Commentary

Save the Farms — End the Subsidies

By Chris Edwards and Tad DeHaven
This article was first published in the Washington Post, March 3, 2002.

“This nation has got to eat,” President Bush said in a recent speech supporting the $170 billion farm subsidy bill pending before Congress. In the new federal budget, Bush is quoted as saying that “our farmers and ranchers are the most efficient producers in the world … we’re really good at it.”

Does the government really need to subsidize such an efficient industry, then? Do we need farming subsidies in order for Americans to eat?

Evidence from New Zealand indicates that the answer is an emphatic no on both counts. In 1984 New Zealand’s Labor government took the dramatic step of ending all farm subsidies, which then consisted of 30 separate production payments and export incentives. This was a truly striking policy action, because New Zealand’s economy is roughly five times more dependent on farming than is the U.S. economy, measured by either output or employment. Subsidies in New Zealand accounted for more than 30 percent of the value of production before reform, somewhat higher than U.S. subsidies today. And New Zealand farming was marred by the same problems caused by U.S. subsidies, including overproduction, environmental degradation and inflated land prices.

Subsidy elimination in New Zealand was swift and sure. There was no extended phaseout of farm payments, as was promised but not delivered under U.S. farm reforms in 1996. Instead, New Zealand’s government simply offered one-time “exit grants” to those who wanted to leave farming when subsidies ended.

New Zealand’s plan was initially met with protest marches on parliament and organized resistance by farmers. Bolstering opposition was the government’s own prediction that 10 percent of all the country’s farms would go out of business. But the subsidies were ended, and New Zealand farming has never been healthier.

A report last year from the country’s main farmers’ group, the Federated Farmers of New Zealand, documents the positive change and growth in that country’s agriculture industry since subsidies ended. While land prices initially fell after reform, by 1994 they had rebounded, and they remain high today. The mass of farm bankruptcies some had expected never occurred; just 1 percent of farms have gone out of business.

Meanwhile, the value of farm output in New Zealand has soared 40 percent in constant dollar terms since the mid-1980s. Agriculture’s share of New Zealand’s economic output has risen slightly, from a pre-reform 14 percent to 17 percent today. Since subsidies were removed, productivity in the industry has averaged 6 percent growth annually, compared with just 1 percent before reform. Farming in New Zealand scores well on the export “report card,” with producers competing successfully in world markets against subsidized farm production in much of the rest of the world.

The Organization for Economic Cooperation and Development (OECD) confirms that New Zealand has the least subsidized farm sector among the industrial nations, concluding that its reforms “resulted in a dramatic reduction in market distortions.” The OECD’s data show that agriculture subsidies account for just 1 percent of the value of agriculture production in New Zealand and consist mainly of scientific research funding. By contrast, subsidies represent 22 percent of the value of U.S. farm production.

Forced to adjust to new economic realities, New Zealand farmers cut costs, diversified their land use, sought non-farm income opportunities and altered production as market signals advised — for example, by reducing sheep numbers and boosting cattle ranching. Farmers were aided on the cost side as input prices fell, because suppliers could no longer count on subsidies to inflate demand.

The striving for greater efficiency also supported environmental protection as marginal land farmed only to collect subsidies was replaced with native bush, and overuse of fertilizers ended when fertilizer subsidies were removed.

The Federated Farmers of New Zealand believe their country’s experience “thoroughly debunked the myth that the farming sector cannot prosper without government subsidies.” It is still not too late to revisit the U.S. farm bill and debunk the myth in this country.

Chris Edwards is director of fiscal policy at the Cato Institute and Tad DeHaven is a research associate there.