Practice Part C Internal Prices and Profits in resource reallocation

Hello cows, goodbye sheep 19/12/2012 Southland sheep numbers have dropped by nearly 30 per cent to 4.1 million in the past five years, compared with 19 per cent nationally, says Beef + Lamb NZ. The news comes after Statistics New Zealand released its provisional agricultural production census this week, showing national sheep numbers have dropped by 7.3 million to about 30 million since the last census in During the same period, the national dairy cattle herd has increased by 1.2 million and now stands at 6.5 million - a 23 per cent increase from 5.2 million. Beef + Lamb New Zealand economic service executive director Rob Davison said Southland was one of the fastest-growing dairying regions in New Zealand and the dairy expansion was displacing sheep and beef. In 2007, Southland recorded 5.7 million sheep which has this year dropped to 4.1 million, he said.

Dairy conversions displace sheep because they take the land that they graze, Mr Davidson said. Federated Farmers Southland dairy chairman Allan Baird said the sheep industry was not generating sufficient income for farmers, resulting in more converting to dairy. "I see it as farmers looking at the future and being realistic, and the sheep industry hasn't really performed in the last seven to eight years." With the price of lamb forecast to drop below $100, sheep farmers might look at their options for dairying, he said. Dairy NZ senior economist Matthew Newman said Southland dairy cows contributed to 8 per cent of the national herd and it was the second-fastest-growing dairying region in the country behind Canterbury. The number of dairy cows in Southland last month was about 540,000, up from 350,000 in , he said. At a milk price of $6.30, about $1.3 billion of revenue was generated for Southland farmers annually, Mr Newman said

Sheep Dairy (Cows) A 5.7 M B 4.1M

Achieved An increase in world dairy prices has made production of dairy products in Southland relatively more profitable than sheep farming. Farmers have reallocated their land from sheep farming to dairy farming to take advantage of these higher profits associated with dairy farming. We have moved from point A to point B on the PPF

Merit As farmers increase their dairy output the opportunity cost in terms of lost sheep farming increases. This is because the land used in sheep farming and dairy farming is not equally suited to the production of both goods. So the economy has moved from point A to point B on the PPF. The total dairy herd has increased from to and the number of sheep has decreased from 5.7M to 4.1M in Southland.

Excellence In order to shift away from sheep farming to dairy farming, the return on dairy farming must increase enough to compensate farmers for the increasing costs of reallocating sheep land to dairy farming. The higher world price of dairy products has compensated farmers for the higher opportunity cost of converting from sheep farming to dairy farming

Changes in the Market and Resource allocation – Internal Practice

Achieved At the current price of P1 there is a shortage of Kiwifruit. Consumers who don’t want to miss out on Kiwifruit, will bit up the price of Kiwifruit. As the price of Kiwifriut increases, producers will increase the quantity of Kiwifruit supplied. This is because Kiwifruit are now relatively more profitable, as the price has increased.

Merit As the price of Kiwifruit increases, producers will increase the quantity of Kiwifruit supplied from Q1 to Q2. This is because Kiwifruit are now relatively more profitable, as the price has increased. As the economy increases the production of Kiwifruit the opportunity cost in terms of lost Banana production increases because resources are not equally suited to the production of both Kiwifruit and Bananas. In this case Kiwifruit do not grow as well in the warmer climates as Bananas do. So an increase in Kiwifruit production will require increasingly larger amounts of lost Banana production.

Excellence In order to shift away from Banana production to Kiwifruit, the return on Kiwifruit must increase enough to compensate producers for the increasing costs. Producers would only make the shift from Point A to Point B on the PPF if the price of Kiwifruit increased enough to compensate the increasingly larger profits lost associated from reallocating Banana land to Kiwifruit production.