Examination of Witnesses (Questions 271
- 279)
WEDNESDAY 14 NOVEMBER 2007
Mr Murray Sherwin
Q271 Chairman:
Welcome and thank you very much for (a) finding the time to come
and meet with us but (b) presenting us with a refreshing and interesting
written piece of evidence. I do have to say it is not the usual
tone of evidence we receive from some Member States and organisations.
We are having an inquiry basically on the CAP health check and
looking forward to CAP reform in the future. This is a formal
evidence session, so there will be a transcript. You will have
the opportunity later to correct it. We are also web-cast. If
you want to make a few remarks of a general nature, then please
do so. We will then move on to a question and answer session.
We will have a conversation really.
Mr Sherwin: My Lord Chairman, thank you for
the opportunity, a rare one for a colonial boy. I have a couple
of colleagues with me: Ms Saffron Powell from the Ministry of
Agriculture and Forestry in Wellington and Peter Kell from the
High Commission here in London. By way of opening comments, let
me say that I certainly would not hold myself out as an expert
on the CAP, far from it. The acronyms and intricacies of it leave
me totally bewildered. We do have a good deal of experience, though,
of its impact on New Zealand as a trading partner in agricultural
matters and we have obviously had a good deal of experience of
our own agricultural system and approaches that we have taken
to that. Historically, New Zealand has not had a great deal of
support for its agricultural system. That changed through the
Sixties, Seventies and in particular into the early Eighties,
largely as a consequence, I would say, of first the oil shocks
but, secondly, Britain's entry into Europe in the Seventies, which
was something that obviously marked a substantial shift in our
agricultural trading relationships. I am an economist by training
and a member of the New Zealand Association of Economists. Through
the Seventies and the Sixties there was a tradition of the Association
of Economists at their annual conference for a prominent economist
to speak and give a toast to le générale
and thanks for his unstinting efforts to keep Britain out of the
EEC! As I said, through the Seventies and particularly in to the
early Eighties, as the impact of the closure of markets and other
pressures came on our agricultural system, we attempted to offset
the income losses by building support subsidies and other things.
If you take the producer support estimates that the OECD uses,
at our peak we got through about 10%, so still well below where
Europe is now. We are currently at 1%; we moved to that very quickly
post-1984. This whole mechanism of trying to protect agriculture
and other parts of the economy moved apace rather spectacularly
and we moved to a free trade model. There are some reasons for
that, apart from a strongly-held principle about the benefits
of free trade. In a very small economy of four million people
and a GDP currently of the order of magnitude of US$ 120 billion,
if we attempt to provide support for any sector of the economy,
but particularly for a very large sector such as agriculture in
New Zealand, you have to look at where that support is coming
from. In a large economy, you may be able to push the costs of
that support off to your trading partners—and certainly
we felt the back end of that in many areas—but in a small
economy you have much less opportunity to do that. When you look
around and try to understand who is going to pay for the support,
there are not very many candidates putting their hands up. As
we did attempt to go down a more supportive route through the
Seventies and Eighties, I think all we found was that we were
recycling support through bureaucracy without great effect. We
tried to focus on responsiveness to markets. We tried to focus
on innovation. I think one of the outcomes has been that our primary
industries really are the drivers of our productivity gains over
the last 15 to 20 years. I think what we found also is that at
the end of the day competitive advantage and productivity wins
out, and so agriculture is far from being a sunset industry for
us with a growing share of GDP. It is a little mixed but certainly
it is in its best state that it has been in for a long time, but
continuing to evolve and in ways that we as bureaucrats I think
would not necessarily have guessed and probably would not have
managed through a tight regulatory environment. Let me stop there.
I am happy to take questions.
Q272 Chairman:
Thank you very much indeed. Your paper describes beautifully the
process of moving away from significantly supported agriculture
and relying almost entirely now on the market, is it not?
Mr Sherwin: It is about 1% in GDP terms, mostly
in R and D.
Q273 Chairman:
What about the farmers themselves? What was the initial reaction
of New Zealand farmers to waking up one day and finding they did
not have a nice warm support of subsidy around them and they had
to face the cold wind of the market?
Mr Sherwin: Context is really important here
because what was occurring in agriculture was part of a much wider
reform process that was taking place in the financial sector and
in the public sector and elsewhere. It was part of a comprehensive
reform agenda. It was also clear that there were very few alternatives
at that stage available to us. We had some serious economic problems
on our doorstep that had to be dealt with. It is also true to
say that farm leaders were amongst the strongest proponents of
change. At the time, they had come to the conclusion that there
was no future in continuing down this route of subsidies and protection.
Again, context is important. Overwhelmingly, given such a small
domestic market, our primary produce is exported. So they are
dependent on export markets; they are price takers in export markets,
except to the extent that they can influence where their products
are positioned. I think it had become very obvious to them that
attempts to protect the sector largely ended up with farmers themselves
paying for that protection, but recycling it through other routes.
Farm leadership was amongst the strongest group of supporters
for reform. If you look right across, there are many farmers who
went through very tough times. This was not an easy transition.
From 1984 through until about 1992, farmers went through some
very difficult times. There were substantial reductions in the
values of properties. Not very many left the land; about 2% came
off the land. The government reaction there was to provide essentially
exit packages, support for farmers to leave, rather than trying
to offset the impacts of the reform process, to encourage those
who had come to the conclusion that there was no future for them
to leave the land. There were small grants up to about $45,000
maximum. Farmers went through a tough time and some difficult
adjustments.
Q274 Chairman:
In terms of products, how did it restructure? Who were the winners
and losers?
Mr Sherwin: Within the agricultural sector,
initially what we saw were shifts in land use particularly away
from sheep and beef and, in the more marginal hill country, in
forestry. There was quite a sweep of that through the late Eighties
and early Nineties. For others, it was just loss of income for
a period, loss of asset value. Some concluded that this was a
difficult and prolonged adjustment but that they would come out
of it better by investing in larger-scale and so forth. Within
the sector, there were adjustments in farm size and property holdings.
Q275 Chairman:
Was there any concern about the mental health problems and things
like that of farmers? They tend to be an isolated group.
Mr Sherwin: They do tend to be an isolated group
and those can be concerns. There were certainly cases that were
reported. Rural communities tend to be very supportive, though,
in those circumstances. The fabric of rural society is important
and was important at the time, and continues to be today.
Q276 Chairman:
We have come across quite a lot of this wonderful phrase "the
European model of agriculture", which is always used when
any form of rational argument has been exhausted. At its best,
it is saying really that there are non-market benefits that agriculture
provides, like a landscape, environmental benefits, some social
benefits. If you move to such a market-led model as you have got,
this gets all pushed to one side, does it not?
Mr Sherwin: No, I do not think so. No, in fact
I think our rural communities are stronger than they have been
for a very long time and stronger for reasons that again many
of us would not have predicted at the outset. Again, context is
all important. We are a very young country. Our landscapes have
been changing radically and rapidly over, say, 150 years in European
settlement of New Zealand. Landscapes continue to move; land use
continues to move quite a lot. I talked about the movement from
sheep and beef into plantation forestry in the wake of the reforms.
During this period of subsidies of course, there had been quite
a move into pasture in scrub areas and even bush clearance, as
encouraged by land development grants and fertiliser subsidies,
and so forth, often into countryside that was not really suited
for farming. We saw a pull-back from that. What we have seen more
recently again is significant diversification into horticulture,
grapes in particular and wine grapes, in areas that we would never
have expected and never have predicted. That is still taking place.
There is a good deal of experimentation. You end up with a combination
in rural New Zealand of wine, food and tourism. It makes for a
very vibrant rural economy. One of the great joys of getting into
rural New Zealand right now is to see the way that that has evolved
and has diversified the rural economy and the rural landscape.
That will continue as we move into different circumstances.
Q277 Chairman:
Has it had an effect on settlement patterns? The argument would
be in, say, the north of Scotland where I live that if we moved
away from less favoured area payments, that would lead to the
sheep and the bests coming off the hill and ultimately to major
adjustments to settlement patterns, which would be seen as a bad
thing.
Mr Sherwin: Yes, of course there are adjustments
there. Again, to go back to that period immediately post-reform,
some of the rural communities took a real battering. There were
school closures, local services closing and so forth. Some of
those will be diminished pretty much for ever, one would presume,
but also, if you look right now, most of our strongest growing
regions are provincial centres. In the deep south, it is a shift
from sheep farming largely to dairying, which is very strong right
now. The horticultural industries in other rural areas have been
very strong, and so we have seen shifts and patterns. As I have
said, the fastest growing populations on a proportional basis
are in those rural areas.
Q278 Viscount Brookeborough:
You mentioned forestry as being something on the increase recently.
What percentage of your land is covered by forestry? Ours is about
11%, which is lower than any other nation in Europe. What proportion
are you increasing by? Presumably you are not through the first
rotation crops since this occurred anyway?
Mr Sherwin: About 30% of the total land area
is forestry and that is predominantly indigenous forests. That
is not commercially harvested a lot for the most part. Virtually
all of our commercial forestry is in plantation forestry. In the
region since the depression when the first plantation forests,
Pinus radiata, got underway, a rapid growth in plantations
through that post-reform period—the late Eighties and early
Nineties—has fallen off substantially. In fact, we have
a period of deforestation occurring now. I suspect that is going
to turn around with climate change policies coming through and
the re-establishing of stronger incentives into the plantation
forestry area; profitability has been quite weak over the last
five, six or seven years.
Q279 Viscount Brookeborough:
But the prices are going up at the moment?
Mr Sherwin: Yes, but offset by a number of other
factors.
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