New Zealand’s current macroeconomic climate is much more stable than it was in the 1980s and the agriculture sector operates in a freer market environment that contributes to growth in productivity and incomes. Essentially this means that farmer returns are more closely aligned to final world market returns and consequently farmers have to assume a greater portion of market risk. The rate of total factor productivity growth of the sector has nearly doubled from 1.5 per cent over the high subsidy period (1971-72 to 1983-84), to 2.5 per cent thereafter. (Much of the material presented here on policy reforms has been taken from a paper presented in Canada by Lattimore 2006).

Real farm incomes have recovered and in some cases are significantly higher than they were during the period of high subsidies. Likewise, real farmland prices are higher than they were under high subsidies.

policy reform – 1984 and beyondIn 1984 the New Zealand Government structured a set of reforms that provided prospective benefits to farmers in the form of lower costs, at the same time as they phased out subsidies. Prior to the 1984 reforms, high farm subsidies in New Zealand were partial compensation for the import selection policy and attendant policy interventions; however, farmers recognised that subsidies were not a sustainable solution. The prospect of freer imports in return for farm subsidy elimination was credible in 1984 because moves had been under way for some years to reduce import protection. A significant factor was also the signing of the free trade agreement with Australia in 1983. The Australian and New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) includes all food and agricultural products and a joint food standards authority to prevent nontariff barriers.

The agriculture sector was reformed quickly and severely in comparison with other sectors of the New Zealand economy. The export and production support policies that favored the agriculture sector were removed swiftly between 1984 and 1987 because of its position as a significant export earner in the economy. However, there remained a multitude of other support mechanisms in place, most of which provided shelter to import competing sectors but raised the cost of intermediate and consumer goods. The removal of these support policies were negotiated with industry groups over an extended period.

While most reform of the agriculture sector was completed during the mid-1980s, general economic reform continued in many forms throughout the 1990s. One such significant policy reform of the 1990s was the establishment of the Fiscal Responsibility Act 1994 which led to a reduction in the size of services provided by the government, a further step from the deregulation in the 1980s. In the late 1980s and early 1990s, social services were also reduced in response to the changing demographic profile of New Zealand’s population.

The post-1990 reforms have further enabled the agriculture sector to benefit from greater synergies, better use of resources, and a competitive industry structure that allows for better response to market signals. This led to an improvement in total factor productivity growth — to average 2.5 per cent a year in the post-1984 period compared with 1.5 per cent in the pre-1984 period.

policy impacts

sector growth

Economic development processes involve a gradual shift of resources from the primary sector to manufacturing and finally to the service sector. This path has been followed successfully in New Zealand but in somewhat different fashion to other countries for two reasons. First, the relative strength of New Zealand’s comparative advantage in agriculture is greater than for most other developed countries. Second, the import substitution bias of policy in New Zealand was greater over the post-World War 2 period than it was in any other developed country.

In this context it is interesting to look at agriculture’s share of GDP and exports. In 1965-66, agriculture’s share of GDP was 14 per cent, but this fell steadily to 5.7 per cent in 1986-87. Agriculture’s share of GDP is affected by international prices, exchange rates and climatic conditions.

In 2001-02, all three factors were favorable and agriculture’s share of GDP peaked. In 2005-06 the share was 4.9 per cent, mainly because of an appreciating currency. In 1959-60, agricultural exports represented over 90 per cent of New Zealand’s total exports, but fell to just over 60 per cent by 1985-86. Following the removal of farm subsidies, agriculture’s export share has continued to fall but at a much reduced pace — in 2004-05 it was around 52 per cent of total merchandise exports.

The number of commercial farms in New Zealand grew following the removal of subsidies — from 77 000 in 1983-84 to around 80 000 over the period 1985-86 to 1992-93. Over this period, pastoral farms became larger and many farms that diversified into deer and horticulture became smaller. There are currently around 66 000 commercial farms, in part as a result of farm unit amalgamations in the expanded dairy industry.

The farm labor force has trended downwards since subsidies were phased out in the 1980s. Increased farm subsidies had resulted in an expanding agricultural labor force that peaked in 1982-83 at 127 000 (full time equivalents) but since declined to around 102 000 in 2003-04. Labor productivity has risen to almost double its level in 1983-84.

The land devoted to livestock and arable farming has declined from 14 million hectares in 1983-84 to around 12 million hectares in 2002-03. However, land productivity has increased by 85 per cent since 1983-84. Over the same period, livestock overwintered on this land fell from over 100 million to 94 million stock units — but the latter were much more productive animals. The productivity of breeding ewes has risen by over 60 per cent since 1990-91 (in terms of kilograms of lamb produced per breeding ewe), while the quantity of milk solids produced per dairy cow has risen by over 30 per cent.

Dairy farmer incomes started to recover from 1988 onwards and improvement accelerated in the 1990s through the beneficial impacts of the implementation of the Uruguay Round Agreement on Agriculture. Incomes for sheep and beef farmers improved more slowly from 1986-87. Sheep and beef farming received a setback during and after the 1998 Asian financial downturn as Asia provides a very important set of farm markets for New Zealand. More recently, there have been some spectacular rises (and falls) in farmer incomes. The large rise in 2000-01 for dairying triggered more major conversions of sheep farms to dairy farms.

Farmland prices bottomed in the late 1980s, and immediately began to recover. Again the recovery was slowest for sheep farmland prices, but this is not surprising given the relatively slow trend in sheep and beef farmer incomes. Around 1995-96 there was some speculative activity in dairy and arable farmland. This activity was sufficient to attract the attention of the central bank governor and the ensuing interest rate hikes resulted in some of those gains being lost. The falls in dairy farmland prices after 1996-97 were also partly the result of lower export prices around the time of the Asian financial downturn of 1998. The upward trends in farmland prices resumed from 2000-01.

general productivity and resource use indicatorsPolicy reform since 1984 has had a significant impact on the agriculture sector, with a lifting in overall total factor productivity. The two major outcomes of the agricultural reforms were productivity growth in individual sectors (for example, dairy, beef, sheep) and resource reallocation to high productivity sectors.

The deregulation in 1984 and the industry restructuring afterward have led to a competitive market structure that is free of distortion and allows for a better response to market signals. As a result, resources are more efficiently used, and changes in export mix reflect the changes in the diversity of markets and products.

Strong indicators of the productivity improvements made within sectors over the past twenty years — as shown in the table on the following page — include higher beef and lamb carcass weights, increased lambing percentages, and improved rates of milk solid per cow. Average carcass weights between 1982-83 and 2003-04 increased by 15 per cent for beef and 28 per cent for sheep. Lambing percentage increased by 18 per cent, from around 96 per cent in 1983 to 113 per cent in 2005, while milk solids per cow increased by 32 per cent over the same period.

Land use has changed also — a larger proportion of land is now used for horticulture than in the 1980s, particularly for grape growing, while a similar proportion of land is used for pastoral industries.

Since 1987, land used for pastoral industries and the total land available for agriculture have declined at a similar rate. Among pastoral industries, more resources have been diverted into dairy farming. Total stock units in the dairy sector increased by 65 per cent, while the beef and sheep sectors both declined, by 2 per cent and 43 per cent respectively.

benefits of freer tradeThe New Zealand experience has shown that subsidies and import protection led to many distortions, including resource misallocation and lower product quality. Freer trade policies tend to steer the sector in the right direction in product and market development terms and support the entry of international best practice technology. Additionally, the removal of subsidies does not necessarily denote a huge drop in farmland prices, even in the short term.

Stock units and productivity indicators – New Zealand April–March years 1982-83 2003-04 Change % Sheep stock unit a 64 474 37 010 –42.6 Beef stock unit a 22 018 21 593 –1.9 Dairy stock unit a 19 658 32 365 64.6 Total stock unit a 106 150 90 968 –14.3 Milk solids per cow kg 231 305 32.3 Lambing rate % 95.7 112.9 17.9 Lamb weight kg/hd 13 17 27.7 Mutton weight kg/hd 19 24 26.3 Beef weight kg/hd 223 257 15.2 Growth in total factor   productivity % 1.5 2.5 66.7 a A stock unit is a measure used to compare the nutrition requirements of different pastoral livestock. For example the standard stock unit is based on one breeding ewe of 55 kilograms producing one lamb. A dairy cow in calf equals seven stock units. Sources: Ministry of Agriculture and Forestry; Meat and Wool New Zealand Limited.

Farmers are more likely to survive a post-reform adjustment period if they have access to the best possible support and advice when negotiating with their bankers. If the subsidy had been very high then radical restructuring of balance sheets would be necessary and associated business plans would need to be marketed well to financing institutions. Where reforming countries already have a reasonably stable macroeconomic environment, farm subsidy removal would have a less severe impact in the short term than was the case in New Zealand.

The final and perhaps most important message is that farm incomes and farmland prices do recover after reform and can go on to make significant gains. The sooner that efficient farmers regain a viable commercial position following reform, the sooner they are able to make essential new investments and the faster the recovery will be.