Subsidies on farm produce

Press, 13 November 1982, Page 14

Subsidies on farm produce

Net incomes from sheep and beef farms are expected to rise a little.this year above the average $17,000 recorded in the last financial year. The sum is not great, but for many sheep and beef farmers half of that net income would disappear, but for the supplementary payments funded by the taxpayer. These simple facts demonstrate the reliance that a large part of the farming sector is placing on the supplementary minimum price scheme. The factors working against New Zealand are showing no signs of improvement. The supplementary payments that were introduced as a temporary measure have taken on an air of permanence. The mechanism for the payments was set up in 1978, but only in the last 18 months to two years has pressure on the system been intensified. This year, the supplementary payments on wool and meat will be over $3OO million. The Government has said that the scheme will remain in force at least until the end of the 1984 season.

To remove the need for some form of supporting payment altogether, prices for farm produce would have to rise by an average of 25 per cent. A further condition would be a firm restraint on costs of production. This is not likely. Although the Government has virtually implied that the whole concept may be scrapped when it is reviewed in 1984, the Government cannot permit the collapse of the agricultural sector. The consequences of such a collapse would be so spread through the economy that the recession now being felt would seem trivial.

Justifications for supplementary minimum prices are easy to find. They maintain confidence in the industry and allow farmers to plan ahead with some degree of certainty. They match to a certain extent the industrial protection given manufacturers. They enable the industry to maintain production instead of running it down so that New Zealand will be well-placed when export opportunities improve. Objections to the system are more numerous and do not stop at the cost.

Many farmers, although appreciating the need for some form of income stabilisation, are unhappy with the system and what they feel is an adverse public reaction to it. New Zealand’s trading partners, many of whom are spending vaster amounts on agricultural subsidies, now appear to prefer to turn a blind eye to their own practices and point the finger at the supplementary minimum prices being paid in New Zealand. This creates difficulties for exporters of New Zealand primary produce and the payments have been used effectively by the French, in particular, as an argument to lower New, Zealand quotas to the European Economic Community. The most dangerous feature of the system is that it insulates the industry

from market realities and can obscure market signals, dulling or even preventing the necessary responses. By guaranteeing the return on stock units, the payments have also had the effect of bolstering prices for farm land out of proportion to other property prices. The payments are creating distortions in the allocation of resources within the agricultural sector. An example of this is the higher return for fine wools that has been created by the supplementary payments on wool.

Unless prices for agricultural produce improve, the level of support may continue to climb.' This year' the Government has made available more than $52 million for subsidies on fertiliser and almost $3OO million for Rural Bank loans. These are intended to increase production. In the short term, the additional meat and wool resulting from this is likely to depress prices further. Almost inevitably, the supplementary payments will have to be bigger for each unit and the increased production will mean that they will have to be paid on more units than hitherto. For as long as the net result is an increase in foreign exchange earnings, and the maintenance of jobs in New Zealand, the temptation will be to continue the supplementary price scheme.. If they merely cushion cost increases in production and processing, or create surpluses that cannot be sold against political and market resistance abroad, this kind of price support will amount to selfdeception. The price of farm land is already showing that buyers have become circumspect about the future. Doubts about relying on a handful of main products will probably continue to encourage more people to turn to growing other produce, particularly horticultural crops. Some farmers may be able to calculate that they would be as well rewarded, or better rewarded, without S.M.P.S by reducing production and reducing their burden of investment for higher production. No generalisation is safe except, perhaps, the generalisation that the final result depends on prices overseas and costs at home. Disguising the connection for long could be fatal.

The dilemma for the Government is how to extricate itself, and the taxpayer, from the supplementary minimum price scheme before it becomes permanently built in to the industry without doing too much damage. A most likely solution and one that should find general support from farmers, is an extension of producer board supplements, such as the income stabilisation account of the Meat Board. Money would probably have to be advanced to these funds in the first instance but, because they would depend on export income thereafter, income smoothing by this method would be more acceptable to New Zealand’s trading partners than the supplementary minimum payments have been.