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.
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.
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 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 farmgate
- 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 capital-intensive 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.
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 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.
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
The following Table 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.
Covered crops is a capital-intensive business. A one-hectare 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.
- 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).
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: TomatoesNZ