Features of modern agricultural policy in New Zealand

CABINET OF MINISTERS OF UKRAINE

NATIONAL UNIVERSITY OF LIFE AND ENVIRONMENTAL SCIENCES

Features of modern agricultural policy in New Zealand

Executed by:

5th year student 3-group,

economic department,

Kate Pyavka

Kyiv- 2011

Plan

Introduction

1. A mini-history of New Zealand agriculture

2. The agrarian reform

3. How the farmer was impacted by lack of government assistance

4. Nowadays evaluation of policy developments

Conclusion

The list of used literature

Introduction

new zealand agrarian policy

New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands Since 1984, successive governments engaged in major macroeconomic restructuring (known first as Rogernomics and then Ruthanasia), rapidly transforming New Zealand from a highly protectionist economy to a liberalised free-trade economy. New Zealand is heavily dependent on international trade, particularly in agricultural products. Exports account for a high 24 percent of its output, making New Zealand vulnerable to international commodity prices and global economic slowdowns.

This report analyses the effects on the farm sector of the reform of New Zealand agricultural policy undertaken in 1985. This analysis is placed within a discussion of the larger issue of the specificity of the farm sector and whether this specificity requires special support from the state in most of the developed countries. This study describes the crisis of the New Zealand economy at the beginning of the deregulation process and explains why the farm sector was at the centre of the reform. The removal of state support to agriculture and the transition measures set in place are documented. The report also analyses the effects of the reform on farms both at the structural level and in terms of farm incomes. The analysis concludes that the farm sector has maintained its level of economic activity despite important reductions in state support. Finally, this study discusses specific changes in marketing and farming.

The main objective of this work is to examine the effects of the abolition of agricultural subsidies to the New Zealand farm sector.

This Policy Review focuses on agricultural policy today and how New Zealand is supporting the agricultural sector now without resorting to subsidies. It describes the policy New Zealand uses to support farmers dealing with adverse events such as climatic disasters.

1. A mini-history of New Zealand agriculture

Agriculture in New Zealand, pre-1984, was built on good demand for agricultural products, strong commodity prices, compensation for costs and support for exports. This was not sustainable; it increased the production of low value commodities, insulated the industry from the market, lead to inappropriate resource use and inhibited innovation.

Prior to European settlement, the indigenous Maori cultivated kumara (Polynesian sweet potato), taro and gourds in addition to fishing and hunting native birds for food. Officially claimed by the British Crown in 1840, in the nineteenth century and for much of the twentieth, New Zealand became Great Britain’s agricultural hinterland, supplying first grain and wool, and then—after the development of refrigerated shipping in the 1880s—meat and dairy products to Britain and other parts of the British Empire.

As late as 1964, New Zealand sent 61% of its total meat exports (lamb, mutton, beef and veal), 94% of its butter, and 87% of its cheese to the UK[6]. Disruptions of this pattern during the First and Second World Wars, however, encouraged New Zealand to adopt increasingly protectionist policies, placing tariffs on imported industrial goods and establishing Producer Marketing Boards for the major commodity groups from the 1920s, designed to represent farmers' interests and to act as single sellers in the global marketplace.

New Zealand suffered a major economic depression in the 1930s and enjoyed a boom period in the 1950s, as post-war consumption levels rose and war-time technologies found new agricultural applications like fertilizer and pesticide production and improvements in transport. (On New Zealand’s rugged landscapes aerial topdressing of pasturelands was widely adopted, and helped boost productivity.)

Several factors threatened the comfortable prosperity of NZ agriculture in the 1970s. The independence of the Pacific Island of Nauru in 1968 spelled the end of New Zealand’s supply of cheap phosphate rock, mined there and on other so-called `phosphate islands' since the early part of the century. Four years later, in 1972, Britain’s decision to join the European Economic Community (now the European Union) signaled a major realignment of global trading relationships, in which New Zealand’s position as a Commonwealth country would no longer guarantee special consideration for its agricultural products. Finally rising world oil prices triggered a period of escalating inflation, making it increasingly difficult for farmers to secure good prices on the international market.

2. The agrarian reform

Governmental policy at this time exacerbated the situation by seeking to boost agricultural production based on the hope of greater returns—farmers were offered subsidies to purchase more fertilizers, and tax breaks for increasing herd sizes—further depressing commodity prices through oversupply. In part because of the recognized importance of agriculture within the national economy, farmers were also offered price supports, low-interest loans, disaster relief, weed-eradication subsidies and special training programs to get them through the hard times. As the laundry list of farm support programs grew, it became an increasingly impossible burden for this small national economy to bear, threatening to further undermine the stability of the whole system.

Agricultural support the majority of which was to sheep meat, wool and beef production was the first to be cut. In the first year, 1984;85, the effects of the cuts were offset by the benefits from exchange rate devaluation combined with high international commodity prices. It took longer to control inflation than had been expected. In the meantime, high real interest rates caused the exchange rate to appreciate again and this, combined with two years of lower international commodity prices, made the adjustment for New Zealand’s farmers to their loss of policy support much more painful than would otherwise have been the case. Land prices fell when support was withdrawn, leaving some farmers severely indebted, whilst farmers in marginal areas found it hard to compete in the undistorted market. Some support to ease the adjustment process was forthcoming from the Labour government after it was returned to power in 1987.

Government agencies in all sectors were subject to `new public management' aimed at increasing their efficiency. Within the Ministry of Agriculture and Fisheries reform began in 1985, with initial targets set for cost recovery of services such as quality control and extension. Organisationally, services were separated from policy and ultimately the former were either privatised or spun off into independent agencies.

An interesting exception to radical reform was the preservation of export marketing organisations. Instead of introducing competition, efforts were made to increase their efficiency and accountability to producers.

Inflation was eventually brought under control in 1989 and both the economy as a whole and the agricultural sector in particular resumed growth in the early 1990s. There was some switching out of sheep meat and wool towards, in particular, dairy and horticulture. Overall, farmers managed to raise total factor productivity, so as to maintain overall output levels with reduced inputs, thereby fairly quickly restoring profit levels after an initial shock.

New Zealand’s reforms were not opposed by the main farmers' organisation. This broadly supported reform and indeed, pressed the government to reform other sectors such as ports and transport where inefficiencies impaired the competitiveness of export agriculture

According to the Kiwi outlook, the ill effects of subsidies include: [6]

1. Resentment among farmers, some of who will inevitably feel that subsidies are applied unfairly.

2. Resentment among non-farmers, who pay for the system once in the form of taxes and a second time in the form of higher food prices.

3. The encouragement of overproduction, which then drives down prices and requires more subsidization of farmers' incomes.

4. The related encouragement to farm marginal lands, with resulting environmental degradation.

5. The fact that most subsidy money passes quickly from farmers to farm suppliers, processors, and other related sectors, again negating the intended effect of supporting farmers.

6. Additional market distortions, such as the inflation of land values based on production incentives or cheap loans.

Various bureaucratic insanities, such as paying farmers to install conservation measures like hedgerows and wetlands—after having paid them to rip them out a generation ago, while those farmers who have maintained such landscape and wildlife features all along get nothing

Аrm leaders in New Zealand among the first to advocate an end to subsidies Interestingly, farming leaders were among the first to recognize the absurdity of the situation and to propose alterations, although they stopped short, at first, of advocating the total elimination of agricultural subsidies. In 1982, Federated Farmers of New Zealand (New Zealand’s leading farmer organization) submitted to the government an economic position paper declaring that controlling inflation, rather than compensating farmers for the consequences of inflation, should be the national priority. They reasoned that a key cause of inflation was the budget deficits required to fund farm subsidies (among other programs), so that more subsidies only made the problem worse.

While most of the Federated Farmers' specific recommendations were rejected by then-Prime Minister Rob Muldoon: economic analysts from across the political spectrum began to the debate the effects of subsidies and other forms of market intervention, and when the Labour Party won a landslide election in 1984 (defeating Muldoon and the National Party) the country was ready for reform.

Because most NZ farmers were traditionally National Party members, the process of reform was to some extent bipartisan. Agricultural reform was also part of a larger package of economic restructuring that included the scaling back of import tariffs; deregulation (or partial deregulation) of public utilities and transport systems; implementation of New Zealand’s first `goods and services' tax (or GST—similar to the US sales tax); and floating of the NZ dollar on the global currency exchange. Further reforms were implemented after the National Party was voted back into power in 1990.

All of this was not achieved without some controversy, and there were a few casualties, both political and economic. It is estimated that around 800 farmers—or 1% of the total number of commercial farmers in operation—were forced to leave the land. Sheep farmers, who as a group were the most heavily subsidized, were (not surprisingly) hardest hit by the elimination of subsidies. Those farmers who were heavily in debt at the start of the reform period were hit hard by rising interest rates, and a transition program was negotiated to ease their situation. Farm-related sectors like packing and processing, equipment and chemical supply, and off-farm transport also suffered, but this was regarded as evidence of their previous inefficiency. Overall the `transition period' lasted about six years, with land values, commodity prices, and farm profitability indices stabilizing or rising steadily by 1990.

Ever since then, the New Zealand experiment has been gradually gaining attention—and respect—around the world. NZ agricultural leaders are invited to speak to international audiences about their country’s experience dismantling subsidies, and foreign officials come to New Zealand to inspect the results first hand. Analysts in Europe scrutinize the NZ example as they draft proposed reforms to the EU’s Common Agricultural Policy (CAP). In 2001 Alistair Poulson, chairman of NZ Federated Farmers, told the BBC News that the average New Zealand farmer’s advice to his or her colleagues in other countries would be to «get off the subsidy gravy train as soon as possible.»

SPECIFIC CHANGES IN MARKETING AND FARMING [6]

* Concessionary farm loans, free advisory services—but did not remove all support. Control of the inflation rate, reduction of the Government deficit, liberalization of regulations, reform of commercial and tax policies, floating exchange rates, more indirect taxation and increased public sector efficiency all helped.

* Since 1984 farming has become more efficient and more responsive to market signals.

* Output and net incomes in some sectors e.g. dairy are higher now than in 1980. Total assistance, as a % of output, has fallen, from 30% in 1984, to 3%. Total lambs produced, lambing % and lamb carcass weight have all increased. The cost of milk production is among the lowest in the world

* Uptake of new technologies has increased e.g. ICM systems, new crops, new varieties e.g. kiwi fruit variants.

* Since 1984 horticultural exports had expanded by a factor of 5 in value but also in terms of diversity of products and destination; 10 countries in 1980, 102 in 2002 .

* Export was driven by availability of produce wanted by the market, quality, value, innovation and convenience. The New Zealand horticultural industry now resembled NIKE in many respects.

Brace yourself: this is free-market faith to make Adam Smith proud. But the New Zealand experience is pretty persuasive. Well into its second decade of subsidy-free farming, New Zealand enjoys a worldwide reputation for its high-quality, efficient and innovative agricultural systems.

New Zealand agriculture is profitable without subsidies, and that means more people staying in the business. Alone among developed countries of the world, New Zealand has virtually the same percentage of its population employed in agriculture today as it did 30 years ago, and the same number of people living in rural areas as it did in 1920. Although the transition to an unsubsidized farm economy wasn’t easy, memories of the adjustment period are fading fast and today there are few critics to be found of the country’s bold move.

Removing subsidies, on the other hand, forces farmers and farm-related industries to become more efficient, to diversify, to follow and anticipate the market. It gives farmers more independence, and gains them more respect. It leaves more government money to pay for other types of social services, like education and health care.

New Zealand has a strong interest in trumpeting subsidy-free agriculture, of course, since NZ farm exporters are at a disadvantage on the global market with respect to their subsidized counterparts in Europe and the US. Almost since the reform process began, New Zealanders have been doing just that.

New Zealand was a founding member of the Cairns Group (named for Cairns, Australia, the location of the group’s organizing meeting), a consortium of agricultural trading nations that banded together in the mid-1980s to lobby for liberalization of trade rules on agricultural products. Cairns Group countries depend heavily on agricultural exports to maintain their balance of trade, and they argue that agricultural subsidies and import tariffs in places like the US, the EU, and Japan are unfair: industrialized countries have grown rich through free trade in manufactured goods, and are now using that wealth to block less-industrialized countries from bringing their (agricultural) goods to market under similarly liberal terms.

As Brian Chamberlin, president of NZ Federated Farmers in the late `80s and a vocal advocate of free-market farming, has written, «It is not an exaggeration to say that for every rural school kept open by European sheep subsidies in Scotland, Wales, or France, one is closed in a rural area somewhere else in the world.».

3. How the farmer was impacted by lack of government assistance

* Today New Zealand has around 80,000 farm holdings on 15.5 million hectares (38.3 million acres). The number of farms has held steady since subsidies were removed; land area has fallen slightly as marginal land has been turned over to forestry or allowed to revert to native bush[4].

* Since subsidy removal the agricultural sector has grown faster than the rest of the economy. Agriculture’s contribution to the New Zealand gross domestic product (GDP) has risen from 14.2% in 1986;87 to 16.6% in 1999;2000. Agriculture accounts for 11.4% of the total workforce[3].

* Rural population has kept pace with national population since 1986. Employment on farms has fallen somewhat, but these losses have been balanced by increased rural employment in tourism-related businesses.

* The number of forced farm sales directly resulting from the removal of subsidies is estimated at 800, or 1% of the total number of farms.

* Agricultural productivity has gone up 5.9% a year on average since 1986. Prior to 1986 agricultural productivity gains were about 1% a year[5].

* The total number of stock units on New Zealand farms has fallen by 9% since 1987. Sheep numbers are down by 29%, but cattle numbers are up by 35%. Sheep farming was the most heavily subsidized sector within agriculture.

* In 2001 governmental assistance to agriculture was equal to just 1% of the value of agricultural output, compared to an average value for developed countries of 31%. Remaining assistance in New Zealand is primarily in the form of funding for agricultural research[4].

* Around 90% of New Zealand’s total farm output is exported. These exports account for over 55% of total merchandise exports. Most food consumed in the country is domestically produced.

4. Nowadays evaluation of policy developments[2]

? Significant progress has been made since 1986;88 in removing policies causing agricultural production and trade distortions. The level of producer support is the lowest across OECD members, domestic and border prices are aligned, and payments are only provided for pest control or relief against climate disasters.

? Reforms undertaken on the statutory producer organisation and marketing boards brought deregulation for all sectors except for kiwifruit, where statutory export rights have been granted to a designated exporter.

? Efforts for sustainable management of New Zealand’s biological and natural resources continued to establish the national frameworks for land and water quality and allocation. A partnership between the dairy industry and both central and local governments has the potential to reduce water pollution. The sustainable farming fund and farm environment awards have made their contribution to the development of sustainable land and water management practices.

? Food safety and biosecurity have been the focus of considerable attention in recent years. The creation of Biosecurity New Zealand consolidated accountability for New Zealand’s biosecurity system into a single authority to improve consistency in risk assessment and efforts to deal with unwanted pests and diseases.

? Efforts for environmentally sustainable development should continue. The government’s efforts to develop additional market-based approaches to deal with both water quality and quantity issues should be encouraged.

Summary of policy developments [1]

Recent policy initiatives in New Zealand relate to sustainable development, biosecurity controls, and water management. Progress was made over 2005;06 toward establishing a national framework for sustainable development. A package of actions in the sustainable water programme and dairying and clean streams accord which were established in 2003 is now under way. The sustainable farming fund has provided financial grants for the efficient use of water and land during the last seven years. The development of policies on climate change and the review of response policy on natural disasters were undertaken. In the area of biosecurity, development of a science strategy is under way and the government made efforts to improve early detection, effective eradication, and contingency planning.

? Support to producers (%PSE) was 1% in 2004;06, down from 10% in 1986;88 and has been the lowest in the OECD since the agricultural reforms in the mid-1980s.

? The share of payments based on input use decreased from 48% of the PSE in 1986;88 to 37% in 2004;06. Payments based on current factors accounted for 10% of the PSE in 2004;06.

? Producer SCT by commodity was 32% for eggs, 9% for poultry and zero for all the other commodities.

? The cost to consumers, as measured by the %CSE, was 2% in 2004;06 (7% in 1986;88).

? Support for general services provided to agriculture as a share of total support increased between 1986;88 and 2004;06, from 21% to 60%. This support consists mainly of basic research, the control of pests and diseases, and flood control.

? Total support to agriculture as a share of GDP is the lowest among the OECD countries at 0.3%, which is less than a quarter of the share in 1986;88.

New Zealand: Commodity-Specificity of Support[2]

In New Zealand, Single Commodity Transfers (SCT) in 2006;08 made up 52% of the PSE, an increase from 19% in 1986;88. Group Commodity Transfers (GCT), where producers have the option to produce any one of a specified group of commodities as part of programme eligibility, made up 22% of the PSE in 2006;08, compared to 68% in 1986;88. Transfers provided under the headings All Commodity Transfers (ACT) and Other Transfers to Producers (OTP) place no restriction on commodities that farmers choose to produce or do not require any commodity production at all.1 Together these made up 26% of the PSE in 2006;08, up from 13% in 1986;88. These changes have to be viewed against an overall reduction in the %PSE from 10% in 1986;88 to 1% by 2006;08.

Conclusion

In 1984, New Zealand introduced important policy reforms in order to address major macroeconomiic and fiscal imbalances. New Zealand’s support to agricultural producers rapidly decreased from 30 percent of the value of production to about 2 percent, and has remained the lowest among OECD economies since that time.

After a difficult transition, the removal of subsidies resulted in a more diversified and competitive rural economy in New Zealand; total factor productivity growth has been roughly 2.5 percent annually since 1984, compared to roughly 1.5 percent in the prereform period.

The New Zealand experience strongly suggests that most of the supposed objectives of agricultural subsidies and market protections—to maintain the traditional appearance of the countryside, to protect the environment, to ensure food security at home and combat food scarcity abroad, to help the family farmer and to slow the corporate take-over of agriculture—are better achieved by their absence.

Removing subsidies forces farmers and farm-related industries to become more efficient, to diversify, to follow and anticipate the market. It gives farmers more independence, and gains them more respect. It leaves more government money to pay for other types of social services, like education and health care.

New Zealand agriculture is profitable without subsidies, and that means more people staying in the business: Alone among developed countries of the world, New Zealand has virtually the same percentage of its population employed in agriculture today as it did 30 years ago, and the same number of people living in rural areas as it did in 1920.

Output and net incomes for the New Zealand dairy industry are higher now than before subsidies ended—and the cost of milk production is among the lowest in the world.

The list of used literature

1. Data summarized from «Life After Subsidies: The New Zealand Farming Experience 15 Years Later» (2006), Federated Farmers of New Zealand (Inc). www.fedfarm.org.nz

2. Agricultural Policies in OECD Countries: Monitoring and Evaluation http://www.oecd.org/dataoecd/13/62/39 579 626.pdf

3. Life After Subsidies: The New Zealand Farming Experience 15 Years Later" (2002), Federated Farmers of New Zealand (Inc). www.fedfarm.org.nz

4. Reforming agricultural policy: lessons from four countries (2007) http://www.odi.org.uk/resources/docs/1872.pdf

5. http://www.maf.govt.nz/mafnet/rural-nz/profitability-and-economics/structural-change/reform-of-nz-agriculture/httoc.htm.

6. Farming without subsidies? By Laura Sayre http://newfarm.rodaleinstitute.org/features/0303/newzealand_subsidies.shtml