MINISTER'S EXPLANATION

Press, Volume LXXIV, Issue 22509, 17 September 1938, Page 18

MINISTER'S EXPLANATION

HOW PRICES WERE

DETERMINED

COMPLETE DETAILS

OF PROCEDURE

DISAGREEMENT WITH

COMMITTEE

ALL LAST YEAR'S PROCEEDS

TO BE PAID OUT

(I>BE9S ASSOCIATION TBLEGBAJI.)

WELLINGTON, September 16. "Before announcing the t G n ° t v !£„j ment's decision on the price that will be naid for butter and cheese produced during the 1938-1939. season, milht I briefly outline the procedure by which the promise made to he dairy industry on the occasion of the 1935 General Election has been faithfully and completely carried out? said the Minister for Marketing (the Hon W. Nash), announcing the new g H?sSr < rf ßri SK- m.ior objectives fi*ft»ffM<. "Set! of the Dominion was the payment to all dairy farmers of a guaranteed nrice for their produce. The farmer was given an assurance that the price that would be paid would be sufficient to cover all his working.expenses, including a minimum standard wage for his employees, and to secure to the farmer an income commensurate with the time, /skill, energy, and experience used by! him in producing the commodity. "The principles upon which the proposed guaranteed price procedure would be based were set out explicitly and explained fully to dairy farmers at that time. The proposal? were based essentially on a recognition, of the importance of the primary industries, and in particular of the dairy industry, in our national economy, and of the necessity therefore, in the interests of the Dominion as a whole, of ensuring that the welfare of this vital industry and of those engaged m it was adequately safeguarded, "lne acceptance of this principle necessitated the working out of a procedure that would protect the dairy farmers income against the continual and disastrous fluctuations to which it had hitherto been subjected as the result of market price fluctuations. Intention of Act "In November, 1935, the farmers were asked to decide between a policy that would guarantee them stability and security in the future as against a continuation of the old, hazardous conditions. The result of the last General Election was justifiably accepted as an expression of approval on the part of a majority of the farming community of the guaranteed price principle. "On assuming office, the Government proceeded immediately to give effect to its election policy. After careful consideration of the most effective way of giving practical application to the principles already enunciated, the Government brought down the Primary Products Marketing Act, which became law on May 15, 1936. The whole objective of the guaranteed price procedure is summed up in thP short title, which describes the act as: 'An act to make better provision for the marketing of dairy produce and other primary products, so as to ensure for producers an adequate remuneration for the services rendered by them to the community.' Basis of Decision "The considerations which are to be taken into account in ascertaining an adequate remuneration are set out in sub-sections 4 and 5 of Section 20 of the act, and are worth repeating as they are fundamental in the whole procedure that has been followed in, determining the price to be paid for the past and the current season. For the first season (1936-37) it will be remembered that the price paid was on a basis of an average over the preceding 10 years, in accordance with the promise by Mr Savage made to the dairy farmers before he assumed office. The price paid in 1937-38, however, and the price to be paid for the current' 1938-39 season, are arrived at in accordance with the provisions of Section 20 of the act, which states: '(4) In fixing prices under v this section in respect of dairy produce exported after July 31, 1937, regard shall be had to the prices fixed under this section in respect of dairy produce exported before that date and to the following additional considerations, namely: (a) The necessity in the public interest of maintaining the stability and efficiency of the dairy industry, (b) ,the costs involved in the efficient production of dairy produce, (c) the general standard of living of persons engaged in the dairy industry in comparison with the general standard of living throughout New Zealand, (d) the estimated cost to the department of marketing the dairy produce concerned, and also thf cost of the general administration qf this act, and (e) any other matters to be relevant.' "In sub-section 5, the act states: 'Due regard having been paid to the several matters mentioned in sub-section 4 hereof, the prices fixed in respect of any dairy produce exported after July 31, 1937, shall be such that any efficient producer engaged in the dairy industry under usual conditions and in normal circumstances should be assured of a sufficient net return from his/business to enable him to maintain himself and his family in a reasonable state of comfort.'

Adjustment During Season

"To appreciate fully the procedure that has been followed and the decisions

that have been made it is necessary to bear in mind the following points: (1) The maintenance of the stability and efficiency of the dairy industry » a matter of national concern; (2) ">e community as a,whole has a responsibility to ensure that those performing an essential national service are afforded'a reasonable standard <*nv-- ;»,«. <*v an adeauate return must pe one which makes full aUowance tor °£e costs involved in the efficient production of dairy produce and is not therefore wholly dependent on overseas relations; (4) that the standard of living enjoyed »e S should be comparable with 'the stand ard enjoyed by other ™<gg§, of the community * en ™*£g. pniial service.- Last, the stana ards of costs and production per labour unit adopted should be determined with reference to the efficient farmer working under normal condi tions It is not, nor has it ever been, the intention 'of the Government to subsidise inefficiency or to pay a price based on abnormal farming conditl(? 'F S ollowing the investigation carried out by the second advisory committee which was set up inSeptember,l936 the Government gelded to buy butter produced during the last 1937-38 sea son at 13id per lb f.0.b., and p cheese at 7.54 d-per lb. In accordance, with the promise made to the dairy industry, that should costs prove to be at a somewhat higher level than those taken into account in fixing the price, the Government would consider tne position, an adjustment of the price was made later in the season whereby the price for butter was increased by a further .41d per lb, and the price for cheese by .21d per lb, bringing the total prices for the season up to 13.6bd and 71d respectively.

"Financial Implications"

"In announcing these increases in June, 1938, I made it clear that the essential principle of the guaranteed price was not in any way sacrificed, said Mr Nash. "It was an adjustment in recognition of cost increases, and in making the further payment the Government was influenced particularly by a desire to help to overcome the difficulty of obtaining farm labour at the price offering. "Acting in accord with the statement made early in July to the representatives of the dairy industry, the Government appointed the following persons to act as an advisory committee to examine the evidence" and to make a recommendation as to the prices at which the Government should buy butter and cheese manufactured between August 1. 1938. and July 31, 1939_the Hon. Sir Francis Frazer (chairman). Mr C. P. Agar, Mr H. M. Caselberg, Mr G. A. Duncan, Mr W. Marshall. Mr N. H. Moss, and Professor A. H. Tocker. In advising the committee of the work which the Government desired them to carry out. I, as Minister for Marketing, stated that the order of reference for the committee was contained in sub-sec-tions 4 and 5 of Section 20 of the Primary Products Marketing Act, which I have already quoted. "The committee, having heard evidence from the New Zealand Farmers' Union, the New Zealand Dairy Board, the New Zealand Co-operative Dairy Company, Ltd., the Eltham Cooperative Dairy Company, Ltd., representatives of dairying interests in Southland, the Acting-Director and another official of the Department of Agriculture, the Government Statistician and representatives of the Land and Income Tax Department, reported to the Government. A complete copy of the report has been handed to the press to-day. In submitting its recommendations based on the evidence submitted to it, the. committee in its report stated that 'it cannot make a definite findingregardingthe financial implications involved in the payment of the prices recommended. The decision as to both the prices to be paid and the financial implications involved is necessarily dependent on ■ general considerations of Government policy regarding finance, and the committee can therefore only submit its recommendations in accordance with its order of reference.' Committee's Recommendation "With this qualification the committee recommended that the basic purchase price of butter f.o.b. should be 15.605 d per lb, and the basic purchase price for cheese f.o.b. should be 8.775 d per lb. These.prices would give a butter-fat price for butter of 16.730 d (l»]d) per lb, and a butter-fat price for cheese of 18.750 d (183 d) per lb. "These prices are built iip on the following bases:—Working and maintenance, including depreciation,- 5.695 d; capital charges (interest), 3.375 d; labour reward, 9.220 d; totalling, 18.290 d; less pig returns 1.540 d, leaving 16.750 d. Adding 2d per lb, the butter-fat price for cheese becomes 18.750 d. These but-ter-fat prices, or payouts, would • be realised by the Government purchasing butter graded at points at 15.605 d per lb and cheese graded at 92-92 J points at 8.775 d per lb. "The purchase at these prices, suming that sales during the 1938-39 season realised the average of last season (118 s per cwt sterling for butter, and 68s 6d per, cwt sterling for cheese), would result in a deficit of £2,824,000. The .working and maintenance costs allowed by the committee show an increase of .625 d over last season's; the allowance for capital charges shows an increase of .315 d, based on a capitalisation of £75 a cow instead of £73 a cow allowed for the previous season;. The labour reward has been increased by 1.930 d over the sum allowed last season; from this increase, however* can be deducted the additional payment of £d per lb of butter-fat which increased the labour reward for last season to 7.79 d, so that if the additional . '. payment for last season to'the original labour reward the increase recommended would be 9.22 d less 7.79 d. or 1.43 d per lb of butter-fat. The figure for pig returns is the same as that allowed last season. Government Disagrees "These increases recommended by the committee, are as follow:—Working and maintenance .625 d, capital charges (interest) .315 d, labour reward 1.430 d—a total of 2.370 d. In the (pinion of the committee this price increase of 2.37 d was justified on the evidence and on the returns of farm production and costs submitted to it. Its recommendation as to price was based on an average butter-fat production an adult male unit of labour, of 5,7501 b. In arriving at this figure the committee took as a standard 2401 b of butter-fat a cow, and it related a 50cow farm to 2\087 adult male units of labour.

"The Government is of the opinion that a more correct standard of efficiency from the point of view of both farm and farmer would be represented by relating 48 cows producing 2501 b of butter-fat to two adult male units of labour. This standard could be expressed alternatively as relating to 50 cows producing 2401 b fat a cow. Accepting this standard of efficiency, which the Government after inquiry considers is likeljr to be more nearly correct than that of the committee, the production an adult male unit of labour is 60001 b of butter-fat. The Government having adopted this standard, the basic purchase price for butter becomes approximately 14.89 d per lb, representing a butter-fat payout for butter of 15.88 d per lb. Amount of Increase "This purchase price for butter represents an increase of 1.23 d per lb on the price for last season in terms of butter-fat payout; and for cheese the price represents 1.5 d per lb above the price for last season. On the question of butter-fat production a cow, the evidence was apparently insufficient to enable the committee to adopt a definite, single figure as representing an efficiency standard, and a range of 220 to 260 lbs was therefore accepted as a basis. The middle figure of this . range was 2401 b, and it appears that)

the committee worked on that A&ure. Tt i<? indeed well known that there is a wide rlnge of butter-fa.t production ? cow**™! tricts, and even from farm to farmi m the same district. Taking, this ana certain other factors h J"£Ji a*, undecided by the committee ****& count, the Government justihea £ adopting the figure of j£»»&« hutter-fat a cow, which is well witnin the range adopted by the committee, S iDla"e of the arbitrary figure of 2401 P b la accepted it- « consequenjal and approximately the same reward ta provided for management *md lab_ our as was recommended, by the com mittee. Dancer of Deficits reference, wWch ***g*-,&S& lhat P refard shall 6?86 to the general standard of living of pe£ons.enlaaed in the dairy comparison with the general-standard of Fiving throughout .New Zealand. If tiiis factor is not given itar correct weifiht a disparity Will arise that it wufnot be possible to overcome In the opinion of the Government the evi dlnce submitted to the committee indicated that were its recommendations Sven effect to in their entirety, such I disparity would inevitably follow. "There is the' further factor emphaS by the committee, of *rbach the - Government is bound to -J™ cogni S ance,\amely, the financial implications of the price determined, xms is a matter which the committee considered did not come within the scope of its order of reference, but which the Government, however, cannot ignore in considering the committees recommendation. .. "Heavy deficits, moreover, if repeated, must inevitably wreck the whole guaranteed, prices Procedure This statement is supported the committee's report where, on page 7 it says: 'A further relevant matter is ,tne necessity of ensuring that prices shall not be fixed at such Revels as will cause the breakdown of the system of guaranteed prices, which has been designed to stabilise the incomes of persons engaged in the dairying industry and to afford an insurance against the seasonal and inter-seasonal fluctuations of a -world market. it will be impossible to ensure the continuance of a reasonable state of comfort if prices are fixed at levels so high as to render it impossible .to avoid deficits in the Dairy Industry Account of such magnitude as necessarily to react to the detriment of the general standard of living of the community; though it is accepted that the community as a whole will bear such deficits as it may be necessary to meet in order to maintain the persons referred to in sub-section 5 in a reasonable state of comfort.' Composition of Price "The opinion of the committee m this regard is -reinforced by toe remarks oTMr R. H. McKenrie, chaurman of directors of the New Zealandl Cooperative Dairy Company,, Ltd., when sneaking at the annual meeting or tne companl in 1936. Mr McKenzie said: 'The surest way to end guaranteed prices would be to fix the pnceata figure which would result in a big deficit.' The Government is satisfied that the working dairy farmer does not wisn to end the guaranteed price Procedure. It recognises, however, that he desires, and is entitled to. a reasonable recompense for such increased costs as have been experienced, and a better labour "Having regard to these considerations and to present price levels and living standards Zealand, the Government is of the opinion.that the prices that should be paid; this season to lift the farmers' standards in sonable relationship with other standards are 14.89 d per lb for butter, and 8.42 d per lb for cheese. These pricer will allow the average efficient dairy factory comDany to pay to its suppliers , 15.88 d per lb for butter-fat for butter., and 17.88 d per lb for butter-fat Sot cheese. The make-up of this price jis as J follows:— Working and maintenance costs 5.424 d, capital charges (interest) 3 214 d, labour reward 8.728 d. a total of 17.420 d; less return from pigs, 1.54 cL leaving 15.88 d. Estimated Deficiency "On the estimate of a continuance of last year's realisations for butter and cheese, these prices will result in a deficit of £1.535.000. If from this sum is deducted the estimated surplus for last season of £600.000, the net deficiency at the end of the 1938-39 season will be approximately £ 935,000 The Government, to .provide a sure return to the dairy farmer and to maintain the stability of the industry is willing to take the responsibility,ofv paying'these prices. It will interest dairy farmers to. know that the figures to hand show that the average payout last season for butter-fat, for butter amounted to' 14.83 d, which is .45d in excess of the basic -return ;from,;the guaranteed price for last season If a like excess in pay-out results for the" present season, the average pay-out for butter-fat for butter should be 16.33 d per lb or lid per lb better than last season. Prices for Various Grades "The result of the Government's decision will mean that the whole of the proceeds of last year's sales will, in effect, be paid to the dairy farmer, and unless prices rise the deficit in the account for the 1938-39 season will be approximately £935,000. Following this decision, the Government proposes to issue an Order-in-CounCil. to provide for the purchase of all butter and cheese manufactured for export at the following prices:— "Butter —For 'finest' grade, 94 points and over, 15.015; for 'finest' grade, 93 points and under 94 points; - the basic price of 14.89 d; for 'first' grade, 92 points and under 93 points., 14.8275 d; for 'first' gradei 90 points and under 92 points, 14.64 d; for 'second' grade, 14.14 d.

"Whey Butter—For 'first' grade, 13.89 d; for 'second* grade, 13.39 d. - "Cheese—For 'finest' grade, 94 points and over, 8.57625 d; for 'finest* grade, 93 points and under 94 points, 8.545 d; for 'first' grade, 92 points and under 93 points, the basic price of 8.42 d; for 'first' grade, 91 points and under 92 points. 8.3575 d; for 'second' grade, 8.17 d. "Sales on the local market will be adjusted to ensure that the realisations will be equal to. the price paid for export. When the Order-in-Council is gazetted, the Government will arrange for the prices to be permanent for the season, and no reduction whatever will be made. ■ > ■ - Last Season's Operations

"For the information of the dairy •farmer, I give the following details of the results of the operations for the last season. The position in regard to purchases and sales of butter and cheese for the 1937-38 seasph is that in respect of butter 125,800 tons have been sold to date at an average London market price of-117s 9d per cwt, showing a surplus of £440,000. • In respect of cheese, 69,700 tons-have been sold to date at an average London market price of 68s 3d per cwt, showing a deficit of £24,000. Thus the "approximate net surplus on butter and cheese sales at to-day's date is £416,000. The quantities unsold are butter 13,700 tons, and cheese 15,300 tons. Assuming that the unsold butter will realise 122 s per cwt, and the unsold cheese 71s per cwt, the estimated surplus in the Dairy. Industry Account for the 1937-33 season will be £600,000, representing-a surplus on butter of £65.000, and a surplus on cheese of £35,000."