number of milk tankers rumbling along Southland roads has also increased dramatically but the funding to maintain them has dropped as the government focusses on Nth Island motorways. I’m not sure what the dairy industry does to compensate road deterioration considering they contribute much of the heavy traffic on our rural roads.
Consumer have also done some research on the inflated cost of our domestic dairy products compared to overseas http://www.consumer.org.nz/reports/dairy-prices
The external costs of the dairy industry that are being shouldered by the taxpayer are considerable and we are basically subsidizing the industry to a huge degree. Even Bill English admitted that they need to deal with tax avoidance in the industry. Why should the tax payer subsidize the Fonterra’ CEO’s $4,000,000 pay and $250,000 tax cut and the dairy farmers’ retirement packages? Bring them into the ETS and make them pay their 2.5 cents for each Kg of milk solids and ignore their crocodile tears!
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Hmm, by my calculations that makes it about 0.3%.
0.3125% to be precise.
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If it truly is 2.5 cents, I think the most significant way to look at it is to consider how much the milk price fluctuates (it fluctuated by 60 cents/kg in February), and consider the 2.5 cent/kg change next to that. You’d think that if farmers can absorb 60c increases and decreases they’d be able to absorb a 2.5c increase.
Something that bothers me, though, is that if the cost truly is that insignificant for something we believe to be a major emitter of carbon, then why should we ever expect farmers to seriously change the way they do things? That’s ultimately what this is about, right? To create an incentive to research and use cleaner methods? Something doesn’t seem quite right to me.
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Lats wins!
@MikeM yes, it IS insignificant, isn’t it. National’s ETS really is that weak (in 2015. It gets stronger veeeery slowly over time. The free credits stop being handed out in 2090) and with those sorts of incentives we shouldn’t expect farmers to make any real changes.
It’s a lame duck, but Federated Farmers etc are all up in arms over it anyway.
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Good point, I’d forgotten it was National’s revised ETS.
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Thats a lot but i agree with MikeM
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Does the 2.5 cents include the cost of the CO2 emissions from the diesel fuel used on the farm and in farm-related transport?
Trevor.
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Sex munce ago I coudnt even spell farma and now i are one.
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No that’s only on methane emmissions. Emmissions on power, fuel, and ferilizer etc is in addition to that.
If it’s only 0.3% of payouts, and Labour reckon that will generate $800m in two years, then that means they think NZ farming will earn $266 billion in two years (yet Fonteras latest annual revenue was $16b).
And yet again we have the Greens seemingly confusing turnover with what farmers actually make (Fonterra recently made a 4% profit on it’s turnover, so even very small diffferences in costs can make a huge difference in profitability).
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Dear Helena, malappropraitely yours!
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@photonz1 10:43 PM
You really do need to try harder to accurately quote from reports photonz1. The 2.5 cents per kg includes both methane and nitrous oxide emissions, the latter of which substantially arises from fertiliser usage (as well as effluent).
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One way farmers can reduce their methane emissions is by filling in their wetlands and mangrove estuaries.
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Toad says “You really do need to try harder to accurately quote from reports photonz1. The 2.5 cents per kg includes both methane and nitrous oxide emissions, the latter of which substantially arises from fertiliser usage (as well as effluent).”
After listing the costs per kg of milk solids, the report says
“Nitrogen fertilisers are ALSO likely to increase in cost by
about $14 per tonne of nitrogen.”
AND
“They [the costs] do not include pass-through
costs from energy and fossil fuel use, or direct onfarm
energy and fossil fuel use.”
There’s some accurate quotes for you, that confirm exactly what I said – the costs do not include emmissions for energy generation, fuel, and fertilizer.
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Perhaps the enviro star idea samiam proposes could be tied to the actual return as a percentage. The less pollution produced per KG of milk solids, the larger the payout. I believe the funds are already pooled. This would require better monitoring, which needs to happen anyway.
It should be aggressive enough to actually make the worst polluting farmers go out of business. This would also avoid costly court cases that aren’t occurring to a degree to curb pollution anyway. It would also balance the fact that it’s currently more profitable to produce milk in environmentally damaging ways. Could be a solution to the problem MacDoctor raises as well. How sorry for farmers should we feel when a small block of cheese costs that much?
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I see someone gave my idea a thumbs down. Do tell, please what your objection is? I’m genuinely curious.
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@samiam 1:16 PM
Probably was a climate change denying lurker. I got one for challenging photonz1 on his assertion that it was only methane emissions and not nitrous oxide covered by the 2.5 cents.
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I received a thumbs down for asking what I thought was a perfectly reasonable question which has triggered some sensible debate. Why?
I am not clear from the above posts whether NOx emissions from farms are covered in the 2.5 cents. These are in addition to the costs of the nitrogen fertiliser, which arise due to the release of CO2 from the conversion of fossil fuels (normally natural gas) into ammonia, whereas the NOx emissions come from the breakdown of that fertiliser.
Trevor.
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This is a good topic. I never knew farmers where paid that low for milk solids.
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Trevor29, well I liked your question – so I tried to correct the damage! Good discussion though. Farmers pay the ETS charges already on all fuel and electricity consumed in production and transport – we all do (even farmers!). The ETS is an “all sectors, all gases” scheme, so in theory Nitrous Oxides, methane etc would be covered if farmers enter the scheme as direct participants. I’m not 100% sure, but I think fertilisers also are already levied to at least some degree for emissions from their manufacture, but I’d say the NOx’s are still not covered (and I guess they’re pretty hard to put a finger on at present). I agree with the person who mentioned about being fair to look at farmers’ actual net income rather than gross. You could imagine spending a million dollars (well, MAYBE you could imagine it!) in a year buying stock, seed, fertiliser, fuel etc etc, then having a really bad weather event and losing enough stock that you “only” make $900,000 back. So, $900,000 sounds like a huge income – but not if you spent $1 million to make it! That’s an extreme example, of course, but it kind of illustrates the point that you have to be careful to sort out your gross from your net income! Whether all that means that 2.5c per kg milk solids is a lot or negligible, I wouldn’t have a clue.
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As to the 2.5 cents per kilogram impost from bringing the ETS charges of 2015 forward to 2013 and its impact on farm profitability:
Farm operating income and costs
Milk income is received on a monthly basis but spread up to 15 months after supply, providing regular cashflow and helping moderate payout fluctuations from year to year. Each season’s milk income will vary largely according to international commodity prices, the exchange rate between the NZ and US dollar, and the processing company’s profitability.
Milksolid returns to farmers show income has increased on average by 3.5% (13 cents/kg Milk solids per annum since 1983). Taking the trend for this line, plus adding returns from the sale of surplus stock, gives sustainable forecast incomes of $5.25 to $5.75/kg Milk solids. Typical operating costs (South Island) range from $3.30 to $3.80/kg Milksolids. The operating margin therefore ranges from $1.50 – $2.50 per kilogram of Milksolids.
http://www.myfarm.co.nz/factsreturns
Fonterra is paying out $8 a kg for this year and forecasting over $7 for the following year. And generally the expectation would be of future returns over $6.
The trend is for rising operating margins.
The problem in the 2008/9 year (the one where half farms did not declare profits) was the high interest rates – farmers pay their mortgage cost out of their operating margin and only then is there a taxable profit.
Since 2001 interest payments on the average New Zealand dairy farm mortgage over land and buildings, livestock, plant, machinery, vehicles and Fonterra shares has increased from 60c a kg to $1.52kg.
Note the lower range for operating profit is $1.50 a kg.
In 10 years farm debt has increased from 10 to $40B – and thus many farmers have a rising capital risk exposirie to their farming operation. This more than low operating profits is the problem for dairy farming.
So indebted dairy farmers are now dependent on $6 per kg for a taxable income.
The average tax for a farm was $30,000 over the past 10 year – so about $90,000 profit. The profit on the average dairy farm is often higher than for other farms, especially in good payout years.
On an average dairy farm there would be about $5000 ETS tax impost at 2.5 cents a kg.
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As to the 2.5 cents per kilogram impost from bringing the ETS charges of 2015 forward to 2013 and its impact on farm profitability:
Farm operating income and costs
Milk income is received on a monthly basis but spread up to 15 months after supply, providing regular cashflow and helping moderate payout fluctuations from year to year. Each season’s milk income will vary largely according to international commodity prices, the exchange rate between the NZ and US dollar, and the processing company’s profitability.
Milksolid returns to farmers show income has increased on average by 3.5% (13 cents/kg Milk solids per annum since 1983). Taking the trend for this line, plus adding returns from the sale of surplus stock, gives sustainable forecast incomes of $5.25 to $5.75/kg Milk solids. Typical operating costs (South Island) range from $3.30 to $3.80/kg Milksolids. The operating margin therefore ranges from $1.50 – $2.50 per kilogram of Milksolids.
http://www.myfarm.co.nz/factsreturns
Fonterra is paying out $8 a kg for this year and forecasting over $7 for the following year. And generally the expectation would be of future returns over $6.
The trend is for rising operating margins.
The problem in the 2008/9 year (the one where half farms did not declare profits) was the high interest rates – farmers pay their mortgage cost out of their operating margin and only then is there a taxable profit.
Since 2001 interest payments on the average New Zealand dairy farm mortgage over land and buildings, livestock, plant, machinery, vehicles and Fonterra shares has increased from 60c a kg to $1.52kg.
Note the lower range for operating margin is $1.50 a kg.
In 10 years farm debt has increased from 10 to $40B – and thus many farmers have a rising capital risk exposirie to their farming operation. This more than low operating margins is the problem for dairy farming.
So indebted dairy farmers are now dependent on $6 per kg for a taxable income.
The average tax for a farm was $30,000 over the past 10 year – so about $90,000 profit. The profit on the average dairy farm is often higher than for other farms, especially in good payout years.
On an average dairy farm there would be about $5000 ETS tax impost at 2.5 cents a kg.
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The short answer is $5000 for the average dairy farm.
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SPC, that’s a verty “illuminating” set of facts! I didn’t know any ofthat stuff. Thanks.
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Great work SPC, thanks!
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