Regional linear programming models for the New Zealand dairy industry

Abstract

Exports of pastoral products have always occupied a most important place in the New Zealand economy. The viability of the economy is closely connected with the growing amount of products New Zealand is able to export and prices received in overseas markets.

The Dairy Industry has always been a major exporter, and has in recent years earned 25 per cent of New Zealand's total export earnings. A significant proportion of the population is employed in the industry and receives its livelihood from dairying and associated industries.

The majority of the dairy produce exported goes to the U.K. market which takes 80-90 per cent of New Zealand’s total dairy exports. The remaining amount goes to various markets around the world.

In recent years economic pressures have arisen on New Zealand's dairy exports through surpluses of dairy produce in several countries. Also in the restricted number, of markets available, dairy exports from New Zealand have had to overcome trade barriers and compete with subsidised home and dumped products. The major cause of the depressed state in international trade has been the large butter surplus in the EEC countries, and the subsequent dumping of butter around the world by these and other countries.

Further pressures on the New Zealand dairy industry will be created by the threat of the U.K. joining the EEC. New Zealand, protected in recent years by a butter import quota system on the U.K. market, stands to lose part of her share of this market to the EEC if England does join.

For these reasons, the future of the industry is likely to remain full of uncertainty. On the one hand, there is a growing world shortage in dairy produce, as projected by organisations like FAO and OECD, but on the other hand there is the increasing difficulty of finding 'free' markets where dairy produce can be marketed. This uncertainty about prices and available export markets reflects itself in the industry, where farmers are faced with decreasing incomes, increasing internal costs, and the possibility of production quotas. To counteract this development and associated uncertainty, some farmers have diversified production, while others have intensified or amalgamated farms to increase output per farm and decrease costs. This study will deal in particular with these short term adjustments that farmers can make. Among these short term adjustments diversification will play a foremost role, but it has to be remembered that some farmers will diversify not for profitability reasons, but to ensure that future incomes will continue at present levels. Among the alternative enterprises, dairy beef is the most likely. Amalgamation will probably be the foremost objective of restructuring. Government has already been encouraging farmer to move into dairy beef, and for the uneconomic units to amalgamate through means of subsidies and financial arrangements.

When England joins the EEC, and this seems to be more likely than the leaders of the Dairy Industry want to admit to the farmers, the Government may be in the position of having to reduce the output of the industry to bring it in line with export prospects. This it could achieve through pricing policies or quota impositions. To see the effects of such measures on the industry, a thorough study of the industry as a whole is required, taking into account the dependence between regions in supplying butterfat and in adopting alternative enterprises. A comprehensive analysis of production potential and structural adjustment possible is needed.

A suitable method of analysis to achieve these objectives is regional linear programming. The method makes it possible to divide the industry into near homogeneous regions, and to represent each region by a group of representative farms, the sum of which will indicate the supply response for the whole of that region. Further, these farms can be analysed under a large number of price and factor supply situations in order to obtain 9 for all regions added together, the correctly specified national response to a given change in price or quota. Although the technique is a normative one, and the results only state what may happen to the industry given certain assumptions about resources available, price levels, and farmers' responses to changing price levels at the margin, it will provide policy makers with the likely results of policy changes.

The importance of the dairy industry to the New Zealand economy has already been stressed, and the problems outlined showed the need for adjustment studies on the industry. The analysis will be concerned with the principal dairy farms in the North Island, and the base year of the study will be 1966/67. These choices were governed by the available data. Nevertheless, the principal dairy farms in the North Island produced in 1966/67. 93 per cent of the total butterfat output, therefore these farms nearly represent the whole industry, and the results obtained will be considered as applying to the whole industry.