Dr Jacqueline Rowarth: Taxes and bureaucracy hampering farmers

A hike in interest rates is suppressing investment on-farm that would enable productivity gains, writes Dr Jacqueline Rowarth. Photo / Brett Phibbs

OPINION

Everybody should be concerned about what is happening to the primary sector because it is the engine of the economy, Dr Jacqueline Rowarth writes.

In the developing scramble of election promises, increasing tax has been suggested by some parties as the answer for future payments.

At the same time, Prime Minister Chris Hipkins has stated that capital gains and wealth taxes aren’t on the cards whilst Minister for Agriculture Hon Damien O’Connor has said that the current tax take isn’t enough to pay for what is required for climate change initiatives.

The difficulties continue when one considers the Government debt.

Although the International Monetary Fund (IMF) has confirmed New Zealand’s financial sector “remains sound with ample capital and liquidity levels,” it also noted that “the external balance has deteriorated significantly”.

The report suggested that we are living beyond our means.

Whatever the feelings about new taxes, including removing (or not) of GST on fresh and frozen fruit and vegetables, New Zealanders should be concerned about the growing debt and our prospects of raising revenue to pay for infrastructure, health, education and debt repayments.

And everybody should be concerned about what is happening to the economic engine of the economy – the primary sector.

Already the economists have calculated that Fonterra’s drop in milk price to suppliers means $5 billion that won’t be circulating.

Agricultural economist Phil Journeaux crunches the figures for dairy farms in the Waikato-Bay of Plenty region every year and is warning that “things are going to get bloody serious very quickly”.

The AgFirst financial survey of dairy farms in the Waikato and Bay of Plenty released on August 3, calculated a break-even point of $8.29/kg milk solids.

On August 4, Fonterra announced a decrease in milk price to a mid-point of $7.00 and AgFirst hastily redid the calculations.

The new budget involved deferring expenditure on repairs and maintenance, reducing feed and, of course, removing tax payments because if a business isn’t profitable, it won’t be paying tax to the government.

But the new break-even price is still $8.17.

This means that the average Waikato-Bay of Plenty farm will be losing 92c a kg for each milk solid produced – a figure just under $80,000 for the model farm.

All farms are different.

Each farm will have different components of the basic budget where it can try and reduce expenditure while maintaining animal health, pasture quality and fit-for-purpose infrastructure.

Penny-pinching in the latter, and deferred repairs and maintenance, might give short-term relief but will have a cost in the longer term.

Dr Jacqueline Rowarth. Photo / Supplied

What can’t be changed are interest rates.

For the model farm, the interest payment is forecast for the season at $1.94 per kg of milk solids. Last year it was $1.61, the year before that $1.11 the year before that and in 20/21 it was $1.00.

Interest rates in agriculture are higher than for houses because of the uncertainty in farm income and hence risk to the bank. (This difference appears to be news to many house owners on an income but won’t be to business operators.)

The hike in interest rates following the OCR is affecting all businesses – and the comment has been made that the increases aren’t having the expected effect on reducing inflation.

This might be because the bulk of people in New Zealand don’t actually have a mortgage (many baby boomers, for instance, have paid off their debt; millennials haven’t yet engaged).

The weight of the interest is falling on business owners, and in the case of agriculture, is suppressing investment on-farm that would have enabled productivity gains.

It is also restricting the ability to take on extra labour (if any happened to be available) to allow the regulatory burden to be addressed.

The fact that agricultural productivity gains were negative in the last reported year (2021/2022) indicates a massive problem for the country that has not yet been fully realised.

The milk price drop, alongside the decline in the meat schedules, and the horticultural export challenges (both quantity and quality affected negatively by the weather events and ongoing lack of sunshine) should be sending signals in Wellington that the $56 billion forecast for the next year is unlikely to eventuate.

Listen to Rowena Duncum interview Dr Jacqueline Rowarth on The Country below:

Further, it would be a positive signal of value if people in power considered what might be done to help farmers regain productivity.

Reassessing the regulatory burden, which results in a third of the time spent on paperwork, could be a start.

No one quibbles when paperwork adds value, but at the moment farmers are faced with presenting various combinations of almost the same data, but in different formats, to their meat and milk processors, their regional council, StatsNZ, WorkSafe and Ministry for Primary Industries.

In a 2018 Harvard Business Review article, management guru Gary Hamel and co-author Michele Zanini suggested that “bureaucracy saps initiative, inhibits risk-taking, and crushes creativity. It’s a tax on human achievement”.

In considering how to pay for election promises and which taxes will or won’t be implemented, reducing the tax on human achievement, in all sectors, not just agriculture, should be a priority.

• Dr Jacqueline Rowarth, Adjunct Professor Lincoln University, is a member of the Scientific Council of the World Farmers’ Organisation and is a director of DairyNZ, Ravensdown, Deer Industry NZ and NZ Animal Evaluation Ltd. The thoughts and analysis presented here are her own jsrowarth@gmail.com.