57: Farming for profit
Rolling back agricultural protectionism
The problem: protectionism costs
Farm incomes can be very variable. Market prices depend not just on seasonal fluctuations in the weather at home, but on climate conditions in other parts of the world too. Because crops may take the best part of a year to grow, and livestock can take several years to mature, investment decisions can prove to have been wildly mistaken when farm produce finally comes to market.
To compensate for these unpredictable effects, and to smooth out the incomes of their farmers, many countries have adopted price controls, marketing boards, and restrictions against imported produce (see the chapter Hot Cocoa).
New Zealand was no exception, establishing a dairy board in 1922, and then other boards to regulate the sale of meat, wool, apples, and kiwifruit - as well as raising import tariffs and restrictions from the 1930s. The 1960s and 1970s saw a further expansion in stabilization policy, with quotas, lending and debt write-off schemes, and floor prices for all the major commodities.
However, this support apparatus came at considerable cost to New Zealand taxpayers, and raised food prices for families by perhaps 5%. With world markets coming to dominate, it became clear that the 'Fortress New Zealand' policy with its artificial market prices, could no longer be sustained.
The policy: phasing out the supports
Following earlier reforms by the new (Labour) government (see the chapter Set the Prople Free), a mini-budget in December 1985 announced changes in farm taxation and tariff reform. The policy involved reducing subsidies to farms by:
· phasing out price supports and winding up the stabilization funds;
· abolishing subsidies on inputs, transport, etc;
· ending concessionary farm loans and charging market rates on rural lending;
· removing tax concessions on new machinery and buildings; and
· setting realistic charges for central-government services to farmers.
These reforms did not amount to a complete free market. The monopsonistic marketing boards still dominated agricultural produce sales; but generally, farmers were required to pay commercial prices for their inputs and credit, and to accept market prices rather than administered prices.
Assessment: tough, but quick
Naturally, these radical reforms caused difficulties for many farmers. Some left the industry, some changed their product mix, some small farmers improved their efficiency by merging with others. During the transition, farm incomes fell, and the government had to respond to appeals for emergency support. Yet by 1990-91, incomes and the terms of exchange for farmers had returned to their earlier levels, and the period of adjustment was effectively over.
New Zealand's farming reforms show that agricultural markets do tend to adjust relatively quickly. Temporary assistance may be necessary, but people rapidly find new ways of working their land more productively, once forced to by necessity, and farm incomes then rise again. This improved efficiency cuts the cost of agriculture for governments (or their taxpayers).
The New Zealand reforms also returned land prices to a normal capital-income relationship with farm revenues. Farmers' exposure to price risk, and realistic interest rates, have helped deflate land prices.
Arguably, there could have been greater benefits all round if the New Zealand reforms had been simultaneously copied by the European Union and other countries with protectionist regimes - ending the vicious circle of tariff leap-frogging as countries try to counter the protectionism of others. But even in the EU, there are signs that the highly-protectionist 'Common Agricultural Policy' is being unravelled and replaced by more sensible market-based reforms.
For more information:
- New Zealand Ministry of Agriculture at www.maf.govt.nz
- Johnson, R W M (2000) Reforming EU Farm Policy: Lessons from New Zealand: Institute of Economic Affairs (London).
- O'Quinn, Robert, and Ashford, Nigel (1996) The Kiwi Effect (download PDF 89kb): Adam Smith Institute (London) www.adamsmith.org.
- Adam Smith Institute (1985) Milking the Consumer: www.adamsmith.org.
Copyright 2002: Adam Smith Institute
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