30 July 1984 AERU release a discussion paper on the state of agricultural credit in New Zealand

The income position of New Zealand farmers would have been enhanced and their credit needs changed had the exchange rate been allowed to float in recent years according to a discussion paper released by the Agricultural Economics Research Unit at Lincoln College.

This was because farmers would have got higher returns from export of primary produce.

The discussion paper, titled The State of Agricultural Credit in New Zealand, was written by Mr John Pryde, Research Fellow in Agricultural Policy at Lincoln College, and Mr L.B. Bain, a research economist with A.E.R.U.

Although there was a substantial fall in the New Zealand exchange rate between 1967 and 1983, throughout most of the time the New Zealand dollar was overvalued from the farmers’ point of view, the paper says.

During the last 20 years the New Zealand economy has experienced a long downhill slide.

This has been characterised by inflation and declining demand for many traditional primary products on export markets.

To compensate agricultural producers for the decline in demand there have been devaluations, and other Government support measures.

The paper says that given a feeling of security by this support, farmers, among other sectors, have generally had little incentive to diversify into new products and unprotected industries.

Government involvement in the farm finance market has increased, both in the support of farm incomes and in controlling the cost and availability of credit.

The supplementary minimum price scheme, used to maintain gross incomes, has undoubtedly had an impact on the demand for rural credit.

Costs have been controlled by the wage and price freeze, and interest rates by regulations.

However, the impact of the lower interest rate policy is only marginal so far and will be very gradual in effect on farm costs.

Funding by the Rural Bank has increased to the extent that the bank has become isolated as the major source of long-term funds.

This Rural Bank funding has off-set the decrease in long-term funds provided by private institutions.

Farmers' equity has increased significantly because debt levels have not risen at the same rate as property values.

The slower rate of increase in debt has probably been because of incomes failing to increase as much as inflation in land values.

The paper says that the cost of finance is now a major concern of farmers, as, in spite of support measures, farmers' incomes have fallen in real terms.

Also, capital gains, once an attractive feature of farm investment, are now uncertain.

A substantial number of farmers could have difficulties in servicing debts, because price expectations and market prospects for several major products may riot be high in the short term.

In the last two years cost rather then availability of finance has become a major concern of farmers.

However, in some sectors of the credit market supply is still a significant constraint.

In real terms the amount of short-term finance from stock and station agents and trading banks has declined significantly in the last decade.

This is in spite of higher levels of stocking and farm inputs.

Long-term finance from private institutional lenders is in very short supply, and farmers who do not qualify for Rural Bank finance are at a considerable disadvantage, the paper adds.

Further information from Mr John Pryde, Agricultural Economics Research Unit, Lincoln College, Canterbury, New Zealand.