Surviving Without Subsidies

August 2, 2007 Surviving Without Subsidies By WAYNE ARNOLD OHINEWAI, New Zealand — Watching grass grow is supposed to be dull. But watching it grow with a dairy farmer like Malcolm Lumsden is anything but. Cows turn grass into milk, and while dairy farmers in the United States and Europe rely much more on grain to feed cows, here in New Zealand grass is pretty much all they get. The richer and more abundant the grass, the richer and more abundant the milk. So like mechanics tuning a race car engine, Mr. Lumsden and his fellow dairy farmers keep close track of the weight of the grass in their pastures, precisely measure its protein and sugar content, and produce computer charts tracking how much they have left to feed their cows through winter. “It’s a science,” Mr. Lumsden mused as he watched a group of his black-and-white Friesians munching dark grass on a wet winter day. “It’s a real science.” Dairy farming in New Zealand was not always this sophisticated. But ever since a liberal but free-market government swept to power in 1984 and essentially canceled handouts to farmers — something that just about every other government in an advanced industrial nation has considered both politically and economically impossible — agriculture here has never been the same. The farming community was devastated — but not for long. Today, agriculture remains the lifeblood of New Zealand’s economy. There are still more sheep and cows here than people, their meat, milk and wool providing the country with its biggest source of export earnings. Most farms are still owned by families, but their incomes have recovered and output has soared. “Farming in New Zealand is now a cold, hard business,” said Mr. Lumsden, who at the time of the farming revolution was president of Federated Farmers in the Waikato region, the heart of New Zealand’s dairy country. “I think we have benefited hugely.” New Zealand’s farmers are not the only ones convinced that eliminating subsidies, or at least sharply cutting them, is a good idea. As negotiators struggle to revive the failing global trade talks and Congress moves ahead on a new farm bill in the United States, New Zealand and Australia — which also cut subsidies but not as drastically — are being extolled by economists and advocates for poor countries as models for Americans and Europeans to follow. “They went cold turkey and in the process it was very rough on their farming economy,” said Ray Goldberg, a retired professor of agriculture and business at Harvard Business School. “But they came out healthier and stronger. They proved it could be done.” Traditional subsidies, economists contend, generally encourage inefficient farmers to grow unprofitable crops far beyond what consumers actually need, secure in the knowledge that the government will help protect them from loss. And they make it much harder for farmers in poor countries to compete on a level playing field against coddled farmers in the West. Removing subsidies, the argument goes, liberates the best farmers anywhere in the world to produce what people really want. “When you’re not going to get paid for what the market doesn’t want, you have to get off your backside and find out what they want,” said Charlie Pedersen, who, when he is not raising sheep and beef cattle on his farm north of the capital, Wellington, is president of Federated Farmers of New Zealand. Just how much the United States can learn from New Zealand is debatable: this country is small and its subsidies and tariffs were a relatively recent indulgence. And unlike the United States, where most farm output is consumed domestically, almost all of New Zealand’s milk, meat and wool is sold abroad. “There’s a lot of differences between New Zealand and the United States," Tom Buis, president of the National Farmers Union in Washington, said in a telephone interview. “They are almost completely export oriented, and that’s quite the reverse of the U.S.” If the United States were to pursue a New Zealand-type strategy, Mr. Buis argued, large corporate entities would end up controlling most farms as smaller farmers went into bankruptcy. “Those people are going to get financially ruined,” he said. Whatever the differences, the response in New Zealand’s dairy industry to the end of subsidies is broadly instructive. Output has quintupled since the end of subsidies, positioning New Zealand to take advantage of a global boom in demand for dairy products, driven from China and India. With little suitable land available for growing grain, New Zealand’s dairy farmers survived by exploiting their environment. Because winters are relatively mild and the country has no predators like coyotes or wolves, it can keep its cows and sheep on pasture year-round with nothing but basic fences to control them. “The reason we’ve succeeded is we’ve been low-cost producers,” said Kevin Wooding, a former chairman of Dairy Farmers of New Zealand who milks about 700 cows in the Waikato’s rolling, iridescent hills. “We kept our grass systems in place.” In addition to reducing the need for expensive fuel to transport feed, Mr. Wooding and other farmers here aver that their pastoral system produces healthier animals. After growing rich in the early 20th century off the byproducts of its pasture, New Zealand imposed subsidies not so much to protect farming but as part of a plan to insulate its domestic manufacturers from global competition. It offset the costs to its farmers from higher industrial tariffs by giving them subsidies. But farming is not a small part of the economy as it is in the United States; it is the nation’s largest, most important sector. “It was wacko,” said John Yeabsley, a former trade official who is now an economist at the New Zealand Institute of Economic Research in Wellington. “Who’s going to pay for the subsidies?” Farmers eventually realized that it was them. They responded to their higher tax burden by maximizing their subsidies. “The whole thing,” Mr. Wooding said, “was a game to try to get as much government money as possible.” By the early 1980s, the cost of this system had created a balance of payments crisis for the nation. A newly elected, left-leaning Labor Party government under Prime Minister David Lange took the uncharacteristic step of pushing through a radical set of free market economic plans, with agricultural subsidies the first to go. When the government also floated the New Zealand dollar, the currency skyrocketed, costing sales abroad while sending interest rates soaring and land prices lower. More than a few farmers flirted with bankruptcy. Some succumbed. As anger mounted, thousands of farmers marched on the capital, letting sheep loose on government lawns and buzzing Parliament with crop dusters. Even Mr. Lumsden, who bucked many of his fellow farmers by favoring the end of subsidies, found that his own debts had grown so heavy that he was forced to sell his family farm to the government. Faced with a potential avalanche of bankruptcies, farm leaders persuaded New Zealand’s banks to write down some of their debt. It made the difference: after fearing that 10 percent of farms would go bust, Mr. Pedersen said, only about 1 percent did. Mr. Lumsden was eventually able to buy his farm back from the government — at a discount. As industrial tariffs fell, the benefits of lower equipment costs made themselves felt and farmers were able to expand by buying out struggling operations. As a result, there are more milking cows in New Zealand, but fewer herds. With the world shifting to more health-conscious products, farmers responded by moving away from Jerseys, with milk rich in butterfat, to larger Friesians, which provide more protein-rich milk. To produce the higher-protein milk in a more compact animal, they began crossing Jerseys with Friesians, in a breed now known as the Kiwi cross. Today, cows in New Zealand cost less to feed and yield more milk solids, making them more profitable. Dairy farming has become so much more lucrative in the postsubsidy era that many sheep farmers, once even more heavily subsidized, have been shifting to dairy. Sheep farmers also responded by becoming more competitive themselves. Farmers reduced the huge herds of mostly small and fatty lambs they had been raising, importing breeds from Finland and Denmark to improve the fertility of their ewes and producing larger, leaner lambs. “The output of 40 million sheep we have today is as great as from 70 million,” said Tom Mandeno, a director at Meat and Wool New Zealand, who manages 2,500 sheep and 400 beef cattle. Australia’s experience in eliminating subsidies, though less sweeping, was similar. Dairy production has boomed; government stipends helped ease the exit of less-efficient farmers. “There were a lot of small farmers who were dying very slowly and were going to have to leave the industry anyway,” said Phillip Goode, manager of international policy at Dairy Australia in Canberra. “This gave them a way to leave in a financially dignified way.” Without government aid, New Zealand farmers have found other ways to deal with the vicissitudes of commodity markets. In 2001, dairy farmers merged two rival cooperatives to form their own purchasing and exporting cooperative, Fonterra, which also gives New Zealand pricing heft in international markets. “I’m very happy with Fonterra,” Mr. Lumsden said. “They’ve taken the peaks and troughs out of the price in the world market.” Fonterra also drives innovation and product development: New Zealand’s dairy farmers have ventured into new lines like antibody-rich milk for the health food and pharmaceutical markets, kosher milk and even chocolate cheese. “What’s happened since the reforms is that you have a new type of farm emerging — a business farm,” Mr. Lumsden said. Giving up subsidies made farming harder, he conceded, but introduced the pride that comes of entrepreneurship. “It made it more enjoyable,” he said.