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Adjusting to No Government Supports in Agriculture: Possible Lessons from New Zealand

By Russell Tronstad
Article Revised 2/96

Keywords: debt, macro-models, policy, sheep, and wool


Political pressure to balance the federal budget has reduced the level of government support to US agriculture through Gramm-Rudman requirements, eroding target price levels, and fewer programs. Political signs also suggest that existing support in agriculture will be reduced and possibly eliminated in the near future, depending on trade negotiations. In 1984 the New Zealand (NZ) government announced a rapid desubsidization plan for agriculture as a component of a national economic reform. This article analyzes NZ's deregulation of agriculture and offers some inferences for U.S. agriculture.

Government assistance to traditional crops of sheepmeat, wool, beef, and dairy products had existed for decades in NZ and was intensified to very high levels in the late 70s and early 80s. Assistance to farmers not only occurred in the form of output price (supplementary minimum prices) but also on inputs like fertilizer, pest control, and low interest rates. The objective of government subsidies was to stabilize business risk, hoping that greater investment and growth would result. Historically, NZ's agriculture growth has been led by exports -- exports to just the United Kingdom, until 1973. NZ's exports of agricultural based products reached a high of around 80% of their total merchandise exports in the 1960s. Domestically, agricultural commodities have made up about 6% of their economy, compared to around 3% for the US.

NZ's policy of high subsidies to agriculture resulted in excessive stocks and an increasing fiscal deficit. By 1983 government expenditures to agriculture made up 9% of total government expenditures and NZ's fiscal deficit was approaching 9% of gross domestic product (domestically produced goods and services), an unsustainably high level. Foreign debt had also risen from 10% to over 50% of gross domestic product between the early 1970s and 1984. Furthermore, conditional farmer support existed for desubsidization because of domestic industrial policies (high input prices) and foreign agricultural policies (declining output prices). These events led to a political front that removed all direct agricultural subsidies within two years.

What has been the outcome of "The NZ Experiment" and are there any lessons for US agriculture? Foremost, adverse consequences projected for NZ did not turn out to be as bad as predicted but were still felt deeply by many sectors. Farm numbers did not decline as projected (although the data is clouded by a reclassification of what constituted a farm) and widespread bankruptcies did not occur as feared. Debt restructing by the government owned Rural Bank, a macro policy that lowered interest rates, and a government "buy out package" for qualified farms mitigated much of the detrimental outcomes that could have occurred for financially strapped farmers.

Sectors hit the hardest were sheep, beef, and wheat producers. The debt to equity ratio for sheep and beef producers increased from a low of 14% in 1980/81 to a high of 36% in 1985/86. Much of the higher debt to equity ratio was a result of declining land values. Depending on land quality, prices declined anywhere from 40% to 60% from their peak level in 1982 to their trough in 1988. Arable land values dropped the most because the loss of protection for wheat growers from the marketing board meant that NZ would be unable to compete with cheaper Australian imports. Sheepmeat and wool was subsidized much more heavily in relation to beef and dairy so that sheep farms also felt a larger impact.

NZ farmers responded to policy reform by shifting away from producing "traditional" crops to more "non-traditional" crops. Sheep farms have declined in numbers while fruit (primarily apples and kiwifruit), vegetable, and other horticultural products have increased in prominence. Statistics suggest that total farm numbers have actually increased after policy reform. Another survival strategy for most farmers was a shift from expenditures on repairs, maintenance, and fertilizers to interest expense and debt servicing. Wage expenses were already at minimal levels so that little reduction in labor occurred.

A more subtle impact of policy reform is that reduced land values appear to have increased farm sales to non-family members. Retiring farmers have had to take a larger portion of their equity in the farm for purchasing retirement property, leaving insufficient equity and funds for their children to enter farming. The age distribution of farmers is somewhat younger now than in the mid-70s with farmers older than 55 declining after reform while farmers younger than 25 and between 35 and 45 have increased. The increase in the 35 to 45 year age group is attributed to high subsidy levels in the early 1980s that enticed entry. The increase in farmers less than 25 years of age suggests that decreased land values which reflect their current income stream rather than future inflated values has made it easier for young individuals to enter farming.

Are there any lessons from "The NZ Experiment" for US agriculture? While it is definitely true that agriculture in NZ is very different from most developed countries in location, diversity, and agriculture's contribution to gross domestic product, some inferences are in order. First, NZ voters realized how expensive their agricultural policy was with runaway fiscal deficits and distortions to relative prices that made subsidies to the farm sector much more costly than just expenditure outlays. Although federal expenditures on US agriculture only amount to about 1% of total government expenditures, pressure exists to cut government outlays and eliminate government induced distortions to relative prices. "Equity" arguments are also debated since over 40% of direct government payments went to the top 3.5% (highest payment levels) of US farmers in 1987 and 1988 who averaged more than $75,000 in payments, almost $100,000 in net cash farm incomes, and more than $750,000 in net farm worth. The top 18% of farmers receiving government payments received 90% of direct government payments in these two years. These signals indicate that reduced government support is coming -- when and how are more indefinite.

The level of support reduction and timing will likely depend upon ongoing trade negotiations. Trade policy was a prominent concern of NZ farmers and is of equal concern by US farmers. Most macro-models indicate that net farm income would decline in the US if government supports were eliminated either unilaterally or multilaterally (all Foreign and US programs eliminated). Although results are somewhat commodity specific, these models also indicate that US's net farm income would not fall near as much under a multilateral elimination of ag subsidies. Thus, negotiating for foreign elimination of government support programs will be important for US farmers in dampening any further erosion in farm income and asset values. If other countries had followed suit with NZ and non-agricultural sectors of their economy had been liberalized to the extent in agriculture, NZ farmers would have been much more competitive internationally and land values would not have declined so dramatically.

NZ was forced to come to grips with desubsidization at a time when world prices for sheepmeat and wool were experiencing sharp downward pressure. Hardship for any ag sector would be greatly softened if desubsidization could take place during a period of upward pressure on world prices, like in the mid 1970s.

Farmers in NZ were quick to respond to economic conditions. They cut back on input intensity where prices were falling and substituted their production efforts into more "non-traditional" crops, plus they adjusted their debt down to a level that was more in line with their reduced income streams. Likewise, US farmers will have to make prudent economic decisions on alternative crop mixes in an era with no deficiency payments or loan price supports. Marketing strategies that consider hedging with futures and options may also be necessary for survival of financially leveraged firms without government guaranteed minimum price supports. Lastly, the NZ experience does indicate that farming without price supports is possible, and not as "unhealthy" as many had feared.

Russell Tronstad is a member of the Western Extension Marketing Committee and is an Associate Specialist in the Department of Agricultural and Resource Economics at The University of Arizona. This article has drawn heavily from a paper presented by J. Hillman, J. Gibson, T. Josling, R. Lattimore, and D. Stumme at the 28th European Agricultural Association of Economics, September 1992.

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