Burden of Mortgages

Sun (Auckland), Volume I, Issue 127, 19 August 1927, Page 13

Burden of Mortgages

Main Factor of Farm Problem

Wage-Reduction a Minor Issue

THAT inflated land values and high mortgages must be regarded as the main contributing factor in the difficulties surrounding the farming industry in New Zealand is the opinion of Dr. H. Belshaw, Professor of Economics at Auckland University. In a luncheon address before the Auckland Chamber of Commerce yesterday Dr. Belshaw said that any reduction in wage costs which the worker is likely to accept would not materially relieve the situation. He estimates the annual mortgage interest burden on the farmers of the Dominion at £9,000,000 which needs to be reduced by at least half to place it in the same relationship with export prices as existed in 1914.

YV'ITHOUT long- and exhaustive research, said Dr. Belshaw, it is impossible precisely to state the present real net income of the farming community. It could be hoped, however, to express the present economic position of the farmers in terms of greater or lesser prosperity, relative to a given previous period. The general questions to which an answer is attempted are: Is the real net income of the majority of farmers greater or less than in the years prior to the war? What factors have led to the present economic position of the farmer? Apart from temporary set-backs, agricultural and pastoral industries may be regarded as having enjoyed conditions of buoyant prosperity during the whole period of rising prices between 1893 and 1920. If it can be shown that the purchasing power of the farmer’s net money income is equal to, or greater than in, say, 1913 or 1914, then he has little cause for complaint. If, however, an analysis of his present position suggests that it is appreciably worse than in those years, his position is unsatisfactory. Neglecting the satisfactions which the farmer derives from the consumption of home-grown produce, his real net income is obtained by subtracting farm costs from gross money income and dividing this amount by the retail price index of the commodities which the farmer and his family consume. For the approximate purposes of this inquiry the index number of export prices may be taken as a measure of changes in the gross income of the farming community, though changes in the costs of processing, marketing and transport may affect the situation. PRICE RELATIONSHIP It is important, as a preliminary, to examine the relationship between the wholesale prices of agricultural commodities, and retail prices of commodities entering into the farmer’s domestic budget. In table 1., the export prices of dairy produce and of all exports are compared with retail prices of -groceries, clothing, footwear and miscellaneous items as given in the Official Year Book. The figures are expressed as a ratio by dividing the retail index into the export indices. The results are set out in columns 4 and 5. When the ratio rises above 100, the price relationship is beneficial to the farmer; when it falls below 100, the ratio is injurious to the farmer. TABLE I. Export Prices.

Base average, 1914 —100. An examination of the table shows that the farming community as a whole benefited from the price relationship during the years 1914-1918, but suffered during the whole of the rest of the period except in 1923 and 1925. The dairy farmer benefited during the years 1914-17 and in 1923, but suffered during the rest of the period. In short, if the movement of farm costs be neglected, the relationship of export prices and prices of household goods purchased at retail has been disadvantageous to the farmer during almost the whole period proportionally to selling prices, though variations in net money income may offset or exaggerate the price-relationship factor. MOVEMENT OF COSTS It is not possible to obtain a precise estimate of the movement of farm costs, but some light may be thrown on the problem by an examination of the movement of wages, the movement of the cost of farm requisites, or “producers’ goods,” and the movement of annual interest charges in respect of land. Export prices and both nominal and effective wages are compared in Table IT., the figures again being expressed as a ratio in columns 5 and 6, by dividing nominal wages into export prices of dairy produce and all exports.

As compared with 1914, the dairy farmer benefited from the relationship between export prices and wages during practically the whole period under review, except for the years 1926-27. The farming community as a whole benefited except in the years 1922, 1923 and 1926. The purchasing power of the money wages of agricultural labour has been less than in 1914 during the period of 1918-1927. While the failure of wages to fall in sympathy with export prices during the years 1926-1927 has imposed a burden on the dairy farmer (and in 1926 on farming in general), it must not be overlooked that the wage earner most decidedly did not share proportionally the gains of the years of prosperity. A reduction of wages to the extent of less than 10 per cent, in 1926 would have effected a return to the 1914 parity, while present market prospects suggest that a smaller adjustment would suffice in coming months—if, indeed, any is necessary at all. According to Dr. Belshaw’s estimate, the reduction referred to would have saved each farmer less than £l3 a year, assuming that labour was distributed evenly among all farmers, or about £lB a worker. The'fact cannot be escaped, however, that if other cost-price relationships were the same as in 1914, the present burden of wages

would scarcely be sufficient to account for the existing depression. The cost of producers’ material required in the farming industry are compared with export prices as before, in Table 111.

The table suggests that the dairy farmer suffered from the relationship between export prices and prices of farm requisites (as compared with 1913) in the years 1914-1915, 19181920, which were scarcely years of depression, and very slightly in 19251926. Farmers in general suffered during the years 1920-1922. Except in reference to farming as a whole in 1921-1922, it does not seem that the disparity between prices of producers’ goods and farm materials has been an important element in depression. LAND VALUES The main cause of depression in recent times is, continued Dr. Belshaw, the high value of land which changed hands during the years preceding and up to 1922. There has been no exhaustive inquiry into the movement of land values in New Zealand as a whole, but figures have been collected and compared by means of index numbers for Canterbury by Mr. H. R. Rodwell, M.A. These figures cannot be taken as an exact picture of the movement of land values over the whole of New Zealand, but they under state the extent of land inflation in the country as a whole. These are as follow:

“I should be surprised indeed,” said Dr. Belshaw, “to find that a farmer could earn a larger real net income at the present time, or indeed for the next ten years, who paid more for land than its market price in 1914, apart from any increase in value due to improvenients. My own estimate places the area which changed hands during 1915-1924 at slightly under half of the total occupied area, and I conclude that annual charges in respect of this land are the greatest real burden pressing on the majority of such farmers as are in difficulties.” MORTGAGES AND CREDIT If the total agricultural indebtedness were placed at £150,000,000, the estimate would probably err on the side of caution. This represented an annual interest charge of not less than £9,000,000. In order to bring this charge to the same relationship with export prices as existed in 1914, it would have to be reduced by at least half—-say, £4,500,000. In short, the sum involved in bringing this item to the 1914 parity is four or five times greater than the sum involved in bringing wages to the 1914 parity with export prices. At the same time, the farmer frequently finds it difficult to obtain the necessary short period or intermediate credit on reasonable terms. This is due partly to a lack of confidence on the part of investors in agricultural industries and partly to the large volume of credit which is locked up in urban and country mortgages—a sum not far short of £280,000,000 in 1926. Another factor of importance is the divergence of investable funds into tax free debentures or local body stock. This amount totals some £70,000,000, and because of its lower tax rate has indirectly resulted in a raising of the rate of interest to farmers. Since 1920 an increasing share of the products of the soil has been going to those who have lent money to the farmer. To bring the farming community back to its 1914 position, this charge would have to be reduced by approximately one half. The disparity between retail prices and export prices has reacted prejudicially on farmers as a whole during almost the whole period since 1917. These two conditions are the primary cause of the recent depression. Since 1922, farming, in general has gained from the ratio of export prices to prices of producers’ goods, and dairy farmers have suffered slightly in 1925-1926. Had the 1914 relationship between these factors and export prices persisted, the farmer would have gained appreciably from the lag in wages, except in 1922 and 1926. Although a fall in wages in 192 G would have relieved the situation somewhat, especially in reference to the cost of clearing new land, it should be remembered that the worker did not share appreciably in the benefits of boom years. An efficient system of credit will do much to relieve the position, but the only complete remedy is the slow liquidation of the over-valuation and over-mortgaging of land, painful and unacceptable as this may be. “U NPALATABLE FACTS.” “New facts have been put before us,” said Mr. A. G. Lunn, president of the chamber, at the end of the lecture, “and palatable or unpalatable as they may seem, we must recognise them as true.” Mr. C. C. McMillan, who was president of the chamber in 1882, moved a motion of appreciation, saying that the only cause of depression missed bv the professor was that of the system of protection. He hoped the chamber would exert every effort to prevent fresh tariffs adding to the burden of the unfortunate farmer.

(1) Dairy (2) All Retail Ratios. Year. Produce. Exports. Prices. (1) , (2) 1914 . 100' 100 100 100 ’ 100 1915 . 108 119 110 98 108 1916 . 130 138 122 107 113 1917 . 160 157 142 106 116 1918 . 151 162 165 92 99 1919 . 168 167 190 88 88 1920 . 174 164 221 80 75 1921 . 214 182 217 99 70 1922 . 144 114 189 76 60 1923 . 156 140 143 109 100 1924 . 159 150 173 92 92 1925 . 146 170 168 87 101 1926 . 136 138 165 82 84 1927 . 125 134 164 77 82

TABLE II. Export Prices. Wages. (1) (2) (3) C4> Ratios. ear. Dairy All. Nom. EfCec. (1) (2) 3914 .. 100 100 100 100 100 100 1915 .. 108 119 — — 108 114 1916 .. 130 13S 121 104 116 122 1917 .. 150 157 129 100 111 J19 1918 .. 151 162 136 95 117 116 1919 .. 168 167 144 92 115 108 1920 .. 174 164 152 86 141 100 1921 .. 214 152 153 86 100 78 1922 .. 144 114 145 91 105 95 1923 .. 156 140 148 94 108 108 1924 .. 159 159 147 92 99 116 1925 .. 146 170 148 91 92 93 1926 .. 136 138 148 91 89 101 1927 . . 130 149 147 91 — —

TABLE III. Export Prices. 3. Ratios. Year. 1. Dairy. 2. All. Material. (1) (2) 1914 ’. 104 111 10S 96 103 1915 . 120 132 128 94 103 1916 . 135 153 130 104 11S 1917 . 156 174 147 106 112 1918 . 157 180 171 92 105 1919 . 175 185 178 98 104 1920 . 1S1 182 220 84 S3 1921 . 223 169 ISO 124 94 1922 . 150 127 14S 101 86 1923 . 162 155 143 113 10S 1924 . 165 177 162 102 109 1925 . 152 189 156 97 121 1926 . 141 153 147 96 104 1927 . 130 149 129 101 116 (Base average, 1909-1913—100.>

Index Index Year. Land Values. Year. Land Values 1914 .. 100 1920 .. 160 1915 .. Ill 1921 .. 143 1916 .. 113 1922 .. 135 1917 .. 115 1923 .. 114 1918 .. 115 1924 .. 108 1919 .. 133 1925 .. 141