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Farm Adjustment to Domestic Policy Reform: Lessons from the New Zealand Experience

Farm Adjustment to Domestic Policy Reform: Lessons from the New Zealand Experience. Allan Rae Department of Applied and International Economics Massey University New Zealand. What do the rich countries spend on their farmers?.

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Farm Adjustment to Domestic Policy Reform: Lessons from the New Zealand Experience

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  1. Farm Adjustment to Domestic Policy Reform: Lessons from the New Zealand Experience Allan Rae Department of Applied and International Economics Massey University New Zealand

  2. What do the rich countries spend on their farmers? • US$231 billion on directly supporting farm incomes in 2001 (OECD) • This is 31% of value of farm production • Another US$54 billion spent on indirect support (R&D, marketing, infrastructure etc) • This total is slightly higher than in 1986-88 • WTO controls largely ineffective

  3. Domestic support has increased substantially in the US • Trade-distorting domestic support can be increased if current spending is below the country’s level of commitment

  4. Increasing Domestic Support Payments can Further Distort Trade • ‘Amber box’ payments clearly impact on production levels and trade • But ‘green box’ payments probably also do to some extent: • Increase farm investment • Increase ability to borrow for above • Farmers become less averse to risk • Protect farm from bankruptcy

  5. Some Policies can be Inefficient in Raising Farm Net Incomes • World prices may fall as a result • Farm costs rise as production expands • Capitalised into land values & captured by landowners • Some capture by imperfectly-competitive off-farm agents • Hinders allocation of labour & capital to off-farm opportunities • So process becomes a ‘treadmill’

  6. Increasing Pressures to Eliminate Domestic Support • Enlargement of EU • Possible return to US budget deficits • Reduction of trade barriers, if achieved, puts more pressure on domestic support • Sense of outrage from developing countries • Increasing public awareness

  7. Key Impediment to Reform is the Perceived Adjustment Problem • Assumption that $100 reduction in support will:  $100 reduction in net farm household income  widespread bankruptcy massive exodus from farming Will argue, supported by NZ evidence, that above is extremely unlikely

  8. Unlikely that household income falls by amount of support reduction • Farmers adjust to price changes • Diversify • Reduce/substitute inputs • Change farmland use • Increase farm productivity • Allocate larger share of labour/capital to off-farm activities • Farm income a declining share of total household income • Enhance competitiveness within marketing channel

  9. The New Zealand Experience • Little assistance to farming before mid-1960s • BoP crises led to objective of increasing farm production & export revenues • New programmes to stabilise/support prices, subsidise inputs, tax concessions, grants for land development & stocking

  10. By 1983, NZ farming had become as heavily subsidised as that of the EU

  11. Sheep and beef farms were the most heavily supported

  12. By 1984, economic problems had become acute: • Govt deficit reached 9% of GDP • Debt servicing was 15% of govt spending • Persistent current account deficit • Over-valued exchange rate • Excessive monetary growth • Rapid inflation • Heavy selling of $NZ

  13. Snap election of June 1984 - • Govt defeated – new Labour government • Major programme of reform • Farm support an obvious target, and rapidly withdrawn • PSE fell from 35% to 5% in 1990, and has been 1% since late 1990s • Will look at how farmers responded

  14. But reforms weren’t limited to farming • Immediate 20% devaluation in 1984 • Removal of financial & exchange market controls • Free float of NZ$ • Import quota system dismantled • Import tariffs progressively lowered • Privatisation of many govt. activities • Central Bank autonomy & inflation targets (1989) • Labour market deregulation (1991)

  15. What happened to farm incomes in this environment? • Focus on sheep & beef farms, as had been the most favoured by support • Removal of support need not lead to permanent fall in income

  16. Actions taken by farmers:Changes in product mix • Transparent world price signals • Between 1984-89 – • Sheep numbers fell from 70.3 to 64.6 million • Beef cattle numbers rose from 4.5 to 4.9 million • Deer numbers rose from 0.2 to 0.6 million • Now, sheep = 44 million, and deer 1.8 million

  17. Actions taken by farmers:Changes in land use • Between 1984 & 1994, grassland area in sheep/beef fell by 1.93 mill. ha (-16%). • Of this – • 1.08 mill. ha  dairy, deer,vineyards, other hort, urban uses • 0.85 mill. ha  forestry, retirement of marginal land

  18. Actions taken by farmers:Changes in input use • Fertiliser the major share of variable costs • Use immediately fell from 15.5 kg / SU to 6-7 kg • Fertiliser sales were 45% lower in 1988 than 3 years earlier • Sales have since recovered

  19. Actions taken by farmers:Rise in productivity

  20. Agricultural TFP rose • By 1.8% p.a. 1972-84 (pre-deregulation) • By 4.0% 1985-98 (post-deregulation) • Such gains aided farming to weather financial stresses of deregulation

  21. How did farmers achieve this?

  22. …and something similar for beef cattle

  23. Actions taken by market channel participants • A govt. objective was to increase competition in domestic economy • Several marketing boards disbanded • Allowed entry of private sector • Labour market & waterfront reforms • Between 1986-1989: • # waterside workers fell 34% • Payout / worker rose 45% • Tonnage handled / worker rose 53% • And stevedoring costs fell substantially

  24. Impacts on meat processing sector • 1984-94: 25% processors closed • As livestock numbers fell & new technology was required • Replaced by smaller hi-tech plants • Comparing 1995 with 1983 • Bull beef • New York prices 12% lower • Farm price 40% higher

  25. Government facilitation of farm adjustment • Farmers weren’t protected by existing social welfare benefits • Special Assistance to Farming Programme (’86 – ’89) gave equivalent benefit • Exit Grants Scheme 1988 • Loan discounting scheme (debt restructuring and some write-off) • About 20% farm debt written off and 5% farms were sold • Govt worked with local support groups (advice & counselling)

  26. Lessons • Farmers can overcome subsidy reduction • Helped by reforms in other sectors, and macro • Lower incomes short-term • Enhanced efficiency & productivity • Adjustment benefits not always rapid • Role for govt. adjustment assistance • Positive environmental impacts

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