Government Policy
Table 2.1
Key Stabilisation and Liberalisation Measures which affected the Domestic and Export Market for Sheep and Beef Farmers (1978 - 1990):
| Year | Measure Introduced/Announced (by Category) |
| 1978 | Exchange Rate Policy - Announcement of intention to manage an overvalued exchange rate to provide incentives to exporting industries. |
| Domestic Product Markets - Introduction of "Supplementary Minimum Price" (SMP) schemes for wool, meat and dairy. | |
| Agricultural Finance Market - Introduction of the rural "land development encouragement" scheme (LDEL, 7% interest rates). | |
| 1979 | Exchange Rate Policy (June) - Relaxation of controls on purchase of exchange and introduction of "crawling peg" exchange rate. |
| Agricultural Finance Market - Introduction of vendor finance scheme. | |
| 1981 | Domestic Product Markets - legislation establishing trading accounts for meat to join the already established accounts for dairy (1954) and wool (1976). (Meat Industry Stabilisation Account). |
| 1982 | Excnange Rate Policy (June) - Fixed exchange rate reintroduced (requiring further subsidising of lamb and wool prices). |
| Monetary Policy (June) - Introduction of a freeze en wages and prices, and controls on interest rates limiting government stock rates to 8% and first mortgage rates to 11 %. | |
| 1983 | Commercial Policy (January) - Announcement of Closer Economic Relations (CER) agreement with Australia, with commitment to freer trade and financial integration. |
| 1984 | Monetary Policy - Price freeze partially lifted early in 1984, then, in last half of year, gradual reduction for other commodities. |
| Domestic Product Markets (June) - Announcement of intention to end SMP scheme in 1984. | |
| Commercial Policy (June) - Producer Board reserve accounts at Reserve Bank to be charged commercial interest rates. | |
| Exchange Rate Policy (July) - Following a major capital outflow, the newly elected government undertook a devaluation of 20% against a basket of currencies of major trading partners. | |
| Financial Markets (July/August) - Market deregulated. Credit growth guidelines abolished and control of interest rates removed. | |
| Commercial Policy (October) - Announcement of abolition of Wheat Board. | |
| Labour Policy (November) - Wage freeze lifted. | |
| Fiscal Policy (November) - Announcement in Budget of phasing out of fertiliser and noxious weeds subsidies, lowering of irrigation and water supply subsidies, partial cost recovery on product inspection reintroduced December 1985), and Rural Bank and Finance Corporation (RBFC) interest rates raised progressively by 1% annually) to market rates. Investment taxation allowance allowed to expire and farm vendor finance scheme ended. | |
| 1985 | Exchange Rate Policy (March) - New Zealand dollar floated on 4th and Reserve Bank role shifts to control of monetary policy. |
| Fiscal Policy (June) - Ten-year clawback and loss limitation taxation provisions repealed, land development concessions phased out and livestock standard value system modified. | |
| Commercial Policy (June) - Commitment made to phasing out assistance to land based and manufacturing industry. | |
| Domestic Product Markets (November) - Termination of Meat Board Sheep Pool and trade returned to the private sector. | |
| 1986 | Fiscal Policy (May) - Introduction of cost recovery of advisory, research, animal health and quarantine services, while MAF budget to be progressively reduced. |
| (July) - First year depreciation allowance withdrawn. | |
| (October) Goods and Services Tax (GST) commenced at 10%. | |
| Agricultural Finance Markets (July) - Announcement of RBFC discounting loans scheme (applications closed July 1987). | |
| 1987 | Fiscal Policy (December) - Announcement of major tax and tariff reforms including raising GST to 12.5% and reduced personal and company tax rates (from 1 October 1988). |
| Commercial Policy (December) - A four year programme of tariff reductions, and a two-step reduction in duty on motor vehicles announced. | |
| 1988 | Fiscal Policy (July) - Review of state sector to promote efficiency and productivity announced. Tax cuts and maintenance of reduced budget surplus announced and also intended reduction in overseas debt. |
| 1989 | Fiscal Policy - Announcement that inspection services by MAF Quality Management would move to full cost recovery by July 1990. |
| Monetary Policy (May) - A new Reserve Bank Bill introduced to Parliament which sets the achievement and maintenance of price stability as Reserve Bank's primary objective. | |
| (July) - Budget includes the restatement of 0-2 % inflation targets for 1992 | |
| Agricultural Finance Market (August) - Rural Bank (RBFC) sold to private interests. | |
| 1990 | Monetary Policy (February) - Reserve Bank Act 1989 came into force. |
| (July) - Budget measures included abolition of excise duties on diesel and motor vehicles; tax simplification measures to reduce avoidance. | |
| (December) - Commodities levies Act provides for compulsory levies on commodities to fund general development of specific industries. | |
| 1991 | Labour Policy (May) - Employment Contracts Act took effect. |
| Note: | Assistance to Agriculture: By 1992/93 the effective rate of assistance to agriculture has fallen to -3% compared to 52% a decade earlier. |
Source: A B Walker, "New Zealand as a Case Study for Understanding Agricultural Economics and the Process of Restructuring in the Agricultural Sector", MAF Policy, August 1993.
Table 2.1 highlights the major Government policy initiatives which affected the farming economy through changing prices for outputs and inputs, including the interest rates charged to the farming sector.
The effect that these measures had on the farming sector (at the farm level) is discussed briefly below:
Commodity Prices
The managed exchange rate policy which prevailed from 1978 to 1984, which had the effect of keeping the value of the New Zealand dollar at artificially high levels, reduced the dollar value of exports. To compensate farmers for the effect of this overvalued exchange rate the Government adopted two measures in particular.
- 1978- The introduction of supplementary minimum prices for meat, wool, and dairy products.
1981 - Meat Industry Stabilisation Account (MISA); meat was included in this scheme in 1981, the scheme was already in effect for wool and dairy produce.
'The MISA accounts were meant to buffer farmers from fluctuations in market prices by supporting prices when they were low and making payments into the account, by way of levy, when prices were high. Lower and upper trigger price levels were set and prices were allowed to fluctuate between these trigger points before payments were made or levies drawn.
Since sheepmeat prices were falling on the export market, this sub-sector required the major level o~ price support and a deficit of $930 million had accumulated in the MISA account when it was eventually terminated and debts written off in 1987. In contrast the wool account remained in credit.
Supplementary Minimum Prices (SMP) were introduced in 1978 with the intention of supporting prices and export revenue expansion.
When the MISA scheme came into effect in 1981 (for meat) the SMP price was generally above the minimum trigger price under the MISA scheme. Consequently the Government paid the difference between the lower trigger price under the MISA scheme and the SMP price but the Producer Board met any shortfall up to the minimum trigger price level, drawing on Reserve Bank 1 % credit facilities until 1984 when market interest rates were charged.
The SMP scheme was terminated in 1984 but a lump sum payment, made as part of the transitional arrangements, meant that support was continued for sheepmeat until September 1985.
As an approximation, SMP payments were worth about $4.50 per head in 1984 and support from the stabilisation account was about $6~00 per head in the same year.
Figure 2.4, 2.5 and 2.6 show clearly the drop in meat prices that occurred in the 1985/86 season, most particularly for lamb.
In 1985/86 actual (nominal) lamb prices dropped by 84.6 c/kg or by about $10 per lamb; when combined with reduced wool and pelt payments this resulted in a reduction of around $12.00 per head for lambs on many farms (about a 50% reduction).
The Government devalued the currency by 20% in July 1984. Whilst this resulted in slight increases in wool and beef prices it had little impact on sheepmeat due to the over supply of product and the high costs in the processing sector at that time which negated any benefits which may have otherwise occurred to farmers.
Interest Rates
Figure 2.7 (click on box at
right)shows the average mortgage rates from the four major trading banks and the Rural
Bank between 1978 and 1990. The graph shows that Rural Bank interest rates were
significantly lower than commercial lending rates from 1978 to 1987. In 1988 commercial
rates applied to Rural Bank loans and in the last few years of the series rates to the
farm sector rose above the rates for other sectors.
The rates charged to farmers for overdraft facilities varied greatly between lending institutions and between farms, depending on the perceived risk to the lender. In some instance overdraft rates exceeded 30% if clients exceeded a predetermined overdraft limit set by the lender.
In 1978 the Land Development Encouragement Loan (LDEL) was introduced and
managed by the
Rural Bank for qualifying land development. In most cases the rate of interest for these
loans was
7%, some 4-5 percentage points below commercial lending rates.
The Rural Bank was the major lender to the rural sector over the period. Prior to the sale of the Bank to the private sector in August 1989, the Rural Bank advanced loans for subsidised development, farm mortgages and for capital works and plant and equipment purchases (term - debt); it was not, however, a source of seasonal finance.
Rural Bank first mortgage rates were of the order of 9% in the early 80's with subsidised development loans and livestock incentive scheme finance at around 7%, both rates were significantly below rates for other sectors.
In November 1984 the Government increased RBFC interest rates progressively to market rates.
However, due to the decline in the rural sector during the latter half of the 80's (after 1985) and the inability of many farmers to repay debt and with negative (or very low) equity which was the result of a decline in land prices, the Government announced the RBFC mortgage discounting scheme in July 1986 with application closing in July 1987.
This scheme kept repayments for most RBFC clients similar since interest rates were increased to 17.5% but the principal amount owing was discounted. The objective of this scheme was to encourage other lenders to carry farmers through this period and avoid large numbers of mortgagee sales by increasing the farmers' equity and giving other financiers greater security over the farm assets (land, buildings, plant and livestock).
In addition to these measures, farmers were entitled to free consultancy services (through the Rural Trust) in order to review their financial situation, farming objectives and management.
A special exit scheme was introduced to enable farmers on non-viable farms to leave faring and Social Welfare provisions were made more accessible to farmers who were unable to meet living expenses from their farm incomes.
Other Measures
Whilst of less significance, a number of other measures were introduced with the objective of eliminating subsidies to the farming sector. Other economic liberalisation measures affected sectors servicing the rural community and, over time, resulted in lower cost services to farmers. The measures included the reduction of significant tax incentives for farming.
The other measures of significance were:
- November 1984: Phase out of fertiliser and noxious weed subsidies, lowering of irrigation and water supply subsidies, partial cost recovery of product inspection (meat).
- June 1985: Ten year clawback and loss limitation taxation provisions repealed, land development concessions phased out, livestock standard value system modified
- July 1986: First year depreciation allowance withdrawn.
- July 1990: Abolition of excise duties on diesel and motor vehicles.
Farm Values
Between 1982 and 1988 the value of grazing farms fell by 32% compared to an increase in values of 540% - 803% in the decade 1972 - 1982, when subsidies were predominant.
Summary
The combination of these measures reduced the effective rate of assistance to the agricultural sector by 1992/93 to -3% compared to 52% a decade earlier.
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