New Zealand's Free Market System

by Ryan Brown, General Manager

Over the last couple years, there have been different sessions held that talk about how in 1984, New Zealand reformed their agricultural programs to produce a subsidy- free environment of prosperity which their thriving agricultural industry enjoys today. I would like to explore this concept further through some of my recent experiences.

Approximately one year ago, I attended a session held at OMAFRA, in which Elizabeth Dixon of the New Zealand High Commission presented, ‘The New Zealand Situation: 20 Years After Reform’. She set the context of the presentation through some basic facts; it was a country containing a highly urbanized population of roughly 4.2 million people that was highly trade dependent like Canada with approximately 90 percent of its agricultural production exported. In 1984, their economy was underperforming terribly; a poor economic strategy was blamed for many things including a fiscal deficit and problems with inflation and monetary growth. They were facing increasing levels of unemployment and they lost their UK guaranteed access market. As a result, the decision was made to reform the economy.

The part that makes me smile somewhat when I hear these presentations is that a key comment is often left out; as a result of the turmoil within New Zealand, the World Bank refused to loan the country money. This is a huge deal when a country is as trade dependent as New Zealand, and this also may have had something to do with the ‘economic reform’. Another point which is sometimes not clearly presented is that it was the entire economy, not just agriculture, where the removal of government controls and regulations were targeted.

Some of the impacts of the reform as presented by Ms. Dixon; there was a 50 percent decrease in land prices within 4 years of the reform which took until the mid 1990’s to recover. Also, farms are privately owned and operated businesses in which farmer production decisions are made from the market and by the producers, not by the government. They want to continue the country’s economic growth through trade liberalization, supported by innovation, agri-research and biotechnology.

Roughly two months ago, I was part of the Advanced Agricultural Leaderships’ International Study Tour. The Class Eleven destination visited both the countries of New Zealand and Australia. The New Zealand part of the tour was of most interest to me as it presented an opportunity to understand this open market concept first hand from the people who worked within industry. One of our earliest stops was with a company called Fonterra. Fonterra is a multinational dairy company which is co-operatively owned by roughly 11,600 farmers. They are the world’s largest exporter of dairy products, exporting 95 percent of their production to 140 markets. They handle USD$8.1 billion in product and own USD$7.5 billion in assets. The average herd size of their family-based dairy producers is 310 cows, which they are proud to say is among the lowest cost to scale in the world. Of course, the talk wasn’t complete with them taking a shot at Canada’s supply-managed system as they were proud to point out how their industry operates in a subsidyfree environment.

Fonterra operates like a state trading agency. Producers must buy shares to market their milk which sounds eerily similar to the Canadian quota system. Fonterra shares can and are being used as security for financing. It was mentioned that 95 percent of the dairy farmers in New Zealand were shareholders but when Fonterra is basically the only game in town, the high enrolment is not unexpected. It was also stated that Fonterra had to sell some of their milk at cost in order to keep them from being considered monopolistic. So, they are not considered a monopoly and yet, enjoy many of the conditions a monopoly operates under. Hmmmm.

One other nugget; some of the AALP class participants spent some time in New Zealand ahead of the study tour and learned there had been some larger Fonterra shareholders that were not particularly happy with their arrangement and were looking to set up their own company. Fonterra allegedly took these producers to court to stop them from setting up this company. Sound like an open market system to you? And when questioned during this presentation, the presenter knew nothing of this situation which we found somewhat surprising.

A couple of farm stops including a dairy farm revealed prime irrigated pasture land selling for NZD $27,000 per acre (roughly Cdn$22,000) with a milking parlour; the same land without the parlour was moving for roughly NZD$20,000 or Cdn$16,500. With land prices this high, it really throws a wrinkle in the whole ‘government subsidies only get capitalized into land’ debate. It was fairly common financing practice to use interest only loans with no intention of ever owning the land; a practice the banking industry completely supports. Property taxes are low and there is no capital
gains tax.

Moving away from the dairy industry for a moment, another stop placed us at Zespri International Ltd.; the single largest marketer of kiwifruit accounting for 22 percent of the global market share. The company is owned by 2,500 producers and earned NZD$26.4 million after tax on sales of NZD$1billion. They are customer-focused and have invested in research and development, which has yielded a proprietary variety called Zespri Gold. And as you may have guessed, Zespri is a single desk monopoly. One of the points made during this presentation was in regard to the Australian wheat board, and the fact that they were keeping a close eye on the future of that group as its demise was certainly going to have significant impact on the future of Zespri.

Meat & Wool New Zealand is a body that acts on behalf of farmers much like OCPA. They collect $36 million in levies (significantly higher than OCPA) and use approximately half of those dollars to fund research and development. They invest in roughly 60 projects per year and depend on significant leveraging from industry and government. The speaker was challenged regarding the government investment in some of their projects; his response was New Zealand was different because they had to apply for the money to receive it.

One of the biggest problems facing New Zealand agriculture today is a similar problem facing Canada; the New Zealand dollar is strong against the U.S. dollar. However, back in the 1980’s, since the entire economy was in turmoil, the New Zealand dollar was severely depressed and they had no choice but to reform their entire system. There was some luck with their timing; as the decreases in subsidies occurred, they were offset by the increases in New Zealand prices. New Zealand’s programs all currently meet their commitments under the world trade negotiations; the point I am trying to make is that whenever you have a chance to hear about their trials and tribulations regarding ‘going it alone’ on the world market without
any government support, my recent experiences would suggest you take it with a grain of salt.