Every five years or so, congressmen from rural areas team up to accept an expensive extension of agricultural policy. They are putting off the cover this year. The Senate recently passed a bill guaranteeing billions of dollars in subsidies to farms, and the House of Representatives did the same.
The Farm Bills project is lobbying. Politicians have never explained why US agriculture needs to be pampered by the government. Congress members are more concerned with grabbing subsidies for farmers in their respective states than discussing or debating the value of federal support.
They are not useful. The agricultural reforms of the 1980s in New Zealand prove it dramatically. In response to a fiscal crisis, the New Zealand government decided to eliminate almost all agricultural subsidies. This was a serious reform since New Zealand farmers were used to massive subsidies and the country’s economy is more dependent on agriculture than the United States.
Despite the protests, the subsidies were repealed in 1984. Nearly thirty production subsidies and export incentives were abolished. Did this result in a massive abandonment of agriculture and the end of family farms? Not at all. Of course, there was a difficult transition period for farmers but few of them left their land, as predicted. Only 1% of farmers in the country failed to adapt and had to quit.
The vast majority of New Zealand farmers proved they were experienced entrepreneurs – they straightened their businesses, explored new markets and rediscovered profitability. Today, New Zealand’s agriculture sector is more dynamic than ever, and farmers across the country are proud to prosper without government intervention.
Many farmers were just to receive subsidies. For example, 40% of the gross revenues of beef and sheep farmers came from government subsidies.
The removal of subsidies was a catalyst for productivity gains. New Zealand farmers reduced their costs, diversified land use, looked for non-agricultural sources of income, and developed new products. Farmers became more attracted to economically viable activities.
Official data confirm the reality on the ground of improving the efficiency of New Zealand agriculture after the reforms. Agricultural production stagnated in the years leading up to the reforms, but since then production has increased significantly faster than in other sectors of the New Zealand economy.
Since the reforms, the share of agriculture in the New Zealand economy has remained stable at 5% of GDP. If we add the para-agricultural activities such as processing of milk, meat and wool, agriculture is estimated to represent 15% of GDP. In comparison, the share of agriculture in the economy has fallen in other industrialized countries.
With the removal of subsidies in New Zealand, agricultural practices are turned to customers rather than attempting to receive as many subsidies as possible. At the same time, the entire supply chain has improved and food security is now of paramount importance. Companies supplying raw materials to farms have had to reduce their costs through the insistence of farmers for better value for money.
Greater efficiency in New Zealand’s agricultural production has resulted in better environmental management. For example, removing subsidies has reduced the use of fertilizers. This removal has allowed the emergence of new agricultural activities such as rural tourism that requires increased environmental management.
What American farmers must remember is that the end of subsidies must be seen as an opportunity, not a fatality. After the end of the subsidies, there is no doubt that American farmers will prove that they are talented entrepreneurs by innovating in many ways as New Zealand farmers have done. And we assume that – like New Zealand farmers – American farmers will be proud of their new independence and will have no interest in living again at the expense of the taxpayer.
It is a good time for America to introduce New Zealand-style reforms because commodity prices are high and farm finances are doing relatively well. It is true that weather conditions and markets create highs and lows for agriculture, but in the long run, the growth of the world’s population means greater demand for agricultural products.
Stopping agricultural subsidies in New Zealand has created a dynamic, diverse and growing rural economy, and has discredited the myth that agriculture can not live without subsidies. So instead of taxing the taxpayers who can no longer afford it, it is time for the US Congress to backtrack and consider an alternative that has proven itself: the market economy.