THE PRESS SATURDAY, JULY 2, 1983. A limit to money at 1 per cent

Press, 2 July 1983, Page 16

THE PRESS SATURDAY, JULY 2, 1983. A limit to money at 1 per cent

The limiting of the amount of money that the Dairy Board is able to borrow from the Reserve Bank at 1 per cent interest will undoubtedly affect the profitability of the dairy industry. No-one can foresee exactly how much it will cost the industry. The estimate by the board’s chairman, Mr J. Graham, that it will cost each farmer at least $2400 in the coming year is not universally accepted. The amount of money to be borrowed had been expected to exceed even the billion dollars that the board had borrowed on January 26, February 23, and March 2 this year. The extra interest that the board will have to pay will be shared among New Zealand’s 17,000 dairy farmers. However, the amount borrowed fluctuates. At the moment it is not far off the $750 million that the board will still be able to borrow at the concessionary rate. Many industries would like to be able to borrow money at 1 per cent interest. The fact that the Dairy Board was able to do so is something of an anomaly. The scheme was introduced in the mid-1980s. This historical perspective is important. The dairy industry was then in dire straits and some farmers had to abandon their farms. The 1 per cent money helped in the establishment of sound marketing. The second important historical point is that, at the time, Government stocks were paying about 2.5 per cent interest. The 1 per cent interest rate was concessionary then; but the concession today compared with the present interest rates of 12 per cent upwards, is a large one. As interest rates climbed, there was no adjustment to the interest rates charged by the Reserve Bank to the Dairy Board. The Dairy Board has not been the only producer board eligible for 1 per cent loans. It has been, however, the only substantial borrower. The Meat Board has access to 1 per cent loans for the Meat Industry Stabilisation Account, though not for marketing. The Apple and Pear Board has access to the 1 per cent money, but its borrowings have been minor. The Dairy Board uses the money as an advance against stocks; this means that farmers get paid for the milk they deliver before the Dairy Board sells the dairy produce. This is a necessary arrangement and in no way exceptional. Some distortions have been evident because of the availability of 1 per cent interest rates to the dairy industry. One is that the holding of stocks costs less when the money to finance them is borrowed at 1 per cent than it would on

money borrowed at commercial rates of interest. This means that dairying is more profitable and, in turn, this is reflected in the price of land for dairying. The competition for land from horticultural producers also adds to the high price of land in some areas. The Government appears to have moved for two main reasons. One is that the amount of money borrowed by the Dairy Board in recent months has affected the general money supply in the community. The Government is trying to keep a grip on money supply, and has committed itself to high rates of interest to attract lenders so that the supply is reduced. The second reason is that there is a general move to try to make some of New Zealand’s export support schemes come closer to what New Zealand is obliged to observe under international treaties. The Minister of Agriculture, Mr Maclntyre, who announced the move, said that the 1 per cent money could be portrayed as a subsidy. In time, the Government will want to stop export incentives because they offend the subsidies code of the General Agreement on Tariffs and Trade. The extent to which the Government should pick on interest rates is debatable because interest rates might be one avenue that the Government should choose to explore if it wants to continue to support certain export industries but to do away with the present export incentives scheme. A rate of 1 per cent would nevertheless seem to be carrying matters too far. The dairy industry is a major earner of overseas funds; about $1.4 billion last year. The Dairy Board has shown great enterprise in diversifying the dairy products and in finding new markets. Both these efforts will have to continue. In fixing a ceiling for the cheap loans, the Government has not shown any real lack of confidence in the future of the dairy industry, but has moved so that its own monetary policy is not threatened; and it has tried to make one more industry lose part of a subsidy and came closer to standing on its own feet in the market. The dairy industry has not had to be supported as much as the meat and wool industries. The industry will be hurt, though certainly not devastated by the move. The drop in the price of butterfat for the coming season certainly makes the timing of the Government’s move open to objections from the dairy farmers, though it was a step that should have been taken some time ago.