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Supplementary minimum prices : a production incentive?

Sheppard, R. L.
Biggs, J. M.
Discussion Paper
Fields of Research
The perception by Government in 1974 of a need to modify fluctuations in farm product prices resulted in the establishment of the Farm Incomes Advisory Committee (the Zanetti Committee) to investigate and advise Government on ways of reducing product price and farm income fluctuations. This Committee reported early in 1975 and recommended the establishment of price stabilisation schemes to reduce the fluctuations in farm product prices and the establishment of criteria for deciding when Government funded supplementary payments should be made to achieve adequate farm income levels. Following this, Government entered negotiations with the N.Z. Wool Board and N.Z. Meat Producers' Board which resulted in the introduction of price stabilisation schemes during the 1975/76 season. These schemes are designed to be market orientated and are administered by the Producer Boards. The Government considered that such market orientated schemes would provide for price stability as well as an adequate level of farm income. However, the operation of the schemes up to the 1977/78 season did not result in what the Government considered to be an adequate income level for the encouragement of increased farm production or the level of confidence considered to be necessary for farm production expansion. Therefore, the Government introduced the Supplementary Minimum Prices (SMP) Scheme at the start of the 1978/79 season in order to provide product prices to farmers at a level thought to be appropriate for income adequacy and guaranteed those prices (in nominal terms) for a total of two seasons in order to provide for improved stability and confidence. In subsequent years (up to 1981/82), the SMPs generally rose in nominal terms from one season to the next but, in real terms, they fell considerably, tending to reflect a move toward a market price orientation and less emphasis on the income adequacy objective. Over the period from SMP introduction to the start of the 1981/82 season, the SMPs were largely ineffective with regard to producer returns as they were either exceeded by market prices or matched by the Producer Board minimum prices (which are based on market expectations). The SMPs announced for the 1981/82 season were, however, well ahead of market prices (and the Producer Board minimums) and reflected the expressed objective of Government to provide prices which would result in farmer income adequacy. These prices have resulted in significant supplementary payments to farmers during the 1981/82 season. The price levels have been maintained (nominally) for the 1982/83 season, reflecting a fall of approximately 18 per cent in real terms and a move back toward a more market level orientation (rather than the maintenance of adequate farm incomes). The impact of such schemes on farm production levels requires examination. Data have been presented that show increased production results from increased land investment, rather than increased total investment. Also, it is apparent that farm income levels are more closely related to other forms of investment (plant, machinery and buildings) than to land investment. Therefore, measures which alter the level of farm income received are likely to have a more significant effect on these other categories of investment than on land investment. This means that farm production levels may not respond directly to farm income changes and the SMP scheme may not result in farm production changes. Also, farm production tends to respond to the relative prices of the various products. Therefore, distortions in the market relativities, which could easily result from the use of SMPs at set product price levels, could lead to production distortions which are not related to the market. It is therefore desirable that agricultural support of a general nature be applied over all products at a similar level either through exchange rate adjustment or the provision of a common percentage increase in market prices rather than through product specific prices. Such assistance would only provide the climate for the encouragement of production increases. In order to ensure that Government funds were used appropriately in ensuring that production increases occurred, such funds should be channeled directly to the production land investment area.