The pastoral livestock sector and the supplementary minimum price policy

Abstract

The Supplementary Minimum Price policy has been a major topic of debate in the past few years, but there have been relatively few attempts to quantify the impacts that the scheme has had on the agricultural sector. Although the level of payments can be readily identified, it is recognised to be very difficult to evaluate the long term impacts on agricultural investment and development. In this study, an econometric model of the New Zealand pastoral sector is utilised in an attempt to evaluate the short and long run impacts of the removal of the policy. In order to isolate the effects of the SMP policies from other factors which are continuously changing, a simulation experiment was performed. Using 1982 price levels both with and without supplementary minimum payments, the levels of farm investment, farm production, and exports were estimated for a five year period. The comparison of these two simulations made it possible to isolate both the short and long run impacts of the pricing policy. The results suggest that in the short term the main implications of removing supplementary minimum payments would be to decrease both gross and net farm incomes with little change in output or export earnings. Although changing income levels do not affect production in the short term they have implications for agricultural investment and output in the longer term. Similarly, foreign exchange earnings decrease in the long run as agricultural investment diminishes. It is concluded that SMP payments cannot be justified solely on the grounds that without them export receipts would fall dramatically. Also, the analysis shows that the productive capacity of the pastoral sector would not have been seriously run down in the absence of SMP payments, and would have been able to respond to any upturn in market returns. Thus, recent increases in market prices seem not to present an ex post justification for an SMP policy.