End Irrigation Subsidies For Dairy Farmers

The NBR this morning has an article that doesn’t include any commentary, but tells us that “without local council and government subsidies, irrigation projects couldn’t go ahead”. (PAID)

The dairy farming industry is a business, and as such should bear the costs of capital projects that primarily benefit their business interests. Statistics New Zealand recently released a document that shows that more irrigated land leads to higher agricultural production.

This is a good thing! More agricultural production is wonderful. But how can an industry be profitable or an efficient use of resources if it relies on subsidies to finance irrigation projects that primarily benefit agriculture?

Some ratepayers are more equal than others – farmers pay higher rates but receive disproportionately higher benefits in the form of capital projects they contribute to at a rate far below what they would have to if the irrigation projects were financed by more targeted rates levies.

With a low rate of return on assets, the deification of the agricultural industry as some reality-defying, economic principle-bending, accounting standards-reinterpreting “special case” is insane. It is even more insane when you realise that banks are lowering their agricultural debt exposure (finally!) because they are aware that high commodity prices won’t last forever.

Irrigation subsidies for dairy farmers and other agricultural enterprises are inefficient. Industries should rise and fall on their merits, not because they are able to engage in capital gains farming on the back of other ratepayers who will never have the opportunity to benefit from asset-price inflation.

If local councils wanted to more efficiently allocate the cost of these irrigation schemes, they could monitor production and profitability of agricultural enterprises in their district and increase rates proportionally to recover the massive risk of borrowing to finance a capital project at the peak of a commodities boom.

It is unlikely that the hysteria of the farming special interest groups will be muted by reasonable analysis of the facts. Therefore, expect Think Big (Milk Solids Edition) to progress without interference from people with a clear understanding of how special interest groups can shift the risk of large capital projects onto “everyone else” by claiming that the “benefits to the community” offset the cost of the higher rates and opportunity cost of what the local councils could have spent on what the people of their districts may want.

Over at Whaleoil a few months ago, Cameron Slater said my comment on a Hawke’s Bay irrigation scheme was the Comment of The Day. For your reading pleasure I’ll reproduce it here:

If the farming sector is so productive and profitable, or would be made so by this dam, why do they need to get every other ratepayer to chip in?

If they really needed it, and weren’t just looking for a handout they’d write the cheque themselves.

The farming sector’s return on assets is dismal. If it wasn’t for capital gains and the tens of billions of dollars banks can’t afford to write down on agricultural debt the loans would have been called in years ago.

Interest cover ratios are abysmal in agriculture.

As for sports stadiums, the economic literature and real world experience is clear they are a waste of money.

There is no difference between saddling Hawke’s Bay ratepayers with a $600 million “productivity enhancing” boondoggle and Dunedin ratepayers $200 million stadium for a rugby union that traded while insolvent.

Both force higher rates in the long term for something they might not even benefit from.

Just look at the Mangawhai sewerage system stuff up!

This stuff is the depressing side of economics. We know that something is clearly wrong, but there is simply no way short of a meritocratic dictatorship that would lead to sensible policy like making industries internalise the cost of capital projects that primarily benefit their bottom lines while imposing costs on everyone else.