The After-Effects of Agricultural Deregulation in New Zealand

The July 2011 Agricultural Symposium sponsored by the Federal Reserve Bank of Kansas City, brought hundreds of banking and business leaders, government officials and academics together to explore the risks to agricultural profits in the 21st century.

"Recognizing Risk in Global Agriculture" included a Bank of New Zealand presentation titled, "NZ Agriculture - Deregulation 26 years on" by Richard Bowman, Head of Agribusiness. To follow are the parts of the presentation which focused upon 1) What happened in the aftermath of Ag deregulation in NZ following 1984, and 2) Conclusions of the outcome of the policy choice 26 years later. (Mostly positive.) ---KM

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Effects of Changes in 1984

• Fertiliser halved to below maintenance levels. After 4-5 years, this started to reduce farm output
• Non-essential repairs and maintenance and expenditure on new plant and equipment was stopped
• New land development stopped -and some land, which had been recently developed, started to decline through inadequate follow-up, a lot of this land was un-economic without subsidy
• Farmers laid off labour and did more farm work themselves. Drawings dropped.
• This reduction in expenditure had immediate and severe effects on rural service industries and rural communities. For every dollar not spent by a farmer, there were three dollars not spent in rural communities. Many people went onto government welfare support.
• About 20% of the total debt owed by the farm sector was written-off (through discounting) and about 5% of farms were sold. The withdrawal of government support to agriculture virtually halved the value of land and livestock over night.
• When government support was first withdrawn, farmers initially acted with disbelief. Then they became very angry and, in 1986, nearly one-third of the farming population marched in a protest to Parliament.
• Government pledged to continue macro economic reform as the best means to improve international competitiveness in farming. This was a clear signal to farmers to start helping themselves rather than seeking ongoing government support.

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CHANGES IN FARMING MIX - NEW ZEALAND

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Conclusions

• New Zealand agriculture has found that there is "life after subsidies". In fact, few farmers now wish to return to the days of government support.
• New Zealand now has an extremely internationally competitive agricultural sector. Quality is very important. New Zealand is very concerned to maintain its clean, green image.
• Inflation proved to be a major destroyer of farm profitability. High inflation reduced international competitiveness, thereby reducing returns, whilst increasing farming costs. New Zealand's inflation rate over the last few years has been considerably lower than our trading partners, and this has further enhanced New Zealand's competitive advantage.
• Companies and individuals now have full market led responsibility for production decisions. They reap the rewards and take the risks of their decisions. Business management skills have improved significantly in New Zealand in the market led environment.
• There is now a much reduced risk of making wrong decisions. Rather than the government picking winners, and supporting particular ventures, decisions are now made by a large number of individuals. The consequences of any one decision-maker getting it wrong is now much less.
• For New Zealand, additional benefits will come from freer international trade in agricultural products. It remains exasperating to New Zealand farmers that much of the international competition New Zealand faces is from subsidised production.

Source –Ministry of Agriculture and Forestry, Reform of NZ Agriculture
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