A Tale of Four Countries- Part 3: New Zealand and Agricultural Reform

For anyone who is an opponent of corporate welfare and pork, you must surely be aware that one of the most wasteful federal programs are “farm bills.” For anyone who believes in free market solutions to problems, especially as they apply to agriculture, you must surely be aware of the 1980s reforms in New Zealand. For any opponent of farm subsidies, New Zealand is the poster boy for free market reforms that work. For any lover of capitalism, you should be aware that Adam Smith is smiling down on New Zealand. That is the thrust of this article- how they did it, the outstanding results of their reform, and why it would work equally well in the United States.

In the US, agricultural policy and farm bills are inevitably listed as areas for reform. In New Zealand, they did not embark on a program to reform their farming subsidies; they embarked on a policy of abolishing them altogether. And much like the reasons for farm subsidies and price supports here, those same reasons were used to originally institute subsidies in New Zealand. Several factors led them towards abolition rather than reform, but probably the biggest factor was political will and guts on a bipartisan basis as part of a general economic restructuring in response to global economic reality.

Until 1964, New Zealand’s major trading partner was Great Britain with over 90% of their agricultural exports bound for Britain. Due to disruptions caused by the World Wars, New Zealand adopted increasingly protectionist interventions in their agricultural sector of the economy. When Britain joined the predecessor to the European Union, the dynamics of trade shifted and Great Britain became less reliant on New Zealand’s products and New Zealand showed decrease exports to Great Britain. As a result, to “aid” agriculture in New Zealand, the government in Auckland instituted subsidies for crops and other agricultural goods like lamb, wool, and dairy products. Like the United States dating back to the New Deal, after subsidies came the inevitable price supports, low interest government loans, government disaster relief, agricultural training programs, and even subsidized weed eradication programs. The subsidies basically created an oversupply of commodities which resulted, obviously, in a decrease in their price which the government then addressed through increased subsidies and price supports. If all this sounds familiar, it is exactly that ill-conceived cycle of “reform” used in the United States.

Things reached a head in the 1980s when farmers themselves came to realize that subsidies just may be the cause of their plight. What happened in New Zealand has its corollaries here. First, there was the unequal application of subsidies (in the US, why is corn subsidized, but not apples or broccoli?). Non- farmers came to resent the subsidies in that their taxes were paying for them and they were paying higher prices for food (in the US, it is estimated that subsidies are an hidden tax of an average of $104 on consumers). They encouraged overproduction of the favored commodities (in the US, the bulk of subsidies go to five major crops). It encouraged the farming of marginal lands (a trend seen in the US which we then compensate farmers for when yields drop on marginal farming lands). It was leading to environmental degradation (sugar farming in Florida is hurting the Everglades). Land values were inflated (same here in the US as most of the increase in farm value is attributable to rising land values). Finally, it created bureaucratic insanity. For example, farmers were encouraged to plant hedgerows and let land revert to wetlands when ten years previous they were encouraged to dig up hedgerows and fill in wetlands for farming (bureaucratic insanity can be applied to any domestic program here, but especially farming).

In 1984, the government decided to simply cease and abolish farm subsidies. Initially, they thought that 20% of all farms would go out of business. Instead, in the initial 6-year transitional phase, only 5% of all New Zealand farms failed, but most of that was by choice. In fact, only 1% of all farming operations (800 in all) were forced sales. What actually happened was farmers learned to become more efficient and diversified their agricultural portfolios. Some land use was converted to tourism. Whereas in 1984 New Zealand was known primarily for its sheep, lambs, and kiwi, today it exports a variety of agricultural products. Most amazing is that 90% of their agricultural products are exported and most domestic food consumption is a product of New Zealand- without protectionist measures.

Today, there are about 80,000 farm holdings in New Zealand, roughly the same amount as there were in 1984. And although the percentage of available land dedicated to farming has decreased, that land has been converted back to wetlands or forestry which has enhanced their tourism industry. Since 1984, the agricultural sector of their economy has grown faster than any other sector. Whereas in 1984, agriculture accounted for 14.2% of GDP, today it accounts for 16.6% of GDP. Also, 11.4% of the workforce in New Zealand is directly employed in agriculture- the same percentage as in 1984. And while farm employment may have dipped a little in the 20+ years since, rural population has remained steady which is indicated in the fact that tourism employment in rural areas has increased offsetting the drop in farm employment. On average, agricultural output has increased 5.9% per year compared to 1% per year with subsidies. Governmental assistance to farming, as a percentage of agricultural output, is 1% in New Zealand with most of that dedicated to research and pest eradication. The average in other industrialized countries, including the US, is 31% of output. As a result, New Zealand has invested the savings from agricultural subsidies towards education and other social services. Imagine the dent we could put in our budget deficit and national debt if we abolished subsidies and price supports.

There are not only domestic fiscal advantages, but advantages in international trade. For example, many agricultural products are treated unfairly by the European Union for two reasons. One is ridiculous- their objection to genetically modified food. But the other- subsidies and price supports- is legitimate. Also, take the case of cotton, one of those favored agricultural commodities when it comes to subsidies and price supports. It is 67% cheaper to grow cotton in an African nation and it is estimated that if the US ceased cotton subsidies, African cotton (no different than cotton grown in the US) would become more popular in the world market. This, the WTO argues, would increase the average income of African nations by 2.3 to 5.7%. Although seemingly insignificant, that would provide food or health care for a family of four in Africa for a year or send ten kids to school for a year. If African countries increased their exports just 1%, it translates into $70 billion a year. Considering that world aid to Africa totals $14 billion annually ($9 billion of it from the US), the immediate advantages to the savings in the State Department’s budget alone is obvious Most likely, domestic cotton growers would suffer some transitional hardships, but like the farmers of New Zealand, they would adjust and diversify and survive.

Another obvious disadvantage of is illustrated in the case of the heavily subsidized sugar crop. Because of the subsidies, marginal land is usually converted to farm use thus leading to overproduction. As a result, more pesticides and fertilizers are used, especially in the wetland areas of Florida- the home of the domestic sugar industry. This has resulted in the pollution of the Everglades. And the EPA since Reagan has asserted that agriculture is the biggest polluter of our rivers and lakes from pesticide and fertilizer runoff. Juxtapose this against liberal assertions that conservatives long for the days of “dirty air and water” (Obama’s words).

The bottom line is that current agricultural policy in the form of subsidies, price supports, crop insurance and the like are nothing more than a 70 year old alleged solution in search of a problem. To add insult to injury, it is government that created the perceived problem and continues the cycle to this day. Considering the fact that 84% of government largesse goes to large agricultural concerns- not family farmers- it begs the question as to who these payments really benefit? So-called family farms will continue to exist and fill a niche. Like New Zealand, there will be the odd case of hardships which will be paraded before Congress and they will share the stage with the likes of Neil Young, John Mellencamp, and Willie Nelson. Nothing against their music, but politically and economically, they are naive dupes.

In a previous entry, I advocated that the government begin the process of reform. In reality, “reform” is nothing more than the status quo played light. What is needed is the political will and fortitude to do what New Zealand accomplished in 1984 and go “cold turkey” with respect to farm subsidies. Given recent events with the current “farm bill” being considered by Congress, one’s hopes are not high. Considering that 13 of the 16 freshman Republican members of the House Agricultural Committee- many of them Tea Party backed in 2010- voted for a near $1 trillion farm bill, it is obvious that politicians are more beholden to King Corn than they are to Big Oil. Nothing short of the abolition of farm subsidies and the like is the only solution.