CHAPTER 8 ORCHARD GROWTH

Warning: The estimates in this publication are indicative. They are presented to give an indication of the magnitude of the impacts of proposed change to Australia's macro-economic accounts. All estimates are subject to refinement and revision in the compilation of the annual Australian System of National Accounts to be published on 8 December 2009 and in the quarterly Australian National Accounts to be published on 16 December 2009.

INTRODUCTION

The costs of establishing orchards and vines are currently treated as intermediate expense items. The System of National Accounts 2008 (SNA08) recommends that they be recognised as produced assets and capitalised as gross fixed capital formation (GFCF). This will add to Gross Domestic Product (GDP), gross mixed income (GMI) and gross operating surplus (GOS), as well as gross output.

The System of National Accounts 1993 (SNA93) recommended that growth in cultivated assets be included as capital formation. The ABS implemented these recommendations for some assets in 1998 but a lack of data prevented implementation for orchards. The definition of orchard growth extends to all fruit and nut bearing plants such as trees, vines, bushes, shrubs etc. that is, any plant that can produce a marketable quantity of fruit for more than one year where the grower intends to obtain a future benefit from the sale of the fruits borne. Costs to be capitalised as part of the value of fruit and nut bearing plants will be the establishment costs involved in planting the new nursery plant and then maintenance costs associated with making the plant grow.


CONCEPTUAL TREATMENT

The approach used to add orchards to non-financial assets in the Australian System of National Accounts (ASNA) will be to estimate GFCF flows and derive depreciation, revaluation, productive and wealth capital stocks and capital services in a perpetual inventory model (PIM). In the case of orchards, the change in value of stocks through time will represent more than GFCF, it also includes depreciation, revaluations and other changes such as unexpected grubbing (digging out rootstock); and the change in stocks will be decomposed into these elements. Given the model based approach required it will be necessary to calculate a net present value (NPV) for orchard assets.

Fruit bearing trees are produced on own account by orchards. Young saplings are purchased, planted and grown over three to five years, at which time they bear an economic amount of fruit. At this time the asset, so future expenditure is maintenance and not GFCF, and changes in the formation of the asset will be: complete asset value result from depreciation; and revaluation due to price inflation. In the absence of a market for mature orchard trees separate from other associated assets, there will be no shadow prices that can be used to help value the GFCF or the value of the stocks. In this situation, SNA08 recommends a cost based approach including a return to the capital (including land) invested in the production process (in this case planting and growing the trees to maturity). An average asset life of 30 years for fruit trees and 40 years for vines will be chosen, based on discussion with growers.


IMPLEMENTATION

Data for the numbers of trees and hectares of vines are available annually from the ABS Agricultural Survey for the years 1984 to 2008. As mentioned previously, GFCF only occurs as the plants grow to maturity. Annual data for the hectares of new grape vines planted are available from 1990, but for orchard trees volume data are only available for the stock of trees (number and hectares planted) for trees under six years old and trees over six years old. Trees under six years old will be considered immature and their growth will be considered capital formation.

A current price value of investment using an 'at cost' approach will be derived by applying average cost data to the age distribution of immature trees.

There are various sources of indicative information:

• establishment costs data are available on an annual pattern of costs from planting to maturity. The pattern is used to estimate the age distribution of trees and vines. Costs are incurred in the first year, with trailing costs related to maintenance and a return to capital (including land) in remaining years to tree maturity. Some establishment cost figures for particular fruits were assumed to be representative of all fruits of that type.
• cost estimates for all fruit and vine types do not necessarily exist for current price estimates, where possible these were adjusted upwards to take into account the GFCF of all other fruits that were not included in estimates. This was done by taking a proportion of immature plants for our selected fruits on total immature plants for all fruits and averaging the proportion over time. Then the average contribution of 'all other' fruits could be determined and added to the major fruit categories.

Trellises and irrigation will be assumed to have little value without the tree and vine, hence they are integral to the biological asset and are not sold off as a separate asset.


INCOME SPLITS

Output is equal to the current price values and will represent a new product produced by orchardists. In past treatment it was assumed that fruit orchardists produced only fruit as output, they now also produce fruit bearing trees/plants as output. The value of the fruit bearing plants will be added to output supply. Because all orchard growth output is own account output, intermediate usage and operating surplus components will not be observable. Intermediate usage will be assumed to be 40% of output (to cover costs associate with developing trees and plants), GOS to be 18% and GMI 42%


ASSET LIVES

There will be three components of capital estimates. These have different asset lives due to the types of plants.

The three series and respective asset lives will be :

1 Asset lives for orchards
	Asset type	Asset life
	Total Orchard Fruit and Nut Trees	30 years
	Total Plantation Fruit Bearing Plants	7 years
	Total Grapevines	40 years

QUARTERLY ESTIMATES OF ORCHARD GROWTH

The timing of planting grapevines depends on the location of the grower. Maintenance activities such as spraying occurs during spring. Banana planting and maintenance activity will occur during any time of the year.

The cost structure of the grapevine growing will be proportioned on a quarterly basis based on expected distribution of activity. Planting expenditure will be allocated into the quarters associated with winter. Construction expenditure for trellising and irrigation before planting and vine maintenance costs such as spraying and fertilising will be allocated during the quarters associated with spring.

Plantation fruit planting, which is mainly banana growing, will be converted to a quarterly series by dividing by four.


FRUIT TREES AND PLANTS VOLUMES

In order to obtain quarterly GFCF figures a volume measure will be multiplied by a price measure. Using a cost approach, new plantings of orchard and other fruit plantations per quarter will represent the volume of new investments in fruit plants. New plantings data are inferred from a range of sources.

To adjust for the contribution of grafted vines, the price component will be adjusted to include the impact of grafted vines. The weight of this contribution was derived as an average proportion of grafted vines on total new plantings and graftings over the years 2004 to 2007 (pure graftings data were available only for these years). This adjustment will only be for grapevines due to lack of data for other orchards.


COST DATA

Currently there is general cost information regarding the establishment and maintenance of various orchard trees and grapes, and will be obtained from a range of sources.
The following costs are capitalised as part of investment orchard growth.

All establishment costs such as:

• ground preparation costs
• nursery plant purchases
• planting and grafting costs
• cost of constructing a trellis
• cost of constructing an irrigation system

All maintenance costs such as:

• all fixed costs (eg. adminstrative costs, rates, general maintenance etc...)
• fertiliser
• weed controls
• pest and disease controls
• fuels and oils
• electricity
• casual labour
• permanent labour (farmer’s own labour)
• return on machinery and equipment assets (@10.4%)
• return on land assets (@10.4%)

The costs that will be capitalised as part of orchard growth relate to the formation of the tree and plant assets itself and will exclude production of fruit costs such as shipping and picking.

A return on capital estimate will be added to the value of trees and plants to reflect a return on investment in farm machinery and equipment and land. This return on capital component will increase the value of the tree and plant asset as it approaches and reaches maturity.


ESTIMATION OF CURRENT PERIODS

Forward estimation will be a three year moving average of the trees under six years series. The orchards deflator will be extended every year by using a five year trend.


RESULTS

The results will show a steady increase until June 2000. The decrease after 2000 coincides with drought conditions and changes in the commodity values over that time period. Orchard growth will have a very low impact on total GFCF by type of asset as illustrated in table 2.

2 Orchard Growth impact on GFCF, chain volume measures - 2000 to 2008
	1994-95	1995-96	1996-97	1997-98	1998-99	1999-2000	2000-01	2001-02	2002-03	2003-04	2004-05	2005-06	2006-07	2007-08
	($m)	($m)	($m)	($m)	($m)	($m)	($m)	($m)	($m)	($m)	($m)	($m)	($m)	($m)
Orchard Growth, current prices	300	380	457	497	561	623	592	563	551	509	532	536	681	638
Total GFCF, current prices	116 273	118 397	124 908	138 340	146 858	160 089	151 474	168 832	194 081	213 760	231 739	260 762	284 707	320 052
Orchard Growth total contribution to GFCF, %	0.3	0.3	0.4	0.4	0.4	0.4	0.4	0.3	0.3	0.2	0.2	0.2	0.2	0.2