- 2.1. The history of agricultural support measures
- 2.2. Agricultural reforms
- 2.3 Impact of the reforms on New Zealand agriculture
2. THE REFORM OF NEW ZEALAND’S AGRICULTURAL POLICIES
2.1. The history of agricultural support measures
Until the late 1960s there was no significant government support for New Zealand agriculture, but thereafter assistance for farmers grew to parallel that in the rest of the economy. While the Government maintained a fixed and overvalued exchange rate and very high levels of protection for the domestic manufacturing sector, this raised the costs for many of the inputs used by farmers. Largely to compensate farmers for the resulting high input prices and low (in New Zealand dollar terms) output prices, a system of farm subsidies had developed by 1984.
The two decades to 1984 also saw a gradual acceleration in production grants and subsidies. Taxation schemes included incentives for land development and concessionary livestock valuation schemes; fertiliser subsidies continued to increase; and loans at below-market interest rates became increasingly valuable as market rates increased.
Absolute levels of assistance remained low until the 1980s, when a major slump in world commodity prices led to an escalation in the level of support to farmers, much of it in the form of deficiency payments. Over the period from 1980-84 assistance increased substantially. Pastoral assistance peaked in 1983 with a Producer Subsidy Equivalent (PSE) of 34% and an Effective Rate of Assistance of 123% (see Figure 1). [ The percentage PSE is the value of all agricultural assistance measures divided by the sum of the value of agricultural production at local (supported) prices and direct payments from government. The Effective Rate of Assistance (ERA) is the net value of assistance (ie less costs imposed by protection of sectors providing inputs) divided by value of production at world market prices at the border. Because the percentage PSE uses local rather than world market prices in the denominator, it masks the true extent of support, which is more accurately reflected in the ERA.] While still moderate by world standards, the support levels were high for New Zealand. There were considerable costs to the taxpayer as well as economic costs arising from revenue and productivity forgone because of the distortionary impact of assistance. The late addition of output assistance seriously aggravated the distortions.
Prior to New Zealand’s economic reforms in the mid-1980s, agricultural policy focussed on development and largely ignored the need for consistency between economic and environmental policy objectives. Policies on economic development, resource use, and disaster relief gave preference to encouraging short-term economic considerations. These policies encouraged certain farmers to take greater risks with climatic factors by adopting more intensive and less diversified management systems. Although New Zealand had had in place long standing flood protection and water and soil conservation policies under the 1941 Soil Conservation and Rivers Control Act, and 1967 Water and Soil Conservation Act, the environmental consequences and costs of agricultural development and production received less attention. While soil erosion in particular was seen as a problem, few saw the connection with agricultural support policies. Environmental policies were subordinated to development objectives, and were largely oriented to alleviating the most obvious adverse effects of agricultural development.
2.2. Agricultural reforms
In early 1984 the Government announced the ending of output price assistance for agricultural products. Subsequently, fertiliser and other input subsidies were abolished as were investment and land development concessions. In addition, tax concessions for farmers were withdrawn. Free government services for farmers were eliminated. Producer Boards had their access to concessionary Reserve Bank funding withdrawn: they now have no access to taxpayer funds. Starting in 1987, central government subsidies for soil conservation, flood control and drainage schemes were substantially eliminated, although some transfer payments generated at a local authority level continue to contribute to funding.
Changes in the general economy also impacted on agriculture. Farmers expected the floating of the New Zealand dollar in 1985 would lead to devaluation given New Zealand's high inflation. But with a tight monetary policy in place to control inflation, high interest rates attracted money into the country. The New Zealand exchange rate appreciated between 1985and 1988, lowering returns to farmers in New Zealand dollars and raising the costs of adjustment to the agriculture sector.
Figure 1 shows assistance to New Zealand pastoral agriculture over the past fifteen years, in terms of Producer Subsidy Equivalents (PSEs). The figure shows the continuing decline from an average PSE of 24 per cent in 1979-86 to 4 per cent in 1995. The Effective Rate of Assistance (ERA) shows even more clearly the decline in real assistance.
The result is that New Zealand farmers are again fully exposed to world market forces. This is in marked contrast to most other developed countries. Figure 2 shows the low level of assistance to New Zealand agriculture compared to other OECD member countries.
2.3 Impact of the reforms on New Zealand agriculture
The withdrawal of farm subsidies was not, initially, popular with all farmers. Nevertheless the main farmers’ organisation, Federated Farmers, promoted the broad reform agenda, provided it was implemented throughout the economy and would lower farmers' costs of production. That said, many farmers felt threatened by the changes. This opposition culminated in a peaceful march on Parliament by farmers opposed to the reforms, in early 1986.
The farmers' fears were not groundless. Farm incomes generally declined during the 1980s. But these falls did not result solely from the removal of government support. A brief surge in incomes in 1985 was a result of favourable exchange rate and good climatic conditions. Then, from late 1985 to 1988, farm incomes fell due to a combination of the New Zealand dollar's appreciation, high inflation, high interest rates and low prices for meat and dairy products in world markets. These low prices were a direct result of the overproduction and subsidised exports of, in particular, the United States and the European Community. Finally, in late 1988, farm prices improved. Farmers' terms of exchange strengthened both as a result of the long-awaited benefits from the reforms and improving world market prices for pastoral commodities. Eventually, farmers also benefited from falling input prices, and from lower processing costs.
Following big increases in farmland prices in the early 1980s, by 1988 nominal values had fallen to around 78% of their peak levels: a fall of around 50% in real terms. This demonstrates the extent to which government support for agriculture was capitalised into the value of farmland. By 1995, farmland values had recovered to around 86% of their 1982 value, in real terms. See Figure 3.
The reforms have had no significant effect on farm size, but the removal of land development grants has meant the withdrawal of a small area of marginal land (ie land not suited forpastoral agriculture) from production. Much of this land has also been planted to forestry with consequent benefits of slope stability and catchment protection (see section 3.2 below).
New Zealand farmers have proved remarkably resilient in adapting to the changes that have swept the sector. After the removal of subsidies in 1984, farmers cut back discretionary expenditure including all non-essential repairs and maintenance; new land development; fertiliser applications; and capital expenditure on new plant and equipment, and they laid off labour and did more work themselves. This had a direct effect on small rural businesses, some of which went out of business. The next few years were a difficult and stressful time in rural communities (Walker and Bell, 1994, pp 29-31). It is also interesting to note that operating expenses, as a percentage of gross farm income, fell from a peak of 80% in 1984 to about 50% currently (Ministry of Agriculture, 1996a). Thus, increased operating efficiency, and the removal of protection from input industries, have helped farmers cope with the decline in income.
The Government did help with some farm debt restructuring. The government-owned Rural Bank wrote off some farm debt and the Government encouraged private lenders to do the same. Many farmers went through credit mediation, involving experts in finance, law, farm management and banking to develop an action plan for the farm. In the end, about 20% of the total farm sector debt was written off and about 5% of farms were sold, considerably fewer than had been predicted (Walker and Bell, 1994; Chamberlin, 1996).
The market-orientation of the agricultural sector now means that the price of farmland better reflects the market value of its output, not the capitalised value of assistance. The reduction in land prices in New Zealand means that young aspiring farmers, who have not had the good fortune to inherit land, face a lesser barrier to entering their chosen profession.
Despite the pain experienced in the agricultural sector, very few farmers were forced by the reforms to leave the land. The rural collapse predicted by some never happened. New Zealand's rural population rose slightly between the 1981 census and the 1991 census despite the removal of subsidies. The rural economy has become more diversified, with tourism and other services accounting for a larger share of rural economic activity. This diversification has made rural communities less vulnerable to cyclical downturns in the agricultural sector.
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