R.W.M. Johnson
The place of capital in agricultural expansion in New Zealand has been largely neglected in the past. Part of the explanation for this lies in the lack of adequate statistics - the official series on capital expenditure on farms only started in 1965-66. Partly the explanation lies in the fact that capital expenditure has been largely autonomous in the agricultural sector and no assistance or encouragement was thought necessary. In fact, investment is not strictly autonomous in the full sense of the word, rather it is generated from within the sector and occurs without making an impact on the institutional framework providing capital to agriculture generally. In part, anyway, this is because the institutional structure is largely geared to financing land purchase and not farm development and expansion per se.
As a result of the shortage of official statistics this analysis is largely based on the independent work carried out at Lincoln College in the 1960's. Official statistics have been used, however, to bring the Lincoln work up to date, and more recent observations are drawn from the Agroscope survey of farmer's capital expenditure carried out by Farm Market Index Ltd. These various sources provide data for the period from 1945-46 to 1978-79.
The paper first examines the historical pattern of capital expenditure in New Zealand agriculture since the war and develops a simple economic model of real net investment I along the lines earlier published by Lincoln College. From this examination certain conclusions can be drawn about the pattern of investment in the post war period. Secondly, the paper reviews the available evidence on the propensity to invest in agriculture in New Zealand and the implications of this for national policy-making. The paper concludes with a discussion of present policy measures and needed developments to encourage the right production response in line with national objectives.
The following discussion is based on the usual definitions of capital investment in a system of national accounts. Gross investment is all expenditure on capital goods by agricultural firms in the fiscal period or March year. Capital goods are durable goods which contribute to further productive effort.
2.
Net investment is the true increment of capital added to the national capital stock in the given period. The difference between gross and net investment is thus true replacement expenditure or economic depreciation. It should be noted that the Lincoln College data used is devised from a concept of true economic depreciation and hence the derived data on net investment is not comparable with other data series based on Inland Revenue permitted rates of depreciation.
Table l brings together the available gross investment data for the period 1945-46 to 1978-79. Up to 1968-69 the series is derived from estimates aggregating individual items of capital expenditure found in secondary statistical sources. It is not a direct measure of capital investment. From 1969-70 the Statistics Department's series of capital expenditure on farms is used - this being a direct census of all farms in New Zealand. The last published year of results of the official survey is 1976-77. The remaining data is derived from a random sample of farmers interviewed by Farm Market Index Ltd. Their questions are modelled on the Statistics Department's questionnaire.
Over the period under review the money value of gross investment in agriculture has increased twenty fold. Over the same period product prices have increased by five times, thus the real value of capital investment has increased by a factor of four. There has been a steady build up of investment in land improvements over the years and also in additional farm buildings.
Investment in plant has fluctuated more over the years and has shown marked price increases in recent years. Since 1949-50, land improvement prices have increased by six times and plant and machinery prices have increased by eight times. As a result of these differential price trends real gross investment in land and buildings has doubled since 1949-50 while that of plant and machinery has only increased by a factor of 1.33 over this period. (Such comparisons do not take account of changes in the technical efficiency of plant, only changes in prices).
Some of this gross investment is for replacement purchases only. The Lincoln College data has identified the share of total investment which is for replacement and the same rules have been applied to the data since 1968-69. At the same time, the net investment series I is converted to real terms by the use of the price indices referred to in the previous paragraph. The resulting calculations are shown in Table 2 along with the value of livestock employed on farms from the Lincoln College data - all at 1949-50 prices. Graph 1 shows the trends in real net investment in Iand and buildings and in plant and machinery for the period 1945-46 to 1978-79.
3.
It can be seen that net additional real investment in land improvements and buildings built up very quickly in the early post-war period reaching a peak in 1955-56, then plateaued somewhat before building up to a further peak from 1960-61 to 1966-67. Thereafter there was a rapid decline in real net investment reaching its lowest level in 1971-72. Two good years then followed and the subsequent years have tended to stabilise at about the real level of the early 1960's. It is clear that net additions to the productive assets have been made in all the post-war years, but also that the growth rate of the 1950's and 1960's has not been maintained into the 1970's.
The real net investment pattern for plant and machinery is quite different. There was a very marked re-equipment period after the war peaking in the years 1949-50 to 1952-53. Thereafter the additions to the stock were very small through the late 1950's and the 1960's. Some of this could represent delayed re-equipping as there was a marked up-surge of net investment in plant and machinery in 1971-72, 1972-73 and 1973-74. After this last year the pattern of the 1960's has re-asserted itself. Thus from 1960 to 1970 there was apparently a marked increase in the efficiency of plant use as production kept on expanding with a fairly constant stock of machinery. In the 1970's re-equipment showed a reverse trend in efficiency and by the end of the decade a stable ratio was being achieved.
From statistics of real net investment, it is possible to proceed to estimates of the real capital stock employed in agriculture. The Lincoln College statistics establish a base year stock for land and buildings in the 1966-67 season and that for plant and machinery in the 1949-50 season. Given a base year, the time series of capital stock are generated by simply adding or subtracting the real net investment increments in every year. The results of this process are shown in Table 3.
The trends in real net investment discussed earlier can now be assessed against the total stock of capital employed. As Table 4 shows, the growth of land and buildings stock has been very steady over the seven five-year periods since 1945.
There has been some decline in the rate of growth of land and buildings stock in the two five year periods since 1970, but growth nevertheless persisted. The fluctuations in the growth of the stock of plant and machinery are now much more apparent. Particularly so 1950 to 1955 and again, from 1970 to 1975. There was actually a net decline in the plant stock between 1965 and 1970. Livestock shows the growth behaviour already well known and documented. Such might be expected from a set of price weights as compared with a set of feed equivalents!
4.
The strong contrast in the behaviour of land and building stocks and the livestock series since 1969 is illustrated in Graph 2. Up to 1969 a strong association was evident between livestock expansion and the land and building stock. After 1969 there is a complete break and this requires further examination.
The first question to ask is whether the statistical material can stand the burden being placed on it? 7 There is little doubt about the accuracy of the livestock series, hence the construction of the land and buildings series should be questioned. The gross expenditure series is reliable, the price series are fairly reliable but there is some doubt about the adjustments for replacement of capital goods.
The average rate of replacement in the Lincoln series worked out at 1% of the real capital stock of land and buildings up to 1969 and this has been assumed for the period after 1969. If this 1% is an underestimate then of course the growth of the stock series would be less. It can be calculated that a replacement rate of 2.25% would cancel out the growth factor - hence further research is needed to see whether this factor can be more narrowly defined.
Secondly, it could be asked if there has been any structural change in capital investment in the 1970's? The balance between land development and buildings investment can be judged by examining the gross money investment series in Table 1. It can be seen that up to 1973-74 there was a rough equality between the series. From that date onwards, however, building investment has tended to increase relative to land improvement investment. Given New Zealand's pastoral comparative advantage, this last trend could well be one of the explanations for the decline in the growth of production in recent years. A further breakdown of recent data is shown in Table 5. New houses have increased slightly as a proportion of total building investment.
Thirdly, it may well be that the type of farming requiring new investment is changing. Statistics Department data is available on gross investment trends by type of farming, though again these are not perfect as the definitions of type of farming have been changed in the period concerned. Table 6 shows the main farm types which can be deduced from the Statistics presentation.
The sheep and beef sector has maintained a constant share of the total; the dairy sector has slowly declined, especially since 1971-72; the crop sector has maintained a constant share except for the years for which data is incomplete; market gardens have steadily increased their share (they are the only horticultural group for which a continuous series is available), and the residual group of "other" has steadily increased its share. This is partly due to the wider coverage of the survey and partly due to the growth of miscellaneous activities such as orchards, poultry farming, stud farming and plantations.
5.
Aggregate gross investment in these items has increased ten fold in the period from 1966-67 to 1976-77. It might be worth researching if these "other" items have a higher component than average of buildings investment rather than "land" investment.
All in all, there is a clear trend away from the pastoral sector, mainly due to the relative decline in dairy investment, and a growth of the miscellaneous sector which includes horticulture and other activities as well. The evidence is not conclusive enough, however, to explain static production trends of itself.
Recent Government policy is best understood against a background discussion of the financial structure of the agricultural sector. This section of the paper therefore discusses the financing of annual production and capital investment, the relation between capital investment and net income and the different stages of development which individual farmers can pass through. The third section will discuss the evolution of Government policy in recent years with regard to assistance for capital investment in agriculture.
In 1977-78 the total value of assets employed in New Zealand agriculture, including live stock, was $11.5 billion. This was made up as follows:
| $(million) | |
| Land and Buildings | 8 300 |
| Plant and Machinery | 1 500 |
| Livestock | 1 760 |
| Total | 11 560 |
There were some 60,000 full-time farm holdings employing about 130,000 people in active production. There were thus about $200,000 of assets per farm and $100,000 of assets per person engaged.
As already noted in the previous section some $357 million was spent in 1977-78 on new farm assets, either replacing old ones or adding new ones. Some $140 million was spent on plant and machinery and $217 million on land and buildings. In addition to these expenditures it is estimated that some · $400 million was spent in 1977-78 on farm purchase, that is largely but not completely on the financing of younger or new farmers on to properties of their own. The balance of . this money was spent on financing farmers into better propositions, up the agricultural ladder, into semi-retirement etc.
Leaving aside the financing of farm purchase, it is estimated that in 1977-78 some $3,000 million was spent in simply financing annual production and investment on farms in production. The details of this calculation are shown in an appendix to this paper.
6.
The position can be summarised, however, in the following simple version of the estimates made.
| Cash Flow New Zealand Agriculture 1977-78 $(million) | |||
|---|---|---|---|
| Ingoings | Outgoings | ||
| Sales of Product | 2,600 | Materials | 1,610 |
| Loans not for purchase | 420 | Wages Interest Tax Principal repaid Investments Living Expenses |
280 190 130 240 50 520 |
| 3,020 | 3,020 | ||
Thus, some 86 percent of annual outgoings are financed from the sale of product with only 14 percent financed by way of a net increase in borrowing. (Only the net increase in bank and stock and station borrowing has been-included in the figures). On the outgoings side some 53 percent of the inflow is spent on materials - this includes livestock purchases, current inputs, and capital goods, but not depreciation. The remainder is made up from wages of employees (9 percent), interest on borrowings (6 percent), repayment of principal (8 percent), taxation on previous years earnings (4 percent) and general living expenses (7 percent). A small allowance has been made for off-farm investment - $50 million - there is very little reliable data on this component.
At any one time the total amount of short-term credit is much greater than that shown. As at the end of July 1978 total trading bank term lending was $94 million, and as at March 31 stock and station agents, advances were $197 million At the height of the growing season the amount would be greater than this. The net change in the total advances to the farming industry over the last two years are made up as follows:
| 1976-77 | 1977-78 | |
| $(million) | $(million) | |
| Rural Bank development loans | 74.3 | 132.3 |
| Term loans | 23.4 | 7.5 |
| Trading Bank advances | 58.8 | 59.3 |
| Stock and Station agents | -12.7 | 61.1 |
| Private loans | 150.0 | 160.0 |
| Subtotal | 293.8 | 420.2 |
| Proprietor's surplus | 857.0 | 614.0 |
7.
Further examination of these statistics over a longer term would reveal the underlying pattern of how the net change in financing is relating to the general prosperity of the . industry. Loan finance not only provides within season working capital, and new investment capital, but also provides a cushion in which year-to-year fluctuations in farming income can be absorbed without calamitous effects both on the standards of living of farmers and their investment activities - the general objective 5f?this report. The predominant feature of the financial system remains the annual sale of product as far as farmers are concerned. In the broader context, of course, their propensity to invest will be coloured by their expectations as to future price 4 and volume trends as well as those of the immediate past. . Further, their judgements will also be influenced by other factors of a non-economic kind such as their perception of their place in the total society, and the future of that society as it affects them.
The strongest economic factor, however, remains the availability of finance out of current earnings. The statistical evidence for this relationship is not particularly strong. Graph 3 shows the net national income in farming - or proprietors' surplus as it is now called - for the period 1946 to 1978 compared with gross agricultural capital expenditure. In the period up to 1972, when income fluctuations were much smaller than in the 1970's, small adverse changes in net income were scarcely reflected in changes in capital expenditure e.g. in 1958-59 and 1967-68. In other years capital expenditure was maintained irrespective of income changes. Since 1972, capital investment has followed up the sharp increase in the money value of incomes, with a set back in 1974-75 reflected in both series.
V Another criteria for judging the propensity to invest is the percentage of proprietors? surplus used for gross investment.
In five year periods, the percentage has varied as follows:
1946-47 ? 1950-51 21.3
1951-52 ? 1955-56 28.5
1956-57 - 1960-61 26.3
1961-62 - 1965-66 29.4
1966-67 - 1970-71 34.0
1971-72 - 1975-76 31.4
1976-77 - 1978-79 46.2
Mean 28.9
This therefore shows how investment levels rose relative to income in the early 1950?s, fell off slightly in the late 1950?s, rose again through the whole of the 1960's, tended to fall slightly in the early 1970?s as a whole, and then recovered considerably in the late 1970?s. Since some of the investment must be generated from the farmers? own income there could be an inverse relationship between these two series in some years.
8.
Finally the marginal propensity to invest from the above data is shown in the following equations:
Y = 37.8 + 0.44 X where Y = Investment
R2= 0.86 X = Net Income
DW= 0.93
SE= 0.03
Further investigative work is required to define the independent variables more appropriately, including distributed lags, wider definitions of income, and other explanatory variables.
As well as a high propensity to invest out of current income, the investment process in pastoral farming is characterised by a definite cycle of spending and profits. Some systems of farming can be improved by small changes in husbandry, technology and management, and the process of investment and growth is smooth and scarcely perceptible. Pastoral improvement in New Zealand, on the other hand, usually relates to fairly large lumpy investment changes related to pasture development, bush clearing, topdressing and livestock development. These events take time to achieve a hence the pay back period is relatively long term. Some recent estimates show payback periods of 13-24 years depending on the vegetative cover to be cleared. The investment process has the further characteristic -that once started it has to be carried through to achieve any results at all. If interrupted, most of the benefits are lost. Expressed in terms of a series of costs and returns over a period of years, the early years show up as a period of cash deficits followed by a period of profit as the investment matures. Graph 3 shows the typical pattern that can be expected. To calculate the rate of return on investment in these circumstances, some form of cash flow analysis is required, such as discounting. In general the long maturity period of this kind of investment requires special encouragement and assistance if it is to be maintained at levels consistent with the national interest.
Traditionally Government played a major part in the land settlement process in New Zealand and not in the land development process. The legislation of the 1890?s breaking up the larger rural estates was concerned with settlement questions and not development. This was also true of the period of soldier settlement after World War I. In contrast the soldier settlement scheme after World War II combined both settlement and development objectives. Properties were ` bought, developed and then settled. Assistance was provided for further development. On the other hand, civilian settlement through the State Advances Corporation was largely concerned with financing purchase of farms right up to the mid 1960's. But in 1978, purchase loans only formed 36% of total rural lending by the Rural Banking and Finance Corporation which took over from the State Advances Corporation in 1973.
9.
There is thus considerable evidence that has been expressed elsewhere that agricultural development in New Zealand is largely autonomous in character. The theory is that the pioneer ethic was largely responsible for the production response in the past, hence government assistance could largely be devoted to providing an institutional framework which supported the desires of the migrant middle class who aspired to own land and work it. Thus, Government provided a straightforward land registration system, migration policies which ensured an adequate labour supply, and a financial system which ensured a settler could get a start in life. The rest was left to hard work, enterprise and not a little luck.
Events started to change in the early 1960?s. Static production levels were identified at the end of the 1950's and led up to the Agricultural Development Conference in 1963-64. This led to two significant changes in policy. Allowable expenses for tax purposes were extended to capital development A associated with the land, but not buildings and machinery. At the same time nil standard values were also introduced. Secondly, new lending policies for the rural section of the State Advances Corporation were introduced to encourage land development. It can be seen that the tax concessions were aimed at removing a disincentive to investment from the plough-back of farm revenues and the development funding was extending a principle already applied to the soldier settlement schemes.
The 1970?s have brought a new government approach. The Livestock Incentive Scheme (L.I.S.) was introduced in the 1976 Budget which actually subsidised the development process on pastoral farms. The intention again was to provide loan money during the formative stages of development, but to make it suspensory if certain expansion targets could be met. Farmers could take a livestock loan or claim a tax concession equivalent to double the grant provided. The significance of LIS was that it extended the 1963 provisions to those who did not pay tax as well as those that did. The 1978 Budget extended the LIS principle to land development in the Land Development Encouragement Loan Scheme. This scheme again tackles the impediment to development posed by the lumpy investment problem. Loans are provided on a suspensory basis for development of land out of bush scrub and tussock to a grass cover, up to a limit of $250 per hectare.
The 1978 Budget also made new moves to provide more certainty for farmers with long term development plans. This process had been started by the 1976 reform of the price stabilisation schemes where more concrete definitions of minimum prices and levy procedures were introduced. The Supplementary . Minimum Prices Scheme provides guaranteed prices for 2 years ahead as near as possible to levels which will ensure reasonable living standards for farmers.
l0.The evidence available to date suggests that the assistance provided in the last 3 years has markedly increased the ratio of capital investment to net farming income, but has not so far generated a positive increase in the volume of production, particularly pastoral production. Further analysis is obviously required on the production side of the equation as the investment process is working well, but results are needed. Programmes which achieve the best results in the national interest should be pursued.
This paper has shown that significant increases in real investment have taken place in recent years without a corresponding increase in output. There is considerable evidence for a diversification of capital away from the traditional livestock sector, and some evidence that buildings have increased as a proportion of total investment. The evidence is not conclusive and further detailed investigation is required.
The analysis of investment in plant and machinery has shown that a definite cycle of replacement takes place in the New . Zealand farm sector. It seems clear that high incomes enable farmers to accelerate their rate of replacement of machinery, and once this is achieved further rises in income have no effect for some time until a new generation of machinery is required. It was further deduced that the efficiency with which farm machinery is used has been improving during the period as large increases in output took place at times when net machinery investment was static. The propensity to invest on New Zealand farms is closely related to normal income limits on farms. By and large, farmers rely on current earnings for their capital needs. The proportion of aggregate net income used for investment is high and has varied considerably in the period analysed. In the 1970's the proportion has risen to very high levels. The marginal propensity to invest out of current income is also high in New Zealand agriculture and is estimated to be about 45% of extra net income.
Government assistance to agricultural investment has taken a number of forms in recent years. In the 1960's full tax remission was introduced for land development expenditure along with a system of nil standard values. This period also saw a rapid expansion of state development lending. In the 1970?s more direct assistance measures have been introduced in the form of the Livestock Incentive Scheme and the Land Development Encouragement Loan Scheme. These provide for suspensory loans when approved development programmes are undertaken. Most recently, Government has introduced the Supplementary Minimum Price Scheme to offer farmers guaranted prices for 2 years ahead. This`package of measures is having a profound effect on rural investment and consequently development at the present time.
11Future policy should aim to consolidate the measures already introduced. There is scope for considerable rationalisation of agricultural development. Areas where gains could be made include programmes for noxious weed control, programmes for accelerated land settlement by young farmers, encouragement of settlement of Lands and Survey development blocks, seeking out development opportunities for state and private development, and investigation of better techniques of land improvement. At the same time it will be necessary to ensure that the financial support structure for farming is adequately provided for so that worthwhile projects are satisfactorily funded. Only by a combination of good planning, co-ordination of objectives and sufficient financial provision will any results be achieved.