R.W.M. Johnson, C. Alma Baker Research Fellow, Massey University, Palmerston North, New Zealand
Summary
New Zealand is a temperate country where the climate favours low cost outdoor livestock production. Owing to high labour productivity and a relatively low population, livestock products dominate New Zealand's export trade. Even though a small country producing a small proportion of world output of livestock products, New Zealand contributes a significant proportion of world trade in temperate products, meat, wool and milk. New Zealand therefore has a major interest in the state of world markets for these products and in any restrictions which may impede such trade.
The main export products are derived from New Zealand's grassland farming system, which requires very little indoor housing for stock. The main inputs are a good climate and relatively high requirements for phosphatic fertiliser. There is only a small export surplus in feed grains and there is a net import requirement for wheat. Price and productivity relativities are such that grassland livestock production gives a better return than grain production and other animal livestock activities such as pig production, poultry and egg production. These latter activities produce outputs at near self-sufficiency level, and utilise about 50 per cent of feed grain supply.
Agricultural policy has, in the past, been supportive of the livestock sector. Livestock producers have received favourable treatment in terms of credit, input subsidies, taxation allowances and in some years, deficiency payments. These policies were based on a perception that there was a strong correlation between export growth and national growth. Agricultural policy should therefore encourage a cost-efficient, internationally competitive livestock sector which, it was thought, could contribute most to the target of export growth.
From this policy position, agricultural policies were designed to support the recruitment of younger farmers, encourage investment in expanded capacity, counteract the inevitable fluctuations in foreign trade and prices, and encourage the growth and use of agricultural research and advisory services. These policies involved a level of economic transfers of 10-15 per cent of value of output in the livestock sector in normal years, and this was believed to be acceptable in terms of the national goal of export led growth.
Up to the mid 1970's, Government income support for agricultural producers tended to be used sparsely and infrequently and only in times of sharp changes in the terms of trade. In the second half of the decade, more permanent support arrangements were introduced in the form of price smoothing and deficiency payment schemes on the reasoning that investment and production capacity should be sustained. From 1981 to 1984, a down-turn in the terms of trade brought these mechanisms into action and the total amount of economic transfers to livestock producers doubled in a few years to reach 26% of the value of of output in 1982-83. Since that time, direct income support policies for producers have been phased out again, even though the terms of trade have not improved.
An important force behind the deterioration in the terms of trade has been the domestic arrangements to protect the livestock and feedgrain sectors worldwide, especially in the industrialised market economies. Complete liberalisation of such protection in the latter countries would benefit New Zealand livestock and arable producers by at least 15% of the value of output.
Concurrent with policies of export encouragement, New Zealand has also pursued policies of internal expansion based on import replacement strategies. These policies were promulgated because of current perceptions of employment and growth requirements, the need for a reduction of the dependence on fluctuating farm based exports, and the need for control over the balance of payments. These policy directions are not reviewed in the present paper. It is important to establish, however, that the pursuit of these different policy goals has led to conflicts between the tradeable and non-tradeable sectors in the New Zealand economy.
In particular, livestock producers as exporters, must carry an extra burden of costs generated by protection of parts of the domestic economy. This is especially important in the New Zealand case, as this impost not only affects prices of inputs used in livestock production, but also has a determining role in fixing producer prices received for processed products. The latter is due to fixed margins in the processing and transport sectors. Attempts to measure this cost excess on livestock producers indicate that its economic magnitude may be at least as great as economic transfers from taxpayers in normal years. (Some experts even go as far as saying that economic transfers to producers are compensation for these excess costs in a mixed economy like New Zealand.)
There are other interactions between agricultural policy and national policy which are relevant to this case study. Given the relative size of the livestock sector in New Zealand, changes in national policy positions were more likely to originate in the farm sector. This applies particularly to monetary and exchange rate policy. The monetary aggregates are affected by the size of the trade flows in the fixed exchange rate policy adopted for a long period. Substantial liquidity could be introduced to the economy by rising export receipts and the reverse in a downturn, hence for many years national stabilisation policies were guided by the export sector and the livestock sector in particular.
The importance of this factor has declined in recent years. Secondly, changes in trade flows were likely to affect the implicit exchange rate for New Zealand currency if not the fixed rate. With declining world markets and high internal inflation there has been downward pressure on the exchange rate for a number of years. It has been New Zealand practice to adjust the exchange rate as a unilateral policy decision when the occasion demanded except for a short period in the early 1980's when a crawling peg device was employed. In the wider sense, therefore, any study of agricultural policy in New Zealand would not be complete without suitable reference to the impact of national macro-economic policies.
These remarks largely reflect agricultural and national policies as they were up to July 1984. With a change of Government in that year a new economic paradigm for the New Zealand economy was introduced. The new policy stance was based on improved transparency, better market signals, a more balanced budget, freedom from financial controls and a floating exchange rate. These policies are designed to achieve a more efficient allocation of resources, greater economic competition, a reduction of economic transfer payments and greater real economic growth. It involves the phased elimination of import licensing and the gradual reduction of all tariffs to nominal levels.
In theory, the reform should be carried through from the financial and export sectors to labour markets and bureaucratic institutions. The balancing of the budget, of itself, will involve a lower level of industry assistance, less government spending on government services and a widened tax base.
For the livestock sector these changes are quite profound. Clearly the concept of export led growth is abandoned; in its place is a market oriented policy in which competitive forces are the guide. Comparative advantage should operate. Export returns will no longer impinge on the money supply but on the exchange rate itself. In turn, the exchange rate could be determined by changes in financial flows which may not be a result particularly attractive to livestock product exporters.
In this scenario, there will be less assistance for the sector in the form of transfer payments as pressure goes on balancing the budget. In addition, pressure on government spending will bring about reductions in Government services provided to the sector, particularly research and extension. Marketing institutions will come under pressure as cheap lines of credit are closed off and price smoothing schemes reassessed. In this environment the reintroduction of deficiency payments is extremely doubtful.
The effects of these policy changes are still being worked out. Further details are given in the main paper before the workshop. The paper recognises that New Zealand has had two policies for the livestock sector in the period under study and has tried to indicate the main differences between them. It has only been possible to assess the impact of the earlier policies in section 3 of the paper, while section 4 gives a descriptive account of the situation as it is at present.