Outline of cost adjustment scheme

Press, Volume CXI, Issue 32541, 26 February 1971, Page 14

Outline of cost adjustment scheme

Only the broad outlines of Federated Farmers’ cost adjustment scheme were contained in a statement issued by the federation when it made submissions to the Government last week for ensuring the continued viability of the industry.

The general basis of the scheme is, however, well enough known to fanners in North Canterbury since the provincial president, Mr W. N. Dunlop, first mooted the idea at the local annual provincial conference held in the middle of last year.

In its simplest form it is an exercise in relating cost increases for certain basic commodities widely used by farmers to farmers’ receipts from their products and in so doing making sure that they are no worse off as compared with a base period. In the modified form now proposed these basic calculations could, however, be subject to adjustment to achieve particular levels of performance in certain fields of farming. “The broad outline of the scheme is that indices of prices received by farmers and prices paid by farmers are used to calculate the adjustment required to enable farmers to' restore i the level of capital inputs and farm development that prevailed at a predetermined base period,” says the statement. “This proposal will show the minimum amount required to achieve this aim, but does not take into account any further action that Government may decide is required to encourage any particular form of agricultural production. “The final amount of the adjustment is allocated in the form of a cost adjustment on a number of items

of significant cost that are used on a widespread basis. These items should be determined by annual negotiations between Government and the federation.” It has been suggested that 1964-65 should be the base period for making these calculations. This period has been selected because it was prior to the current inflationary spiral; export prices in that season were relatively stable and had reverted to a normal level after the previous season’s wool boom; farming confidence, stimulated by the Agricultural Development Conference, was such that fanners were willing to borrow for farm development; and net incomes were not at peak levels for either sheep or dairy farmers. The federation proposes that the Department of Statistics’ gross farm income statistics and volume of farm production statistics should be used to calculate an index which indicates the movements in prices received at the farm gate, and to calculate the index of prices paid it suggests that the indices used should be the cost indices of the New Zealand Dairy Board and the New Zealand Meat and Wool Boards’ Economic Service, with the two being combined to form an index of prices paid by farmers for farm inputs. The indices of prices received and prices paid are then related to the base period income and farm ex-

penditure figures to calculate the amount of adjustment required to restore farming to its base period position, assuming constant volumes of farm production and farm inputs used. This statistically calculated amount is a minimum which would act as the starting point for negotiations between the Government and federation. Other relevent factors which could influence the final amount include (a) changes in the purchasing power of money; (b) changes in the volume of farm production; (c) changes in the relative incomes of non-farming sectors; and (d) trends in the balance of payments position. The initial allocation should be in the form of a cost adjustment on a number of items of significant cost to the farmer that are used oh a widespread basis. In deciding on this allocation the following broad principles should be observed—(l) the price influences of overseas markets should not be obscured and the efficient use of resources should not be discouraged; (II) the benefit of the adjustment must accrue to the farmer; and (III) the allocation to cost items should be such that administration can be easily, economically and effectively carried out.