Chapter 5: The Impacts of Economic Reform on Industry/Institutions

Introduction

The previous chapter looked at how farm families and rural communities managed the change from a regulated to a deregulated economy. This highlighted the point that change meant the withdrawal of government support. It looked at what impacts this had on the services to rural communities and how farm families had to change their emphasis from being just technically good farmers to being good farm business managers.

This chapter describes the changes that have taken place at the industry and institutional level. Two major types of industry organisations are reviewed:

(a) Output-related organisations:

- producer and marketing boards

- processing companies; and

(b) Input-related organisations:

- firms supplying goods and services such as sale of livestock, fertiliser, finance and transport.

Producer and Marketing Boards

In New Zealand, a high proportion of agricultural exports are associated with producer and marketing boards. The major function of the boards is to promote and develop its particular industry. In the case of dairy products, pip fruit, and kiwifruit, exports are controlled by statutory marketing boards. For sheepmeat, beef, wool, and deer, exporters are licensed and their activities are regulated to varying degrees by producer boards.

Producer and marketing boards play a major role in New Zealand's international trade. The extent they have been affected by economic liberalisation depended on their activities. These institutions, and the benefits which they can secure for producers and the nation, have come under increasing scrutiny in recent years.

While there has been considerable deregulation in domestic agricultural industries, the policies which influence agricultural marketing have been relatively slow to change, particularly for the international marketing organisations. Around 80% of the value of New Zealand's agricultural and horticultural exports are influenced by marketing boards and export authorities. Around 30% of these exports were controlled by boards with statutory monopolies.

The boards are commonly controlled by a directorate with a required majority of producers and minority of government appointed representatives. Powers are frequently very broad, and range from the right to collect information and levy producers, through to the power to acquire product from producers and trade in international markets.

Not all the boards have fully applied the powers granted under their legislation. Up until now, producer and government monitoring of board activities through the political process has influenced the specific activities of boards.

The range of activities and powers that the major producer boards had developed prior to 1984 were:

  • to collect levies which were used for promotion, research, the development of grading schemes and other activities aimed at enhancing the returns for these products;
  • intervention aimed at stabilising prices through the purchase of product, both on domestic and international markets, or the retention of funds in industry stabilisation accounts. Where a board acquired the product, these funds were operated as part of price pooling activities;
  • of exporters;
  • controls through monopoly acquisition of farm products.

Restrictive licensing of exporters has been a means of regulating export marketing, with the threat of delicensing used to restrict the actions of individual exporters. This power can restrict the total number of exporters or their access to specific markets.

One of the most controversial issues in marketing board policy has been the decision by governments to allow some boards to assume complete responsibility for the marketing of their product. The Dairy, Apple and Pear, and Kiwifruit Boards had the responsibility to acquire virtually all product from producers, to organise its exports, and determine final pool payments to producers. These organisations also had either direct or indirect control over domestic prices, processing decisions, breeding programmes, and product development. During periods of low prices the boards have been able to take control of which utilise product. The greatest degree of intervention occurred in those industries using supply controls as part of the marketing board programmes. Each of these marketing boards used production quotas to maintain stability of prices and production.

The Reforms of Producer and Marketing Boards

Domestic Producer Boards

Government evaluated the regulations covering the production and marketing of agricultural and horticultural goods for the domestic market. It concluded that the regulations distorted resource allocation and therefore should be removed. The distortions included: excess production of eggs, excess capacity in the flour milling industry, poor location of production for eggs and wheat, and reduced efficiency and innovation such as in the packaging of milk.

Rapid deregulation took place in the domestic industries. The wheat and egg industries were the first, followed by the town milk industry, or fresh milk market. Many other products including potatoes, honey, raspberries, hops, tobacco, apples, pork and poultry were also deregulated. Once the process began, external forces ensured that the pressure for reform was maintained. The main external forces included the Closer Economic Relations (CER) agreement with Australia, and the implications for wheat imports.

Export Producer Boards

While there were major changes in the domestic marketing boards, there have only been minor changes to the structure of export monopolies or licensing authorities as part of the economic reform programmes. The most significant change, announced in 1986, was the removal of producer board access to cheap Reserve Bank funds, which had previously been used to finance exporting and stabilisation activities at minimal cost to the industry.

The Producer Board Amendment Act, passed in 1988, made minor changes to the legislation applying to boards. These changes were:

  • allow boards to access a wider range of funding sources without needing government approval or supervision;
  • government reduced its involvement in fixing prices and monitoring activities within these industries. For example, the government had previously participated in setting initial payments in pooling schemes and establishing prices for stabilisation schemes. This changed to where the boards themselves, usually following consultation with the industry, made these decisions;
  • boards, in most cases, were granted the "powers of a natural person" which provides them with the financial flexibility similar to public companies;
  • in 1988, producer board earnings became fully taxable.

Misguided stabilisation activities resulted in the build-up of huge debts which the government wrote off. While the changes were significant in reducing the degree of government involvement in the industries, they had little real direct impact on the overseas marketing activities of the boards.

Debate Over Marketing Monopolies of Producer and Marketing Boards

The major debate since 1984 about the role of producer boards in the New Zealand economy has been over the statutory monopoly marketing of export products. On the one hand, economic analysts, led by Treasury, contended that a single selling agency, and its monopoly over exporting, can lead to bureaucratic inefficiencies without any advantages that could not be achieved by competitive firms. It was argued that because of the competitive environment which New Zealand faces, there were few opportunities for returns to be increased above those which could be if captured by competitive firms. Where there were opportunities for higher prices, it was argued that these can be obtained by alternative selling arrangements to single selling agencies. For example, the tendering of access rights to sensitive markets.

The other side of the debate was argued by the producer board representatives. They argued, based largely upon marketing principles, that increased control would lead to the implementation of more sophisticated marketing strategies, increasing returns. Such arguments assumed the need for marketing board legislation to control "free riders" (those who benefit but do not pay) in order to maximise gains from promotion and marketing investment. This debate is ongoing.

Processing Companies

From the early 1980s there has been considerable change in the processing sector for New Zealand farm products. These changes became greater as the economy was deregulated, and particularly as the volumes of farm output changed.

Meat Processing Sector

Over the last decade nearly one-quarter of the larger, older meat processing companies, which had operated for many years in New Zealand, were closed down. These companies were not able to compete as stock numbers (particularly lamb) fell, and investing in new technology became necessary to produce higher quality products. They have been replaced by smaller, high technology processing works located nearer to the source of livestock. These new processing plants produce very high quality products to particular consumer specifications. There are now more meat processing plants in New Zealand than there were previously, even though livestock numbers have fallen.

These changes have also seen the ownership of the meat industry move from overseas companies to New Zealand control. Labour costs have declined, and the introduction of new technology allows leading firms to feed-back management information to farmers.

There have been dramatic changes in the volumes of lambs processed and their markets. In the mid 1970s, virtually all New Zealand lamb was exported in carcass form to the United Kingdom. Today more than 60% of the lamb is further processed, and only 25% of total lamb exports go to Britain.

Specialist, high technology deer processing companies have developed as deer numbers increased. The deer industry is now one of New Zealand's most sophisticated meat processing industries, producing very high quality products for niche markets.

Dairy Industry

The dairy industry is based on farmer-owned co-operative dairy companies processing milk products which are centrally marketed by the New Zealand Dairy Board. There has been considerable rationalisation in the dairy sector, but for different reasons than in the meat sector.

Prior to Britain joining the European Community, most of New Zealand's milk was processed into butter, cheese and milk powder, and exported to Britain. Today there are many hundreds of products exported to numerous markets, many manufactured or packaged for specific requirements. The proportion of milk processed for butter has declined dramatically, and powder products, casein and cheese have increased. New Zealand dairy products are now marketed in over 80 different countries.

As the number and sophistication of dairy products increased, dairy companies had to invest very heavily in new technology and equipment. To get the benefits of scale many of the smaller, older dairy companies amalgamated and built larger, more sophisticated plants. There are now fewer dairy companies manufacturing many more products. Ownership has stayed in New Zealand hands.

Wool Industry

There have also been changes in the wool industry, with significant investment in wool scouring and carpet and yarn manufacturing in New Zealand. However about 90% of New Zealand's wool is still exported for manufacturing overseas.

Apple and Kiwifruit Industries

Apples and kiwifruit are marketed as fresh products. To cope the increased volumes of apples and kiwifruit produced, there has been major investment in packing and cool store facilities. Computerised technology has been introduced to improve quality management. This new technology also provides valuable management information to orchardists.

Process Crop Industry

As the product mix diversified new processing plants were built, often in areas with no tradition of processing vegetable crops. New Zealand now has a significant export industry in process vegetable crops, most based on smaller scale, high quality processing companies producing for niche markets.

Wine Industry

There has also been considerable growth in the wine industry in the last 10 years, with a large increase in the number of wineries processing increased grape volumes. The New Zealand wine industry is based largely on small, high quality boutique wineries producing top quality wines.

Forestry

Huge investment in new forestry processing plants has coincided with the sale of State forests to private companies, and the maturing of State-planted forests. Much of the investment in forestry processing has been by overseas companies, often in joint venture with New Zealand firms. A much wider range of forestry products is now produced and exported.

The Servicing Sector

The servicing industries for agriculture have always operated within a free market. However, the activities of the government and government agencies have had significant impacts on their freedom of operation.

Rural Finance

The government has had a major role in providing finance for farmers . In the regulated environment the government set up the Rural Bank which acted as an agency for government policy and provided subsidised loans to help develop the agricultural sector. The initial reasoning was to increase exports and the so-called special nature of farming which involves longer lead times between investment and returns.

The Rural Bank provided subsidised credit for farm purchase and land development. Farm purchase loans were made to qualifying farmers at heavily subsidised interest rates. The Rural Bank loaned large amounts relative to the equity or cash the farmer invested in the property. Under various government schemes finance was made available to farmers and horticulturists for development purposes. Often the principal sum advanced was written off if certain conditions were met. At the peak of its operations, the Rural Bank had about 80% of farmers as clients.

This intervention led to the benefit of the lending being capitalised into the value of the land. Land prices rose above what they would have been without the government support. This made it more difficult for new farmers to get a start in farming because of the artificially high land prices. It also made farmers very rich once they sold their properties. In addition, the policies resulted in higher levels of production than would have been the case without the support. Unsuitable land was developed into pasture in hill country areas that should have been left in the original tree cover. Much of this land is now reverting.

A further consequence of government intervention was that the commercial banks were crowded out of the market. These banks could not compete with the subsidised conditions of the Rural Bank. This delayed the development of services in the banking sector for farmers.

The reforms involved the stopping of all subsidised lending and the gradual raising of the terms of existing lending to market rates. The Rural Bank was sold off and the proceeds used to retire overseas debt. During the period of high inflation at the beginning of the reform process, the raising of interest rates did cause a considerable level of pain. The government wrote off a lot of debt. Competition has meant that the sector now has a wider range of sophisticated services and products to meet the specific needs of farmers.

Stock and Station

The stock and station industry provides selling services for livestock and other farm produce and supplies farm inputs including equipment and machinery. A number of firms compete for business. They range from large international and national firms to small regionally based firms and single agents. Government intervention has affected them mostly in an indirect way by altering the operating environment. When support for farmers was high the level of services provided to farmers by the industry grew. The firms employed more people and provided a higher level and broader range of services than would otherwise have been the case. The removal of subsidies reduced the level of business and the firms were forced to contract to survive. There was a series of business mergers, the level of services contracted back to the core, fewer people were employed and poor performing branches shut down.

Fertiliser

Because fertiliser is one of the main inputs into farming, it became the target for government support. It was a well defined input and was thus a convenient way to support farming. Over the years prices for the basic phosphatic type fertiliser and lime were subsidised, along with transport costs, at increasing levels. As a result, more fertiliser was applied than needed for the products New Zealand could sell overseas. This not only was inefficient, but contributed to the pollution of water ways through excess run off from pasture into streams. Because only some types of fertiliser were subsidised, the policies slowed down moves to more sophisticated products.

The removal of the subsidies caused a major reduction in demand for the basic types of fertiliser. The industry has now adjusted to the new level of demand. New products that contain multiple nutrients in higher concentrations are more common and the efficiency of distribution and application has improved.

Transport

Prior to deregulation, transport systems were subject to wide ranging controls. The State owned the railway system, including the critical inter-island ferry service between the two main islands. It also controlled the single national airline. There were restrictions on road transport firms contolling how they could compete with rail. Shipping and the ports were rigidly bound up under labour union controls sanctioned by government through law.

All these controls and regulations impacted indirectly on farming through the raising of the cost structure. This reduced international competitiveness on which New Zealand depended for a rising standard of living.

Freeing up of transport had a major impact on farming. Rail was corporatised and the new disciplines of the market led to huge efficiencies in wage costs as labour was cut back to levels required to run the business at rates competitive to road. Restrictions on road transport were removed. Transport firms were required to pay road user charges to meet the real cost of maintaining roads used by heavy vehicles. Competition was allowed in air transport, thus lowering costs and vastly improving the service. This benefitted exporters of high value, low volume products such as cut flowers. Port operations were privatised and efficiency in terms of throughput rose while cost fell. Coastal shipping is still in the process of deregulation.

Rural Services

Over the years the level of services in rural communities grew to the level that could meet the demand from the farmers they served. Each little community would typically have a core group of services including a post office, bank, petrol station, transport operator, Ministry of Agriculture office and different supply stores. Contractors supplied a range of services from these small towns depending directly on business negotiated with farmers. Some of these services were supplied by the government, but most were companies or individuals working on their own. As the amount of money farmers had to spend became increasingly dependent on government support, these communities were more vulnerable to the withdrawal of subsidies.

When the support for farming was cut rural communities were the first to suffer. The initial reaction of farmers was to stop spending. The pain of adjustment was perhaps felt greatest in small towns where many businesses were forced to shut down.

After several years some of the smaller towns have still not recovered. Government run businesses have been sold, and many small private operations shut down. Medical services have been cut and concentrated on larger cities. The big stock and station companies have rationalised and shut small branches. Contractors who suddenly had no work either went on unemployment benefit, or moved to the city. Many of the rural supply stores closed. People now have to travel greater distances to meet their servicing requirements. For some communities there is the prospect of closing small schools as rolls have declined.

The positive side of the situation is that the level of service is now more appropriate to the size of the business available. Farm costs, which rose at a faster pace than the general level of inflation or price increase, stabilised and now increase at a lower rate. This means that farmers are more efficient because costs can be held down and budgeting carried out on a more certain basis. This means planning for future development is on a more realistic basis.

While the supply or input side of the servicing sector is now much more settled and focused, there is still considerable change possible on the output side. The increased freedom of the boards must be matched with clear gains for the pressure for further change to decline.

Key Lessons from New Zealand's Experience

  • organisations were inappropriate in the new environment
  • activities and regulations of output-related organisations can disguise price signals and therefore alter the actions of farmers.
  • which may have been efficient at delivering goods or services in a protected or regulated economy were no longer relevant in a deregulated economy. Where they no longer had a role they disappeared, unless they could adapt to the new environment.
  • large organisations/institutions takes time and much longer time than people expect.
  • is a fundamental difference between the view taken by market theorists and the view of pragmatic business people, particularly when dealing with the international marketing environment and maximising international returns.

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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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