Once upon a time, in a country way, way down under, the government dismantled its system of agricultural subsidies and supports. Initially, cries of outrage and disbelief were heard from farmers all across the land. For more than 20 years, farm assistance had steadily increased, peaking at 33 percent of total farm output (about double the level of assistance in the U.S. today). Then, with one swift and decisive decree, all subsidies were eliminated.

The transition period, which lasted about 6 years, was not easy, but it was less painful than expected. The government predicted a 10 percent failure rate, but only 1 percent of farms went out of business. Government assistance during the transition period was limited to one-off “exit grants” for those leaving their farms, financial advice, and the same social welfare income support afforded to all citizens.

The fortune of farmers now depended on their ability to meet consumers’ demands. Overproduction no longer occurred. One year, under the subsidy regime, 6 million lambs were rendered into fertilizer because no one wanted them; sheep farming had been the crown prince of the subsidy king. Without subsidies farmers were forced to diversify and produce those goods that were most sought after in the marketplace. Sheep stock decreased, while the number of dairy cows increased. Over time, the agricultural sector diversified into not only new crops and livestock, but also rural tourism.

Production decisions, though, were constrained by the type of land being farmed. In order to be competitive, farmers had to keep costs down and this meant using resources efficiently. Subsidies for fertilizer had resulted in its wasteful application. Without subsidies, fertilizer use decreased, water quality increased, and yields were not affected. Additionally, farmers fit their production to the land. Marginal land, which was only farmed to receive subsidies, went out of production and reverted to native bush.

Competition also drove innovation, and farm productivity improved substantially. Labor productivity nearly doubled, and land productivity increased 85 percent. Lamb carcass weights rose 34 percent, and the quantity of milk solids produced per dairy cow increased by more than 30 percent. Annual productivity gains before reform were about 1.5 percent. For the first 9 years after reform, they averaged 6 percent—higher than any other sector in the country’s economy.

Many had worried that the end of subsidies would destroy agriculture in the country, yet the agricultural sector grew as a percentage of GDP. Today approximately 90 percent of farm output is exported, making up more than 55 percent of total merchandise exports. Productivity gains have allowed farmers to remain competitive in a world market where they compete with farmers in subsidized countries. Real farm incomes have recovered, and in some sectors income is even higher than it was under subsidies.

Instead of disappearing into the mists, the country’s farm sector became known throughout the world for high-quality, innovative, and efficient agricultural practices. After the initial failures, farm numbers held constant, and the amount of land in agriculture fell only slightly as marginal land went out of production. Decreases in farm employment have been offset by increases in employment in rural tourism. Thus, the percentage of the population living in rural areas remains virtually unchanged. Real land values, which initially plummeted, have recovered and surpassed their pre-reform level.

Over time, nearly all embraced the idea of a market-driven agricultural sector. Farmers learned not only how to survive, but to thrive in a subsidy-free world. Common sentiment now is that subsidy elimination was “the best thing that ever happened to farming.”

A prosperous farm sector without government subsidies? Sounds too good to be true...sounds like a fairy tale. It’s not. In 1985, New Zealand permanently eliminated 30 different agricultural production subsidies and export incentives. Over the past 20 years, as New Zealand’s farms flourished without assistance, the opportunity cost to American consumers and taxpayers of U.S. farm programs has totaled more than $1.7 trillion. With the 2007 Farm Bill, our government has the opportunity to make much needed reforms to farm policy. We could do worse than look to New Zealand’s policy tale for guidance. Like any good fairy tale there is more to take away from their experience than just the story...