Rogernomics replace Muldoonisms
By Hugh de Lacy (snr)
If the 1970s were all about the compulsory acquisition debate and its directionless aftermath, the 1980s were all about the removal of government subsidies for farming. As the country’s economy struggled with the twin calamities of two successive oil crises and the United Kingdom’s entry in 1973 into the European Economic Union, the National Government of Sir Robert Muldoon had decided to try to farm its way out of the difficulties. Muldoon, a cost accountant by trade, seemed to think that more sheep meant more money, and in the late 1970s and early 1980s he showered sheep and beef farmers with government subsidies called Supplementary Minimum Payments, or SMPs, designed to encourage farmers to produce more. For example, the wool SMP guaranteed farmers a minimum return of 320 cents a kilogram against a 1980-81 market average return of barely 255 cents. The taxpayer and Wool Board reserves made up the difference.
Shearers and farmers had another name for SMPs: skinny sheep schemes. Farmers were encouraged to get overall stock numbers up by taking on debt to finance sub-division fencing and other means of boosting production.
Muldoon saw the underlying need for subsidies to counter the effects of increasing trade protectionism among our main trading partners, and particularly the European Union. Before Britain joined the EU, New Zealand had virtually open and unfettered access to the UK market but, as part of the price of becoming European, the UK was required to impose cripplingly small quotas on New Zealand’s key exports of meat and dairy products. Wool was not included in the quota system because its production didn’t threaten the viability of European farmers, and probably also because it was already perceived as an industry being slowly killed off by synthetic fibres.
The essence of Muldoon’s SMP schemes was that they pitched the tiny New Zealand economy into a subsidy war with global giants like the EU, the US and Japan – and New Zealand never had a show of winning such a battle.
In 1984 Muldoon’s Government was toppled at the general election and replaced by something the voters didn’t know they had voted for: a radical right-wing Labour administration wielding a tranche of monetarist policies that would have had the party’s early leaders spinning in their graves. Determined to free the country from the clutches of what it perceived – and not without some justification – to be a nanny state, the government of David Lange and his Finance Minister, Sir Roger Douglas, ditched the sort of centralised economic policy-making that was Muldoon’s forte.
While allowing the New Zealand dollar to float against world currencies was a brave decision, suddenly wiping all the subsidies on which farmers had been encouraged to depend was an act of economic brutality. Virtually without warning or cushioning, the SMPs and nearly all other preferential treatments for farmers were wiped in 1985. While city investors revelled in their new-found ability to create paper fortunes on a wild-west sharemarket, in the countryside farmers were going to the wall in their hundreds as returns from their output failed to meet their interest bills and living costs. Interest rates of nearly 20% for seasonal borrowings were common, and a slump in meat prices made matters worse.
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Wool prices had held up surprisingly well in the late 1970s, but from 1980 they began to slide. The Wool Board’s intervention floor price was set at 170 cents per kilogram in 1979, raised to 200c the following year, 215c in 1981 and 250c for the subsequent three years, but over that period the actual auction prices fell from 405c in 1979 to 297c in 1984.
In 1982 Muldoon devalued the dollar by 6% and in 1984-85, as the new Labour administration swept to power, wool prices hit an average of 377 cents a kilogram. They slumped back by a third the following year, but for the next three years the floating dollar boosted the market to a new record of 516 cents greasy (688 cents clean) in 1988-89. By then the Wool Board’s intervention policies had become largely redundant and its role in the market had become closer to that of a speculator.
The good wool prices of the late 1980s did not prevent a shrinkage of the national flock, caused by the removal of SMPs and continuing poor returns for meat. Sheep numbers had peaked at 70.3 million between 1981 and 1984, but by 1990 they were back to just over 58 million.
A feature of the 1980s market was the rising influence of China as a buyer of mid-micron and the finer crossbred New Zealand wools for the hand-knitting market. By 1989 China was buying 40% of the clip but, after the 1989 Tienanmen Square student massacre in Beijing, it slashed its purchases to just 7%.
The high sheep numbers of the 1980s kept shearers busy even though the Wool Board’s training courses were feeding around 2500 new shearers into the labour market every year. The board during this period also worked hard at raising woolhandling standards, and by early in the decade there were more than 550 registered wool-classers working.
The Romney breed had recovered some of the ground it had lost to Coopworths and Perendales in the 1970s. By 1990 there were nearly 28 million Romneys (46% of the national flock) compared to 7.5 million Coopworths (12.5%) and just under five million Perendales (8%). Corriedale numbers had slipped to 2.7 million (4.5%) and Halfbreds to 2.3 million (3.8%). By contrast the Merino flock was on the rise, having reached 2.5 million (4.1%).
By the end of the decade shearing expenses had nearly doubled to $178 million, and their slice of farmer returns for wool was 16%.
It had been a tumultuous decade, encouraging for the wool industry but traumatic for farmers and the New Zealand economy. The sharemarket bubble Roger Douglas had created burst in late 1987, precipitating a recession from which the country would not recover for more than 10 years.