Predicting farm level response to government policy : a simulation approach with special reference to Hill Country farming in New Zealand

Abstract

The main objective of the study was to develop a simulation model of the New Zealand North Island hill country farming system to assist planners and analysts in their assessment and evaluation of government policy measures. A secondary but associated objective was to analyse and describe several important aspects of financial decision making behaviour; in particular behaviour related to consumption, investment and the use of credit. An examination of each of these aspects of decision making was carried out and contributed to the subsequent development of the simulation model.

The model was designed to simulate, over a number of years, the physical and financial operation of a representative North Island hill country pastoral farm. The model includes flock and herd sub-models which simulate annual livestock production under the influence of stochastic seasonal production parameters. The value of this production is determined by specified or randomly generated product prices. Various functions and algorithms then operate to estimate operating expenditure and taxation payments, and to simulate borrowing, consumption, and investment or disinvestment behaviour. Investment expenditure generates farm growth through land development and the associated increase in stock carrying capacity. Alternatively, under adverse economic (and/or climatic) conditions, disinvestment in the form of reduced farm maintenance and fertiliser expenditure, may lead to reduced stock carrying capacity. By manipulating model parameters and data related to prices, costs, taxation and credit, a range of policy types can be represented and their effects simulated.

The model was subjected to validation testing and sensitivity analysis before being used to simulate the effects of a number of farm support and stabilisation policies. It was concluded that the model, as developed, is effective as a policy analysis tool and could well form the basis for modelling other classes of sheep and beef farm. With respect to the secondary objective of the study some insight is provided into aspects of financial decision making, particularly in relation to consumption and borrowing behaviour and the role of liquid financial reserves in the financial operation of the farming system.