Dynamic effects of the statutory single-buyer status
Dynamic benefits of reform are generally realised over a period of time, and are likely to be reflected by increasingly efficient resource use. Dynamic benefits largely flow from competition. To capture them it is therefore important to allow competitive exporting and competitive neutrality between exporters.
The potential dynamic benefits of Producer Board deregulation are likely to derive from:
- Greater opportunities for, and incentives to, innovate
- More flexibility and responsiveness to markets
- More investment and technology
- More efficient capital utilisation
- market signals are less likely to be confused. As such, true returns will be factored into investment decisions, which will improve the quality of investment decisions; and
- boards and dairy companies will have clearer objectives and will therefore be more able to concentrate on value creation. Boards and dairy companies will also be able to invest capital outside producer board industries if this is a value maximising strategy.
- Ability of producers to access their off-farm capital
- More opportunities to add value
Deregulation will reduce restrictions on innovation in products, market development and marketing techniques. Potentially innovative exporters must currently apply to the Producer Boards for an export consent, in the process divulging confidential product and market information. In practice, this has proven to be a barrier to exporting and consents have been given only for relatively small volumes. More innovation will, over time, generate a faster export and industry growth rate.
South Africa provides an example of the potential for innovation in a deregulated market where, since grape exports were deregulated, the number of brands grapes are exported under has increased from 4 to about 40.
Deregulated industries are likely to be more responsive to market conditions because (a) they will have direct access to market information, including prices (this will decrease the costs of return bundling (dairy) and return pooling); and (b) exporters will have a strong incentive to adjust quickly to market conditions so as to ensure they can retain producers’ supply by offering the best returns.
Deregulated Boards will also have greater commercial freedom and flexibility to pursue market opportunities and raise capital, because they will not be impeded by the need to seek legislative change.
Considerable new investment in marketing activities, production and post-harvest infrastructure has occurred post-Producer Board deregulation in the Israeli and South African fruit industries[19]. In Israel, this has taken place despite significant restriction of foreign investment.
Producer Board legislation generally excludes the raising of equity from investors outside the dairy, apple and pear, and kiwifruit industries. Deregulation will increase opportunities for new investment, from New Zealand and from overseas. Foreign investment, in particular, is likely to significantly benefit to the industry because it is likely to be accompanied by new technologies from overseas and be associated with access to wider marketing channels. Inflows of overseas technology are also likely to occur as overseas customers assist producers to develop their capability in meeting market demands.
Over time, deregulation can be expected to lead to better investment decisions because:
Although Boards’ capital productivity performance is difficult to determine due to a lack of information and counter-examples, the available evidence suggests that it is likely to be sub-optimal. Ireland Wallace and Associates (1994) studied returns on off-farm assets in the dairy industry and found that there was probably a far lower-than-competitive return on capital. The Apple and Pear Board appears to be overcapitalised onshore and has found it difficult to divest coolstores. This capital is sunk but new investments would be subject to more constraints.
More efficient capital utilisation will benefit producers - as the owners of boards and dairy companies – through an increase in the value of their shareholding. It will also have wider economic benefits as New Zealand’s scarce capital stock becomes used more productively.
Under the current “compulsory cooperative” system, producers involuntarily contribute capital to the Boards (and, in the case of dairy, processing cooperatives). At book value, this amounts to approximately $200,000 per average dairy farm; $65,000 per apple orchard and $6,500 per kiwifruit orchard[20]. In a deregulated system, producers would have control over where they chose to invest that money (again, this is largely a “compulsory cooperative” problem).
Allowing investors choice of where to invest their funds would provide strong incentives for the Boards – regardless of the corporate form they choose – to use capital efficiently, and therefore give a satisfactory return on equity. Capital tied up unproductively could also be used in other industries or to fund industry growth.
Deregulation is also likely to mean that downstream industries will have greater opportunity to add value to New Zealand, if they find it profitable. This is currently impeded by the fact that organisations wanting to export products which have a significant component of, say, dairy produce[21], must apply to the Dairy Board for an export consent.
The foregone opportunities to add value represent costs to the wider economy of the current regulations. However, deregulation would also provide a benefit to producers by potentially increasing demand for their produce.
It is not possible to model the dynamic effects of Producer Board deregulation with any accuracy. However, the dynamic benefits of competition and regulatory reform have been well investigated. Empirical estimates of dynamic gains in areas as diverse as intra-European Union trade liberalisation and the impact of introducing competition to various sectors suggest that the dynamic benefits of reform are often between 1.5 and 8 times as large as static benefits.
Examples include Cecchini (1988); Romer (1994); Blöndal and Pilat (1997). Some of these benefits may have accrued to consumers (and in the case of Producer Boards, this would not necessarily contribute to the New Zealand economy but would require pre-existing market power). However, all of the benefits discussed above – and the dynamic benefits discussed in the literature - suggest that dynamic benefits will also accrue to producers.
As illustrated in table 3, other countries that we are aware of which have deregulated their Producer Board structures have all experienced higher export growth rates post-deregulation[22].
| Country | Product | Year of deregulation | Export growth rate pre-deregulation | Export growth rate post-deregulation |
|---|---|---|---|---|
| South Africa | Citrus, Deciduous Fruit[23] | 1997 | 8% per year (4 years preceding deregulation) | 23% per year* |
| Israel | Citrus | 1991 | -7% per year (7 years preceding deregulation) | 4% per year |
| Uganda | Coffee | 1990 | Flat (5 years preceding deregulation) | 18.6% per year |
| Morocco | Fruit & vegetables | 1986 | Flat (5 years preceding deregulation) | approx. 17% per year |
| Ivory Coast | Pineapples | 1990/91 | -3% per year (4 years preceding deregulation) | 4% per year |
*this is growth in volumes of deciduous fruit only in the first deregulated season. Numbers for value and citrus are not yet available.
Sources: DFPT (1998); Citrus Marketing Board of Israel; International Herald Tribune (1997); Uganda Coffee Trade Federation; Azoulay (1995).
Notes
- [19]The experience of the South African deciduous fruit and citrus industries is more appropriate than the experience of other deregulated South African industries because the fruit industries are export focused.
- [20]Including the cost of KNZ’s new computer system. Source: Annual reports (NZDB and dairy companies, Kiwifruit New Zealand, Apple and Pear Marketing Board)
- [21]In the case of dairy, an export consent is required for all products containing over 30% dairy products. This covers products such as shortbread and ice cream.
- [22]Deregulation was undertaken in these countries for a number of reasons. In contrast, New Zealand would be primarily concerned with the economic outcomes, which this report examines.
- [23]All agricultural products were deregulated but the figures in this table are for oranges and deciduous fruit.
