Keith Woodford, honorary professor of agri-foods systems at Lincoln University, said New Zealand’s commodity-based dairy industry, along with the lack of capital gains tax, created “a perfect storm for risk-taking behaviours”.
Writing on the Pundit blog, economist Brian Easton examined the dairy industry’s downturn in the context of NZ’s history of farming slumps and surmised a capital gains tax would discourage speculation on farm land which stoked debt and had disastrous consequences when the bubble burst.
Farm land prices boomed during World War I, he noted, but when farm product prices collapsed in 1920 farmers walked off their land as they had borrowed to buy their farms and could not service the debt when their revenues shrank.
Much the same seemed to have happened during the Long Depression of the 1880s, and at the start of the Great Depression last century.
Again, they walked off their land and history almost repeated with the removal of land price controls by the first National Government after World War II. But a boom in wool prices in the early 1950s enabled farmers to ease their debt burden.
Easton suggests farmers were carrying too much debt again in the late 1970s. National Prime Minister Rob Muldoon bailed them out with supplementary minimum prices and other measures.
When David Lange’s Labour Government removed these in the 1980s, some farmers could not service their debts and had to abandon farms.
“It seems to be happening again,” Easton said, noting how the surge in Chinese demand for dairy products had encouraged dairy farmers to increase supply, in part by borrowing to buy more land. International dairy supply inevitably caught up, prices collapsed and some farmers were struggling to service their debt.
Musing on why the lessons of history were ignored, Easton said too much of NZ’s farming was for capital gains.
“Too many farmers are willing to take low incomes relative to their assets and their effort, in return for a large capital sum when they sell out,” he wrote.
Big capital gains usually require ‘high gearing’ (high debt to income) – as high as lenders will allow. At that point debt financing becomes speculation and a crash is unavoidable.
It was too late to stop the consequences of the most recent round of speculation. Innocents who were not beneficiaries of the upswing would be among those who paid.
But measures to dampen future booms should be considered, Easton said. His “easy solution” was a comprehensive capital gains tax. He acknowledged it was not obvious how such a tax could be introduced.
“It ought to be obvious, though, that having a leading economic sector integrally dependent on a boom-and-bust speculative cycle is not in our best interests.”
Woodford said Easton raised many valid points.
“There is no doubt that New Zealanders farm for capital gain and this is particularly the case with dairy,” he said.
“Undoubtedly, this situation distorts investment decisions.”
Internationally, NZ was unusual in not taxing gains on business assets, Woodford said.
But “the politics of a capital gain tax are complex and influential people have much to lose”.
The scope for a “bubble burst” was considerable, Woodford agreed, although it was easier to see bursts in hindsight and nothing was certain.
“When bubbles burst, many people get hurt, but the powerful with assets to leverage tend to become more powerful,” he said.
NZ had built a dairy industry that was largely commodity-based and vulnerable to high price volatility. The risk-taking behaviour fostered by this and the lack of a capital gains tax could be greatly rewarding for those who got their timing correct through good fortune.
Woodford said there was no doubt considerable international funds were waiting in the wings.
Jacqueline Rowarth, professor of Agribusiness at the University of Waikato referred to an article she had written two years ago on capital gains related to housing, saying a capital gains tax didn’t appear to affect valuation or ownership. In Britain bad behaviour in land investment had been encouraged by attempts to avoid such a tax.
In theory, in the same way a capital gains tax on housing would drive up rents, on agricultural land it would drive up food prices, she said. Farmers would still lose their land when costs of production were greater than the price for product received.
“Who would be able to buy? Corporates – and they are the very ones most able to wriggle out of taxes,” Rowarth said.
She suggested instead of taxes the Government should look at the regulatory environment in which farmers and processors were trying to operate and consider what might enable them to act more efficiently.
“I don’t think that farmers accept low prices and then capitalise on selling – they simply haven’t the alternative in terms of high prices, at least most of the time,” she said.
“And the banks have lent money for environmental compliance and resilience on the basis that there is an asset.”
