Should we thank god for our farmers?

In an interesting move, Federated Farmers president Charlie Pedersen stated that we should “thank god for the (food) producers” (*) in New Zealand, for providing us with food and/or wealth.  Now I have to admit, I find this attitude a bit ridiculous.

Don’t get me wrong, agricultural products do create a lot of wealth, hell meat and dairy alone accounted for 29% of our exports over the year to April (Source).  However, doesn’t the farmer and the other people involved in the production process extract the surplus from this trade?

They produce these goods out of their own interest – this is the beauty of free exchange.  However, I don’t start praising to the high heavens about people I buy things off.

The idea that farmers are creating wealth for us stems from the “multiplier“, whereby a small increase in a countries wealth turns into a greater return over time, helping everyone.

However, the multiplier idea is borne from the concept that demand creates its own supply – hardly a realistic assertion in economics, which is supposed to be the study of scarce resources.

Also remember that if the land and resources were not used for farming, they could be used for something else – as a result of this opportunity cost from farm production, the reduction in wealth will not be as severe as some may suggest if the farmers decided to stop producing in the face of our “lack of appreciation”.

Ultimately I feel like Mr Pedersen is saying, “farmers own a large number of the resources, and so we should thank god that they use them well” – when I frame it this way the claim seems ridiculous!

  • Multiplier effects…

    One of my fondest memories from undergrad was pestering one of our several Keynesian profs by going up to the chalkboard and proving that the Eric multiplier was much much larger than the investment multiplier (as it’s a much smaller fraction of GDP) and consequently we ought to have massive transfers to Eric. Good times….

  • Hone

    I agree that farmer’s don’t deserve special thanks for owning resources. I am a bit conflicted though because I do think that other entrepreneurs making export dollars should be applauded (like that fella from ice breaker or those Jade software cats in Christchurch).
    Charlie may be a bit off the mark but do you think the sentiment is right – that there is a tendency, in policy and more widely, to take our major resource endowment (fertile land and a good climate for growing stuff) for granted?

  • “I am a bit conflicted though because I do think that other entrepreneurs making export dollars should be applauded”

    Ultimately, I don’t see why we should applaud people for doing things that are in their own interest, and taking risks. If they are willing to do it, then it is good.

    “there is a tendency, in policy and more widely, to take our major resource endowment (fertile land and a good climate for growing stuff) for granted?”

    I do agree with you on this point though – as a society we do tend to punish people based on their endowment, and I would prefer we didn’t.

    However, if we are applauding them simply to make up for the fact that we also put them down then we are being ridiculous.

    In a policy sense we may ask, are we making an environment that allows people to take appropriate risks and create wealth and Mr Pedersen really just wanted to state that the RMA doesn’t allow this.

    But Mr Pedersen also seems to believe that only primary production creates value and as a result the only reason we have any standard of living is because of him and his farmers, when this is simply not the case.

  • unaha-closp

    Our “lack of appreciation” for farmers meaning our instituting new taxation specific to farming?

  • “Our “lack of appreciation” for farmers meaning our instituting new taxation specific to farming?”

    Ahhh, if we specifically say that the issue was taxes directly on carbon emission then I can see that there is a debate. However, the decision to try and use emotive language, in the sense that we should be “thanking god” for their actions was ridiculous.

    The fundamental debate surrounding the tax issue seems to stem from the export market. It is the transaction that creates the carbon emission (so both the producer and consumer are in some sense “too blame”). If we were a closed economy the producer could pass on part of the cost to the consumer – however when we export the good, the full cost falls on the producer, as other countries are not setting up equivalent ETS’s.

    That is how we ended up with a debate about whether agriculture should be in the ETS, with some reports stating that the current ETS is better than higher income taxes, and some saying the opposite (namely NZIER).

    If he raised that argument I would have written about that. Instead he decided to illustrate his view of the primary producers moral superiority.

  • unaha-closp

    Emotion is what is getting us into an ETS, there is no rational reason for it.

    “It is the transaction that creates the carbon emission (so both the producer and consumer are in some sense “too blame”).”

    I always understood a transaction to be a function of demand and the consumer creates the demand. It is the producer that creates the carbon emmission, but they are only doing this (as you observe) in their own self-interest to profitably fulfill the demand. Further the transaction is not equivalent for all production – a kW of power supplied from a dam emits less carbon than a kW from a coal fired station.

    “If we were a closed economy the producer could pass on part of the cost to the consumer” and an ETS in a closed economy would mean the price of the good rises, causing demand to fall and reducing carbon emissions. However we do not have a closed economy in most products (except electricity) and hence the effect of an ETS is to increase carbon emissions. “As other countries are not setting up equivalent ETS’s and share an open economy with us an increase in cost of production here will cause a marginal increase in profitability of all producers, except ours who will see a decline. Our producers of agriculture significantly more carbon efficient than most of the world’s, a NZ ETS on agriculture will increase carbon emissions.

    “However, the decision to try and use emotive language, in the sense that we should be “thanking god” for their actions was ridiculous.”

  • Hi unaha-closp

    “Emotion is what is getting us into an ETS, there is no rational reason for it.”

    Interesting.

    I thought we were setting up an ETS as the government believes it is the least cost way of providing for our Kyoto Liability – this does not sound too emotive to me.

    But, if we do not believe it is the least cost way but we believe it is fair (like I have said earlier) then I can buy the argument that the ETS is emotive. As in a sense the emotion is just a catalyst for our own normative value judgments.

    Now I’m not going to defend or attack the ETS in this post (as it was not its focus), however I’m sure I can use this lens to view Mr Pedersen’s comments.

    His value judgment appears to be that “farmers create the wealth” so we should appreciate them for it. However, I don’t see why we should “thank god” for them just because they do what is in their own interest.

    People that benefit from the farmers actions (outside of the people that receive tax money – which is a discussion on the optimal role of government in society) are people involved in voluntary trade with them, or in some connection with them. Those people create the wealth along with the farmers – and as a result, farmers should be just as keen that “thank god” for the person working in the port, and the person driving the milk tanker.

    I find it annoying when anyone tries to claim that they, or their group, is the best part of society. This sort of arrogant attitude seems both out of kilter with reality and, well, arrogant.

    So the value judgment I am criticising is the one that states “farmers create the wealth” – my value judgment is that I believe that trade between people creates the wealth, and get annoyed when one of the parties involved tries to claim it.

  • unaha-closp

    Gidday Matt,

    We went into Kyoto, because we expect AGW to exact a high price if not averted. If this price is accepted as prohibitively high (which would seem to be reasonable) then an ETS becomes irrational.

    I thought we were setting up an ETS as the government believes it is the least cost way of providing for our Kyoto Liability – this does not sound too emotive to me.

    The purpose of Kyoto supposedly being to reduce AGW gas emissions, therefore us undertaking a policy that will increase AGW emissions to provide for our Kyoto liability is not rational. It is an emotive appeal to the consuming/voting public to find blameworthy the practices of producers, to say “reducing emissions here in the production of goods for the global market will reduce AGW” is an irrational statement, that holds a facile appeal.

    I find it annoying when anyone tries to claim that they, or their group, is the best part of society. This sort of arrogant attitude seems both out of kilter with reality and, well, arrogant.

    All things being equal, I agree. However all things are not equal, we are about to impose a tax upon his group for no good reason. He can therefore claim that his group is superior to ours.

  • “The purpose of Kyoto supposedly being to reduce AGW gas emissions, therefore us undertaking a policy that will increase AGW emissions to provide for our Kyoto liability is not rational”

    Not fully, the ETS is being implemented under the belief that it is the cheapest way of meeting our Kyoto Liability. That is why they commissioned Adolf’s study a while back:

    http://www.scoop.co.nz/stories/PA0710/S00325.htm

    I have agreed that if this wasn’t the case it could be seen as “emotive”.

    However, if we do believe that an ETS is a lower cost option then funding the liability through income taxes then it seems fair enough.

    Fundamentally I think this may be where our disagreement lies. I believe that the ETS is being placed on efficiency grounds, you are saying it is on normative “equity” grounds (which farmers may justifiably feel peeved with). Interesting stuff, but I don’t know if we will ever be able to reach a conclusion as neither of us will be willing to change our assumption here 🙂 (which is completely fine)

    “However all things are not equal, we are about to impose a tax upon his group for no good reason”

    I still don’t think that the ETS argument is sufficient to explain his claim that we should be “thanking god” for farmers. Again he is claiming that producers create all the surplus – this type of pre-industrial revolution way of thinking is just inappropriate, even if he is having a bad day 😉

  • unaha-closp

    Matt,

    Like the smilies.

    Fundamentally I think this may be where our disagreement lies. I believe that the ETS is being placed on efficiency grounds, you are saying it is on normative “equity” grounds (which farmers may justifiably feel peeved with).

    Perhaps. I do think that our farmers are by world standards quite efficient at producing a kg of product and I think that our consumers are quite carbon inefficient at keeping body & soul together. Cannot see how a tax (the ETS) on the first as opposed to the second group is based on efficiency.

    However I think there is a more fundamental disagreement, relating to economic costs.

    Why did we join Kyoto?

    I have always presumed it is because we believe an “almighty cost” will likely occur in the event of runaway climate change caused by AGW gas emissions and that Kyoto offered itself as a solution to prevent this future cost.

    “…the ETS is being implemented under the belief that it is the cheapest way of meeting our Kyoto Liability.”

    Kyoto assigns this liability to us and we pay it on the basis that our paying now will reduce the likelihood of that “almighty cost” being brought to bear later. So paying our Kyoto liabilities in such a way that it leads to an increase in AGW gasses will be exceedingly costly, because we increase the likelihood of bearing that “almighty cost”. An ETS policy when introcuced is in my opinion going to lead to an increase of AGW gas emission.

  • Once we have worked out what is the most efficient way of paying off our Kyoto Liability we can make a discrete choice between the “not paying it” and “paying it” schemes. This is a separate issue, and one that I’m not going to argue as I don’t have any information on it at all.

    As a result, when looking at the case when we are going to pay off the liability we want to find the least cost method.

    “Perhaps. I do think that our farmers are by world standards quite efficient at producing a kg of product and I think that our consumers are quite carbon inefficient at keeping body & soul together”

    Sorry, I don’t understand what you are talking about with regards to the consumers in this case.

    When it comes to the production and consumption of the meat some carbon liability is created. The feeling behind the ETS is that if you tax those who are creating the liability you will get a more efficient outcome than if you just slapped on an additional income tax.

    Now, it doesn’t matter if our farmers are “relatively” more carbon efficient then farmers in China if our interest is solely minimising our own liability. (Note that the interest is paying off our liability – not ensuring that we lower world carbon emissions – that is a criticism of the Kyoto scheme, not of the ETS!)

    The fact that we are a small open economy makes this more difficult – however every analysis apart from the NZIER one has concluded that in the NZ context the loss in GDP from targeting carbon producers is lower than the case when you increase income taxes to pay for the scheme.

    Since our goal is to minimise the economic cost of the scheme, this would indicate that we should use an ETS – that is the logic that the government is running with, and it is a danged site more objective than Mr Pedersen’s claim that we should tell the man upstairs how cool our farmers are 😉

  • unaha-closp

    Matt,

    Once we have worked out what is the most efficient way of paying off our Kyoto Liability we can make a discrete choice between the “not paying it” and “paying it” schemes. This is a separate issue, and one that I’m not going to argue as I don’t have any information on it at all.

    It is not a discrete choice, Kyoto liability is a way of representing the cost of preventing an AGW event. An ETS scheme has the effect of promoting an AGW event, to follow an ETS means paying both the cost of prevention (as cheaply as possible) and bearing the cost of the event (which you have equated to zero). The ETS only makes sense if you equate the cost of an AGW event to zero.

    We do have infomation the cost is not zero, we are subject to a liability to pay money to the former Eastern Bloc and to sponsor carbon efficient tech into the developing world. We can infer this is done for a reason and assign that reason a future cost, we must logically assume that the future cost is greater than the Kyoto liability.

    Let us run an analogy to the ETS. There is a disaease that will cripple a person for life. There is an vaccine which costs 30 days pay but will leave the patient unable to work for 10 days. You decide to purchase the vaccine and find a way that will allow you to purchase the vaccine using a mere 20 days of work as long as you do not take the 10 days off to administer the vaccine. Have you successfully saved 50% of your costs?

    When it comes to the production and consumption of the meat some carbon liability is created.

    Yes.

    The feeling behind the ETS is that if you tax those who are creating the liability you will get a more efficient outcome than if you just slapped on an additional income tax.

    No sh*t.

    ETS is a tax on production and income tax is a tax on income. A tax on the production side of the equation is more effective than a tax that is not related in anyway what-so-ever.

    Sorry, I don’t understand what you are talking about with regards to the consumers in this case.

    Consumption.

    Consumption is of direct bearing to the equation. A carbon consumption tax could both fulfill our Kyoto liability and reduce AGW emission (win/win). It could be internalised to the NZ economy and not harm our international competitiveness. It was not considered worthy of examining, because we have decided pre-report to blame farmers and for that reason we should “thank God” they exist. And we should quietly “thank Helen Clark” that the ETS on farmers is not coming in till 2012 so they will continue to exist, hopefully we can do away with ETS absurdity between now and then.

  • Hi again unaha-closp

    “It is not a discrete choice, Kyoto liability is a way of representing the cost of preventing an AGW event”

    Sure, but we don’t pick the Kyoto liability – we only pick whatever is the least cost method of funding the liability. It is an external cost that is being imposed on us and we need to find the least cost method of paying for it – if the Kyoto agreement was not set in such a way that it will prevent AGW event then thats a pity, but that is not the issue at stake when setting an ETS.

    “Consumption is of direct bearing to the equation. A carbon consumption tax could both fulfill our Kyoto liability and reduce AGW emission (win/win). It could be internalised to the NZ economy and not harm our international competitiveness.”

    A tax on the consumption side could raise the funds – however it would not lead to a reduction in our emissions as the emissions or the Kyoto protocal are measured from the production side and agricultural products are tradable goods. If we tax the consumer for a tradable good then the whole incidence of the tax will fall on them, as NZ farmers can still sell the product at the world price, tax fee, overseas. That is why it wasn’t considered.

  • unaha-closp

    Matt,

    Our fundamental disagreement:

    Sure, but we don’t pick the Kyoto liability – we only pick whatever is the least cost method of funding the liability. It is an external cost that is being imposed on us and we need to find the least cost method of paying for it – if the Kyoto agreement was not set in such a way that it will prevent AGW event then thats a pity, but that is not the issue at stake when setting an ETS.

    You have defined an AGW event as having no effect on the economy, effectively setting the cost to zero. I disagree and assume an AGW event will entail a high future cost. This is a disagreement on costings and easily solved.

    I can provide estimates on the costs of an AGW event by several reputable bodies that all estimate a cost much greater than zero. Would you accept these to imply detrimental costs to the economy if so presented? Would a known detrimental cost to the economy be relevent to deciding the costs to the economy in picking a way of meeting the Kyoto liability?

  • Hi again unaha

    “I disagree and assume an AGW event will entail a high future cost”

    I’m not disagreeing with the cost – I’m disagreeing with our countries impact on the cost. If we halve carbon emissions we will reduce our Kyoto liability – so that is a benefit.

    However, the probability of AGW event occuring will still be the same – as we produce such a tiny amount of the worlds carbon emissions – as a result there is no additional benefit from lowering the probability of AGW event.

  • unaha-closp

    If it is assumed it is immoral to knowingly pollute the planet, then we are arranging an ETS to maximise our immoral gain. We are persecuting farmers by selective punishment, therefore it is reasonable for them to assert their superiority.

  • “If it is assumed it is immoral to knowingly pollute the planet, then we are arranging an ETS to maximise our immoral gain. We are persecuting farmers by selective punishment, therefore it is reasonable for them to assert their superiority.”

    Actually if we are going to use the “morality” card we can state that it is the farmers “immorally” polluting the planet, as they are the ones that create most of the carbon emissions. The ETS is set up so those benefiting from the “immoral” practice of creating carbon emissions are the ones who pay – implying that it is still ridiculous for farmers to act like they are superior to us.

  • kisekiman

    Matt,

    Great post and have to agree that it is indeed ridiculous to “thank god” for anything. If God (or Allah) was so great he/she would never have put all those dinosaurs under the desert to ferment into dirty oil for us burn in the 20th and 21st centuries following the birth of his/her esteemed “son”.

    Onto other more pressing creations of the human imagination. I was an active farmer and should disclose I still have a beneficial interest in several farms and I fully agree that farmers neither need nor should seek any applause for pursuing their own self interest.

    As I understand it any farmer converting to dairy after 2005 will have no carbon allowance and therefore will be fully liable for all emssions.

    From what I have managed to find out from current literature in science (and it is bloody difficult to get data) an average dairy cow emits something in the range of 350 – 450 grams of methane and 1000g of CO2 a day. Adjusting for molecular weight and the the GW potential of methane which is allegedly 23 times more potent than CO2, an average modern NZ farm operation of 500 cows would therefore be responsible for emissions in the vicinity of 1300 tonnes of carbon equivalent per year.

    Given a nominal value of $30 a tonne (but actually who knows what value the market will set under ETS), this would equate to an annual charge of about $40k per year assuming no offset is allowed for the potential carbon sink of pasture.

    This is an estimate of the potential cost to farmers considering setting up operations in New Zealand and who may consider offshoring such operations to more favorable places such as Uruguay or Brazil.

    The longer term consequence may be that faced with a physical inability to reduce emissions and a prohibitive emissions cost, Farmers acting in their self interest will ramp down production and plant trees on their farms which of course will please the greens but will have the effect of reducing food supply thus driving up prices.

    Farmers possibly won’t be any worse off, but we may then be able to have a moral debate along the lines proposed by Fidel Castro who criticised the diversion of arable land into biofuel crops at the expense of food production.