What can we learn from Australia and New Zealand about agricultural policy reform after Brexit?

Introduction

 With the decision taken by the UK government to exit the EU there are a myriad of questions and issues for all sectors of the economy including agriculture, the rural environment and the food economy. Although agriculture is a small part of the UK economy (0.59% of GDP in 2017) its importance is far greater. Farmers manage more than 70% of the land area in the UK. The food and drink processing sector is the largest manufacturing sector in the UK employing 400,000 workers. The total agri-food sector employs 3.9 million people.

The economics profession has for a time long advocated serious and far reaching root and branch changes to how we organise and deliver agricultural policy.  The situation we now find ourselves in is seen as a “once in a life time opportunity” to significantly change how we design and implement agricultural policy. To this effect the UK Government initially published an Agricultural Bill in September 2018. However, due to the prorogation of Parliament the Bill will need to restart the legislative process. This delay aside it is highly likely that the “new” Bill will fundamentally change how agricultural policy in the UK will function: farming will only obtain public financial support for the production of public goods. This means the removal of the last vestiges of the traditional forms of agriculture support. In addition, the Bill proposes a transition period running from 2021 until 2027, although the start of this process is highly likely to be delayed.

Given the extent of the proposed changes to agricultural policy, combined with new trade arrangements plus the wider impacts of Brexit itself, predicting outcomes for the sector and the food supply chain are fraught with difficulty. Almost certainly in the short term UK farming will face new and challenging external pressures and as a result potentially large and far reaching structural changes. That process may well result in a more competitive and efficient farming sector but, even if economically justified, these changes will be politically challenging and commercially complex.

In this paper, we briefly consider how the reform process might be implemented. To address this issue we consider previous examples of agricultural policy reform, specifically those that have occurred in Australia and New Zealand.  The choice of these countries stems from the likelihood that the Agricultural Bill may well result in UK farming operating in a policy environment akin to that which prevails in Australia and New Zealand. To understand what insights the UK can obtain we briefly explain the reasons why Australia and New Zealand implemented the agricultural reforms that they did. Much of what can be learnt comes from understanding how the reforms came about, the way they have been implemented and the resulting issues that now confront farmers in both countries.

Policy Reform in Practice

Australia

The 2019 OECD report on levels of government support for agriculture reports that Australia’s agricultural producers received amongst the lowest levels of government support in the OECD at 2% of gross farm receipts (0.2% of GDP) in 2018. Of the support provided it is evenly split between support to primary producers (e.g., upgrading water infrastructure to improve water use efficiency, initiatives to increase resilience to drought and support to address negative environmental externalities) and to agricultural services (e.g., services to help with R&D and farm level extension services by commodity). No form of output price support is employed..

The reform process in Australia and the current state of agricultural policy and support can be traced back to the early 1970’s when Australia started to dismantle the extensive policy interventions then in place. This change in policy emphasis can partly be attributed to the UK entry into the European Economic Community in 1973 and the loss of an important and traditional agricultural export market. The motivation for the start of the reform process is neatly summarised by Anderson et al. (2007) as follows:

”Disenchantment with Australia’s interventionist trade and related economic policies gradually spread in the 1960s, but it was not until the 1970s that tariff reductions began.” (p. 473).

Importantly, the economy wide reform of government policy that began in the 1970s continued for the next 40 years as gradually the many varied forms of intervention were removed. Prime examples of how the process took so long can be understood by examining various commodities such as wool and the Reserve Price Scheme (RPS), grains and the Australian Wheat Board (AWB), milk and state level Statutory Marketing Authorities (SMAs).

As a result of the removal of traditional forms of agricultural support, Australian producers no longer received any market price support and domestic prices fell to world price levels minus transfer costs. Production, for the vast majority of commodities, has a strong export orientation and with it an emphasis on gaining competitive advantage. This in turn means that there is a continuous emphasis on productivity gains that is supported by an extensive agricultural knowledge and innovation system. There is also, in common with many OECD countries, an increasing emphasis on the sustainable management of the resource base which is supported by government although there is also a strong duty of care (i.e., a minimum level of expected environmental management) that land owners need to take account of.

New Zealand

Since the economy wide reforms of the mid-1980s there are virtually no agricultural production or trade distorting policies in New Zealand. The resulting level of support to farmer is therefore amongst the lowest in the OECD. This means that domestic producer prices approximately equal world prices.

The agricultural policy reform process in New Zealand was very different to that which occurred in Australia. In the early 1980’s New Zealand was in the grip of a macroeconomic crisis brought about by structural imbalances with an overvalued exchange rate, high levels of inflation and high levels of government debt. Concurrently an increasing array of support policies for agriculture, such as output subsidies and import protection had been introduced to protect the sector.

The changes that occurred in 1984 not only impacted the agricultural sector but the whole economy. Importantly, the policy regime for agriculture took a sudden about-turn. The reformed policy no longer attempted to keep farms or farmers in the industry but offered financial support to transition out of farming if required and placed much more emphasis on the economic viability of the sector without the need for government support.

Of course the impact on the farming sector in New Zealand was dramatic with input prices increasing after subsidy removal and the real income for beef, and sheep production declining by more than 50% in 1986 and for dairy by 25%. There was also a significant decline in land prices – more than 50% between 1982 and 1987. In response, the industry started to restructure and changed how it produced output using considerably less inputs.

Since the reforms, the New Zealand agricultural sector and support has evolved. Farm level support is confined to animal health and disaster relief support. In terms of production, grass-fed livestock is the focus such that New Zealand is the largest exporter of dairy products and sheep meat. Also agriculture and food processing has an increased share of GDP (currently 6%) with a large share of all exports (almost two-thirds). Importantly, the majority of agricultural and food exports are processed for final consumption, the sector as a whole is no longer focused on commodities. Like Australia there is a strong focus on government support for general agricultural services including knowledge and innovation systems. The motivation is the same as Australia: to maintain strong exports it is necessary to improve agricultural productivity.

The Key Difference in Terms of the Reform Processes

The main difference between the approaches to agricultural reform is the time involved in implementing policy change and the resulting transition phase. Even though the motivation in both countries stemmed from a view of the world that considered the many forms of policy intervention as economically inefficient and unsustainable, the reform processes differed dramatically.

In the case of Australia the political process (i.e., the relationship between Federal government and State governments) and strong industry political lobbying had almost certainly necessitated the need for a gradual, and at times a somewhat piecemeal, approach to the reform process. In contrast, it was not until a major macroeconomic crisis occurred that support for the structural reform took hold in New Zealand.  Clearly, the reform of New Zealand agricultural reform was both rapid and far reaching.  In addition, the reform of agriculture was only part of the overall restructuring of the economy and as such no special interest arguments prevailed.

What can we learn from these experiences?

The lessons that we can learn from the experiences of Australia and New Zealand will in large part be determined by how the policy reform process is to be implemented in the UK. As is clear from the Agricultural Bill there is an identified transition period between 2021 and 2027. This would indicate that the reform process is far more likely to be akin to that observed in Australia compared to New Zealand. Of course, the policy environment could change far more dramatically and rapidly if the UK exits the EU without a trade deal and reverts to World Trade Organisation (WTO) rules such that we would be looking at a policy change far more like the situation that occurred in New Zealand.

Regardless of which policy path we embark upon there are some general lessons that remain relevant.

First, with an agricultural sector that is going to be exposed to greater international competition there will need to be an increasing emphasis on securing productivity gains. It is a given that productivity growth is an important issue for agriculture, food and the rural economy especially when this sector will be subject to much greater competition as a result of Brexit. Unfortunately, the productivity growth rate of the UK agriculture sector has been fairly low since the 1980s. However,  a small open economy, which is what the UK will become after Brexit, requires productivity growth if an industry is going to compete successfully both domestically or overseas.  Indeed, given the prevailing competitive advantage of many other countries in terms of food production it is unlikely we will see exports grow significantly from their current level. Furthermore, if the UK adopts low or zero import tariffs on agricultural commodities and food it is predicted that a significant proportion of UK farmers will struggle to remain financially viable given the levels debt they carry and the changes that will occur to capital values. In March 2019 the government announced a large set of import tariffs on many agricultural commodities that differ from existing EU tariffs, but it remains unclear if UK farmers will be competitive even with the level of protection these afford. Of course, if UK farmers are unable to export their output then we might see imports being replaced by domestic supply but this would likely simultaneously require a significant devaluation of the exchange rate. Regardless of which scenario prevails, the UK will need to follow both Australia and New Zealand and channel increased funding into research and development across all levels of the food supply chain. Trade is crucial to respond to the demands of the modern consumer in the UK who is used to be able to buy almost all types of produce all year round – a consumption style and pattern that is not matched by the UK production even when excluding exotic fruit and vegetable.

Second, as already noted UK farming will be subject to a short transition period before the new agricultural policy comes into effect. During the transition period it is proposed that payments will be paid to farmers that are de-linked from any form of agricultural activity or the need to farm the land.  The rationale for this is to introduce more flexibility and allow farmers to plan for the new policy environment post 2027.  However, in the case of Australia we have excellent examples of how policy reform can be effective but prolonged and costly. In particular, the changes in milk marketing illustrate how, and the demise of the RPS for wool how not, to organise the transition of protected agricultural commodities. The RPS, a classic example of a buffer stock scheme, illustrates how difficult it is to organise a policy for an export orientated commodity when subject to a floating exchange rate and fluctuations in global demand for the commodity. The RPS was introduced in 1970 and it finally collapsed in 1991 after a slow and painful demise thanks to efforts to keep the scheme functioning even when wool production was clearly unsustainable. In contrast the changes made to the State and Federal level marketing arrangements for milk show that necessary structural adjustment can occur with the help of financial incentives. This scheme ran from 2001 until 2009 with the aim of removing differences in milk marketing between the States and structural transformation of farm level production. Even if the incentives used to facilitate the change to the dairy sector might be viewed as economically inefficient they did yield the change in industry structure required to produce an efficient outcome.

Third, even after the very different reform paths taken by Australia and New Zealand the current pressures they face are similar. We have already noted the emphasis on policy to help productivity growth. Also, in both countries there are increasing public demands to ensure that farming is conducted in a sustainable manner and that the contributions of agriculture to climate change, as a result of greenhouse gases, are dealt with. Regardless of the transition path the UK follows, the need to ensure farming is implemented in a sustainable way with serious reductions in greenhouse gas emissions will apply, perhaps stronger. Indeed, the 25 Environment Plan and the target of achieving zero net carbon emissions by 2050 means that many of the current policy pressures are common regardless of other aspects of agricultural policy.

Fourth, although the trade reform process started in the early 1970’s in Australia, it took a long time for many of the key changes to occur. Clearly, political expediency can play a major role in how the reform process was, and will be, implemented, so minimising policy choices that are politically motivated is essential. The signs are already there in the UK that various sectors will seek government financial support as Brexit policy induced changes play out. For example, under a no deal scenario and zero most favoured nation tariffs there is a strong likelihood that UK sheep producers will be at a serious competitive disadvantage to meat imports from New Zealand. Furthermore, sheep exports to the EU from the UK will also be seriously compromised as the result of EU tariffs being applied. It therefore comes as little surprise that the UK has in fact announced a potential set of customs duties on imports, many of which apply to agriculture[1]. There has also been discussion about the re-introduction of some sort of headage payment on sheep to support incomes. Both measures will protect domestic producers and although this might help insulate the industry from the initial shock of a no deal Brexit (if it occurs) experience about the policy reform process tells us that reversing these interventions will be difficult.

Finally, even though the reform processes in Australia and New Zealand has removed almost all direct support to producers, both countries have various non-tariff barriers (NTBs) in place such as the restriction on specific imports via the WTO Sanitary and Phytosanitary (SPS) rules. These rules govern how a country can use food safety and animal/plant health regulations to restrict imports. Take New Zealand and its Import Health Standards (IHS) that were introduced as part of the 1993 Biosecurity Act. New Zealand put in place measures that prevent table eggs, uncooked chicken or honey being imported into New Zealand. What this means is that domestic consumers face above world market prices as demand is meet by domestic supply and as result suffer a welfare loss. In many ways, the reform process has obviously reduced many market distortions but there is always scope to manipulate international trade using NTBs and many of the most subtle changes that occur will be in terms of how NTBs implemented.

Conclusion

The experiences of how agricultural policy reform in undertaken is clearly context specific. However, what we learn from Australia and New Zealand is that very different reform processes can eventually result in very similar policy environments. What unites both countries and the reason for arriving at similar policy destinations is their obvious desire to achieve efficient and productivity agricultural and food production. Clarity of objective and the willingness of policy makers to pursue an outcome is the key.

About the author

Iain Fraser is a Professor of Agri-Environmental Economics in the School of Economics, University of Kent. He has previously live and worked in Australia and the US. He has undertaken extensive economics research on various aspects of agriculture, food and the environment

Further Reading

Anderson, K., Lloyd, P. and Maclaren, D. (2007). Distortions to Agricultural Incentives in Australia Since World War II. The Economic Record, 83(263): 461-482.

Edwards, G. (2003). The story of deregulation in the dairy industry, The Australian Journal of Agricultural and Resource Economics, 47(1): 75–98.

Griffith, G. and Watson, A. (2016). Agricultural Markets and Marketing Policies. Australian Journal of Agricultural and Resource Economics, 60: 594-609.

Lattimore, R. (2006). Farm Subsidy Reform Dividends’. Paper prepared for the North American Agrifood Market Integration Consortium Meeting, Calgary, Alberta.

OECD (2019), Agricultural Policy Monitoring and Evaluation 2019, OECD Publishing, Paris, https://doi.org/10.1787/39bfe6f3-en

[1] For details see: https://www.gov.uk/government/publications/temporary-rates-of-customs-duty-on-imports-after-eu-exit/mfn-and-tariff-quota-rates-of-customs-duty-on-imports-if-the-uk-leaves-the-eu-with-no-deal#sheep-meat