Econ Focus

A Free Market for New Zealand Farmers

U.S. farm policy illustrates the old maxim that "there is nothing as permanent as a temporary government program." The Freedom to Farm Act was supposed to phase out agricultural subsidies over seven years, but government payments are now on the rise. In New Zealand, however, policymakers decided to eliminate most farm subsidies in just one year, and so far the results have been good.

In 1984, the New Zealand economy was sputtering, and the incoming Labour government was faced with a series of tough spending decisions, not the least of which involved farm policy. At the time, the average New Zealand sheep and beef farm received almost 40 percent of its gross income from government payments. The government removed nearly all the subsidies that year and offered farmers leaving the industry a one-time "exit grant" equal to about two-thirds of previous annual income.

"There were a lot of farmers who thought, 'This is it. It's the end of the family farm,'" says Aaron Smith, an agricultural economist at the University of California at Davis who was raised on his family's sheep and dairy farm in New Zealand.

With government support gone, farmers altered their behavior. For instance, heavy fertilizer subsidies had led to grazing on marginal land. "When they pulled the subsidies, a lot of the high country went out of sheep production," notes economist Warren Johnston, also of the University of California at Davis. Land prices, which had been bid up to reflect the farm subsidies, plummeted.

Most farmers were resilient in the face of hardship, though. Smith says, "It's important to note that the removal of subsidies didn't lead to the disappearance of the family farm. My dad wasn't surprised at the guys who didn't survive. Their debt levels were too high. They were spending money on things they didn't need, like new tractors or big cars."

Farmers soon learned to make better use of their assets. The weight of the average lamb carcass climbed 13 percent between 1986 and 2000. Andrew Burtt, North American regional manager for industry trade association Meat New Zealand, says, "The lamb industry used to export carcasses. Now, we disaggregate the lamb before export and focus on serving different markets with different cuts. Part of the weight gain came from eliminating smaller sheep. If you're going to cut up a lamb, you might as well be cutting up a bigger one."

The dairy industry followed a similar path. The average cow increased its milk-fat production 20 percent, and the number of dairy products jumped as farmers started creating higher-value products targeted at niche markets. Other events also spurred farmers' interest in new markets. Caroline Saunders, professor of commerce at Lincoln University in Canterbury, New Zealand, notes, "The loss of large-scale preferential access to the European Union market probably inspired the dairy sector to find new markets as much as the reforms."

Annual productivity growth in the agricultural sector has averaged 3.9 percent, compared to about 0.9 percent for the rest of the New Zealand economy, and the price of farmland has recovered. More important perhaps than any statistic is the pride New Zealand farmers take in their newfound self-reliance. Smith says, "The subsidies were like a weight around your neck. You were so focused on getting government money that you were not able to farm freely and respond to the market incentives that were there."