NO TURNING BACK THE SUBSIDY CLOCK FOR NEW ZEALAND FARMERS

UNCLAS SECTION 01 OF 02 WELLINGTON 000115

SIPDIS

SIPDIS

SENSITIVE

STATE FOR EAP/ANP, EEB/TPP/ABT, STATE PASS TO FAS KHALIKA MEARDY
OCRA, PAUL KIENDL OGA, JIM DEVER OFSO, COMMERCE FORITA/MAC/AP/OSAO,
PACOM FOR JO1E/J2/J233/J5/SJFHQSTATE

E.O. 12958: N/A
TAGS: EAGR ECON EFIN ETRD PREL NZ XV
SUBJECT: NO TURNING BACK THE SUBSIDY CLOCK FOR NEW ZEALAND FARMERS

WELLINGTON 00000115 001.2 OF 002



1. Note: This is a joint Foreign Agricultural Service and
State report. End note.


2. (SBU) Summary. Up until approximately twenty years ago, New
Zealand farmers were some of the most heavily subsidized in the
world. Farmers were provided with price supports, low-interest
loans, extensive disaster relief, weed-eradication subsidies and
special training programs. However, as the level of farm support
grew, it became an increasingly impossible financial burden for the
country to bear and agricultural subsidies, which represented as
much as 33% of farm income, were eliminated in 1984. Although the
transition to an unsubsidized farm economy wasn't easy, agriculture
has maintained its crucial place in the New Zealand economy
accounting for approximately 5% of gross domestic product (GDP) and
over 55% of merchandise exports. The acceptance of subsidy-free
agriculture is now firmly entrenched in New Zealand's psyche, a view
supported by the country's largest farm lobby. There is no call by
New Zealand farmers to turn the clock back. End summary.

Agricultural Deregulation Pays Off
--------------


3. (SBU) By most accounts, New Zealand's experimentation with
agricultural deregulation is a major success story. The percentage
of the GDP accounted for by agriculture is holding its own at 5%.
Farm productivity is increasing annually by 3.4%, on average,
compared with 0.5% in subsidy days. Land values are soaring.
Agricultural exports are strong accounting for over 55% of
merchandise exports. New Zealand, which exports most of what is
produces, is the world's largest exporter of dairy products, sheep
meat, venison and kiwifruit and the second largest exporter of
wool.

Rural Economy Changed as a Result
--------------


4. (SBU) Deregulation altered the landscape of New Zealand
agriculture with dairy, rather than sheep and beef, emerging as the
largest sub sector making up approximately one third of the
country's commodity exports. Fonterra, the largest dairy
cooperative in New Zealand with a 95% share of the domestic
production, has a 40% share of world trade in dairy products. In
response to high international dairy prices, Fonterra hiked its
domestic payout to dairy farmers to a record NZ $6.90 (US $5.31) per
kilogram of milk solids. This represents a 58.6% jump from last
year and equals an estimated NZ $3 billion (US $2.4 billion)
increase in dairy farmer revenues (although costs have also gone
up). Over the next few years, New Zealand dairy production is
expected to increase faster than in previous years as more land is
being converted to dairying, especially in the Southland and
Canterbury regions of the South Island. Along with dairy,
horticultural production has also increased in importance with
horticultural exports, including wine, expanding by a factor of 10
since 1984. Wine is a particular standout. The total area planted
in wine grapes increased to 29,680 hectares in 2007, up 23% since

2005. Wine exports are expected to overtake kiwifruit exports, on a
value basis, in 2008.

Yet Some Sectors Falling on Harder Times
--------------

5. (SBU) While wine exports are breaking records and dairy farms are
selling at record prices (median price per hectare is NZ $37,000 or
US $29,600),sheep producers have fallen on hard times. With poor
returns, increasing on-farm costs (shearing and fertilizer),high
capital costs (land),and an over supply of sheep meat on world
markets, there is a strong negative sentiment among farmers about
the future profitability of sheep. The problems besetting sheep
farmers have been amplified by drought conditions over much of the
country. Some farmers on the east coast of the North Island and
parts of the South Island are now in their second summer of drought
and water shortages are taking their toll. A report from the
Ministry of Agriculture and Forestry found the drought's cost was NZ
$345 million (US $276 million) for sheep and beef farmers - or NZ
$25,200 (US $20,160) for the average sheep and beef farm. Real farm
profit for sheep and beef farmers has dropped significantly from NZ
$66,800 (US $53,440) in 2003-04 to NZ $38,700 (US $30,960) in

WELLINGTON 00000115 002.2 OF 002


2006-07 and is forecast by Meat and Wool New Zealand, an industry
organization, to fall to NZ $19,543 (US $15,634) in 2007-08,
assuming the New Zealand dollar stays in the US $0.80 range. The
exchange rate is a big factor impacting on all New Zealand farmers.
For sheep farmers, the record high New Zealand dollar is wiping out
the benefits from better market prices. Wool market prices from
July 2007 to December 2007 were up 3.7% and lamb prices were up 8%
but the exchange rate appreciated 7.9%. Market prices for beef in
North America, New Zealand's largest market, are reportedly at near
historical highs but, when converted to New Zealand dollars, prices
are down 10%. According to industry analysts, if the exchange rate
stays at its current high level, this would make for the third worst
year for the sheep and beef industry in 50 years, which is in stark
contrast to the dairy industry.
Farmers Not Calling for Return to Old Ways
--------------


6. (SBU) In spite of the difficult times facing sheep producers in
New Zealand, farmers are not calling for a return to subsidies.
Instead, many see a fragmented meat marketing structure as a big
part of the problem. Alliance, one of two major meat processing
cooperatives, has proposed a merger with other processors and is
currently soliciting farmer reaction to the idea. The mega meat
company would have an 80% share of New Zealand's livestock supply
and would require approval from the New Zealand Government.


7. (SBU) Over the last two decades, the New Zealand agricultural
economy has gone from being one of the most heavily subsidized in
the world to having by far the lowest level of producer support in
the Organization for Economic Cooperation and Development. In spite
of drought conditions and poor returns, a mindset characterized by
hardy independence is now deeply ingrained in New Zealand farmers.
Most farmers would not want to return to subsidies because, in their
view, it would put New Zealand agriculture at a competitive
disadvantage by blocking market signals, increasing inefficient
production and discouraging innovation.

Farm Lobby neither Wants nor Expects Govt Helping Hand
-------------- --------------


8. (SBU) The resilient independence of the NZ farmer was upheld by
Annabel Young, Chief Executive of Federated Farmers, New Zealand's
largest and most influential farming lobby. In a conversation with
Post, Young said that her organization has not sought any rural
assistance package from the Government in this year's budget, nor
does she expect any. Young noted that the Government is extremely
reticent about rendering assistance to farmers. Even in the event
of natural disasters, Young said that any specific government
assistance for affected rural areas is usually limited to the
restoration of vital infrastructure. Consequential loss of income
and insurable assets are not covered by the Government. Farmers are
able to receive work and income assistance ("welfare") payments in
the case of hardship, but this is no different from any other
welfare recipient in New Zealand.

McCormick