Farming without subsidies?

Some lessons from New Zealand

By Laura Sayre

Posted MARCH 20, 2003: What would the world look like without agricultural subsidies? What would the United States look like? If a crystal ball exists for those questions, its name is New Zealand, one of the first and still one of the few modern countries to have completely dismantled its system of agricultural price supports and other forms of economic protection for farmers.

Brace yourself: this is free-market faith to make Adam Smith proud. But the New Zealand experience is pretty persuasive. Well into its second decade of subsidy-free farming, New Zealand enjoys a worldwide reputation for its high-quality, efficient and innovative agricultural systems.

New Zealand agriculture is profitable without subsidies, and that means more people staying in the business. Alone among developed countries of the world, New Zealand has virtually the same percentage of its population employed in agriculture today as it did 30 years ago, and the same number of people living in rural areas as it did in 1920. Although the transition to an unsubsidized farm economy wasn’t easy, memories of the adjustment period are fading fast and today there are few critics to be found of the country’s bold move.

A mini-history of Kiwi agriculture
So how did they do it? Where did the political will power come from, and what was the fallout like? Here’s a mini-history of New Zealand agriculture. Prior to European settlement, the indigenous Maori cultivated kumara (Polynesian sweet potato), taro and gourds in addition to fishing and hunting native birds for food. Officially claimed by the British Crown in 1840, in the nineteenth century and for much of the twentieth, New Zealand became Great Britain’s agricultural hinterland, supplying first grain and wool, and then—after the development of refrigerated shipping in the 1880s—meat and dairy products to Britain and other parts of the British Empire.

As late as 1964, New Zealand sent 61% of its total meat exports (lamb, mutton, beef and veal), 94% of its butter, and 87% of its cheese to the UK. Disruptions of this pattern during the First and Second World Wars, however, encouraged New Zealand to adopt increasingly protectionist policies, placing tariffs on imported industrial goods and establishing Producer Marketing Boards for the major commodity groups from the 1920s, designed to represent farmers’ interests and to act as single sellers in the global marketplace.

Like the US, New Zealand suffered a major economic depression in the 1930s and enjoyed a boom period in the 1950s, as post-war consumption levels rose and war-time technologies found new agricultural applications like fertilizer and pesticide production and improvements in transport. (On New Zealand’s rugged landscapes aerial topdressing of pasturelands was widely adopted, and helped boost productivity.)

Several factors threatened the comfortable prosperity of NZ agriculture in the 1970s. The independence of the Pacific Island of Nauru in 1968 spelled the end of New Zealand’s supply of cheap phosphate rock, mined there and on other so-called ‘phosphate islands’ since the early part of the century. Four years later, in 1972, Britain’s decision to join the European Economic Community (now the European Union) signaled a major realignment of global trading relationships, in which New Zealand’s position as a Commonwealth country would no longer guarantee special consideration for its agricultural products. Finally, and again as in the US, rising world oil prices triggered a period of escalating inflation, making it increasingly difficult for farmers to secure good prices on the international market.

Governmental policy at this time exacerbated the situation by seeking to boost agricultural production based on the hope of greater returns—farmers were offered subsidies to purchase more fertilizers, and tax breaks for increasing herd sizes—further depressing commodity prices through oversupply. In part because of the recognized importance of agriculture within the national economy, farmers were also offered price supports, low-interest loans, disaster relief, weed-eradication subsidies and special training programs to get them through the hard times. As the laundry list of farm support programs grew, it became an increasingly impossible burden for this small national economy to bear, threatening to further undermine the stability of the whole system.

Talk about shock and awe: farm leaders in New Zealand among the first to advocate an end to subsidies
Interestingly, farming leaders were among the first to recognize the absurdity of the situation and to propose alterations, although they stopped short, at first, of advocating the total elimination of agricultural subsidies. In 1982, Federated Farmers of New Zealand (New Zealand’s leading farmer organization) submitted to the government an economic position paper declaring that controlling inflation, rather than compensating farmers for the consequences of inflation, should be the national priority. They reasoned that a key cause of inflation was the budget deficits required to fund farm subsidies (among other programs), so that more subsidies only made the problem worse.

While most of the Federated Farmers’ specific recommendations were rejected by then-Prime Minister Rob Muldoon, the cat was out of the bag: economic analysts from across the political spectrum began to the debate the effects of subsidies and other forms of market intervention, and when the Labour Party won a landslide election in 1984 (defeating Muldoon and the National Party) the country was ready for reform.

Because most NZ farmers were traditionally National Party members, the process of reform was to some extent bipartisan. Agricultural reform was also part of a larger package of economic restructuring that included the scaling back of import tariffs; deregulation (or partial deregulation) of public utilities and transport systems; implementation of New Zealand’s first ‘goods and services’ tax (or GST—similar to the US sales tax); and floating of the NZ dollar on the global currency exchange. Further reforms were implemented after the National Party was voted back into power in 1990.

All of this was not achieved without some controversy, and there were a few casualties, both political and economic. It is estimated that around 800 farmers—or 1% of the total number of commercial farmers in operation—were forced to leave the land. Sheep farmers, who as a group were the most heavily subsidized, were (not surprisingly) hardest hit by the elimination of subsidies. Those farmers who were heavily in debt at the start of the reform period were hit hard by rising interest rates, and a transition program was negotiated to ease their situation. Farm-related sectors like packing and processing, equipment and chemical supply, and off-farm transport also suffered, but this was regarded as evidence of their previous inefficiency. Overall the ‘transition period’ lasted about six years, with land values, commodity prices, and farm profitability indices stabilizing or rising steadily by 1990.

Ever since then, the New Zealand experiment has been gradually gaining attention—and respect—around the world. NZ agricultural leaders are invited to speak to international audiences about their country’s experience dismantling subsidies, and foreign officials come to New Zealand to inspect the results first hand. Analysts in Europe scrutinize the NZ example as they draft proposed reforms to the EU’s Common Agricultural Policy (CAP). In 2001 Alistair Poulson, chairman of NZ Federated Farmers, told the BBC News that the average New Zealand farmer’s advice to his or her colleagues in other countries would be to “get off the subsidy gravy train as soon as possible.”

Why New Zealanders don’t like subsidies
According to the Kiwi outlook, the ill effects of subsidies include:

1. Resentment among farmers, some of who will inevitably feel that subsidies are applied unfairly.
2. Resentment among non-farmers, who pay for the system once in the form of taxes and a second time in the form of higher food prices.
3. The encouragement of overproduction, which then drives down prices and requires more subsidization of farmers’ incomes.
4. The related encouragement to farm marginal lands, with resulting environmental degradation.
5. The fact that most subsidy money passes quickly from farmers to farm suppliers, processors, and other related sectors, again negating the intended effect of supporting farmers.
6. Additional market distortions, such as the inflation of land values based on production incentives or cheap loans.
7. Various bureaucratic insanities, such as paying farmers to install conservation measures like hedgerows and wetlands—after having paid them to rip them out a generation ago, while those farmers who have maintained such landscape and wildlife features all along get nothing.

Removing subsidies, on the other hand, forces farmers and farm-related industries to become more efficient, to diversify, to follow and anticipate the market. It gives farmers more independence, and gains them more respect. It leaves more government money to pay for other types of social services, like education and health care.

Down-under advocates for a new future for agriculture
New Zealand has a strong interest in trumpeting subsidy-free agriculture, of course, since NZ farm exporters are at a disadvantage on the global market with respect to their subsidized counterparts in Europe and the US. Almost since the reform process began, New Zealanders have been doing just that.

New Zealand was a founding member of the Cairns Group (named for Cairns, Australia, the location of the group’s organizing meeting), a consortium of agricultural trading nations that banded together in the mid-1980s to lobby for liberalization of trade rules on agricultural products. Cairns Group countries—the other member states are Canada, Brazil, Colombia, Argentina, Uruguay, Chile, Fiji, Australia, the Philippines, Malaysia, Thailand, Indonesia, and Hungary—depend heavily on agricultural exports to maintain their balance of trade, and they argue that agricultural subsidies and import tariffs in places like the US, the EU, and Japan are unfair: industrialized countries have grown rich through free trade in manufactured goods, and are now using that wealth to block less-industrialized countries from bringing their (agricultural) goods to market under similarly liberal terms.

As Brian Chamberlin, president of NZ Federated Farmers in the late ‘80s and a vocal advocate of free-market farming, has written, “It is not an exaggeration to say that for every rural school kept open by European sheep subsidies in Scotland, Wales, or France, one is closed in a rural area somewhere else in the world.”

Save family farms? Eliminate subsidies, suggests New Zealand experience
The New Zealand experience strongly suggests that most of the supposed objectives of agricultural subsidies and market protections—to maintain a traditional countryside, protect the environment, ensure food security, combat food scarcity, support family farms and slow the corporate take-over of agriculture—are better achieved by their absence.

Life without Subsidies How the farmer was impacted by lack of government assistance • Today New Zealand has around 80,000 farm holdings on 15.5 million hectares (38.3 million acres). The number of farms has held steady since subsidies were removed; land area has fallen slightly as marginal land has been turned over to forestry or allowed to revert to native bush. • Since subsidy removal the agricultural sector has grown faster than the rest of the economy. Agriculture’s contribution to the New Zealand gross domestic product (GDP) has risen from 14.2% in 1986-87 to 16.6% in 1999-2000. Agriculture accounts for 11.4% of the total workforce. • Rural population has kept pace with national population since 1986. Employment on farms has fallen somewhat, but these losses have been balanced by increased rural employment in tourism-related businesses. • The number of forced farm sales directly resulting from the removal of subsidies is estimated at 800, or 1% of the total number of farms. • Agricultural productivity has gone up 5.9% a year on average since 1986. Prior to 1986 agricultural productivity gains were about 1% a year. • The total number of stock units on New Zealand farms has fallen by 9% since 1987. Sheep numbers are down by 29%, but cattle numbers are up by 35%. Sheep farming was the most heavily subsidized sector within agriculture. • In 2001 governmental assistance to agriculture was equal to just 1% of the value of agricultural output, compared to an average value for developed countries of 31%. Remaining assistance in New Zealand is primarily in the form of funding for agricultural research. • Around 90% of New Zealand’s total farm output is exported. These exports account for over 55% of total merchandise exports. Most food consumed in the country is domestically produced. Data summarized from “Life After Subsidies: The New Zealand Farming Experience 15 Years Later” (2002), Federated Farmers of New Zealand (Inc). www.fedfarm.org.nz

Keep a basic social security framework for farmers as for urban residents, keep funding for agricultural research, the Kiwis argue, keep environmental barriers like measures to keep agricultural pests from leaping around the world, and do away with the rest.

Many, if not most, ‘alternative’ farmers in the US do not benefit from the elaborate system of protection and assistance represented by our enormous bi-decadal Farm Bills. Perhaps it’s not surprising, then, that much of the agitation for reform of agricultural funding in the US is just that: reform, not abolition, trying to figure out how to stop funding the forms of farming we don’t like and secure more funding for the forms of farming we do like.

It’s tempting for organic farmers in the US to look longingly over at the EU, where countries like Britain, Denmark, and Germany have been paying farmers to convert to organic but organic farming is growing fast in New Zealand, too, without the direct help of the government. Instead they relied on farmers' ability to follow the market and decide the best future for his or her farm.

Interestingly, advocates of sustainable farming in the US tend to be hostile toward the idea of international trade liberalization for agriculture—remember the heated debates surrounding the Uruguay Round of the General Agreements on Tariffs and Trade (GATT) in the late ‘80s and early ‘90s? The strange thing about discussions of free trade is that they tend to bring out contradictions in people’s thinking. Like I said, this is free-market faith to make Adam Smith proud. But the New Zealand example is pretty persuasive.

Laura Sayre has been working on organic farms and writing about agriculture since 1991.