Producer Board Reform

  • Dr Lockwood Smith
International Trade

Warkworth Rotary Club
Warkworth Golf Club

There is a lot of misinformation about the Government's Budget announcement regarding producer boards. In that announcement, the Government said that we regard the removal of special statutory backing for producer boards as inevitable over time. Because of the importance of the industries concerned, the Government said that boards and their industries have a responsibility to plan carefully for eventual change and that we have a responsibility to ensure they do. We set 15 November 1998 as a date to receive initial plans.

The Government fully recognises the complexity of some of the issues which reform would raise. In particular, it would be important to ensure that New Zealand continued to be able to administer quota markets, and meet our obligations with respect to those quotas to the satisfaction of our trading partners. There are commercial issues which need to be considered carefully, such as borrowing arrangements, forward foreign exchange cover and the honouring of long term contracts. For these reasons, the Government expects the timeframe for change for each board to differ. The Prime Minister, Jenny Shipley, has spoken of timeframes of between three and five years.

Despite this very careful approach to reform, one board in particular and the Labour Party have begun a campaign of disinformation about the Government's reform programme. I would like to outline fully the reasons for the Government's announcement and our expectations of boards.

The conclusion of the Uruguay Round led to significant ongoing gains for New Zealand, estimated to be worth around $1.6 billion. We were able to take a leading role in those negotiations - far beyond our size would justify - in large part because of the Labour Government's agricultural reforms in the mid 1980s. A country as small as New Zealand would never have gotten anywhere trying to trade off our subsidies and protectionism for concessions from other countries. The fact that our subsidies and protectionism had already been abolished allowed us, with the Cairns Group, to use moral leadership to make progress.

Despite that, agricultural trade is far from fully liberalised. In 1997, OECD countries transferred US$280 billion from their taxpayers and consumers to their farmers, in the form of such things as export subsidies and domestic support. That is about the same as the United States Federal Government was expected to spend in 1996 on health (excluding Medicare), education, the environment, international aid, NASA, community and regional development and military procurement - combined.

Market access is also severely restricted internationally. For example, the 270 million people of the United States consume three billion kilograms of cheese a year. Because of trade restrictions, New Zealand has only one third of one percent of that market. Americans consume 500 million kilograms of butter a year. Again, because of trade restrictions, the entire world is allowed to market them just 1% of that. Canada allows New Zealand to sell them only 1,600 tonnes of butter each year. But we are only allowed to sell that small amount of butter to Canada's state trading enterprise, the Canadian Dairy Commission. It marks the butter up 60% and then sells it to Canadian processors. That Canadian state trading enterprise takes over a third of the value in that market for itself, leaving less than two thirds to the New Zealand dairy farmer. The Japanese allow the world to sell them 1,873 tonnes of butter each year. Above that, we face a tariff rate of around 700%. The Koreans take just 460 tonnes of wholemilk powder, and just 900 tonnes of skimmilk powder. Anything above that faces a tariff of 187%. The EU is generous enough to allow us to sell 300 tonnes of high quality beef a year, with a tariff of "just" 20%. Anything above that, and we have to pay the 20% tariff, plus around NZ$3,700 a tonne.

Because the Uruguay Round outcome did not complete the process of liberalising trade in agricultural goods, it mandated that further negotiations to liberalise agricultural trade must begin by the end of 1999, under the auspices of the World Trade Organisation (WTO). In Geneva last month, that was reconfirmed with an instruction to WTO officials to start work in September this year on an agenda for the negotiations. The United States offered to host the next WTO ministerial meeting in late 1999, at which the negotiations will be launched. The Geneva WTO meeting also provided for sectors other than agriculture and services - which was also mandated by the Uruguay Round outcome - to be covered by the negotiations. That would allow the trade offs necessary to get a successful outcome from the negotiations in terms of agriculture.

New Zealand and the Cairns Group countries are determined to make progress from these developments. In early April, we met in Sydney to develop our agreed "vision" for the negotiations. We reconfirmed it again when we met in Geneva. The goal is to put trade in agricultural goods on the same basis as trade in other goods. Specifically, we are seeking:

the elimination of export subsidies and government subsidisation of export credits;
open market access and deep cuts in tariffs; and
improved disciplines on domestic support, including its decoupling from production.
In Geneva, the Cairns Group met with the United States Trade Representative Charlene Barshefsky and the US Agriculture Secretary Dan Glickman. They agreed to support the Cairns Group agenda. In his address to the WTO, President Clinton also committed his country to agricultural reform. He said:

"For example, agriculture -- which I understand has been discussed quite a bit here -- is at the heart of our economy and many of yours. Tearing down barriers to global trade is, I believe, critical to meeting the food needs of a growing world population. Starting next year, we should aggressively begin negotiations to reduce tariffs and subsidies, and other distortions that restrict productivity and the best allocation of food. We must develop rules rooted in science to encourage the full fruits of biotechnology. And I propose that even before negotiations near conclusions, WTO members should pledge to continue making annual tariff and subsidy reductions so that there is no pause in reform."
He also said he wanted progress to be made faster than in the past:

"We must develop an open global trading system that moves as fast as the global marketplace. In an era in which new products' lifecycles are measured in months, and information and money move around the globe in seconds, we simply can no longer afford to take seven years to finish a trade round -- as happened during the Uruguay Round -- or to let decades pass between identifying and acting on a trade barrier we all know ought to fall."
However, when supporting the Cairns Group's agenda, Ms Barshefsky and Mr Glickman stressed that they would want to add one other issue to the list: state trading enterprises, like the Canadian Dairy Commission and our dairy, apple & pear and kiwifruit boards.

Meat New Zealand Chairman John Acland claims that when he met with members of the House of Representatives Agriculture Committee, they said they were interested in the state trading enterprise issue, only insofar as it related to transparent pricing. With respect to Mr Acland, it is the trade representative and the agriculture secretary who are the negotiators.

This gives New Zealand a choice. We could argue against the Americans that our trading producer boards are not state trading enterprises, even though they are under WTO rules. Our efforts could be directed at trying to get an exemption to any ban on state trading enterprises. But, in doing so, we would distract our efforts from the real prize of achieving the Cairns Group's agenda.

In fact, I would go further. State trading enterprises with import monopolies do New Zealand untold harm internationally, with the Canadian Dairy Commission being just one example. We may well be best to side with the Americans and argue that all state trading enterprises should be abolished and prohibited.

No matter which strategy we decide upon, two things are clear. First, the removal of our trading producer boards' special statutory powers is inevitable over time. Second, we will gain nothing from being behind the trade liberalisation race, and trying to play poker at the international table. We are kidding ourselves if we believe that we will get anywhere trying to play a tit for tat game. Influence for a country as small as New Zealand can only come from moral leadership.

And we certainly do have influence far greater than our size would justify. The New Zealand presentation was the only one at the WTO, other than those by Heads of Government, to receive spontaneous applause from the floor. Our message of trade liberalisation, along with those from President Clinton, President Mandela and Prime Minister Blair, was well received. The momentum is on the side of the reformers. We need to ensure we continue to be seen as a reformer, not get distracted by arguments about our state trading enterprises.

While trade arguments apply to the trading boards - dairy, apple & pear and kiwifruit - domestic considerations apply to all boards, including meat, wool, game and pork. And even were there no trade angle to consider, domestic considerations would still make it sensible for our producer boards to plan carefully and sensibly for the eventual loss of their special statutory powers.

A sizeable and growing proportion of farmers is concerned about the boards' performance, and that concern is shared by a growing number of MPs. Meat farmers have paid more than half a billion dollars to the Meat Board, in 1997 dollars, over the past 20 years. They question whether they have seen an adequate return from that money. At the recent AGM, a remit was narrowly lost arguing for the abolition of the board's compulsory levies. A remit was passed calling on levies to be halved. Wool growers pay 5% of their takings to Wools of New Zealand, more than many would be paying in tax given the low profitability of the industry. They ask whether that 5% mightn't be better off in their pockets.

Then can be nothing surer than that the trading environment our industries will face will change. Our industries need to be free to anticipate and respond to those conditions and the dictates of the market. For a small player in world production terms, we need to be flexible and innovative.

Others in our primary industries point out that some of the major players in certain industries are reaching the size where they may want more say in the strategic marketing direction of their businesses. For example, Maori may be wanting to market products independently, believing there is a marketing advantage for them in doing so.

Others note that major retailers internationally are beginning to want to purchase a basket of goods from a particular exporter. Statutory export monopolies have two impacts in terms of this type of development. First, they limit the ability of businesses who see opportunities to take advantage of them. Second, the boards themselves are likely to face both legal and political barriers to grasping those opportunities themselves.

If these kinds of concerns grow, the risk increases that a parliament might be elected which chose to remove the boards' special statutory powers overnight. After all, sudden change is not unknown in New Zealand as the agricultural reforms of the mid-1980s or the benefit cuts of the early 1990s show.

The problem with the status quo is that our most important industries are beholden to parliament. They are at risk of a future parliament removing their powers unilaterally, without any transition time and without involving the industries in planning for the future. In contrast, the current Coalition Government is determined to avoid any hasty and confused change in the future. We believe it is better to make the change progressively so that our most important industries are free forever from the risk of sudden political interference.

I want you to be very, very clear on this issue: the government is not proposing the abolition of our producer boards.

In the case of the trading boards, reform will involve the end of their export monopolies and legislative backing. New entrants into the industries will be allowed to export if they can get support from producers. However, we expect that each board will continue as a successful private enterprise. If the boards have the support of farmers and growers that they claim, I believe they will continue to operate as the major players in their industries, and, personally, I believe that will be a good thing. If the boards are as effective and efficient in the international marketplace as I believe they are, then it would be difficult for any new entrant to compete on procurement. The difference is that it will be farmers who make the decision not parliament.

In the case of the non-trading boards, producer organisations will be able to continue to undertake many if not most of their current functions. Boards will be able to continue operating under the Commodity Levies Act, which may need to be amended to cater for larger industries. Under the act, as it is written now, if a levy proposal is voted for by more than 50% of farmers or growers on both a numbers and production weighted basis, then a compulsory levy is imposed on all farmers or growers.

With the meat and wool boards now, parliament decides there shall be a board and parliament decides it shall impose a compulsory levy. The Government's proposed reform would give that power to farmers. As long as farmers supported their board, that board would be able to continue operating just as it does now. Given that, questions could well be asked why it is Meat New Zealand which stands out as least cooperative with the Government.

The meat and dairy boards manage our quota markets. Contrary to what Meat New Zealand says, the Government believes it is critically important that the administration of these quota markets remains in New Zealand. Any change to the current administration of these quota markets would need to be discussed with our trading partners, but I would not expect any major problem. By starting planning now, we have the gift of time to work through such issues.

There are a number of commercial issues - such as financing, honouring existing commercial contracts and long term research programmes - which need to be considered carefully by the boards and the Government. The Government recognises these commercial risks and is determined to minimise the disruption caused by change. This, too, demonstrates the benefits of starting planning early.

Also of great importance is the question of who owns the boards. In the case of the Dairy Board, it is currently dairy farmers, through their ownership of dairy companies. In other cases, ownership isn't clear, other than a general statement that the boards' assets are ultimately owned by producers. The Government welcomes the initiatives of the apple & pear and kiwifruit boards to resolve these issues prior to deregulation. It will be important for this issue to be resolved by all boards before any change is implemented.

Once ownership is established, we will need to consider how to allow farmers to exit from their current marketing organisation, while retaining their capital. In other cooperative organisations, from the local tennis club to far more complex commercial operations, it can be difficult or impossible for people to exit with their capital. The difference is that those involved in such organisations have had a choice about whether to be involved in the first place. It may be that that choice could be exercised at the time of transition to a deregulated environment. Careful consideration will need to be given to this issue.

Nothing will change on 15 November. All that will happen on or prior to this date is that each of the boards will submit initial plans to the Government. These plans will outline how they would adjust to and operate in a future without special statutory powers. They would identify issues which will need to be addressed in advance of deregulation, such as quota management.

For the non-trading boards, these plans will be fairly simple. For the trading boards they will be more complex. We will continue to work with the boards on the plans after 15 November, so that they can be finalised well before any change takes place. It is for boards to lead the debate and consult with their producers to ensure that when the special statutory powers go, the industries are best place to competed in the global marketplace.

The question is raised what the Government would do should the boards not cooperate. The answer is that we have not planned for that because the boards are working constructively on the issues.

The Government is taking a pragmatic approach to producer board reform. Some in Wellington do have strong ideological views about the reform of producer boards. I have never been persuaded by these. I do not believe that reform will lead to either economic nirvana or disaster, but it will help us with trade liberalisation, which is the only way forward for our primary industries, and it will also free our most important industries from the risk of political interference forever.

Over the last two years, I have considered the trade, economic and political realities, and I have concluded that change is inevitable. I've concluded that sensible, careful reform is the best way to go. Having done that, I am totally committed to seeing reform through. Nobody should be in any doubt about that.