PRODUCTION AND PRICES.

Press, Volume LXIII, Issue 19158, 15 November 1927, Page 10

PRODUCTION AND PRICES.

THE FARMER'S BURDENS. CHAMBER OF COMMERCE BULLETIN. | The following bulletin, prepared by j the Department of Economics of Can- ' terbury College, was presented to the > Canterbury Chamber of Commerce at ' last night's Chamber meeting:— , The last bulletin, No. 33, which in- ' vestigated the expansion of overhead | costs in New Zealand since 1914, rej veais a somewhat disquieting position. | OihciaJ statistics indicate that our present production per head of population is no greater than in the years immediately oefore the war. Wage indexes provide evidence that the wageearners covered are approximately us well oft as before the war; that is, they secure about the same proportion of a volume of production which is no greater per head. There can be o doubt that overhead costs have expanded greatly on account of higher capitalisation, increased indebtedness, higher interest rates, heavier taxes and rates, and other items, and that, overhead costs are, therefore, a considerably greater proportionate charge on total production. Production per head has not increased; apparently the same share goes to labour; a greater share goes' to meet overhead costs; consequently the residual claimants, the producers, who secure a proportionately smaller share of the product, bear an unduly large share of the burden of an increase in overhead cost,

for which they are by no means wholly responsible. The rest of the burden is spread mainly over salaried workers and recipients of professional and other incomes whose earnings have increased less than the general increase in prices. All these find now that their incomes possess less purchasing power than they did in more normal times. Their occupations are thus "endered relatively less attractive, and the dislocation of balance in the relative attractiveness of various occupations may have significant long run effects. For the present discussion, however, the effect on producers alone will he considered

> Unequal Distribution of Burden. ! Although this burden falls so largely ;on producers in general, many of • them can pass it on. and the ultimate incidence is not evenly distributed, but tends to be • roncentrated upon particular groups of producers. The distinction, between sheltered and unsheltered industries affords some assistance in analysing this'unequal distribution. It has been shown in previous bulletins, (Nos. 24 and 25) that the' pastoral and dairying industries alone account for about 55 per cent of our total production: 37 per cent. is'produced by mainly sheltered industries supplying a purely local market; while industries partly sheltered, but competing. with imports, and also supplying only the local market, provide the remaining, 8 per cent. The first group of primary producers is alone subject to the full force of world com petition, and it must accept for its produce the prices offered in the world's markets. The two latter groups are more sheltered; they sell their products only in local markets where the force of competition is less, and where cjistom and protective regulation combine to maintain their prices at leveli which yield, for the most part, reasonable profits. This difference in marketing conditions is sufficient to enable many industries in the sheltered , groups to pass on their increased overhead costs in prices higher than they would otherwise be. But these higher prices enter largely into the production' costs of the unsheltered industrial group, who, selling in more competitive markets cannot pass them on. r.ut must bear them. I It appears, therefore, that a consid- j erable part of the burden of the in- j crease in our overhead costs is ; assed i oniuntil it has to be borne by the pri- | mary producers. Wage-earners, for instance, whose wages are adjusted to maintain the pre-war standard of liv-

ing, are thereby protected against carrying any part of the burden of taxation and rates increased to meet war charges or to provide additional social services; many industries sheltered from competition in their local markets can pass on such increases; i*) is mainly the exporting producer who cannot pass them further, and who must eventually foot the bill.

The Evidence of Prices. The manner in which expanded costs are passed on to be borne mainly by producers for export, is indicated by the relative levels of these producers' prices and general internal prices. Price levels for primary produce are best shown by the official index num,bers of export prices; no perfect measure of costs of production is available, but on average they are likely to follow closely the general level of internal prices. The best indication of internal price levels is probably the cost of living index, for the other available index number, that of wholesale prices, is determined largely by the levels of export and import prices. In the following table, which must bo regarded as a general indication rather than an exact measure, the official index numbers of export prices r.nd of the cost of living are compared, and an index is computed from them lowing the real purchasing power of those producers who use their income from exports to buy local goods.

The most significant feature of this table is brought but in the last column, which indicates the real income accruing to farmers from the sale of exportsIt appears that during the war years, farmers, as a whole, gained greatly. From 1914 to 1917 they were able to exchange the same volume of primary products for an amount of local goods which increased steadily, until in 1917 their purchasing power was 22 per cent, higher than 1914. This was due to the fact that export prices rose rapidly and in advance of local prices. But from 1917 a change set in and local prices rose more rapidly than export prices, and continued to rise, or remained fairly high, while export prices fell and fluctuated around a lower level. By 1920 farmers were able to buy, for the same amount of exports, only 92 per cent, of the local goods they could buy in 1914.' By 1923 they could bay only 72 per cent, of such goods. By 1924 they reached again their 1914 level of purchasing power, and were 5 per cent, above it with the excuptionall.v favourable prices of 1925 Since then, export prices have fallen about 20 per cent., while internal prices show practically no change, and the

farmer, in the first half of 19*27, is 17 per cent, worse off than in 1914, being able to buy now only So per cent, of what he could buy then for the same amount of exports. It is undoubtedly true that primary producers made considerable gains during the war period, and it is often considered that the subsequent losses may fairly be balanced against those war gains. But war gains, and the expectation of a continuation or such grains, were in large measure capitalised during the land boom of 1919-21, and, where the over-capitalisation induced has not been written off, it now remains largely an added burden to the industry. An average of the whole period, too, shows'" that the farmers have been losers on balance during the years 1914 to 1927, for their bad years have brought losses much greater than the gains of the good years. But the period is too long to average in this way. Farmers expect some alternation of better and worse conditions over rhort periods, and allow for these changes But over the last seven years they have averaged only •SS per cent, of their 1914 purchasing power. Even including the exceptionally good year of 1925. farmers have been able to buy. over the whole period, 12 per cent less local goods for the same quantity of exports. Such a contraction of purchasing power might be borne easily enough over one or two years, but over a period as long •as seven years it suggests a permanently changed situation which must inevitably react, and react unfavourably, on the economic life of the country as j a whole. Heavier Charges. But this contraction in tho parchasing power of exports as compared with local goods is not the whole story. For out of a real income, depressed because the expanded costs of other industries are passed on to him, the farmer has yet to meet other unavoidable charges which have expanded to an extent far greater than his export prices. Some indication of these charges is given in the next table, where various figures are shown for 1914 and 1926. and the percentage increases are compared. In-

.All these increases concern primary producers very closely. Land taxes and county rates are paid largely by farmers, the rise in mortgage indebtedness and in land valuations .indicates the causes of further charges on their incomes. The cost of living lias risen 63 per cent., and this tigure probably indicates fairly closely the increase in many of the costs of farm production. But farm wages have risen only 47£ per cent., and that figure is considerably higher than tho level of farmers' incomes, for export prices have risen 38 per cent. It follows, therefore, that while the purchasing power "of producers' incomes from exports, has been, over the last seven years, 12 per cent, lower than in 1914, their costs of production

and their overhead charges appear to have increased considerably more than their produce prices. Pressed between high costs and lower prices, their net income has been contracted and its purchasing power further reduced ; owing to the relatively higher level of internal prices. # But this decline in effective

> purchasing power reacts again on tho ■ sheltered industries. For they, like the farmers, are dependent on their market; but their market is purely local, and the farmers comprise a large proi portion of that market. Since the export industries produce more than half the estimated total production, the producers for export probably constitute directly about half of the local market, : and the other half is all dependent, j more or less directly, on the purchasing | power of the primary producers. Con- | traction of that purchasing power j means inevitably a contraction of the i local markets for sheltered products, j with over-production and unemployment in the sheltered industries as a direct j result. Depression in the towns must ; therefore follow upon depression in tho rural industries, and during recent years the position has been made worse because both capital and labour have been attracted from the country to the towns by the more protected, and hence more attractive conditions prevailing there.

This disparity between the price levels of the sheltered and the unsheltered industries is undoubtedly a main cause underlying the economic difficulties which have afflicted the Dominion since 1920. Variations in the balance of trade and payments bring alternations of relative prosperity and depression, but these are temporary, and pass. The permanent basis of sound prosperity and progress in New Zealand is and must long continue'to be the primary industries, for they alone are strong enough to export and sell in competition with the rest of the world. Other industries, being unable to export goods in any quantity, must rely upon the local market, the condition of which varies.with the fortunes of the big exporting industries. When primary producers suffer depression, their depression' must inevitably be communicated through contracted local markets, to other producers. While present conditions persist, the primary industries must suffer some depression, and it j follows that some measure of general j depression is unavoidable.

Remedies. It becomes necessary, therefore, to look for means to alleviate present conditions and to restore prosperity to those primary industries on which the prosperity of the whole Dominion is so closely dependent. Since present difficulties are largely due to the disparity between farmers' costs and prices, they might be remedied either by lower costs, by higher produce prices, or by both. But little is to be expected from higher farm prices. It appears probable that export prices will improve somewhat during the coming season But they depend on world levels of prices, and world prices are now much more stable than at any time since 1914, and they are well below the internal price level in New Zealand. It is practically certain that, in the future as in the past, our export prices will fluctuate alternately above and below a fairly stable general level of world prices, which means that they will average considerably , below our present level of internal prices. The disparity between price le,vels is therefore unlikely to be much reduced in this way. Much more is to be hoped from an increase in farmers' incomes without corresponding increases in their produce prices; that is, from increased farm production at about the present level of prices. Something has already been done in this direction, for farmers, enjoying none of the artificial protection of sheltered industries, and suffering little directly from the restrictive regulation imposed upon those industries, have relied more on their own ability and energy to meet their difficulties. Close .attention to the business side of farming, better farm management and organisation, elimination of wastes, fuller utilisation of resources, methods such as herd-testing and topdressing of pastures, a" these have been advocated as means whereby production might be expanded without corresponding increases in costs, and some measure of success is being, achieved. Such methods are the foundations of solid progress in any industry, and it is highly desirable that their use be exfended in every kind of production. But the adoption of improved methods siich as these should not be con-

fined to primary production alone, and the increased production effected in some of the primary industries might be much enhanced were expansion not due to high internal prices. The internal price level is kept up by high overhead charges, heavy taxation, and rates, retarded by the prevailing high costs over-capitalisation, etc., and by high prime costs for which the tariff and State regulation are largely responsible. To the burden imposed by taxation and rates we shall return in an early bulletin. How Industry is Hampered. With a view to lowering internal prices which bulk so large in our present difficulties, the easiest and most beneficial reform appears possible in drastic revision of regulations, which now restrict production and increase cost. The need for increased production at lower cost is universally recognised, but it is futile to expect that this desirable end should be fully achieved while we fail to recognise how greatly industry is hampered by the cost-increasing regulations and restrictions imposed by Arbitration Court awards and by public authorities. At the present time the State appears to be doing its utmost to help particular industries with one hand and to hinder industry in general with the other, while it imposes on all industry the swollen costs of both its help and its hindrance. The basic primary industries, unsheltered, unprotected, and but little regulated, have achieved soundness and health in the past, largely because their freedom threw the onus of achieving success on the initiative and enterprise of individuals. If we wish other industries to achieve the same sound health, to produce more at lower cost, thereby widening the local market for their goods and for the labour they employ, to ensure their own well-being without State aid, and to help rather than hinder the progress of the primary industries and the Dominion as a whole, then the restoration of a similar reasonable measure of freedom appears to be essential.

Purchasing Power of Exports. PurchasExport Cost of ing power prices. living, of exports. 1914 ... 100 100 100 1915 ... 118 107 110 1916 ... 138 116 119 • 1917 ... 157 129 122 1918 ... 162 . 143 114 1919 ... 167 157 107 1920 ... 164 178 • 92 1921 ... 152 177 86 1922 ... 115 160 72 1923 ... 140 158 88 1924 ... 160 160 100 1925 ... 170 162 105 1926 ... 138 163 85 First half of 1927 ..135 163 83

( urease f£1000>. per 1914. 1926. £ 1.266 cent. Land tax paid 767 m Ccrnty rates ... Too 1,797 133 Total mortgages 112.700 2S2,700 lol Valuation of land (unimproved) in counties only 159.800 231,600 AT, Cost of living ... 100 163 63 Farm \vap;es ... 100 147 J 47 K Export prices ... -100 13S 38'