assistance to entry into farming in new zealand

Agricultural Administration 21 (1986) 95-l 18

Assistance to Entry into Farming in New Zealand

W. J. K. Thomas

Agricultural Economics Unit, University of Exeter, Lafrowda House, St German’s Road, Exeter, EX4 6TL, Great Britain

(Received: 20 March, 1985)

SUMMARY

Apart from the fortunate minority who take over the family farm unhindered by any problems of inheritance, entry into farming poses many d@culties for those wishing to come into the industry. Because of the activities of several agencies, in particular those of the Rural Banking and Finance Corporation, young New Zealanders have much assistance in their efforts to startfarming in their own right. Thispaper examines the various schemes availablefor thispurpose in New Zealand. It is a country so highly dependent on the contribution of agriculture to its national economy that it is almost incumbent on the part of the authorities to facilitate the establishment of the next generation offarmers in order to preserve the country’s economic well-being. Whether New Zealand’s experience in this activity has any relevance in other parts of the world is a matter for conjecture but the information in this paper should assist in that consideration.

INTRODUCTION

It goes, almost without saying, that a would-be entrepreneur wishing to set up his first business faces many obstacles. Farming is no exception to this generalisation save for the favoured few who take over the family farm unencumbered with the difficulties of a divided inheritance. As the successful future of any industry, trade or profession is dependent on the regular intake of enthusiastic and qualified newcomers, it would seem

95 Agricultural Administration 0309-586X/86/$03.50 6 Elsevier Applied Science Publishers Ltd, England, 1986. Printed in Great Britain

96 W. J. K. Thomas

incumbent on the present generation of entrepreneurs to provide the opportunities of entry for their successors. In farming, comprised as it is of many thousands of businesses of all sizes, this matter is of extreme importance and there is much concern about it in the United Kingdom as, no doubt, there is in many other countries. The following quotes may express the thoughts of many. Thus Bunting2 has spoken of the need ‘for drastic changes in the tenancy laws and more opportunities for share farming. Without them young people, whose parents are not owner- occupiers, have no chance of setting even a foot on the first rung of the farming ladder’. The Northfield Committee4 also recognised ‘that young people wishing to farm face considerable difficulties because of the shortage of tenancies and the high cost of establishment as an owner- occupier’.

In the United Kingdom there is no official programme to assist young farmers to get started on their first farms except for the statutory provision of County Council Smallholdings under legislation dating back to 1892 and consolidated under the Agriculture Act 1970. Even this provision, however, is being eroded as Councils amalgamate their very small holdings to form economically viable units while some Councils are selling off their smallholdings in the interests of economy or capital accumulation. In New Zealand the position is very different, possibly because farming is such an important part of the national economy that there is almost a compulsion on the authorities to ensure the healthy future of the industry through the inflow of well-qualified young people. An examination of the various schemes of assistance available to these young people is the main content of this paper but first a few facts about New Zealand’s agriculture are given to set the later information in perspective.

NEW ZEALAND AGRICULTURE

The main types of farming, of occupier and forms of tenure are shown in Table 1.

The area of occupied farmland is 2 1.2 million hectares of which arable crops use only 2 per cent while grassland and rough grazings occupy 67 per cent. Grazing livestock are, therefore, of paramount importance in the farming economy, with 2 million dairy cows, 1.9 million beef cows and total cattle 89 1 million (UK 13.2). Ewes number 48 million and ewe

Assistance to entry into farming in New Zealand 97

TABLE 1 Types of Farming, Occupier and Tenure in New Zealand

1980 ‘000

1980 1979 % o/o of land

Type of farming: Mainly dairying Mainly sheep Mainly beef Mixed livestock Other Idle and unused

Occupier : 15.6 Individual owners 25.9 Partnerships

8.2 Private registered 4.0 companies

11.7 Trusts 6.2 Others”

Tenure: 56 Freehold 50 29 Crown land 43

Leasehold 6 10 Other land 1 3 2 100

Total 71.5 Total 100

a Government, local authorities, public companies, co-operatives and other organisations.

hoggets 14 million, giving a ratio of total breeding sheep to the human population of 20 to 1 compared with about 1 to 2 in the UK.

The data in Table 1 indicate that the typical New Zealand farmer, in terms of business structure and tenure, is either an individual owner- occupier or an individual tenant of Crown land, with partnerships forming the second largest section of the structure.

Of relevance in this study of entry into farming is a brief examination of the land market in New Zealand, for the difficulty and expense of obtaining land is one of the major obstacles to entry. In this resume of the land market, it is fortunate that the Government’s Valuation Department collects and publishes a great deal of information, but unfortunate that the definition of buyer-type was changed in the period under review. Table 2 gives some recent statistics. It is of interest to note that the most frequent buyers of freehold rural land were existing farmers, who accounted for 53.4 per cent of these sales in the year to June 1982. They, therefore, represent the main competitors to would-be entrants to the industry in the latter’s attempt to acquire land. Businessmen are also strong competitors, acquiring land for tax or investment reasons but, while they may deny new entrants the opportunity to own land, they may well provide openings for aspiring farmers. They do so by forming partnerships or entering into share-farming agreements with the young, qualified persons providing the farming skills to work alongside business capital. New farmers accounted for 25-30 per cent of freehold sales in

98 W. J. K. Thomas

TABLE 2 Rural Farmland Sales

6 months to

I980 June Dee June I981 1981 1982

Freehold sales Buyer type: Existing farmer” 2431 1296 1451 1056 New farmer 1463 789 650 541 Businessman 555 315 468 395 Government, local authoritiesb 18 28 Other 270 135 48 38

Sub-total 4125 2595 2635 2058

Other sales Family Leasehold Other

1288 466 198 n a 363 113 115 n a 599 324 788 n a

Sub-total Total sales

2250 903 1761 n a 6975 3498 4396 n a

“The definitions of buyer-types were changed as from July 1981, prior to that date the ‘Existing farmer’ class comprised two sub-classes entitled ‘Farm enlargement’ and ‘Changed farms’; because of this, the series is not exactly comparable though adequate for the purpose of information. b See ‘, this class was not distinguished in the earlier classification. Source: Valuation Department, N Z Government.

recent years to which must be added the new entrants in the ‘family, leasehold and other sales’ in which the buyer-type is not differentiated. In total, the transactions in rural farmland averaged 7000-7500 per year, about 10 per cent of the total number of farm businesses.

As already mentioned, the capital cost of purchasing land is a major difficulty facing would-be farmers in New Zealand but they are not alone in this respect; Tables 3 and 4 conclude this introductory section by showing the magnitude of the capital requirements for various types of farm in that country.

While a new entrant would not necessarily start his farming career on a farm of the average size as in Table 3, the per hectare land costs indicate


TABLE 3 Sale Price and Average Size of Farms by Type-of-Farming in 1981

Type of farm

Dairy Fattening Grazing Horticulture

Average size (ha) 68.5 234 652 9.6 Sale price ($000) 254 358 388 182 Price ha* (S) per 3713 1520 596 18849 *as an index with 1979 = 100 153 165 151 170

“Approximately N Z $2.50 = El.00 sterling

TABLE 4 Capital Position on New Zealand Farms

Sheep farm’ Dairy jhrm (Factory supply)

Assets $ per hectare

Assets $ per hectare

Capital value (land, buildings, improvements)

Truck, tractor Other plant & machinery Livestock - sheep

- cattle

1092 38 26

185 52

Farm capital 1393 Other assets* 209

Land and buildings 3416 Other land 148

Value as freehold 3564 Plant 221 Livestock ~ cattle 647

~ pigs 5 ~ other 8

Farm (as going concern) 4445 Other assets 195

Total 1602 Total 4640

a Finishing and breeding farms in the South Island *Cash, homestead, car, investments.

100 W. J. K. Thomas

the financial obstacle facing him. In addition to the cost of the land itself, further capital is required to stock and work the farm, and Table 4 gives an example of the balance sheet capital position on two types of farming in New Zealand.

Expressed on a per hectare basis the capital figures may appear fairly modest, but on a farm level:

Sheep farm (350 ha)-total capital $560,785 (&228 000) Dairy farm (73 ha)-total capital $338,765 (&138 000)

they show the considerable capital investment in New Zealand farms and thus the magnitude of the savings or access to loans a new entrant must have if he is to start up on his own. These financial hurdles to entry justify the policies of the national government as conducted by the Rural Bank which are now examined.

THE RURAL BANKING AND FINANCE CORPORATION (RBFC)

The Corporation, colloquially known as the ‘Rural Bank’, although only established in 1974, can trace its antecedents back to the ‘Advances to Settlers Office’ which was set up in 1894 to lend money on a long-term basis at reasonable rates of interest to assist farm settlement and development. Over more recent years various proposals had been suggested to form an organisation to deal solely with the capital requirements of the rural and primary sectors of the economy and these culminated in the formation of the RBFC. In its first report6 the Bank said ‘it has already proved its worth by moving quickly to introduce expanded and more flexible loan policies for farmers and by widening the assistance to primary processing and farm servicing industries’.

While the Bank, therefore, caters for the capital needs of the rural sector in the widest sense, this paper is concerned with its role in the settlement of farmers, a role which absorbed 28 per cent of its funds in 198 l-82. The essence of its function in this direction is to provide loans at preferential rates of interest to qualified New Zealanders, by birth or naturalisation, to make a start in their own farm businesses. For this purpose it operates three schemes:

1. Standard Settlement loans 2. Special Settlement loans 3. Settlement loans for farm workers


Standard settlement loans

The primary objective of these loans is to establish successful applicants on properties which will provide permanent settlement. The Bank does not specify minimum requirements as to the size and productive capacity of the unit being purchased but these factors, together with the condition of any improvements, are taken into account when consideration is being given to the economics or potential economics of the property. The proposed farm would normally be expected to:

(a) provide a reasonable standard of living for the applicant and his family;

(b) meet all farming expenses and adequately maintain the property; (c) meet interest and principal repayments on the Bank’s loan and on

any other borrowing; (d) be reasonably priced.

The Rural bank normally lends on the security of freehold land and on most Crown leases, but other leases are acceptable as security if there is a worthwhile mortgageable interest and the lease is suitable for long-term lending. A first mortgage over the land to be purchased is normally required and first security over stock may also be necessary to enable the maximum loan to be granted. If a loan is needed to purchase additional land, security over the existing property is also required and this could be by way of a second or subsequent mortgage. Within these limits, the Bank normally lends up to two-thirds of the market value of the land plus two- thirds of the market value of the stock. There is, however, a degree of flexibility and the normal upper limit to the loan may be exceeded if it can be shown that the total debt can be adequately serviced.

TABLE 5 Standard Settlement Loans

1980-81 1981-82

Type of farm No. of Average No. of Average loans loan loans loan

($000) ($000)

Dairy 437 86.4 399 108.2 Sheep and cattle 354 91.0 343 115.2 All farms 880 84.9 836 106-3

102 W. J. K. Thomas

The numbers of loans and their average size granted in two recent years are shown in Table 5.

The rate of interest for farm settlement in 1982 was 9 per cent but rebated to 7i per cent for the first three years on the whole amount borrowed. Loans are granted for periods up to 25 years and are repayable by equal quarterly payments of interest and capital which provide for the complete repayment by the end of the term.

In recent years the Bank has not been able to meet all the applications made to it for Standard Settlement loans and has, therefore, given preference to applicants in the following categories:

(i) those engaged in farming such as share-milkers, managers and tenants who have not previously owned land and wish to purchase an economic (viable) or potentially viable unit; and

(ii) those who own an uneconomic or a marginal land holding and can acquire additional land which together form a sound economic farm.

Each application is considered on its own merits taking into account:

(a) the applicant’s qualifications and experience in the type of farming for which the loan is sought; and

(b) the applicant’s contribution to the proposed purchase in the form of cash, stock and plant together with the terms of any existing borrowing.

An applicant who has sold a reasonably sized property with a view to acquiring a larger one is not normally eligible for assistance under Standard Settlement,

It can be seen from Table 5 that there were between 800 and 900 farmers settled under this scheme, with the Bank lending a total of NZ $88.8 million (&36 million) in 1981-82.

Special Settlement loans

This Scheme, introduced in 1976, provides loans, on preferential terms, of up to 85 per cent of the in-going costs of their first fully economic farm to a limited number of applicants who have shown high standards of thrift and management ability but who, because of their modest financial means, would not otherwise have a chance of buying a farm. Also, because of the large loans made under Special Settlement, the prospective properties must be of a superior quality to those under the Standard Scheme, and desirably have the potential for greater production.


Under this scheme the number settled annually is about 100 and, because this is far less than the number of applicants, the following classes are given preference :

(i) those engaged in farming as share-milkers, managers and leasees (tenants) who have not previously owned land and who intend purchasing an economic unit; and

(ii) applicants who have at least 5 years’ experience in the particular type of farming for which the loan is sought, and preferably, for part of that time, should have been in a managerial capacity.

The majority of applicants will be for sheep and dairy farms but other types of farms are also considered. The requisite characteristics of the property for purchase are similar to those outlined for Standard Settlement in that it must provide a reasonable standard of living for the occupier and his family, meet all farm expenses including the Banks charges and maintain the property.

The conditions of the loan in regard to the tenure of the land, security and interest rate are similar to Standard Settlement. The amount of the loan will depend on the type and viability of the proposition, but it will not exceed 85 per cent of the Rural Bank’s valuation. The applicant must have sufficient cash to meet the difference between the loan and the total in-going cost.

For occupiers settled under this scheme, the Bank provides seasonal finance and a budgetary service which is operated by one of the Bank’s Appraisers, who keep in regular contact with occupiers.

The numbers and average size of loans made under the Special Settlement Scheme for two recent years are shown in Table 6.

TABLE 6 Special Settlement Loans

Type offarm

1980-81

No. oj Average loans loan

($000)

1981-82

No. of Arjerage loans loan

(SOOO)

Dairy 58 158.2 57 190.2 Sheep 44 240.2 43 308.1 All farms 104 192.8 100 240.2

104 W. J. K. Thomas

The 100 loans made under this scheme in 198 l-82 involved the Bank in a total lending of NZ $24.13 million (g9.8 million).

Settlement loans for farm workers

The aim of this scheme is to encourage competent farm workers to remain in the agricultural industry by providing loan finance to enable them to purchase properties which, while in themselves are uneconomic, will with the worker’s off-farm earnings meet the charges on the loan after providing a reasonable standard of living. The property forms a hedge against inflation for the worker’s savings and could be used as a stepping- stone towards the purchase of a fully economic holding.

The applicants must be bona jide farm workers actively engaged in physical day-to-day work on farms, they must also be able to demonstrate their ability and intention to farm the units and continue their main occupation as farm workers. As the income from the farm unit will inevitably fluctuate seasonally the applicant must be able to regulate off- farm earnings to maintain a regular satisfactory level of total income. The off-farm earnings should come from employment of a continuing, but not necessarily regular, nature, and there must be evidence that the opportunity for this work exists. Usually the applicant will have been carrying out this activity in the district for some time. The off-farm earnings should form a significant part of total income so that the proposition is, in fact, a genuine farm worker’s holding.

The applicant’s contribution to the purchase of the land should be mainly through his own savings and it should not be necessary to have recourse to any substantial borrowing other than that from the Rural Bank. The Bank normally lends up to two-thirds of the market value of the land plus two-thirds of the market value of the stock. A first mortgage over the purchased land is normally required and it may also be necessary to have a first security over the stock in order for the maximum loan to be made available.

Loans may be granted for terms up to 25 years and are repayable by equal quarterly payments of interest and principal which provide for the complete repayment by the end of the term. The numbers and average size of loans made for Farm Workers’ holdings over the two recent years are shown in Table 7.

The Bank’s total lending under this scheme in 198 l-82 was $16.6 million (E6.7 million).

Assistance to entry into jhrming in New Zealand 105

If the possession of land is regarded as the first rung of the farming ladder, then in 1981-82 the Rural Bank enabled 1269 young farmers in New Zealand to take this initial step. That number of farm holdings represented about 17.5 per cent of the total rural land transactions, which indicates the significance of the Bank’s activity in this respect. With the Bank’s help, the farmers established under the Standard and Special Settlement loan schemes were placed well up the farming ladder and their permanent position there, or their upward progression, depend largely on their own skills and hard work. They have already shown these qualities so that, given the reasonable luck that all succesful farmers need, there is no reason why these new entrants should not form a valuable part of the future agricultural economy which is so important for New Zealand.

TABLE 7 Farm Workers’ Settlement Loans

Number of loans

Average loan

($000)

1980-S 1 252 41.1 1981-82 333 49.9

Besides the three settlement schemes outlined above, the Rural Banking and Finance Corporation of New Zealand has other avenues of help for aspiring young farmers. Additionally, other departments of the national government are also active in this respect and an examination of these further forms of assistance is the content of the second part of this paper. While some of these can have no parallel outside New Zealand, it is possible that others could be implemented to facilitate the establishment of the next generation of farmers in other parts of the world.

In his book ‘Joint Ventures in Farming’, Stratton’ investigated the various forms of share-farming operating in different countries; among these the New Zealand system. of share-milking figured prominently. Stratton concluded that share-farming could be developed for use in England and Wales as it would result in ‘the provision of new farming ladders’. In New Zealand, share-milking is a well-established section of the farming ladder, partly regulated by legislation, and the Rural bank encourages its progression in the following ways.

106 W. J. K. Thomas

Stock and plant loans

In order to help prospective farmers, who do not own land, to become share-milkers by acquiring a dairy herd the Rural Bank offers loans to purchase livestock and plant. In order to qualify for a loan, the applicant must have reasonable security, e.g. a satisfactory share-milking agreement normally of 3 years standing, and can also contribute to the purchase from his savings. In these circumstances, the Bank will provide a short-term loan (5-7 years) of up to 60 per cent of the market value of the stock and plant, the latter being the security for the loan.

Longer term loans, of up to 25 years’ duration, are also available when additional or more expensive livestock is required by the share-milker by reason of land development, the purchase of extra land or a change in the farming programme on the ‘host-farm’. Briefly under this system, the share-milker provides the dairy herd (cows and bulls or AI fees), the labour and the variable costs of running the herd. The partner, the farm owner, provides the landlord’s capital, i.e. the land, buildings and fixed equipment such as the milking plant and water supply. He also ensures that the fences, hedges and drains are in good condition at the commencement of the agreement. In the most popular arrangement, the 50:50 agreement, the receipts from the sale of milk or cream are sub-divided equally between the owner and share-milker.

The importance of share-milking in New Zealand farming is illustrated by the facts that it is being practised in 25 per cent of the country’s dairy herds and accounts for 30 per cent of the milking cows. In 1980-81 the average size of herd in the 50:50 agreements was 153 cows, a capital asset of $60 thousand, thus illustrating the necessity for some preferential help to would-be share-milkers. In 1981-82 the Bank made stock and plant loans to 1223 share-milkers, the average loan was $24.6 thousand and the Bank’s total lending in this form was $30 million.

Suspensory loans to share-milkers

From this initial agreement, the share-milker would normally progress to a bigger and better agreement and eventually to a property of his own. In the latter event, a share-milker with a large herd (and some will have 200 cows or more) may be forced to sell some of his cows, for it is unlikely that he could afford to buy a property big enough to accommodate such a sizeable herd. The sale of the cows, surplus to the carrying capacity of his


new farm, would incur a heavy tax liability and, to cope with this, the Rural bank provides an interest-free suspensory loan secured by a mortgage on the land purchased. It is a ‘suspensory loan’ in the sense that it is written off provided the recipient remains in occupation and farms the property on his own account for a period of ten years.

Average loans of just under $3000 were made to 147 share-milkers for this purpose in 1981-82. The ‘philosophy’ of these loans is that such tax liabilities should not deter share-milkers from moving into farm businesses in their own right and the loans, therefore, form a valuable, if somewhat limited, assistance.

The RBFC has no money of its own, its principal source of funds is a Government Loan Account from which, in 1981-82, it drew $334 million but to which was added $150 million in repayments from existing mortgagors. In addition to these funds, the Rural Bank encourages and assists the introduction and accumulation of capital for investment in farming in two different ways: (a) the Farm Vendor Finance Scheme; and (b) the Farm Ownership Savings Scheme.

Under the Farm Vendor Scheme, suitably qualified would-be farmers are enabled to buy their first farms because eligible vendors, i.e. the sellers of farms, are encouraged by the Bank to leave money in their farms. The inducement to do so is that part of the interest on the money invested in this way is exempt from taxation. Two options are available to vendors- a farm vendor mortgage, or a farm vendor finance bond. Under both schemes eligible vendors and purchasers are similarly defined but in the context of this paper it is the purchasers who are of interest for they must be new entrants. An eligible purchaser must:

(a) not hold or have an interest in a property which the Bank considers to be a full-time holding;

(b) have a personal equity--capital or farm assets-of not less than 20 per cent of the prospective farm as a going concern;

(c) personally occupy and farm the property; (d) preferably be 25 years of age or older; (e) be actively engaged in farming and be suitably experienced in the

type of farming to be practised; (f) be a New Zealander by birth or naturalisation.

Under the vendor mortgage option, an eligible vendor on selling his farm will offer a registered mortgage to the eligible purchaser approved by the Bank. In 1982 the rate of interest was not to exceed 9 per cent and the

108 W. J. K. Thomas

minimum period for the mortgage was 7 years. After the settlement is approved by the Bank a ‘certificate of compliance’ is issued to the vendor and to the Inland Revenue which entitles the vendor to claim tax exemption on up to 50 per cent of the interest earned on the mortgage. The maximum amount of mortgage eligible for tax exemption is $250 000 provided that the total borrowings do not exceed 80 per cent of the sale price or the Bank’s valuation of the farm whichever is the lower. This ensures that the second condition of purchaser eligibility is met.

All types of farms are eligible for vendor finance provided they are economic units, or can quickly be made so, in that the holding can generate sufficient income to provide a reasonable standard of living for the occupier and his family after meeting all farm expenses and debt servicing.

Under the vendor finance bond option, the Rural Bank accepts the role of mortgagee and the investment of the outgoing farmer is satisfied by the issue of the finance bond. In practical terms, once the bond is issued it is not related to the property or the purchaser who is then under the normal borrower-lender relationship with the Bank.

For the vendor, the benefits of the finance bond are several:

(a) 50 per cent of the interest payable on the bond (9 per cent) is exempt from income tax;

(b) he is relieved of any administrative problems of making and holding a mortgage;

(c) he receives guaranteed interest payments and becomes a holder of a Government guaranteed security redeemable on death thus not creating any difficulties for beneficiaries;

(d) he is assured of being able to convert the bond into cash after 7 years.

The purchaser has all the advantages of a Rural bank mortgage for 25 years with repayment terms for satisfactory long-term settlement. During 1981-82 the Rural Bank approved 115 mortgages averaging $99.4 thousand, and issued 26 vendor finance bonds averaging $121.2 thousand, a total call of $14.29 million on its funds.

Under the Vendor finance schemes just described, the outgoing generation of farmers is encouraged to le ave capital in the industry. This idea is in contrast to the Farm Ownership Savings Schemes (FOSS) under which the next generation of farmers is persuaded to accumulate capital for future investment in farming. On the introduction of the first

Assistance to entry into jhrming in New Zealand 109

FOSS in 1974, now known as the Ordinary Scheme, the Rural Bank announced its purpose was ‘to assist farm workers, share-milkers, students and others intending to take up farm ownership to save an adequate deposit towards the purchase of their first farm’. This laudable aim was, however, partly ruined by the effects of inflation and rising land prices so that, by 1980, the Bank was only suggesting that the scheme ‘offered a form of savings which will to some extent maintain their farm purchasing power in the face of rising land prices and inflation’.7

Under the Ordinary Scheme, an eligible saver qualifies for a non- taxable grant from the Government when he purchases his first farm or enters into a share-milking agreement. The saver opens an account with one of the prescribed banking institutions by depositing $250 and, thereafter, amounts of up to $5,000 per year can be saved to qualify for a grant. The grant is related to the number of ‘saving years’ as follows:

Sacings period (years) Grant as % of savings

3, 4, 5 25 6 30 I 35 8 40 9 45

10 & over 50

Interest at 3 per cent is paid on the savings. The initial deposit is included as part of the annual savings so that the maximum amount that can be held is $60000.

The Special Farm Ownership Scheme, introduced in 1976, provides not a grant but a tax rebate of 45 cents for each dollar saved, the rebate being claimed in the year the savings are made. As under the Ordinary Scheme the maximum annual saving eligible for the rebate is $5000. Interest of 3 per cent (1982) is paid and the interest also qualifies for the rebate but within the eligible maximum savings.

The eligibility conditions are of interest. In order to start saving under the Schemes the applicant must be 15 years old and, if still at school, must certify an intention to become a farmer in New Zealand. Older applicants must be studying courses relevant to farming, or be actively engaged in farming or have had the relevant experience to become an efficient farmer.

110 W. J. K. Thomas

At the time of farm purchase or entry into share-milking the saver must:

(i) be a New Zealand citizen; (ii) not have a financial interest in land exceeding $100 thousand; (iii) have had 3 years’ practical farming experience since opening the

savings account; and (iv) have spent at least 2 of the last 3 years gaining experience on the

type of farm to be purchased.

The extent of participation in the two savings schemes is shown in Table 8.

TABLE 8 Participation in Savings Scheme 1980 and 1981

Years Ordinary Scheme Special Scheme ending

31 March No. of Total No. of Total savers savings savers savings

($ million) ($ million)

1980 867 1.69 3533 15.61 1981 997 2.09 5935 26.82

It is evident that the Special Accounts are much the more popular and that savings are increasing rapidly, with over $11 million being deposited in 1980-8 1.

Table 9 shows that not many account holders used their savings to assist in farm purchase or entry into some form of farm-sharing in the periods reviewed.

In an appraisal of the savings schemes Woodford’o states that the actual returns on the savings are dependent on the savings period. He calculates that for the Special Accounts the return on capital invested can be in excess of 40 per cent per annum when the savings period is 3 years but that this declines to 15 per cent on savings over 10 years. For the Ordinary Accounts his figures were 20 per cent over 3 years but reducing to 10 per cent over 10 years. Woodford concluded by saying that due to the effects of inflation the increases in cash deposits required for farm purchase are likely to outstrip a person’s ability to save through the Farm Ownership Savings Scheme. Accordingly, he suggested that these


TABLE 9 Numbers of Withdrawals from Savings Schemes 1979-81

Years ending

31 March

Ordinary Scheme Special Scheme

Farm Share Farm Share purchase farming purchase farming

1980 0 4 0 0 1981 11 11 17 47 1981” 6 6 64 41

a April-June

accounts should be considered primarily as a means of saving for entry into share-farming but only as a secondary means of saving towards farm purchase.

The availability of capital for farm purchase can be a stumbling block for a new entrant when he is in the fortunate position to be able to service it and this paper, so far, has shown how the Rural Bank encourages capital from within the industry to come forward for use by new farmers. The Bank also operates a scheme whereby capital from outside the agricultural sector is induced for long-term investment. This is the Farm Mortgage Guarantee Scheme which encourages lenders to invest their funds in farm mortgages in the knowledge that the Bank guarantees them against loss should the borrower fail to repay the loan. While the scheme is not solely for the benefit of new entrants they can take advantage of it, along with established farmers, if they can avail themselves of mortgage funds from sources which may be apart from the normal ones available for farm purchase. By obviating the risk of loss, this scheme places farming on a more equal footing with other industries in New Zealand in the competition for capital funds.

Because of the protection which a guaranteed mortgage carries, a ‘capitalist’ is encouraged to:

(i) lend to farmers on medium-long term terms secured by a land mortgage;

(ii) lend up to 80 per cent of the farm valuation; (iii) renew the mortgage on the due date; (iv) to make allowance on interest rate and other mortgage conditions

because of the minimised risks.

112 W. J. K. Thomas

TABLE 10 Mortgage Guarantees Approved by the Rural Bank

Type of farm 1980-81 1981-82

No. of Total Average No. of Total Average loans amount loan loans amount loan

($ million) ($ 000) ($ million) ($ 000)

Dairy 101 3.13 31.0 78 3.29 42.2 Sheep 50 2.81 56.2 59 5.38 91.2 Other 7 0.43 61.4 13 0.49 36.1 Total 158 6.37 40.3 150 9.16 61.1

It is the lender, not the Rural Bank, who must satisfy himself of the ‘worthiness’ of the borrower, the value of the security and the ability to service the proposed loans; supporting evidence of a valuer’s report or other professional documentaiion is usually available. When a lender has funds to invest in farming but cannot find an acceptable borrower, the Bank will assist but generally it desires to interfere as little as possible between the lender and borrower. The number of loans and amount borrowed in two recent years are shown in Table 10.

This paper so far has described the various ways in which the Rural Banking and Finance Corporation assisted new farmers to gain a foothold in the farming industry of New Zealand but its activities are far more widespread than in the settlement area alone. Finally, in order to

TABLE 11 Mortgagors of the Rural Bank in 1981-82

Type of jbrming No. of mortgagors (‘000)

Sheep 18.5 Dairy 14.1 Horticulture 3.1 Mixed cropping 2.8 Pigs and poultry 0.3 Other 1.8

Total 40.6


emphasise the Bank’s involvement in the farm section of the rural sector, Table 11 shows the total number of its mortgagors in 1981-82.

This total represented an increase of 2.1 thousand over the previous year, i.e. in the number of borrowers but not of individual loans, for a proportion of borrowers have more than one loan. More than a half of all New Zealand farmers were benefiting from the operations of the Bank thus demonstrating how valuable an institution it is.

ASSISTANCE TO ENTRY TO FARMING FROM OTHER AGENCIES

While the Rural Bank can be regarded as a ‘QUANGO’ (quasi- autonomous non-governmental organisation), other departments of the New Zealand government also make a contribution to help young farmers to get started in their own business. Foremost among these is the Department of Lands and Survey, but first a few words about other avenues of assistance.

Stamp duty exemption on purchase of first farm

This allowance is made by the Inland Revenue to bonafide persons who are going into farming on their own account and are purchasing their first farm. No stamp duty is payable on the farm purchase if the transaction fulfils these conditions :

(a) neither the purchaser nor his spouse owns or has owned a substantial interest in farm land or a farming company;

(b) the property must be capable of supporting a full-time farming operation;

(c) the purchaser must actively farm the property within two years of purchase;

(d) the purchaser must acquire a controlling interest in the farm or farming company and must not dispose of it within two years of acquisition.

Maori Lands Board

The Board, administered by the Department of Maori Affairs, provides financial assistance to farmers of Maori descent to purchase farms,

114 W. J. K. Thomas

livestock and plant and also to develop and improve Maori land. Its lending policies are such that both farm and horticultural holdings are eligible for assistance.

Marginal Lands Board (MLB)

The MLB operates under the aegis of the Department of Lands and Survey and acts as a government lender of last resort primarily to provide finance to restore, maintain or increase production on farms that are potentially economic units. The Board’s functions were amended in 1977 to allow financial assistance to be offered to would-be farmers wishing to purchase non-viable ‘stepping-stone’ holdings and thus to make a start in farming in their own right. The 1980-81 report of the Department of Lands and Survey3 concluded that this amendment had been fully justified by the strength of the demand for this assistance from well- qualified young farmers. While the Marginal Lands Board is, therefore, another avenue of help to entry into farming, its fund for this purpose is small as indeed is its total assistance to farming compared with other rural lending agencies. The Board’s lending over two recent years is shown in Table 12.

Settlement by the Department of Lands and Survey

Earlier it was stated that some of the schemes of assistance to entry to farming in New Zealand reviewed could have no parallel in the United Kingdom; this obviously must be so for the Maori lands finance and it is

TABLE 12 Marginal Lands Board Lending 1980-8 1

Years to March

Loans for 1980 1981

($ million)

Development” 1.475 1.503 Purchase of additional land 1.778 1.877 Purchase of uneconomic units 0.085 0.333 Refinance 0,590 0.317

Total 3,928 4.030

a Includes purchase of stock and plant and seasonal finance.


also the case of settlement by the Department of Lands and Survey which is the final option for new farmers examined in this paper.

Under the 1948 Lands Act, which consolidated earlier legislation, the Land Settlement Board (an agency of the Department) carries out large- scale development of Crown land in New Zealand. When the land has reached a satisfactory level of productivity it is sub-divided into economic one-man units for settlement. By 1961 there was no longer the urgent need to provide for ex-servicemen, the first settlers under this legislation, and the scheme was extended to include civilian applicants.

Originally the land development scheme was designed to bring idle Crown land into production but because (i) the reserves of this land are not inexhaustible, and (ii) the demand for settlement continues to be strong and unabating, the Board is empowered to buy privately owned land. Such purchases are usually made by agreement, although for a period the Board had official power to acquire land by compulsory purchase. The properties purchased have the potential for development and eventual settlement as sheep or dairy farms.

In the first phase of the three-stage programme-development, consolidation, settlement-the emphasis is on the improvement of the original ground cover, often tussock (a very poor grass species). This is the ‘grassing’ stage and, depending on the topography and soil type, will be done by cultivation or aerial oversowing. In addition, houses and buildings will be erected and water, fences and roads will be provided in accordance with the needs of the eventual efficiency needs of the settled block. All development work is carried out by private contractors.

In the consolidation phase the land is farmed by employees of the Land Settlement Board with the emphasis on building up the fertility of the soil and increasing livestock numbers but more slowly than in the first phase. This stage continues until the accumulated profits from farming plus the likely sum to be recouped on settlement will offset the costs of the original purchase and development. In 1981 the Land Settlement Board farmed 285 thousand hectares (700 thousand acres), which were stocked with 1.2 million breeding ewes, and the following stock units of other livestock:

‘000 SUS”

Other sheep Breeding cows and heifers Other cattle

466 90 98

a 1 stock unit = 1 breeding ewe.

116 W. J. K. Thomas

The Board’s receipts from the sales of sheep, wool and cattle amounted to $56 million, so it obviously conducts a vast farming operation.

The final settlement stage involves the sub-division of the block of land into economic one-man farms and includes the building of additional structures, e.g. woolsheds and hay barns, together with the improvement in the water supply and fences, etc., as required. The Board’s report for 1981-82 noted the Government’s approval for the offer of 78 farms for settlement as indicative of its policy to meet the increased demands for farms by landless applicants. This number of farms was exceeded only in 1961 when civilian settlement was first introduced.

Applicants for farms under this scheme must:

(a) be New Zealanders by birth or naturalisation; (b) be at least 25 years of age at the date of settlement; (c) have the appropriate educational and practical experience which

should guarantee their successful career as independent farmers, e.g. 5 years’ full-time experience under all climatic seasons.

In addition the applicant must have access to the capital required for the deposit on the farm which is calculated as a proportion of the value of the improvements and of the value of livestock and plant to be taken over. The size of the deposits will vary but were in 1982 unlikely to be less than $50 thousand.

Applicants fulfilling all these conditions are interviewed by a local committee and, if approved, their names go forward to a ballot from which the successful applicants ‘emerge’ at random. There are special provisions for unsuccessful applicants from earlier ballots if, in any district, there are more than three farms on offer at any one time. The lucky ‘balotee’ is offered a chance in a lifetime but the system, while apparently fair, is not without its critics in New Zealand.

CONCLUSION

This paper has examined the ways in which young New Zealanders are helped by official agencies to become farmers in their own right. Even with these avenues of assistance, entry into farming in New Zealand is anything but easy, a view emphatically put by an accountant8 in that country in one of a series of articles on ‘Financing that first farm’. In this he wrote ‘By now you will have decided that my plan for eventual farm

Assistance to entry into jbrming in New Zealand 117

ownership is far too ruthless; that you cannot cope with the relentless pattern of saving, and saving and more saving. . . It is not easy. When I promised you a package deal of high motivation, hard work, peerless management of all resources and endless scrimping, saving and slaving, I meant exactly that’. His plan envisaged moving on from a 5050 share- milking agreement to farm ownership with maximum saving by the would-be farmer and his/her spouse under the Farm Ownership Savings Scheme mentioned earlier.

Despite this gloomy prognosis, the 198 1 Report of one of the large New Zealand ‘Stock & Station’ companies5 with an active interest in real estate suggested that the demand for farming properties of all types remained as keen as in previous years. This was so in spite of land prices rising in line with or above farm cost inflation, and in some instances these were well up on the Government valuations made only a few years earlier. A survey of a small sample of ‘new’ farmers, all established with the help from the Rural Bank, demonstrated that if there is the will to farm then there will also be a way to do so. The way is facilitated in New Zealand as has been described; it excites the thought that this path should be smoothed in other countries so heeding the warning given, for the United Kingdom, by Boden’ in his remark ‘to ignore your youngsters in farming is to forget the future’.

ACKNOWLEDGEMENTS

The writer acknowledges with much gratitude the financial awards received from the British Academy and the University of Exeter which made his visit to New Zealand possible. He is also most grateful for the warm reception and help of his hosts at Lincoln College, Canterbury, New Zealand, and, with his wife, expresses his appreciation of the friendliness encountered from all the New Zealanders they met during their visit.

REFERENCES

1. Boden, T. ‘Youngsters may soon get started with EEC money’, Farmers Weekly, 16th December 1983, London. 1983.

2. Bunting, C. Chairman of the National Federation of Young Farmers at a meeting in January 1982 to discuss the 50th anniversary of the movement, Farmers Weekly, 15th January 1982, London. 1982.

118 W. J. K. Thomas

3. Department of Lands and Survey. Report for the year ended 31st March 1981, Wellington N.Z. 1982.

4. Northfield. Report of the Inquiry into the acquisition and occupancy of agricultural land. Chairman Lord Northfield, HMSO Cmnd 7599, July 1979, London. 1979.

5. Pyne, Gould and Guiness Limited. Annual Report for 198 1, Christchurch, N.Z. 1982.

6. Rural Banking and Finance Corporation of New Zealand. Report for the year ending 31st March 1975, Wellington, N.Z. 1975.

7. Rural Banking and Finance Corporation of New Zealand. Report for the year ended 31st March 1980, Wellington, N.Z. 1980.

8. Russell, D. Financing that first farm, Dairy Exporter, October 1982, N.Z. 1982.

9. Stratton, R. Joint ventures in farming. Sponsored by the Country Landowners Association, London. 198 1.

10. Woodford, K. B. An evaluation of Farm Ownership Savings Schemes, Department of Farm Management and Rural Valuation, Lincoln College, N.Z. 1981.

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