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Abolishing Agricultural Subsidies – The New Zealand Story

Abolishing Agricultural Subsidies – The New Zealand Story

When it comes to agriculture, there does not need to be a trade-off of profit versus planet. New Zealand has demonstrated this.

Next year will mark forty years since Sir Roger Douglas became New Zealand’s 35th Minister of Finance. Douglas’s bold decision to significantly scale back government intervention and deregulate the economy laid the foundations for what is today one of the world’s most productive, efficient, and environmentally friendly agricultural sectors.

Prior to 1984, agriculture in New Zealand was rife with government support in the form of subsidies, minimum prices, low-interest loans, tax incentives, and debt write-offs. These supports created perverse incentives for New Zealand farmers and promoted inefficient land use and farming practices.

At the time, more than two million hectares of unproductive marginal land were being farmed, often causing significant environmental degradation. The land was being developed that would prove unviable without subsidies and the overuse of heavily subsidized fertilizers was commonplace.

Production of agricultural products chased subsidies rather than adapting to consumer demand. Farmers were not responsive to market forces, including prices, and consistently failed to produce what the market demanded. This got so bad that in 1983 the government paid for the slaughter of sheep that were unable to be sold resulting in 6000 tons of surplus lamb being turned into fertilizer. By 1984, the value of agricultural output was less than the costs of processing it.

At this time, more than 30% of farmers’ incomes came directly from the poor taxpayer in the form of subsidies. The sector had become stagnant as innovation was stifled. Government support payments significantly reduced the incentives to innovate, restructure and diversify as farms were allowed to survive on secure incomes even though they weren’t creating value.

By 1984, the country was verging on bankruptcy and New Zealanders demanded change at that ballot box. The election ejected Prime Minister Robert Muldoon, infamous for his interventionist control of the economy, and replaced him with a reforming Labour Party.

From here, the period of ‘Rogernomics’ was born with Minister Roger Douglas slashing the equivalent of €1.7 billion in taxpayer support for farmers and significantly deregulating the economy. Many tariffs were removed, the dollar was floated and around 30 different production subsidies were eliminated.

The removal of fertilizer subsidies saw sheep and beef farmers halve its use from 1985 to 1986 yet production remained strong. This forced productivity improvements and encouraged farmers to carefully consider where and how to apply fertilizer the most effectively.

Farmers were incentivized by market forces to adapt and innovate, reigniting the ‘kiwi ingenuity’ that they are so well known for today.

Today, New Zealand farmers receive no subsidies yet continue to contribute significantly to GDP. Dairy earnings growing more than tenfold since the removal of subsidies is just one example of New Zealand’s primary industries becoming more profitable, productive, and efficient following these changes.

Some farmers were forced to recognize the stark reality that they weren’t productively using their land. Despite widespread fears that they would go bankrupt, less than 1% of farmers left the industry.

Instead, the absence of distortionary subsidies sparked a wave of innovation and diversification across the sector. Land was changed to its most profitable use, often seeking out new and untapped niche markets.

Some areas of steep high-country land were regenerated or replanted into native forests where they now produce high-value mānuka honey and operate as commercial hunting parks. Others have diversified to suit the climate, soil type, and topography of the land producing high-quality products such as kiwifruit, venison, and delicious New Zealand wine.

Over the next 30 years, the number of sheep in New Zealand dropped by 53.6% yet production has remained similar. Efficiency and productivity have been the name of the game with farmers focusing more on genetics, pasture quality, improvements in processing, and technology allowing output to increase despite reducing inputs.

CO2 equivalent emissions for sheep and beef have been reduced by 30% in this time without any legislator commanding them to do so. For countries looking to reduce agriculture’s impact on the environment, removing subsidies is a good start.

New Zealand farmers are able to compete with subsidized farmers globally on price, quality, and environmental impact even after shipping our product halfway across the globe.The world can learn a lot from New Zealand farmers.

Undoubtedly, there are still some environmental challenges ahead but it must be recognized that the government is often standing in the way of the solution rather than the savior it proclaims to be. New Zealand’s archaic genetic modification laws that prevent the planting of low-carbon pastures is just one way the Government is standing in the way of industry-led emission reduction.

When it comes to agriculture, there does not need to be a trade-off of profit versus planet. New Zealand has demonstrated this and, while we still have some challenges, we’ve come a long way and continue to move forward. New Zealand farmers are some of the most innovative, hardest-working people around. They don’t need handouts to be successful, and neither should the rest of the world.

Author

  • Connor Molloy is studying Law and Public Policy at Victoria University of Wellington, New Zealand. He works as a Researcher for the New Zealand Taxpayers’ Union fighting for lower taxes, less waste and more accountability in government. Connor spent the beginning of 2023 as an intern at the Austrian Economics Center.

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The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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