Every five years or so, members of Congress from rural areas team up to push through a costly extension of farm programs. They are at it again this year. The Senate recently passed legislation to keep billions of dollars in subsidies flowing to farm businesses, and the House just passed a similarly bloated bill out of committee.
It isn't needed. New Zealand's farm reforms of the 1980s dramatically illustrate the point. Faced with a budget crisis, New Zealand's government decided to eliminate nearly all farm subsidies. That was a dramatic reform because New Zealand farmers had enjoyed high levels of aid and the country's economy is more dependent on agriculture than is the U.S. economy.
The vast majority of New Zealand farmers proved to be skilled entrepreneurs — they restructured their operations, explored new markets, and returned to profitability. Today, New Zealand's farming sector is more dynamic than ever, and the nation's farmers are proud to be prospering without government Despite initial protests, farm subsidies were repealed in 1984. Almost 30 different production subsidies and export incentives were ended. Did that cause a mass exodus from agriculture and an end to family farms? Not at all. It did create a tough transition period for some farmers, but large numbers of them did not walk off their land as had been predicted. Just one percent of the country's farmers could not adjust and were forced out.
Prior to the 1984 reforms, subsidies stifled farm productivity by distorting market signals and blocking innovation. Many farmers were farming for the sake of the subsidies. For example, nearly 40 percent of the average New Zealand sheep and beef farmer's gross income came from government aid.
When the subsidies were removed, it turned out to be a catalyst for productivity gains. New Zealand farmers cut costs, diversified their land use, sought nonfarm income, and developed new products. Farmers became more focused on pursuing activities that made good business sense.
Official data supports on-the-ground evidence that New Zealand greatly improved its farming efficiency after the reforms. Measured agricultural productivity had been stagnant in the years prior to the reforms, but since the reforms productivity has grown substantially faster in agriculture than in the New Zealand economy as a whole.
Since the reforms, agriculture's contribution to New Zealand's economy has remained steady at about 5 percent of gross domestic product (GDP). Adding activities outside the farm gate, such as processing of milk, meat and wool, agriculture is estimated to contribute over 15 percent of GDP. By contrast, agriculture's share of the economy has fallen in many other industrial countries.
With the removal of subsidies in New Zealand, agricultural practices are driven by the demands of consumers, not by efforts to maximize the receipt of subsidies. At the same time, the whole agricultural supply chain has improved its efficiency and food safety has become paramount. Businesses that deliver inputs to farming have had to reduce their costs because farmers have insisted on greater value for money.
More efficient agricultural production in New Zealand has also spurred better environmental management. Cutting farm subsidies, for example, has reduced the previous overuse of fertilizer. And cutting subsidies has broadened farm operations to encompass activities such as rural tourism that bring management of the rural environment to the fore.
The message to American farmers is that subsidy cuts should be embraced, not feared. After subsidy cuts, U.S. farmers would no doubt prove their entrepreneurial skills by innovating in a myriad of ways, as New Zealand farmers did. And we suspect that — like New Zealand farmers — American farmers would become proud of their new independence, and have little interest in going back on the taxpayer gravy train.
Now would be a great time for America to embrace Kiwi-style reforms because commodity prices are high and U.S. farm finances are generally in good shape. It's true that weather conditions and markets create ups and downs for agriculture, but over the long run, global population growth will likely sustain high demand for farm products. Some people claim that America needs to subsidize because other countries do. But unsubsidized New Zealand farming is globally competitive, with about 90 percent of the country's farm output exported.
The removal of farm subsidies in New Zealand gave birth to a vibrant, diversified, and growing rural economy, and it debunked the myth that farming cannot prosper without subsidies. Thus rather than passing another big government farm bill that taxpayers can't afford, the U.S. Congress should step back and explore the proven alternative of free market farming.