How New Zealand ended farm subsidies

July 23,2006

Workers picking out bruised kiwi fruits while the machines classify them in a KatiKati packing house. By Jung Kyung-min

[First in a series] Agriculture Minister Park Hong-soo said in March that he wants to reform agricultural support programs, using New Zealand’s system as a model. “The era where the government gives full support to everything has come to an end,” the minister said, as he marked his first year in office.
New Zealand is among the world’s most competitive countries in agriculture, although in past years it was noted for its huge subsidies to farmers and was far from being able to hold its own internationally. But the government abolished subsidies to farmers in 1984 after New Zealand’s economy came close to a breakdown because of their cost.
Since then, New Zealand’s farming industry has undergone a rigorous restructuring and has become robustly productive.
Korean farmers, concerned about the free trade agreement with the United States, could learn much from the changes New Zealand’s farming industry has made, and could also learn lessons from a few missteps New Zealand made along the road to reform.
Palmerston North, in the North Island of New Zealand, is home to a farm owned by Alistair Polson, former chairman of the New Zealand Federated Farmers and special agriculture trade envoy for New Zealand.
Mr. Polson’s farm, on which he raises cattle and sheep, is located in a remote area where roads are unpaved and cell phone service is unavailable. Despite his isolation, Mr. Polson keeps extremely current in farm techniques and trends, not only in New Zealand but also in Europe and North America.
That’s thanks to the Internet. One of the most important parts of his work, he says, is to download market data from the Web and analyze it. “If a farm fails to move according to the market, it will be weeded out of the market quickly.” he said.
In a microcosm, that is one of the secrets of New Zealand’s agricultural competitiveness. Mr. Polson says you have to keep abreast of what the customer wants.
That attitude is fairly new among New Zealand’s farmers, however. Until the early 1980s, 35 percent of farm income was in the form of government subsidies. Ranchers were even more cosseted; half the income earned by stockmen who raised cattle and sheep came from government handouts.
Wellington paid subsidies based on the number of head of livestock a rancher owned, so there was every incentive to keep herds and flocks growing. That swelled the amount of subsidies provided.
“For example,” Mr. Polson said, “we produced 39 million lambs for export, but the market could support only about 25 million head. We sold about 10 million to very poor-paying markets, and we actually boiled down.”
Market prices plummeted, and the government subsidy budget was strained. In 1983, the crisis struck. The New Zealand dollar appreciated sharply just as international food prices plunged. Exporters in New Zealand were hit hard.
Mark Blackmore of New Zealand’s Treasury said foreign borrowing soared to the amount of 95 percent of the gross domestic product, while the unemployment rate, which had been below 1 percent, shot up to 10 percent.
In 1984, the Labor Party took control of the government and began to shake up the country’s agricultural sector. In just a year, direct subsidies were abolished. Indirect subsidies were phased out over three or four years. By the 1990s, New Zealand had the least regulated agricultural sector in the world, with zero subsidies to farmers.
Roy Diggerman, a cattle rancher at KatiKati, remembers those days well. “Government subsidies were wiped out suddenly,” he said, “and it was the hardest time I have ever experienced.”
Bereft of subsidy checks, farmers had to sink or swim by themselves; the alternative to restructuring was bankruptcy. The first step for most was to cull their herds and flocks. In the 1980s, there were about 70 million sheep in New Zealand at any given time; by 2000, that average number had dropped to about 40 million.
Wool, mutton and lamb production rose, despite the smaller number of animals, because productivity increased. Farmers also began paying much more attention to their markets, and were sensitive to price changes.
When demand for venison rose in the European market, for example, more New Zealand farmers began raising deer. Dairy farmers began turning to the production of high-value milk products, such as cheese and butter. As a result, the ratio of cattle raised for meat to dairy cattle decreased sharply.
Farmers set up agricultural produce export cooperatives, and in the late 1990s, those cooperatives merged to give New Zealand a single brand. Other multinational agribusiness firms, such as Zespri and Fonterra, were set up.
And farmers, although the owners of these co-ops, decided to leave marketing and management to experts in those fields.
Andrew Ferrier, the chief executive of dairy product manufacturer Fonterra, was recruited from a Canadian sugar company. Its chief marketing executive is an Indian national who came there from Unilever.
Ken Geard, Fonterra’s senior trade strategist, said with some satisfaction, “New Zealand’s dairy products have been successful in overseas markets because we gave marketing jobs to people who knew the global market.”
Zespri, founded in 1997, also devoted part of its efforts to global marketing; it has a subsidiary, Zespri International, that handles export marketing and sales. With that unified Zespri brand, farmer-owned cooperatives began to work on product quality.
At Bay of Plenty, there are 60 kiwi fruit farms under contract to Zespri. In early June, harvesting was in full swing; the time was selected based on weather data provided by a kiwi packaging company there. The weather data it provides is extensive, and includes temperature and wind speed updated hourly.
Scott Diggerman, a kiwi orchardist, said the fruit is very sensitive. It can be harmed by strong winds as fruit on the trees collide with their neighbors, and warm temperatures are important. “So the timing is very important in order to harvest good-quality kiwi,” he said.
The harvested fruits are sent to a packaging company where they are rated according to strict standards set by Zespri and applied nationwide by the company. Once graded, a barcode decal is slapped on each box indicating the grower, time of harvest and distribution channel. Those details allow Zespri to quickly track down problems in its production system before they get out of hand. The result has been a gradual evolution to strong consumer confidence in the fruit and the brand.
Such drastic reform has not been seen in Korea, although in 1993, during the Uruguay Round of trade negotiations, the Kim Young-sam administration announced a 10-year plan to strengthen Korea’s agricultural competitiveness. The plan included a program to train 150,000 farmers in modern techniques and boost profit margins of farmers to 50 percent of their gross receipts. The administration promised farmers that it would turn the sector into a major export industry.
To reach those lofty targets, the government announced a 42 trillion won ($44.2 billion) budget to reform Korea’s agricultural and marine product sectors. The program was to have been backdated to 1992 and continue until 1998, but was markedly unsuccessful in raising agricultural competitiveness. The succeeding Kim Dae-jung administration set aside a budget of 45 trillion won for agricultural development between 1999 and 2003.
Over the last 10 years, the Korean government has poured 68.7 trillion won into Korean farms and food processing industries. Add to that a 15-trillion-won program for rural development funded by a special tax, and the 10-year bill for Korean government programs is about 84 trillion won.
That money did not help Korean farmers’ ability to grow rice at a competitive price, however. The Roh Moo-hyun administration was forced to begin negotiating a second 10-year delay in the full opening of Korea’s rice market in 2003, when its date agreed to in the Uruguay Round for a market opening loomed.
Mr. Roh, like his predecessors, gave more money to farmers, devising a program to pay 119 trillion won into the agricultural sector between 2004 and 2013.
Part of the contrast with New Zealand is a matter of geography and social traditions, however. New Zealand has 80,000 farmers tilling 15 million hectares (37 million acres) of farmland; Korea has 1.2 million farmers working on 1.8 million hectares.
But the argument for a link between uncompetitive farming and subsidies is compelling. New Zealand farmers, with all their natural advantages, sunk into uncompetitiveness as subsidies rose, but came roaring back as a major international competitor only a decade after the shock of removing those subsidies in 1984.
But Korean politicians, seeing in their mind’s eyes a sea of red headbands and iron pipes in angry farmers’ hands, may tremble at the thought of such reform. That means, perhaps, that reform-minded economists here will have to depend on international pressure in trade negotiations to bring about substantive change.

by Jung Kyung-min

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