FARMERS' RESPO~SES TO ECONOMIC R£STRUCTURING IN HURUNUI ANO CLUTHA COUNTIES:
PRELIMINAkY ANALYSIS OF SURVEY DATA
by
John R Fairweather
RESEARCH REPORT NO. 187 MAY 1987
Agribusiness and Economics Research Unit L i nco 1 n Co 11 ege
Canterbury New Zealand
ISSN 0069-3790
AGRIBUSINESS & ECONOMICS RESEARCH UNIT
The Agribusiness and Economics Research Unit (AERU) operates from Lincoln College providing research expertise for a wide range of organisations concerned with production, processing, distribution, finance and marketing.
The AERU operates as a semi-commercial research agency.
Research contracts are carried out for clients on a commercial basis and University research is supported by the AERU through sponsorship of postgraduate research programmes. Research clients include Government Departments, both within New Zealand and from other countries, international agencies, New Zealand companies and organisations, individuals and farmers.
Research results are presented through private client reports, where this is required, and through the publication system operated by the AERU. Two publication series are supported:
Research Reports and Discussion Papers.
The AERU operates as a research co-ordinating body for the Agricultural Economics and Marketing Department and the Department of Farm and Property Management, Accounting and Valuation. This means that a total staff of approximately 50 professional people is potentially available to work on research projects. A wide diversity of expertise is therefore available for the AERU.
AERU REVIEW COMMITTEE
Professor B J Ross, M.Agr.Sc.
(Principal, Lincoln College) Professor R H Juchau, B.Com., B.Ed., M.A.
(Professor of Accounting and Finance, Lincoln College) Professor A C Rayner, B.Com. (Hons), M.Soc.Sc.
(professor of Agricultural Economics, Lincoln College) P G Bushnell, B.Agr.Sc., M.Agr.Sc., Ph.D.
(Director, Economics Division, Ministry of Agriculture and Fisheries)
B D Chamberlain
(President, Federated Farmers of New Zealand) R T J Clarke, M.Sc., Ph.D.
(Chief Director, Department of Scientific and Industrial Research)
The major res\'larch areas supported by the AERU include trade policy, marketing (both institutional and consumer), accounting, finance, management, agricultural economics and rural sociology. In addition to the research activities, the AERU supports conferences and seminars on topical issues and AERU staff are involved in a wide range of professional and College related extension activities.
Founded as the Agricultural Economics Research Unit in 1962 from an annual grant provided by the Department of Scientific and Industrial Research (DSIR), the AERU has grown to become an independent, major source of business and economic research expertise. DSIR funding was discontinued in 1986 and from April 1987, in recognition of the development of a wider research activity in the agribusiness sector, the name of the organisation was changed to the Agribusiness and Economics Research Unit.
General policy direction is provided by an AERU Review Committee which meets annually. An AERU Management Committee comprised of the Principal, the Professors of the two associated departments, and the AERU Director and Assistant Director administers the general Unit policy.
E J Neilson, C.B.E., B.A., B.Com., F.C.A., F.C.I.S.
(Lincoln College Council) P J Rankin, M.A., M.P.A.
(Director, New Zealand Planning Council) P Shirtcliffe, B.Com., A.C.A.
(Nominee of Review Committee) J G Pryde, O.B.E., M.A., F.N.Z.I.M.
(Director, Agribusiness and Economics Research Unit) (ex officio)
R L Sheppard, B.Agr.Sc. (Hons), B.B.S.
(Assistant Director, Agribusiness and Economics Research Unit) (ex officio)
AERU MANAGEMENT COMMITTEE 1987
Professor A C Bywater, B.Sc., Ph.D.
(Professor of Farm Management) Professor R H Juchau, B.Com., B.Ed., M.A.
(Professor of Accounting and Finance) Professor A C Rayner, B.Com. (Hons), M.Soc.Sc.
(Professor of Agricultural Economics)
AERU STAFF 1987
Director
J G Pryde, O.B.E., M.A., F.N.Z.I.M.
Assistant Director
R L Sheppard, B.Agr.Sc. (Hons), B.B.S.
Visiting Research Fellows
G R Griffith, B.Ag.Ec., M.Ec., Ph.D.
Professor L T Wallace, Ph.D.
Senior Research Economist
S K Martin, B.Econ., M.A. (Hons), Ph.D., Dip. Tchg.
Research Economists
G Greer, B.Agr.Sc. (Hons) R G Moffitt, B.Hort.Sc., N.D.H.
Professor A C Zwart, B.Agr.Sc., M.Sc., Ph.D.
(Professor of Marketing) J G Pryde, O.B.E., M.A., F.N.Z.I.M.
(Director, AERU)
R L Sheppard, B.Agr.Sc. (Hons), B.B.S.
(Assistant Director, AERU)
Research Sociologist
J R Fairweather, B.Agr.Sc., B.A., M.A., Ph.D.
Assistant Research Economists J E Chamberlain, B.Agr.Sc.
T P Grundy, B.Sc. (Hons), M.Com.
J C Robertson, B.Com.Ag., M.Com.
Secretary R Searle
LIST OF TABLES PREFACE
ACKNOWLEDGEMENTS
CHAPTER 1 1.1 1.2 1.3 1.4 1.5 CHAPTEI{ 2
2.1 2.2 2.3 2.4 CHAPTER 3
3.1 3.2 3.3 3.4 3.5 3.6 CHAPTER 4
4.1 4.2 4.3 4.4
CONTENTS
Page (i)
(i i i) (v)
(vi i)
APPROACHES TO UNDERSTANDING FARMERS I RESPONSES TO
ECONOMIC RESTRUCTURING 1
Introduction 1
International Back9round and Policy Issues 1
The New Zealand Case 3
Farming Strategy and Structural Change 5
The Research Problem 8
METHOD 11
Introduction 11
The Questionnaire, Sample, and Response Rate 11
Sample Representativeness 12
Limitations of the Method 13
RESULTS 15
Introduction 15
General Characteristics of All Respondents 15
Financial Situation 17
Farmers ' Responses to Economic Change 21
General Attitudes 25
Approach to Farming 30
SUMMARY AND CONCLUSION 39
Introduction 39
Summary of Main Findings 39
General Implications of the Findings 40
Future Research 40
LIST OF REFERENCES 43
APPENDIX 1 The Questionnaire
LIST OF TABLES
Page TABLE NO.
1. Comparison of Farm Type Using Agricultural Statistics
Data and Survey Data 12
2. Comparison of Farm Size Distribution Using Agricultural Statistics Data and Survey Data 13 3. Number and Size of Farm by Extent of Farming and
County 17
4. Approximate Financial Situation 1985/86 18 5. Respondents' Statement of Financial Situation 19 6. Largest Area of Borrowing in Last Two Years 20
7. Preferred rvlanagement Strategy 21
8. New Land Uses Undertaken or Intended 22 Y. Management Strategies Considered or Adopted 23 10. Extent of Change in Total Capital Expenditure 24 11. Distribution of Future Investments 25 12. Importance of People as Cause of Recession 26 13. Importance of Types of Assistance 28 14. Directions of Change in Next Ten Years 29 15. Degree of Change Desired for Processing and Marketing 30 16. Level of Agreement with Management Statements 31 17. Factor Scores for Each Management Statement 32 18. Level of Agreement for Each Factor and for Each
Management Statement 35
19. Level of Importance of Motivation Statements 20. Factor Scores for Each Motivation Statement
21. Level of Importance for Each Factor and for Each
36 37
Motivation Statement 38
(i)
PREFACE
Primary production is undergoing rapid changes at the present tilne and there are two broad areas where these changes have an impact.
The first and most immediate impact is on farmers themselves as they seek to adjust to a new economic order. The second impact is on the character of the structure of agriculture. Decisions taken now by individual farmers add up to longer term changes in the overall character of the pri mary producti on industry. The AERU contri butes to understanding primary production by undertaking research which focuses on these two types of changes.
A topic of immediate concern is farmers' responses to economic restructuring. In this research report Dr Fairweather begins the process of studying changes in primary production by reporting the results of a survey of farmers in Hurunui and Clutha counties undertaken in August/September 1986. The report gives a general overview of farmers responses and includes data on financial situation in conjunction with attitudes, needs, and approach to farming.
J G Pryde DIRECTOR
( iii)
ACKNOWLEDGEMENTS
The author is grateful for financial support from the ~linistry
of Agriculture and Fisheries, Advisory Services Division, and for the assistance rendered by those farmers who contributed to the survey.
( v)
sur~I~ARY
The preliminary results from a 1986 survey of farmers in Hurunui and Clutha counties are presented in this report. The survey included 3H4 farmers and the results give an indication of how farmers were responding to changes in government policies.
Some of the results are as follows. Nearly one quarter of respondents say they have to make a major adjustment. Few seek to diversify, but over one quarter have developed new land uses. Many have adopted a low input policy with expenditure cut back by $10,000.
While most respondents disapproved of government policy there were 20 percent who did approve. Most respondents wanted recognition, financial advice and change in government policy, but few wanted financial or technical advice from MAF. There was awareness that the future of primary production would be dominated by market related factors. In general, the report presents much decriptive data parts of which should De of value to a wide range of people with rural
interests.
While the literature on farmer adjustment suggests that there are two different types of management strategy, the New Zealand data reveal four approaches to management strategy and three types of motivation for farming. The four types of manager are: 'financial manager', 'productivity increaser', 'individualistic worker' and
'"I i festyl e farmer'.
( vi i )
CHAPTER 1
APPROACHES TO UNDERSTANDING FARMERS 1 RESPONSES TO ECONOMIC RESTRUCTURING 1.1 Introduction
The intention of Chapter 1 is to provide a background to economic change in agriculture. The changes that have occurred internationally are used to show that the events in New Zealand are not unique. Later in this chapter some literature is reviewed in order to show what role farming strategy and structural change play in economic adJustment. Finally, the problem for research is defined in terms of
the need to know accurately how farmers respond to economic change.
1.2 International Background and Policy Issues
Similar conditions affect the position of farmers in Australia, Europe, Canada and the United States. In general terms, there are problems of overproduction and low commodity prices combined with high interest rates and falling land values. These factors result in acute financial pressure on farmers. The situation in the US has received wide attention. Tweeton (in Hillman, 1984) states that there are three problems with farming: overproduction, the level and variation of return on resources, and high farm failure rates. According to Walston and Roberts (1985) farmers in the US now face their worst situation since the 1930 1s, and there have been bank failures and declining machinery and input sales. They argue that the inevitable result is a remorseless fall in farm numbers.
Similar descriptions are found for other countries. In the last five years bankruptcies in Canada increased from 0.04 percent of census farms to 0.45 percent of census farms (Kooters and Arthur, 1985). For Britain, Nix (1985) states that overproduction, decreased product prices and relatively steady input prices have resulted in a drop in farm income since 1976.
The similarity of the problems facing farmers serves to illustrate the international character of contemporary agriculture. In fact, as SChuh (1986) argues, agriculture can be understood only in the context of trends in the global economy. To some extent all producers are linked to international trends in food prices. Typically.
commodity prices show a long-term price decline. Also, there is an international food and monetary system which can force adjustments in any country1s agricultural sector regardless of changes in internal cost structure. It appears that many Western nations have agricultural sectors adversely affected at the present time by these international trends.
There are data which support the view that the problems faced by farmers are caused, in part at least, by declining commodity prices.
International Monetary Fund data show that the weighted index of primary commodity prices has fallen from a high of 100 in 1980 to 76 in 1985 - the saine level as for 1974. The index of market prices for food shows a decline from 89 in 1983 to 75 in 1985. Specifically. beef prices and lamb prices both followed the trend and declined steadily.
1
2
For agricultural raw materials (including wool) the index increased from 84 in 1983 to 88 in 1984, then declined to 77 in 1984. Fine wool followed this particular pattern while coarse wool declined steadily.
Generally then, the international prices of agricultural commodities have declined since 1980. It is difficult to evaluate the significance of the decline, and on the above figures it is appropriate to note that falling international prices have coincided with changes in domestic policy and economy to add to farmers ' financial burdens.
Another common element to farmers 1 current problems derives from changes in the extent of borrowing. It appears that a significant proportion of individual farmers, but not necessarily all of them, have increased their rate of borrowing in the last decade. Borrowing has been successful where commodity prices are stable, government poliCies supported agriculture, and While farm land prices increased. Borrowing appears to have characterised farming in Europe, North America, and Australasia. For example, farmers in Ireland avoided debt up to 1970 and then in the 1970 ' s took up more credit (Atwood, 1983). In Atwood's view not all the borrowing was subject to careful scrutiny, and some loans WOuld have involved repayment problems even if there were not an economic down-turn in agriculture. The issue of the wisdom of borrowing remains open and is not resolved by apportioning blame after the fact. It seems fair to say that agricultural borrowing became a popular strategy for many farmers and this change in behaviour has been an important factor in the current financial crisis.
There have been a wide variety of policy responses to farmers 1 financial prOblems and many suggestions for improvement. For example.
the UK Economist (1985) emphasises that the family farm prOblem in the US is a liquidity prOblem not an insolvency criSis, hence it would be unwise to influence commodity prices because of the adverse consequences which would follow. In their view, new policy should be aimed at decreasing debt service repayments. Tweeton (in Hillman, 1984) advocates sound monetary and fiscal policy to promote national economic growth, and payments to farmers to store grain buffer stocks in order to achieve stable prices. On another tack, Schwab (1985) suggests using the 1939 mortgage moratorium statute, subsidisation of interest rates, and the establ i shment and deployment of farm debt review loans. However, some research on the 1930s US farm foreclosure moratoria suggests that while some farmers averted foreclosure, there were failures despite the provision of assistance (Alston, 1984). Yet another suggestion is group farming which is thought to provide economies of size from specialisation (Bartholomaeus, 1981). Finally, Nix (1985) advocates greater budgetary control and low cost farming which may have high management and investment savings when compared to high input farms. Alternatively. farmers can attempt to improve the quality of product, undertake auxilliary enterprises to add value to their produce (e.g., cheesemaking), or take on a part-time job.
Few observers analysing the farm debt prOblem and possible policy options consider the broad trends in agriculture and what general kinds of policy changes are needed for the future. Given the rapid changes in agriculture and the acute problems farmers face it seems relevant to throughly reappraise agricultural policy. Cochrane
(1985) does this by giving an historical overview of US farm structure change and agricultural policy. He concludes that high prices have accompanied increased production because of government programmes.
Early adopters of new technology have enjoyed a permanent rise in
3
income and have then expanded farm size, thereby increasing the price of land. Generally, programmes aimed at helping mid-sized farms have actually contributed to their demise. Cochrane advocates removal of all price and income benefits, while at the same time advocating a government role in assisting necessary adjustments, especially debt restructuring of indebted farmers rather than forcing them out of production. Some farmers need managerial guidance.
Similarly, Urban (1985) takes a critical view of past agricultural policy and advocates a general rural development policy rather than a farm policy as traditionally conceived. He argues that since the 1920's US agricultural policy has focused on control of prices, supply, farm credit, and productivity increases via federal and state research and development. Rapid social and economic changes were needed to acnieve these policy goals. Urban argues that these post-1920 policies are dangerous now because they lead to overprlclng of products, dislocation of farmers and suppliers, and decrease the effectiveness of the food production system. Thus, what is needed is a strong rural economy of independent businesses and recognition that differences in regional production require specific policy. Thus, local and regional groups should De involved in directly-funded programmes but without the link between farmers and federal government.
Similar criticisms of the relevance of traditional agricultural policy have been made by Lee (1983) in response to recent changes in farm structure.
It is quite clear that agricultural policy is in a state of change, at least in terms of discussion about general objectives if not in terms of practical application. The acute financial problems faced by farmers in many countries suggests that new policies may emerge in the present decade. One of the issues in New Zealand is establishing a distinctive agricultural policy in an environment where agriculture is subordinated to the dictates of macroeconomic policy.
1.3 The New Zealand Case
According to the 1986 Agricultural Review Committee, the main elements of farmers' financial problems in New Zealand are static world prices and wide ranging economic policy changes (State of Agriculture Report, 1986). Among the latter are the floating of the New Zealand dollar, removal of interest rate and other controls, and a reduction in subsidies. The results of the new policies included a high exchange rate for most of 1986, which disadvantages all exporters. and high domestic interest rates. Farmers faced declining sheep and beef gross incomes, increased input costs deriving in part from continued inflation, and very high interest rates. In addition, land values have declined thereby increasing debt to equity ratios. Prior to policy changes there have been droughts which were 'an important' backdrop to current financial problems.
The farm problem in New Zealand can be examined from a number of viewpoints. The Meat and Wool Boards' Economic Service provides one of the better documented examinations of farmers' financial problems, although their interpretation of their survey data must be accepted cautiously. The following account gives an overview of the main findings of the Meat and Wool Boards' Economic Service and includes some cautionary comments.
4
The Meat and Wool Boards ' Economic Service research papers (Nos. 1930 and 1931, 1986) conclude that the prices of farm inputs used by sheep and beef farmers increased by 13.2 percent between January 1985 and January 1986, compared with a 10.1 percent increase the year before. Interest charges showed the biggest increase so that high interest rates, coupled with increased borrowing, meant that interest charges were the largest single expenditure item on an average farm. In addition, the papers note that sheep productivity, while less than the previous year, was still at a high level. Stocking rates were expected to fall. Prices received at the farm gate had fallen by 17 percent so that the terms of exchange were expected to decline by 27 percent over the 1985/86 year. Gross farm income for 1985/86 was estimated to fall by 22 percent or $28,200 per farm. With respect to farmers ' debt, data show that with a 40 percent decrease in land values, which is a reasonable estimate of the actual decline in land value, there was an increase from six to 18 percent of farmers with equity less than bO percent of total farm value. In general. farmers faced increased input costs and declining returns which manifest as cash flow problems and increasing debt to equity ratios.
Later reports from the Meat and Wool Boards ' Economic Service show similar findings, and although many farmers experienced limited improvement on some financial indices, there were many facing acute financial problems. In addition, the Boards state that farmers are adjusting to the present economic environment by moving to a system of lower inputs and lower outputs.
However, the Meat and Wool Boards ' Economic Service historic data show that rapid increases in interest rates and other input costs have occured before. For example, interest rates increased by 23 percent between 1980 and 1981, and repairs and maintenance increased by 27 percent between 1978 and 1979. At the same time as farmers faced these large increases in input costs farm land values increased by 22 percent. It is more sanguine to suggest that it is the combination of financial pressure with falling land values which makes for a different situation in 1986. Earlier input increases were found to be tolerable in an environment of rising land values.
Surprisingly. other data show some decreases in input pric~s.
According to the Statistics Department, the all farming input prlce index for the March 1986 quarter decreased by 1.2 percent, and for the June 1986 quarter decreased by 2.6 percent. By September 1986 the quarterly aecline was a minimal 0.6 percent. The Statistics Department all farming inputs price index excludes expenditure on interest, government charges and wages. These Statistics Department data suggest that there was a lowering of many input costs through 1986.
Generally then, as the Meat and Wool Boaras ' Economic Service argues, farm income generated from the market has been insufficient for the needs of the farm operation. For a considerable period of time many farmers have been net borrowers, borrowing more than was being repaid annually. Such farmers were forced to borrow for both development and to finance current expenditure, and this borrowing was initially possible because of high and increasing levels of farm equity bought about by rising land values. This explanation fits in with detailed research on farmers consumption and borrowing behaviour on North Island hill country farms (Beck and Dent, 1984). They argue that farmers are not averse to borrowing but that they may be averse to incurring significant levels of debt. Thus, in times of inflation,
5
farmers will borrow because it is possible to hold or even improve their debt to equity ratio.
The wiSdom of this borrowing policy has been questioned before the current crlS1S in 1986. In October 1984 Atwood noted that the yrowth of farmers' equity, when aggregate farm incomes have been static, can create an unrealistic degree of willingness to take on loans against the security of the farm property. Atwooa emphasised that few farmers would be willing to meet debt repayments out of equity. However, despite this and presumably other warnings, farmers considered that their level of borrowing was an acceptable and profitable business practice. Given the environment at the time in which the decision to borrow was made, it is most likely that the decision was rational.
The Advisory Services Division of r~AF provides another viewpoint on sheep and beef farming with its farm monitoring system (MAF, 1986). The data are based on a selection of a small number of farms that are thought to be typ; cal for the area and for farm type.
For the all classes representative farm, gross farm income for the 1985/86 season was expected to be down by at least $28.000 or 24 percent on last season's income. Revenue from sheep sales was down by 46 percent, from cattle sales down by 18 percent, and from wool sales down by 13 percent. Farmers adjusted by reducing farm working expenditure on fertilizer, repairs and maintenance, weed and pest control, and labour. Total farm working expenditure was down $11,000 or 18 percent over the previous season. Total financial charges increased 13 percent in the 1985/86 year and required 27 percent of gross farm income -- interest payments alone accounting for 20 percent of gross fann income. On balance, the seasonal current account deficit was $5,173.
During 1986 farmers have been organised via their union, the Federated Farmers, to protest to the government and to urban New Zealanders that farmers are suffering both financially and in terms of morale. For farmers, the 1986 coincidence of poliCies and prices severely threatened their livelihood and the farm itself as equity was eroded. Their protest has focused on key problem areas in the economy, such as the exchange rate, inflation, government spending, and unbalanced policy. Farmers appealed to government for some kind of softening of policy, and for even application of policies to all sectors of the economy. On Wednesday 30 April 1986 a large group of farmers and rural people marched on parliament to protest against government policies. Early in 1986 there was little sophistication to the farmers' argument and few new ideas which represented a viable path between the perceived extremes of new and Old policy. Government's response has been to advocate that farming has to operate on a sound business basis like any other business, and not receive special support. Implicit in government policy is the view that structural adJustments are necessary in which profitable commodities are produced instead of unprofitable commodities. This policy implies that new areas for investment are required.
1.4 Farming Strategy and Structural Change
One element of the contemporary crisis in agriculture is the general management strategy of farmers. Of particular relevance is the logic of management strategy, that is, what the long-term goal of farming is to the farmer. It is the general goal which, for example, provides an orientation to the option of borrowing for development.
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SOffle recent overseas research finds two broad strategies: one of 'intensification' and one of 'extensification' or enlargement (Ploeg,
19~5). The 'intensification' strategy avoids purchased inputs and seeks productivity increases per unit of input by pursuing the
"cra ftsmanshi p" of producti on. Product; on ; ncreases are gai ned by knowledge applied to management and day to day work. The farmer attempts to preserve independence and self sufficiency. In contrast, the enlargement strategy involves delegating work tasks and coorainatlng fal~m management via market relations. The farm is developed and expanded in size and scale by adjusting to evolving economic conditions. Ploeg found that both strategies can lead to increased production, and in Italy at least, the enlargement strategy was predominant among contemporary dairy farms.
It is possible that both strategies exist among farmers in New Zealand. Obviously, the enlargement strategy has been popular between 1951 and 1971 when there was a rapid decline in the number of farms.
Enlargement may be still important after 1971 on pastoral farms which have tended to increase in size. We may have at present two groups, one of which tends to follow the intensification pattern and another group which tends to follow the enlargement pattern. The latter strategy would have predisposed farmers to take on developments and then suffer as returns were not sufficient to pay back development and borrowing costs. The former strategy, if it has been adopted in New Zealand, would mean that there is a group of farmers better able to survive the current economic changes largely because of their past management strategy. It remains to be seen whether these two
strategies have been operational in New Zealand and if they have been, to what extent each has been adopted.
Somewnat similar dichotomies of farmers have been found in the US associated with different cultural groups. For example, Salamon (19H5) finds that farms in a German ethnic group are smaller and more diversified than a group of Yankee farmers. The former group are motivated to replicate the family farm and farming goals, whereas Yankee farmers are driven by entrepreneurial motives and tend to develop crop monocultures. Flora and Stitz (1985) prOduced similar findings for these two ethnic groups, but while German origin was a good proxy for yeoman farming, US-born farmers were not necessarily entrepreneurs. Even Briti sh research reports generally simil ar types of farmers' strategies. A detailed study of 400 Scottish farms between the 1978/79 and 1982/83 seasons (Wagstaff, 1985) finds many farms in the high performance category were low input farms and that high input use appears to result in small and uncertain gains in terms of unit cost. While this research is on a different tack to that which includes ethnic background, it does show that there can be two strategies in overall farm management, and that the 'intensification' strategy can be economically viable.
The above literature indicates that there are at least two general approaches to farming management. These strategies may be related to the degree of financial stress farmers have faced. Looking at farmers' responses in terms of intensification or extensification would be useful in understanding farm management.
uther research has focused on individual farmers' responses to changed crop economies, and examined the implications of these changes for farm structure at the aggregate level. For example, Gladwin and
Zaba~"a (1984) studied farmers who faced a major decline in commodity
7
price for tobacco and looked at the overall changes in the pattern of agricultural development. For these Florida farmers, tobacco was 65 percent of the value of total agricultural production. The study focused on the decision to cut back production and on the decision on how to cut back production. Relevant to NZ conditions is the finding that some tobacco producers diversified into nursery crops and tomatoes because these crops required management similar to tobacco production.
However, high capital requirements and changing markets led to many failures in these new commodities. Out of 51 farmers, 19 became larger, 11 became smaller and part-time operations, nine left farming and Ii retired. Over the years following the first year of low tobacco prices, the full-time farms became larger operations with larger gross sales, net farm income and assets, and also larger debts and debt/asset ratios. Part-time farmers, by adopting a conservative strategy, maintained a greater share of assets.
The structural changes in the county derived from individual farmers ' responses to changed crop economies. The findings showed that fan"ers had to get bigger, get off-farm work, or get out of farming, responses which have been quite typical of many farm structure adjUstments in the US. These responses fit in with the growing dual structure of US agriculture where the few remaining full-time farms produce most of the total agricultural production.
Barlett (1984) found different responses in another county-level study of farmers I response to drought and increasing debts. Results from a survey and from interviews showed that there were three types of farmers. First, and least affected by economic changes, were retired and disabled small-scale farmers most of whom had not borrowed money. Second was a group of part-time farmers on larger farms who work 40 hours per week off-farm. Both the first and second group accounted for 56 percent of all farms, owned 30 percent of all land, and while some of them lost savings and income from drought few faced bankruptcy. The third group were full-time farmers with farms at 283 hectares on average, about five times larger than the first or secona group. Most of those full-time farmers had some off-farm income. However, 37 percent were in serious financial trOUble with debts greater than 75 percent of assets.
The farmers in this county had a number of strategies to cope with drought and low prices. These strategies and who undertook them are listed below:
1. Increase area operated (mostly full-time farmers - 42 percent) 2. Decrease area operated (many, mostly retired/disabled - 38
percent)
3. Increase hirea labour (few, some full-time farmers) 4. Decrease hired labour (about one third of all farmers) 5. Increase off farm work (all, most full-time farmers - 29
percent)
6. Use irrigation (most full-time farmers - 46 percent)
Other adjustments included renting land rather than buying land, and during the adjustment period there were very few land sales.
Barlett argues that the family farm will survive better than other types in the current phase of farm structure change in the county
8
studied. Of the full-time farms, it is the renters and the large scale farms with more than 50 percent hired labour who were going bankrupt.
These two types had the greatest debts and had been in farming for less time than the full-time family farms which owned most of their land.
Thus for Barlett, the farm crisis will not necessary weed out the best managers but select farmers who established early.
It is clear from the above research that the structural implications of farmers reactions to financial crisis are ambiguous.
One study reports that family farms must get big, get off-farm work, or get out of farming. Other research shows that established family farms with less than 50 percent hired labour and who have not borrowed to develop are the survivors of the financial squeeze. The findings reflect a major divide in the theoretical literature over the long~term
prospects for family farms. One viewpoint has it that family farms will be subordinated to capital and take on the characteristics of industrial production based on wage labour. The other viewpoint argues that the household labour characteristic of family farms provides greater scope for survival.
The ~esearch Problem
There is only a small amount of factual information on farmer's responses to economic restructuring and changes in NZ agriculture as a whole. There are opinions about possible changes in NZ agriculture.
For example, Neil Taylor of the New Zealand Meat and Wool Boards' Economic Service (1986b) suggests that there may be increases in farm size, increased corporate ownership, and more extensive management farming (i.e., decreased inputs and outputs). Taylor sees little option for diversification within traditional agriculture because of lack of management skills, physical limitations, high capital requirements, and market uncertainty. He sees more opportunities in the area of new products and new markets. This view is shared by Mr Moyle (1986), the Minister for Agriculture and Fisheries, who sees the problem as one of under-marketing of existing produce.
Pessimism regarding change is also recorded in the t4AF Advisory Services Division survey of sheep and beef farmers. They find that where diversification into horticulture has occured, both decreased product pri ces and hi gh interest rates on money borrowed for diversification are weakening the financial base of the whole farm.
The Advisory Services Division also states that farmers are adopting the following short-term survival tactics:
1. sale of capital stock, plant or machinery 2. non-replacement of plant and machinery 3. sale of farm timber
4. sale of part of farm
5. seek i ng off-farm work by farmer or spouse 6. reducing labour
Longer-term tactics included increasing crop area, reducing sheep numbers in favour of cattle, and changing to all wool farming.
The Oivision found that farmer morale was low, and with an uncertain environment combined with high levels of stress, there was little forward planning.
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A more optimistic view of the future can be gained from the results of John Pryde's 1985 farmer opinion survey (Pryde and McCartin,
19~6). In response to a question on whether they were currently intending to set aside some part of their farm for the development of activities other than the type of farming they were presently involved in, about one third replied in the affirmative. Of these, 32 percent nominated goat farming, 25 percent horticulture, 15 percent deer farming, and ten percent trees. Thus, at least some farmers appear to have the resources to undertake changes in production.
At the present time we lack an informed view on two key aspects of restructuring in agriculture. The first area concerns the individual responses of farmers. An important part of this research would include study of farmers I perception of new agricultural policy and to document in general terms their responses to economic change.
The second area concerns the collective response of farmers, that is, the changes in primary production as a whole. The sum of all individual changes influence the overall structure of agriculture. The present reseach addresses the first of these issues and seeks to analyse farmers ' responses to economic change. The above literature review suggests that farmers can make a variety of responses to economic change and that these responses may be associated with different types of management strategy. The remaining task is to present up to date data on restructuring. Following the methods chapter, survey data are presented and analysed in order to provide a description of contemporary adjustments and responses. Finally, the results are discussed in terms of the need for extended analysis of the data and additional research on farm structure, and in terms of understanding farming strategy in the New Zealand context.
2.1 Introduction
CHAPTER 2 IvlETHOD
The general objective of the empirical research was to learn about pastoral farmers' responses to economic change in 1986. The survey was designed to give an indication, in two se"lected regions, of how farmers saw government policy, their own situation. and what they were aoing in order to adjust to the financial downturn in primary production. This chapter outlines tile method used and presents data relevant to an evaluation of that method.
2.2 The Questionnaire, Sample, and Response Rate
A seventeen page questionnaire was prepared in booklet style containing a four paragraph, introductory letter requesting assistance (see Appendix 1). Respondents answered questions by writing a number in a box, or by writing an occasional comment. Questions covered seven topics, namely: farm information, approach to farming, government policy. financial situation, coping strategies, assistance needed, and farmer information. The questions sought to describe farmers' situations and their responses to the financial downturn. In addition, the questions sought to address the issue of intensification and extensification, and approach to farming.
Rather than a comprehensive survey based on a sample from all New Lealand farmers, the author. in consultation with the Ministry of Agriculture and Fisheries, decided to focus on two specific counties.
Hurunui and Clutha counties were selected because they represented pastoral agriculture and because they both had a large number of farms.
Both counties have a clear majority of sheep-beef farms. Hurunui County is north of Rangiora and includes Loburn, Amberley. Waikari. and Hawarden. Clutha County is south of Balclutha and includes Clinton.
Owaka and Chaslands.
The sampling frame was the June 1986 Valuation Department list of all holdings in each county. The list excluded residential land, forestry land, and the residual category of "other" land. From the list of 2,217 cases a one third sequential sample was taken yielding a sample of 739 cases. The questionnaire was posted on the 5th August 1986 and a reminder card posted on the 22nd August 1986. Most replies were received by September.
From the 739 questionnaires mailed out a total of 426 replies were received. This number returned represents an unadjusted response rate of 5H percent. There were 384 usable responses giving a final response rate of 53 percent.' The presence of 22 incompleted questionnaires reflects the fact that the questionnaires were sent to all holdings listed regardless of size. Many of these 22 cases were on
1 Of tne 739 questionnaires mailed out there were 15 returned by the Post Office as "gone no address" and five returned with a note that the original occupier had either moved or sold their land. Taking these 20 cases off the original 739 leaves 719 of which 426 is a 53 percent response rate. From the remaining questionnaires received 22 were sent back incompleted because the respondents considered them to be irrelevant.
11
12
sloallholaings or were retired from farming. For the remainder of this report the results are based on the replies received from the 384 usable questionnaires.
The Valuation Department records provide a means to evaluate repl ies in terms of full or part-time activity. More full-time farmers replied than did part-time farmers, so that the response rate from full time farmers was 60 percent.
2.3 Sample Representativeness
The 384 replies represent 17.3 percent of the total farm population for Hurunui and Clutha counties. Past research (Fairweatner, 1985) has shown that a 17 percent sample is sufficient to be a representative sample for surveys of farmers. In addition, it is possible to evaluate the representativeness of the sample by comparing it with known standards. In this case some characteristics of the sample are compared with the Agricultural statistics for 1984. Table 1 shows farm type in terms of number and area for both counties. The data shows that the distribution of farm types is similar for both sets of data. It is reasonable to conclude that the survey sample is representative of the population for Hurunui and Clutha counties.
Table 1
Comparison of Farm Type Using Agricultural Statistics Data and Survey Data
Survey Agricultural Statistics
No. % Area No. % Area
(hectares) (hectares)
HURUNUI
Horticulture 11 6 14 28 3 11
Dai ry 4 2 64 16 2 45
Sheep/l:3eef 139 74 447 645 76 412
Arable 15 8 134 44 5 80
Other 19 10 18 114 13 1288
Total 188 100 345 847 99 492
Clutha
Dai ry 7 4 95 28 4 88
Sheep/l:3eef 162 91 335 649 88 300
Arable/horticulture 5 3 234 17 2 254
Other 4 1 94 44 6 1267
Total 178 99 318 738 100 349
13
Table 2 shows the patterns of farm size distribution for each county for the same two sources of data. Again, there ;s general similarity in the distributions. The two tables indicate that the sample is representative.
Table 2
Comparison of Farm Size Distribution Using Agricultural Statistics Data and Survey Data
HURUNUI
% CLUTHA
%
Size Range (hectares)
Survey Agr.Stats. ' 84 Survey Agr.Stats. ' 84
< 5 5-9 10-19 20-39 40-59 60-99 100-199 200'*399 400-799 800 ... 1199 1200-1999 2000-3999
> 4000
11 7 7 9 4 8
13 16 11 6 5 1 1
2.4 Limitations of the Method
7 9 7 10
6
8
13
19 10 5 2 1 1
2 2
3 3
4 4
1 4
1 3
6 7
22 23
41 36
15 12
3 2
1 2
1 1
There are tnree limitations to the method. First, the survey provides information from one point in time, namely August and September 1986. The method does not provide direct information on changes in attitude or response to a questionnaire over time. However, to some extent this problem can be mitigated by attempting to learn about the fundamental qualities of the respondents which are unlikely to change over time. Second, the questionnaire is not suitable for studying detailed aspects of farmers I responses to economic change.
For example, only summary data are available on financial situation.
The objective of the research was to cover all major aspects of farmers I responses in order to give a comprehensive overview of their situation rather than detailed information on specific issues.
The third limitation relates to the generality of the findings.
The two selected counties have about 2000 farms but there are approximately 60,000 farms nationally. Thus, on a statistical basis the results may not be generalisable to New Zealand primary production in general. However, both counties have a clear majority of pastoral farms, and they may, to some extent, be taken to represent pastoral farming. It seems likely that, in general terms, pastoral farmers in Hurunui and Clutha counties will respond to economic changes in ways similar to pastoral farmers elsewhere.
CHAPTER 3 RESULTS 3.1 Introduction
The primary source of data is the questionnaire survey and the following presentation of results is based on this source. Each section below begins with a summary of the main findings in that section. The initial objective is to describe the general characteristics of the respondents and to build up a profile of the
"typical" farmer.
3.2 General Characteristics of All Respondents
A number of questions focused on general farm information, and taken together they give a description of the typical farmer respondent. I n summary. most of the respondents are full-ti me, sheep-beef farmers on a farm of 381 hectares on average. They are owner-operators with financial control of the farm, and on average.
they are 44 years old. The farms are typically freehold and organised as individual ownerships or partnerships. The farms are just as likely to have unpaid family workers as paid farm workers or managers.
The average size of farm for all respondents was 326 hectares, with a mode of 16 hectares and a median 199 hectares. These data reflect the relatively large number of smal1holdings included in the sampling frame. With respect to type of farm, Table 1 (see earlier) shows that most respondents (82 per cent for both counties) have sheep/beef farms and there are small proportions of all other types of farm. The average size of sheep/beef farm is 381 hectares, with 35 or nine per cent of these being high or hill country grazing farms, and 277 or 7L per cent of these being fattening farms.
Most respondents (69 per cent) were full-time farmers and seven per cent were part-time farmers, defined in the questionnaire as deriving most income from their farm. The remaining category was smallfarming, deriving most income from off their farm, and this category was the second 1 argest at 21 per cent. Generally. the resu'\ ts reflect the wide range of farm sizes and types included in the sampling frame but clearly show that the typical respondent is a full .. time farmer. Thus, most respondents (at least 57 percent and probably more) are full-time, sheep/beef farmers.
Other data show that 78 per cent of all respondents said their occupation was farmer. Other occupations were professional (three per cent), self-employed (six per cent), and wage earner (eight per cent).
Regarding prior occupations 28 percent said they had always been a farmer, 23 per cent said they had been farm labourers, and 13 per cent said wage-earners. Most respondents (89 per cent) said they were owner-operators and 91 per cent said they had control over the financial management of the farm. The average age was 44 years, mostly men responded (92 per cent), and they had operated their present farm for 14 years on average. Respondents had been farming for 21 years on average, a'lthough there is a large group who said they had been farming for 10 years. Thus, the typical respondent is a male farmer of 44 years with financial control over an owner-operator unit.
15
16
Some other information is available on the farm itself. Almost all land is freehold tenure and held as either individual ownership (33 percent) or as a partnership (46 percent). This proportion shows more partnerships than the national figures based on the agricultural census (47 percent and 39 percent respectively for 1985) and suggests that the pastoral sector is among the leading sectors which are making the change from individual ownership to partnerships. Other survey data show that dairy, arable and grazing farms have about equal individual ana partnership ownership, whereas fattening (the majority) and horticulture have more partnerships than individual ownership.
In the last five years 164 respondents (43 per cent) bought or sold land, with most of this group (121) buying land. The average size of land Dought was 214 hectares, (modal and median size 80 hectares).
while the average size of land sold was 409 hectares (modal and median size 60 hectares). Thus, most of the land transactions involved purchases of about 80 hectares, typically added on to sheep/beef farms with an average size of 381 hectares. It;s probable that some of the units of land bought are the same as those sold because the sizes are similar. In addition, national farm size data show a trend of declining numbers in the 40 to 200 hectare range, and the addition of 80 hectares to farms of 381 hectares fits this general trend.
There is some data on farm work organisation. While most respondents are owner-operators, there are 26 per cent who say that there are two people who dO the physical work on the farm. This number corrODorates the point noted above that there were a significant number (46 per cent) in partnerships. The fact that more people say they are in partnerships than work as two owner-operators suggests that some of the p~rtnerships are with spouses who do not usually do physical work on the fan". There are 141 or 37 per cent of the total number of respondents who said they had one or more unpaid family workers.
There were very few private lessees or sharefarmers. However, there were 68 ( ten per cent) paid farm workers, nine ( two per cent) paid farm managers, and 57 (15 per cent) paid family workers making a total of 134 (35 per cent) paid employees. Since in most cases respondents who selected these paid worker categories said they employed one person, it is likely that 134 farms employ one person on average. As noted above, there is an approximately equal number of unpaid family workers.
Finally. some county comparisons are available. Table 3 shows some differences in extent of farming activity for each county. Also full time farmers are larger in Hurunui county, while part-time farmers are larger in Clutha county. There are more part-time, small farm or retired farmers in Hurunui county than in Clutha county, and comparing full-time farmers, versus non full-time farmers for both counties produces a significant Chi-square at the 0.01 significance level.
These findings are explained by the greater proportion (30 per cent) of businesspersons, professionals, self-employed or wage earners in Hurunui county compared with eight per cent in Clutha county. Hurunui county is close to Christchurch which means that there is a greater proportion of non-pastoral farms occupied by a range of people with non-farm occupations.
17 Table 3
Number and Size of Farm by Extent of Farming and County
Hurunui Clutha Sign. Level
Full-time 115 143
524 ha 375 ha
*
Part-time 14 11
58 ha 158 ha
**
Small farmer/Retired 52 21
22 ha 33 ha
Other 7 3
375 Ha 122 Ha
Total 188 178
345 ha 318 t1a
No Response 18
384
In the following analysis data from all respondents is used and these data are taken to represent the "typical" farmer described above.
Where the type of farm or farmer is relevant then the data are broken down accordingly. Of immediate concern now ;s the financial situation of the respondents.
3.3 Financial Situation
In summary, 71 per cent of respondents said their financial situation was worse than last year. One third of respondents had a deficit of -$15,000 and two-thirds had an average surplus of $20,000.
Typically, gross income had declined by $22,000 since the previous financial year. Twenty per cent were in a difficult or crlS1S situation whereas 40 per cent were in a sound position. Debts derived from refinancing existing debt and from development expenditure.
All respondents were asked to describe their financial situation and compare it with their last financial year (i.e., 1984/85). Seventy-one per cent said it was worse than their last year, 21 percent said about the same as their last year, and six per cent said it was better than their last year. In addition, respondents were asked to describe in approximate terms their current financial situation for the 1985/86 year. Table 4 shows a summary of financial situation and includes data specifically for full-time farmers and for sheep/beef farmers. The deficit and surplus figures are averages and show the number of respondents in each situation. Fewer respondents provided these data.
18
The table shows that full-time farmers had lower off-farm income and higher figures for all the other categories when compared with all respondents. However, the net result in terms of either deficit or surplus was much the same. The higher off-farm income for all respondents reflects the higher proportion of non full-time farmers with significant off-farm income in this group.
Table 4
Approximate Financial Situation 1985/86
Farm Income Off-Farm Income Gross Income Total Cash
Expenditure Deficit Surplus
"Round Figures"
Gross Income 84/85 Gross Income
85/86 Difference
All Respondents
(n = 240)
$
81,255 14,150 93,602 90,470
-15,612(71,36%) 20.293 (125,64%)
108,000 (298) 86,000 (283) 22,000
Full-Time (n = 197)
$ 106,537
5,117 113.620 110,166
-16,292(61,41%) 22,411(88,59%)
140,000 (216) 111 ,000 (206)
29,000
Sheep/Beef (n ::: 118)
$
84,993 8,760 95,774 92,769
-15.962(62,39;r~)
20,779(99,62%)
113,000 (254) 89,000 (243) 24,000
The sheep/beef group has lower fann income than the full-time group, possibly reflecting better financial conditions for the latter type of farm. However, the figures for the sheep/beef group are quite similar to the all respondents group.
Regardless of group, the table shows that just over one-third of respondents were in a deficit situation to the extent of about
$15,000 on average. The maximum deficit was stated as -$70,000 and 22 out of the 71 cases (36 per cent) were at or below -$20,000. The most frequent deficit figure was -$10,000. The table also shows that just under two-thirdS of responaents were in a surplus situation to the extent of about $20,000 on average. The maximum surplus was $100,000 and 49 out of the 125 cases (39 per cent) were at or above $20,000.
The most frequent surplus figures were $10,000 and $20,000 (ten each).
19
In general, the data show a wide spread of financial situations with most respondents in a surplus situation.
Table 4 also shows respondents I statements of gross income in round figures for the last two financial years. These data are a check on the accuracy of the specific figures and they show similar levels of gross income. Typically, gross income has declined by about $22,000, and by up to $29,OUU for full-time farmers. A gross income for 1985/86 equal to 1984/85 would have left most respondents in a surplus situation. Surpluses would have ranged from $5,000 to $40,000.
Other data are available which gave an opportunity for respondents to express how they perceive their financial situation.
Table 5 shows the relevant data for all respondents.
Table 5
Respondents ' Statement of Financial Situation
Sound positlon, no need to make significant adjustments
Delicate position, can hold on with minor adjustments
Difficult situation, have to make some major adjuSDTIents
Crisis situation, may not survive
No Response Total
No.
147 152 64
12 375 9
384
%
39 40 17 3 99
The first category reflects a sound financial situation, and it is suprising that there are 147 cases here when there are 125 in Table 4 who have a surplus, regardless of size. However, not all respondents replied to the questions on which Table 4 data is based. Table 5 also shows that an equally large number (152) are in a delicate financial situation, and some degree of major change is required for 20 per cent of all responednts, with three per cent thinking that they may not survive.
While the above data give an overview of respondents financial situation, there is some additional data on financial factors that contributed to their current financial situation. Table 6 shows the areas for borrowing over the last two years. Most respondents (29 per cent) selected refinancing existing debt as their largest area of
20
borrowing and many (21 per cent) selected development. These two areas accounted for half of all the cases, with remaining responses spread evenly over the other five options. Thus, respondents· financial troubles have not occured suddenly but are to a large extent a product of earlier debt situations.
Table 6
Largest Area of Borrowing in Last Two Years
No. %
Land 25 14
Building 16 9
Livestock 16 9
Plant and Machinery 22 12
Refinancing 52 29
Development 38 21
Other 12 7
181 101
Did not borrow 165
No Response 38
Total 384
Two other points conclude this section on financial situation.
For those respondents with a cash deficit, most (44 per cent) said they will try to finance their deficit through their traditional financier such as a bank or a stock agent. Thirteen per cent mentioned the Rural Bank discount scheme and 17 per cent mentioned off-farm work by themselves or their spouses. However, while the focus of the responses was on negative aspects of financial situation, there was optimism for tne future presumably from those who were in a sound position. There were 153 (41 per cent) who stated that they believe they will have a cash surplus over the next five years, and this is more than the 77 (21 per cent) who answered in the negative. This latter number roughly equates with the 69 in Table 5 who are in a difficult or crisis situation.
It is clear from the above data, despite being an overview of financial situation, that a significant proportion of respondents were in a serious financial situation in August and September of 1986.
While it can be argued that some respondents may have been over-reacting and exaggerated the description of their situation, it is equally likely that some respondents would knowingly or even
