Subsidy
withdrawal: Efficiency rules in New Zealand
Farming
in New Zealand changed irrevocably in November 1984. That was the
month the country's new government, faced with a financial crisis,
decided to end all direct support payments to its farmers with virtually
immediate effect.
Twenty-five years later there is no question, New Zealand agriculture
is better for it. Its farmers have a much greater understanding
of their market opportunities, and have developed farming systems
to exploit them effectively.
Agriculture,
along with tourism, is the industry that drives the country's economy,
making up about 17% of New Zealand's current gross domestic product.
In the main, it has a good climate for agriculture, with decent
amounts of sunshine and rainfall, boosted by irrigation where necessary,
and reasonably fertile soils. As a consequence the country can base
its agriculture around a low-cost, efficient pastoral system.
Prior to subsidies
being scrapped, sheep farming was dominant. At its peak there were
more than 72 million sheep in the country, now it is just 32 million.
The price supports, particularly the government-backed minimum prices
for lamb, encouraged production with little regard for market or
profitability.
Ending subsidies
meant farmers produced for the market and, as a result, sheep numbers
have fallen dramatically - but prices have gone up. And while head
numbers have reduced, improved per-head performance has offset the
loss in total meat production to an extent.
Those productivity
gains are reflected in most sectors across New Zealand's agriculture.
"The sheep and the dairy cows are basically supercharged,"
said Charlie Graham, the former managing director of ANZ Rural bank.
"The application of science in improving genetics, the performance
of stock and pastures, the development and refinement of plant management
systems and the use of technology has led to incredible productivity
gains.
"The result
has been the GDP for agriculture has grown by 110% in the past 20
years, compared with just 61% for the wider economy. And it has
been achieved off 20% less land area." Within that growth there
has been one significant trend: the rise of dairying to where it
has overhauled sheep and beef as the number one sector.
When you look
at the real profitability of each sector it is not hard to see why
there have been a large number of conversions into dairying. "Depending
on where you are, you can make an operating cashflow of NZ$4,000/ha
from dairying after farm working expenses. Arable cropping makes
NZ$1,500/ha, and for the sheep and cattle sector it is NZ$800/ha.
"So if you live in country suitable for dairying, you've seen
a significant shift to that industry over the past 20 years,"
Mr Graham said.
An obvious
example of the progression of agriculture in New Zealand is the
province of Canterbury. Over the past 20 years it has been transformed
through the efficient use of "dryland" overhead irrigation,
with water drawn from the immense groundwater system under Canterbury
or from the great rivers falling from the mountains and dissecting
the plains.
Traditional
dryland farming systems used to revolve around two pasture flushes
to finish lambs for slaughter, Mr Graham explained. "That system
used to generate a total farm income of, in today's terms, about
NZ$500-600/ha, and arable farmers on dry land revolved their cropping
around cereals, ryegrass seed and peas."
In 1982-83,
there was just 20,000ha of dairying; now it is 10 times that, driven
by the take-up of overhead irrigation, plus improved pasture management,
silage production and nitrogen use.
"Overhead irrigation changed everything," said Mr Graham.
"It allowed the expansion of dairying, with incomes generated
of NZ$8,000/ha. Arable farmers have been able to intensify by diversifying
into crops, such as high yielding small seeds, as well as continuing
with the traditional crops.
"And they
can diversify again. If you can get that main crop off early enough,
you can also sow a winter feed crop and finish lambs and get two
lots of revenue from the farming operation, generating NZ$3,500-4,000/ha."While
there is significant capital investment involved in irrigation,
those income levels leave you in no doubt about the economic benefits."
Indeed, dairying
has been so successful, there is some concern whether it will encroach
too much into the arable areas. "It is starting to move on
to some of our better soils, where dairy farmers can get good production,
and is putting pressure on land availability," said Barry Croucher,
an arable farm consultant in mid-Canterbury.
"But with
New Zealand being primarily a niche and targeted market for seed
multiplication for export, rather than a large producer of commodity
crops, I think we should be able to continue with a good arable
industry by targeting those opportunities." Unlike most countries,
export is the primary market for virtually all New Zealand's agriculture
sectors, with 95% of dairy, 94% of lamb, 87% of beef, 90% wool,
96% venison and 95% of the country's kiwi fruit exported.
But in the past 20 years the markets have shifted. While the traditional
market of the UK is still important, particularly for lamb, they
have been augmented by China and south-east Asia in certain sectors,
including dairy.
"Those
markets continue to grow significantly, along with some diversification
into Latin America and the Middle East," added Mr Graham. Part
of the success in marketing into those areas has been the strong
co-operative model, allowing New Zealand's farmers to share in the
value of the product generated on supermarket shelves.
Fonterra, formed
in a merger of four co-operatives in 2001, is the poster child for
all co-operatives. It is 100% owned by the producers, who own shares
based on production. Its fully integrated supply chain with its
transparent pricing policy, efficiency and ability to create value
in the supply chain have been central to its success.
Innovation,
a common trait seemingly within New Zealand's agriculture sector
post-subsidies, is another key attribute, which is why Fonterra
has invested in the largest dairy research facility in the world
in Palmerston North. "If you're going to be exporting 90% of
your production, you're not going to be putting it in a bottle and
selling it, like most dairy producers can," explained Nicola
Shadbolt, a director of Fonterra.
"Our customers
are all around the world, so there has been a lot of ingenuity to
find out what else can you do other than take the water out. Our
researchers have two tasks – to increase our efficiency within
New Zealand in transporting and processing and to find what else
milk can be turned into, or what can be pulled out to create opportunity
for our customers around the world."
Examples of the latter were using a dairy product to create the
buttery taste in popcorn and a thickener for yoghurts. Both previously
came from non-dairy products, Prof Shadbolt said.
"It is about pulling out what can deliver the requirements
of our customers."
It is a mantra that the whole New Zealand agriculture sector appears
to have grabbed.
Future challenges
for New Zealand agriculture
- Attracting
new people into perceived “sunset industry”
- Investment
in research and development
- Environmental
management: nitrogen, biodiversity, market perception
- Rewarding
good stewardship
- Moving to
low-emission agriculture
- Adopting
new technologies needs good IT infrastructure
Case study: Doug Avery, Bonavaree Farm, Marlborough
If any farmer demonstrates how New Zealand farmers can develop innovative
systems, it is Doug Avery. It was not just the changing economic
environment he had to deal with, but the climate too. His 1520ha
dry land, hill country Bonavaree Farm in Marlborough on the South
Island, runs 3800 pregnant ewes, 600 dry sheep, 900 beef cattle
and 400 dry dairy cows, and is in one of the driest parts of New
Zealand. “It
is hot, dry country. In the 90s we had eight consecutive years of
drought, and 17 of the past 19 years below average rainfall. Something
had to change.
“I was
challenged to produce a farming system, that would be resilient
in the face of extreme weather and variability, miserly with the
water and conserving of energy, and highly profitable in good years
while not losing money in bad ones.”
The answer
lay in changing his grazing from a ryegrass base to lucerne, and
moving to a 10-month farming system. “We can’t influence
the weather, but we can influence how we use our limited water and
grow plants that use that water efficiently.”
According to
Lincoln University research in New Zealand, lucerne can double the
amount of dry matter produced using ryegrass on a hectare from around
250mm of water in the spring..
“It gives us quality feed when we need it,” Mr Avery
said. Since sowing half of the farm with lucerne in 2005, he has
consistently produced lamb growth rates in the top 5% in New Zealand
and improved his hogget scanning from a disastrous 40% to 162%.
“The reward has been a system that has given stock performance
we could only dream of a few years ago and produces profits, despite
variable rainfall.”
Subsidies: why were they all scrapped?
For more than
20 years up to 1984, there was a steady increase in the level of
support given to New Zealand’s farmers, although a full programme
of subsidies was only introduced in the 1970s. That was after the
country’s balance of payments plummeted as a result of higher
global oil prices, Bruce Ross, the former vice-chancellor of Lincoln
University, said.
In 1984, nearly 40% of the average sheep and beef farmer’s
gross income came from subsidies. “It was clear the government’s
minimum prices, which made up the difference from world prices,
were out of line with market reality.”
At the same
time, the whole economy was struggling, and in May 1984 the government
presented a budget that proposed a fiscal deficit of 9.5% of GDP,
which seemed horrendous, said Prof Ross.
Shortly after,
a new government was elected and it presented a new budget in which
the major feature was the removal of most forms of support to farmers.
“Farmers were told the assistance provided by the devaluation
[in currency] would replace the cash support payments. Not only
did this reduce the pressure on the budget, but also removed the
distortions provided by the support payments.”
But it was
a painful process, and part of the restructuring of the whole economy,
Prof Ross stressed. Inflation and unemployment rocketed and interest
rates followed, peaking at more than 20%, while land and house prices
fell and unemployment rose to 11% by 1991.
“For farmers, it became tough to get credit and there was
a substantial loss in equity. The pain was felt most keenly by those
who were most indebted.”
But official
predictions of 8,000 farms failing were wide of the mark, according
to Federated Farmers of New Zealand information. In fact, only 800
farms, faced forced sales in the end. And a much more dynamic, successful
farming sector has emerged from the years of hardship.
Opinion: Mike Abram
It is not until you go to New Zealand that you realise just how
different its farming is from ours. On the face of it, our climate
seems similar and we have, in the main, similar agriculture sectors.
But dig beneath the surface and it becomes clear New Zealand operates
in a very different environment. Exporting virtually all their agriculture
production has led to an intense focus on exactly what its customers
want, a vision only sharpened by the absence of subsidies.
It has made its farmers into extremely business-focused operators,
with a keen eye for opportunity and innovation.
Whether UK
farming would be better off subsidy-free is difficult to extrapolate.
Our farmers operate in a very different market environment to the
almost exclusively export-focused Kiwis, and the likelihood is the
sudden removal of subsidies here would create untold hardship, just
as happened in New Zealand 25 years ago. But if we can learn one
thing from New Zealand, it would be to bring that hard edged business
focus to more farms in the UK.
Source:
Farmers Weekly
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