Economists ‘often fooled’ by farm production myth

Press, 18 March 1988, Page 15

Economists ‘often fooled’ by farm production myth

A "dangerous myth" that farmers . produce more when they face financial pressure is being proved wrong, according to Dr Ralph Lattimore, a reader in agricultural economics at Lincoln College.

He said the myth had existed in New Zealand and overseas since World War II and had been used to downplay the importance of agricultural policy. The myth developed because it usually took agriculture a long time to adapt to economic change. As a result, the industry ' could appear to show a perverse reaction to some change. “Economists often get fooled by these reactions which appear to support the myth." said Dr Lattimore.

The livestock cycle was one phenomenon which helped give rise to the myth., When beef producers think the price is

going to drop, they will immediately sell i more stock than usual,! even capital stock. This results in sin apparent boost in production while the price of beef drops. The livestock cycle can also affect the country's balance of payments. WHen prices drop, stock is slaughtered to bring flock and herd numbers down. The extra killing boosts exborts.

■[That fools people into thinking the drop in prices was not as bad as they thought.” he said.

it usually took two or th p ee years for the livestock cycle to catch up apd exports to drop also. The cycle also causes problems’ during a recovery.

“IF there is a build-up in the sheep industry the fist thing to happen is a drop in exports because people hold onto their hoggets for breeding. The current account can get worse, just when the poli-

ticians thought they were getting things right.” I | The myth was used by European Economic Community officials to argue against reducing subsidies to its farmers. They maintain a drop i in subsidies svduld encourage farmers to produce more. I To obtain a better picture of how the agricultural sector was reacting to any economic changes, observers needed to step back from production and consider over-all farm investment. That was difficult to do, said Dr Lattimore.

"More often than not they just look at the balance of payments, see things are not too bad, and think everyone has been crying wolf.”

The effects of economic : change on the rural sector were only now beginning to show in Government ' financial statistics. Politicians were starting i to take notice of what was | happening !and the Minis-

ter of Finance, Mr Douglas, has admitted things were unbalanced. Dr Lattimore said.

Changes to he economy should have been made gradually so that all sectors adjusted at the samej time. The Government had instead tackled the easier groups first, leaving the tougher ones until last.

"They started off with the easy target first. That was the farmers. There were no negotiations.

"Then came the manufacturers. The Government had to negotiate there for a year or two and got about half of what it wanted. "Then came the hard ones like the Public Service, and selling the Stale Owned Enterprises. Next it will be the strong unions and firms. “It is becoming more and more difficult for tijie Government to . get changes. “The whole scheme of

readjustment only) works if all sectors are adjusted at the bame timei otherwise things get \ unbalanced. Vou have also got to get all the way to the end or you leave half the economy still high and drv." i

i The | unbalanced res(tructurjng of the economy (had caused a lot of uni necessary economic, pain, , He thought the New :Zealanh dollar was overvalued jby as much as 20 per cent but said it would definitely drop in value. He shid floating currencies tended to overshoot I their real value in cycles. They j would overshoot above ( trend for several years, i then fall below trend for the next period. No-dne knew when the swing (would come in the opposite direction. “Th s cyclical process in both the foreign exchange and share markets seemingly has as much to do with psychology as with economics,” he said.