Why New Zealand Abolished Farm Subsidies

U.S. Farm Subsidies vs. The New Zealand Model: A Comparative Analysis

Key Concepts:

• Agricultural Subsidies: Government financial assistance to farmers, intended to stabilize income, ensure food security, and support rural economies.
• Producer Subsidy Equivalent (PSE): A measure of the percentage of a farmer’s gross income received from government support.
• Agricultural Adjustment Act (AAA): A U.S. law enacted in 1933 during the Great Depression aimed at raising farm incomes through production controls and subsidies.
• OECD: Organisation for Economic Co-operation and Development, an international organization that provides data and analysis on economic and social issues.
• Market Discipline: The principle that prices and production levels should be determined by supply and demand, without government intervention.
• Productivity Improvement: Increases in output per unit of input (e.g., more lamb produced per sheep).
• Fecundity: The reproductive capacity or rate of an organism.
• Terminal Sires: Breeds of livestock used to improve the growth rate and meat quality of offspring.

I. The Historical Context of U.S. Farm Subsidies

The United States’ involvement in supporting its agricultural sector dates back to the Great Depression with President Roosevelt’s Agricultural Adjustment Act (AAA) in 1933. The rationale at the time was national food security amidst global economic turmoil. As stated in a historical quote, “With the whole world in turmoil, even the united efforts of the farmers themselves would not have been sufficient without the cooperation of the government of the United States.” This marked the beginning of a long-standing tradition of government intervention in agriculture.

Currently, the scale of these subsidies is substantial. Dan Glickman, former Secretary of Agriculture, notes that “there's a huge amount of agriculture subsidies in the United States. I mean, it's billions and billions of dollars.” A recent OECD report (covering 54 countries) found that agricultural support policies generated an average of $842 billion per year in transfers between 2022 and 2024.

II. The Impact of Tariffs and Market Instability

Recent trade policies, specifically tariffs, have highlighted the vulnerability of U.S. farmers to external economic shocks. The example of soybean exports to China illustrates this point. When tariffs were imposed, China shifted its sourcing to Brazil and Argentina, creating a “dagger in the heart of American agriculture” as described by Glickman. This resulted in full grain elevators and uncertainty regarding future production, demonstrating the reliance on stable export markets. The U.S. government responded with economic assistance to farmers, further reinforcing the cycle of dependence on government payments.

III. The Case of New Zealand: A Radical Departure

In stark contrast to the U.S., New Zealand completely eliminated agricultural subsidies in a single year (1985). This decision was driven by a severe economic crisis in the early 1980s, with the loss of its primary export market (Great Britain joining the European Union) and unsustainable public spending. Lockwood Smith, a former New Zealand Agriculture Minister and farmer, recalls the situation: “We were within months of being bankrupt, if you like.”

Prior to the reforms, New Zealand’s agricultural sector was heavily subsidized, particularly the lamb industry, with a Producer Subsidy Equivalent (PSE) reaching 90% for sheep farmers. This led to overproduction; in 1984, New Zealand had 70 million sheep and was unable to export all its product, even resorting to using carcasses as fertilizer.

IV. The Immediate Aftermath and Long-Term Results in New Zealand

The abolition of subsidies was met with significant protest, as described by Peter Jex-Blake, a New Zealand farmer who participated in demonstrations: “Probably the biggest protests I've ever seen on the front steps of the New Zealand Parliament were in that year, in 1985.” Farmers faced immediate hardship, with income halving, land prices plummeting, and interest rates soaring. The initial decade following the reforms was characterized by economic struggle.

However, the long-term results have been remarkable. Farmers were forced to adapt and innovate, leading to substantial productivity gains. New genetics were introduced into the sheep flock (Finnish Landrace and Perendales), improving fecundity. Pasture management practices were also enhanced. As a result, sheep numbers have decreased from 70 million in 1984 to less than 26 million today, yet lamb production remains comparable. Overall, productivity in the sheep industry has increased by 170% since the mid-1990s. Agriculture remains a crucial part of the New Zealand economy, accounting for around 70% of goods exports, but it is now largely unsubsidized.

V. The Applicability of the New Zealand Model to the U.S.

The video explores whether the New Zealand model could be replicated in the U.S. Iowa farmers interviewed expressed a preference for stable markets over direct payments, stating a desire to “create products for the market instead of creating markets for the products.” However, Dan Glickman argues that political realities make such a shift unlikely. He emphasizes the significant political power wielded by agricultural interests, noting that “every senator has large amounts of farm country and farm products and farmers…they have equal power.” He concludes that “we're going to have subsidies of some sort forever,” regardless of economic arguments for free markets.

VI. The Core Argument: Market Discipline vs. Political Constraints

The central argument presented is the tension between the economic benefits of market discipline and the political pressures to maintain agricultural subsidies. While subsidies can distort market signals, create inefficiencies, and potentially hinder innovation, they are deeply entrenched in the U.S. political system due to the strong representation of agricultural interests. The New Zealand case demonstrates that eliminating subsidies can lead to significant productivity gains and a more resilient agricultural sector, but it also requires a willingness to endure short-term pain and overcome political opposition.

VII. Technical Terms Explained:

• Producer Subsidy Equivalent (PSE): A metric used to quantify the level of government support received by farmers as a percentage of their gross income.
• Fecundity: A measure of reproductive rate, crucial in livestock breeding for increasing output.
• Terminal Sires: Breeds specifically selected for their ability to improve the growth and meat quality of offspring, enhancing overall production efficiency.

Conclusion:

The video presents a compelling comparison between the U.S. system of extensive agricultural subsidies and New Zealand’s radical shift towards a free market approach. While the U.S. system aims to provide stability and security for farmers, it also creates distortions and dependencies. New Zealand’s experience demonstrates that eliminating subsidies, though initially painful, can foster innovation, improve productivity, and create a more sustainable agricultural sector. However, the political obstacles to replicating the New Zealand model in the U.S. appear substantial, suggesting that farm subsidies are likely to remain a fixture of the American agricultural landscape.