Chapter 3: The Effects of Government Policy on Farming in New Zealand

Introduction

This chapter provides a brief overview of farming in New Zealand, before discussing the influence government policies had, and how these had progressively made New Zealand farming internationally uncompetitive.

Farming in New Zealand

New Zealand lies in the Southwest Pacific Ocean. It consists of two main islands and a number of smaller islands. It has a total land area of around 270,500 km5; similar in size to Japan or the United Kingdom. Much of New Zealand is mountainous, so only two-thirds of the country can be farmed.

The climate is temperate, and extremes of hot and cold are rare. Rainfall and sunshine hours are adequate for pastoral and arable farming. Rainfall is generally reliable throughout the year. Grass grows most of the year round, and about 90% of New Zealand farmland is in pasture on which livestock graze all year round. Hay and silage are made from spring feed surpluses and fed to livestock in the winter.

Arable crops of mainly barley and wheat are grown on about 7% of farmland. The remaining 3% of land is used for horticulture, mainly apples, kiwifruit, grapes and some process vegetable crops. Small areas of radiata pine trees are grown on some farms, but most forestry is grown in large scale forests on mountainous areas, less suitable for pastoral farming. About 5% of New Zealand's land area is in plantation forestry (radiata pine), and is increasing rapidly.

There are a small number of pig and poultry farms producing for domestic consumption. As well, there are some deer farms, producing velvet and venison for export.

New Zealand currently has around 53 million sheep producing both meat and wool, and around 5 million beef cattle on some 24,000 sheep and beef farms.

Approximately 14,500 dairy farms carry 2.6 million dairy cows. There are about 3,800 kiwifruit orchards and about 1,700 apple orchards. Deer are farmed on approximately 5,000 sheep farms. There are also about 36,000 small, part-time farms in New Zealand.

A typical sheep and beef farm is around 400 hectares in size and carries 2,300 sheep and 200 cattle. A typical dairy farm is about 70 hectares in size, milking about 170 cows. A typical apple or kiwifruit orchard is between 10 and 20 hectares in size.

Farms are mechanised, and most of the work is done by an owner-operator with some family help. Contractors are used for bigger jobs such as sheep shearing and fruit picking.

New Zealand, with a small population of 3.4 million, exports about 80% of its farm and horticultural production. Agricultural exports make up around 60% of New Zealand's total export earnings, so agriculture is therefore very important to the New Zealand economy. New Zealand - the world's largest exporter of sheep meats and dairy products, and the second largest exporter of wool - is very dependent on international product prices.

New Zealand farmers have property rights to manage their farms in the way they wish. Virtually all New Zealand farms are privately owned and the majority are owner-operated as "family farms", some are run as companies and partnerships. Sharefarming - where the farmer owns the land and the sharefarmer the stock and plant, with the profits split between them (usually 50:50) - is common on dairy farms. Sharefarming is a way for younger farmers to accumulate capital before buying their own farm. Leasing land occurs, but it is not widespread.

Most New Zealand farmers have to borrow money to buy the land, livestock and equipment. Borrowing is generally from commercial banks at commercial interest rates, with some borrowing from family sources. About 80% of New Zealand farms have a debt, usually a mortgage over land or sometimes livestock. Banks will generally lend up to around 60% of the value of the assets. About 8% of New Zealand farms are bought and sold annually.

Farm Decision Making

New Zealand farms are run as private businesses. Farmers usually try to make as much profit as they can to meet a range of personal objectives, for example, purchase of more land, lifestyle, to educate children, etc. All decisions as to what to produce, how to produce, how much to produce, and when to produce are made by the farmer. Other than resource management constraints, there are few regulations or restrictions on farming practices.

The farming and enterprise mix is dependent on land type ( which restricts some uses), the costs of production, and prices received. The best and most expensive land is used for horticulture as it is more profitable, dairying on the best pastoral land, with sheep and beef on the poorer hilly land. In better areas, farmers can choose between, and move to and from, sheep and dairy. It is also generally possible to alter the balance between the numbers of sheep and beef run on sheep and beef farms.

Within climatic and land constraints, farm production decisions are based on an equation of: Gross Farm Income

less Farm Working Expenses
less Debt Servicing
equals Profit available for personal consumption, re-investment and tax.

Farmers have many options on what they produce and how they produce it. Using a sheep and beef farm as an example. Gross farm income can come from: wool sales, lambs sales, mutton sales, store sheep sales, prime beef sales, store beef sales and cull stock sales.

Sheep income could be influenced by producing fine wool or coarse wool, heavy lambs or light lambs, or store stock. The quality and quantity of each can be influenced by management practices such as sheep breeds, stocking rates, selling practices and sheep to cattle ratios. Inputs such as fertiliser, animal health remedies, and weed and pest control can also affect the quality and quantity of outputs produced, and therefore profit.

Balancing all these factors and making decisions is based on product prices and input prices. Most farmers use a budget to do this.

As most farmers need to borrow seasonal finance to fund farming working expenses, interest rates (i.e., the cost of money) are important, as is the net worth or equity (i.e., assets less liabilities) - banks will not lend unless they have adequate security and know that the farmer can repay the loan. Most New Zealand farmers now use current working budgets to help them plan their farming operations, make farming decisions and monitor and manage progress. A typical current working budget for a sheep and beef farm is shown.

Once tax is paid, a New Zealand farmer can use the profit as he or she likes. A prudent farmer puts a proportion of profit aside. However, if a poor season or low product prices or high input prices cause the farm to run at a loss, then the only options are:

to borrow more,

sell all or part of the farm or other assets,

or seek off-farm income.

Making a profit or avoiding a loss is a very strong incentive to farm efficiently.

Effects of Pre-1984 Government Policies on New Zealand Agriculture

In the pre-1984 period, New Zealand government policies had the major effects of insulating New Zealand agriculture from international market signals, and consequently reducing the international competitiveness of New Zealand farmers. The policies also significantly influenced New Zealand farming practices, and therefore contributed to a more "painful" restructuring in the post-1984 period.

Government assistance was of three types;

  • support,
  • on inputs,
  • assistance to produce more output.

Price Support for Farm Returns

The farm gate price depends on a sequence of margins from consumer to farm gate. While the farm gate price is mainly determined by international market prices, which are based on consumer prices, government support of product prices was important.

New Zealand government policies in four areas affected New Zealand farm gate prices through:

  • rate policy;
  • Zealand processing and transport costs;
  • product price support; and
  • board/marketing board regulations and performance.

The exchange rate policy isolated New Zealand from ruling international prices. A low exchange rate increases export returns, whilst a high exchange rate reduces export returns. Because of the fixed exchange rate mechanism, New Zealand farmers were not fully aware of international product prices. This helped distort farm production decisions.

Processing and transportation costs were passed directly to farmers. Because of protection to New Zealand industry, they were higher than international costs - reducing farm gate returns and therefore farm profitability.

Direct product price support came initially through government funded income stabilisation measures, and later through direct price support called Supplementary Minimum Prices.

Farmers responded by producing more of the products with higher support, increasing lamb and wool production at the expense of beef and dairying which had lower levels of support.

Producer and marketing boards play a major role in New Zealand agriculture. The Dairy Board, Apple and Pear Board and Kiwifruit Board all serve as single export sellers. These boards sell farm produce on behalf of farmers. The Meat Producers Board licences meat exporters and promotes New Zealand meat. The New Zealand Wool Board controls the export of New Zealand wool, as well as undertaking wool promotion. How these boards perform, and how they pay farmers, has a major affect on prices received by farmers.

The benefits of product price support for farm products often did not stay with farmers. Because farmers were "well paid", there was little incentive for processors to reduce their costs. Processors therefore "captured" much of the benefit which should have flowed through to farmers. Meanwhile, farmers continued to produce products that the world did not want, but for which they were well paid through government support.

Subsidies on Farm Inputs

Government paid direct subsidies on fertiliser and lime as they are major farm inputs in New Zealand. Farmers used more of the susbsidised products, contributing to more farm outputs - particularly lamb and wool. This use was often not efficient. At the same time, fertiliser manufacturing plants had little incentive to reduce the costs of making fertiliser or importing cheaper fertiliser from overseas. A range of input price supports were used in New Zealand agriculture.

Assistance to Increase Farm Output

In addition to direct price schemes or input subsidies, the New Zealand government subsidised the use of factors of production - including land, labour and capital. For example, the New Zealand government encouraged farming in poorer areas by subsidising land development and irrigation. While at the time this increased production, it eventually led to land degradation problems as farmers were encouraged to develop marginal land which wasn't suitable for farming.

Cheap government subsidised interest rates and taxation advantages encouraged farmers to borrow more, and to invest in producing more outputs. These measures were important in encouraging increased lamb, wool and kiwifruit production in particular in New Zealand.

The government also paid for inspection services required to certify products for export, scientific research and agricultural extension. And finally, government helped farmers reinstate their farms after a natural climatic disaster. As a result, farmers did not try to mitigate against future disasters.

Overall Effects of Government Support on New Zealand Farming

The overall effects of government support for New Zealand farming were profound. The key results were:

  • became highly dependent on government support. In 1984, the level of support was equivalent to 30% of the total output from New Zealand farming. Such dependency is risky for farmers, as their livelihoods can be changed by unpredictable and uncontrollable changes in government policy. This happened in New Zealand.
  • levels of support altered the way New Zealand farmers farmed. Because there was higher support for sheep, farmers produced more lamb and wool although many of the lambs could not be sold and were rendered down for fertiliser. Lower support for beef meant less beef was produced, even when international prices were relatively good. As a country, New Zealand lost out.
  • developed poor hill country because they were paid to do so. Much of this is now eroding. Taxation and development incentives encouraged huge plantings of kiwifruit in particular. Most kiwifruit growers today make losses. Farmers put on a lot more fertiliser than they needed, and bought more plant and equipment than was necessary. Taxation affected the amount of forestry planted. Initially, forestry was encouraged by a grant, but was later discouraged by changes in taxation. Forestry is now, however, very profitable and new tree plantings are increasing.
  • servicing sector became less efficient. Because farmers received good prices, the service sector had the view that farmers could "afford" to pay more for fertiliser, transport and processing costs. This discouraged these firms to become more efficient. Less technology was introduced as there was little incentive to do so. Much of the support paid to farmers was actually captured by processors.
  • prices increased as support was capitalised into land values. This created a debt problem as farmers borrowed against this apparent equity using income supported by government. Farmers often farmed for capital gain rather than for farm profitability. Financiers loaned money on the basis of security without an understanding of the farm business. New Zealand farmers only had to be technically efficient to be profitable. There was little emphasis on farm business management. With the changes in government policies, land values collapsed and a lot of money was eventually lost.
  • New Zealand farmers were insulated from international prices; both for the products they produced and for the inputs they used. They had no way of knowing what the actual international prices were, and our farming was not in line with international requirements or prices. This was a very bad situation for a country which exports around 80% of its agricultural output. And finally, the government carried the risk of wrong or poor decisions because, regardless of what farmers did, they were still paid. This cost taxpayers a lot of money.
  • Zealand gradually lost international competitiveness. Government policies encouraged farmers to produce what international consumers weren't willing to pay for. Production and processing costs were higher than international competitors. New Zealand farmers used more inputs than needed. All New Zealanders were worse off because they had to pay support to farmers, meaning was not possible to invest this money in other more profitable ventures.

The New Zealand situation was clearly not sustainable and in 1984 the government introduced new policies to make New Zealand a more market-driven economy.

This situation is not unique to New Zealand. Common Agricultural Policy of the European Community is now going though the same process. More than half the income received by a European farmer comes from government support. This has led to huge surpluses being produced, at great cost to European consumers (taxpayers). The cost of the support paid to a farmer is more than the average wage paid to a European worker. In addition, consumers have to pay more for their food as it is more expensive. There are also costs of paying farmers to produce surpluses and the cost of storing unused stock. Most observers recognise this situation is also not sustainable.

Key Lessons from New Zealand's Experience

  • will respond to prices in a market economy.
  • general economic and agricultural policy decisions affect prices.
  • government policies affect prices, farmers become insulated from international prices.
  • farmers from lower international prices will lead to inefficiencies, and will reduce the overall competitiveness of the sector.
  • is not generally good at picking winners.

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Contact for Enquiries

Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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