Introduction to agricultural systems

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6.1.3 Modernization

By the 1920s, much of the southern Prairies had been settled with a farm on nearly every quarter section of arable land, and a town every 2-3 miles along the railway - lots of branch lines. But then the roaring 20s became the dirty 30s (depression and drought) and homesteads were abandoned and soil filled the sky. Now we see many of these homesteads as groves of trees, perhaps an old house or barn. In 1937, the average wheat yield was 3 bu/ac. Yields and the economy improved in the 1940s and 1950s, with a series of good crops and better prices. Mechanization and mobility were contributing to rural depopulation; smaller farmers sold out, farm size increased; small towns got smaller, big towns got bigger.

That trend continues today. Some criticize subsidized grain freight rates (Crow rate) as the reason why rural Saskatchewan is depopulating. They suggest that the subsidy deterred any value- added processing of the grain commodity in the production region. Some analyses indicate that the system was designed this way from the beginning (Fowke, 1957).

If it is only farmers that a community services, as the number of farmers decreases, the size and number of communities decrease. Therefore, as agricultural systems change, they change the social and economic environment. What happened on the Prairies is unique to that time and place - and its particular set of the government policies, international relations and physical environment. As an example, a comparison of the Eastern versus Western Canadian agriculture shows how two very different systems developed.

Eastern Canadian agriculture developed to serve the local domestic market. It provided the food that kept the first settlers from starving. The size of the resource base was not large relative to the local market, so farmers produced a wide assortment of products for local consumption. Thus the goal of agriculture in the East was to feed the local population, which differed from the goal of agriculture in the west.

In contrast, farmers in western Canada were, and are, export oriented. They were also required to import, from outside of the western region, most of the inputs they required for farming, such as ploughs, barbed wire, machinery and automobiles. Export markets are more volatile than the domestic markets for eggs, poultry and dairy products that faced Eastern Canadian farmers. Weather fluctuations at home and abroad, the level of world economic activity, and the domestic policies of other importing and exporting countries contribute to the large boom and bust cycles that have characterized the wheat export market. The result is a high level of risk and uncertainty for the farmers and economies of the Prairies.

Over time, markets have changed due to technological change and changing domestic policies of exporting and importing nations. As a result, supply has exceeded demand and real grain prices have trended downward over time (Figure 5-12 Fulton et al., 1989, p. 1) and the market has been volatile.

Modern wheat production modified the physical environment. The Prairies have been transformed from a sea of grass to a fields of wheat during the last one hundred years of European settlement. The Prairie sod, very rich in organic matter and nutrients, was broken and turned into homestead shack and farmland. The gradual transition from one grassland ecosystem to another has been replaced by sharp boundaries that represent fields, farms, towns.

The wheat-fallow rotation (one year of wheat followed by one year of summer fallow) became the main cropping system across the Prairies: Why? The extra moisture stored in the soil during the fallow year made the production of a good crop every second year a more certain, especially in the semi-arid regions. The fallow period was also used to control weed populations to increase soil N levels. The problems associated with summer fallow are soil erosion, by wind and water, and reduced soil fertility. Frequent tillage to control weeds and prepare the seed bed increases the susceptibility of soils to erosion and increases the rate of soil organic matter decomposition. Nitrate leaching during the fallow period has reduced water quality in some areas.

Tillage summer fallow is now less common, but the impact of agriculture on the environment is still large. The large diversity of plant and animal life on the Prairies has been replaced, mainly with a few grain, oilseed, pulse and livestock crops, and may be further reduced as pesticide use increases. Soil organic matter decomposition and fossil fuel use contribute greenhouse gases to the environment, and soil erosion and nutrient leaching reduce soil and water quality.

6.1.4 The Modern Wheat Complex (Figure 5-5 from Busch et al., 1991, p. 112).

The productivity gains associated with the industrialization of agriculture resulted in world-wide grain surpluses after WWII. In reponse, Public Law 480 ( PL480) was introduced in the U.S. in 1954 as a food aid mechanism through concessional sales at a negotiated price. Developing countries welcomed cheap food (US subsidized wheat) because the development ideology of the time encouraged them to focus on the industrialization of their economies. This was seen as a way of promoting more rapid development in the third world. Industrialization programs were undertaken at the expense of domestic agricultural production, and much of the farm population moved into urban areas to fill the need for an industrial labour force. By the late 1960s, many developing countries were dependent on imported food. The main import was wheat, which gradually replaced traditional dietary staples . From the 1950s to 1970s, the per capita consumption of wheat increased by 63% in developing countries, but not at all in developed countries.

Starting in the 1970s, two factors undercut this dependence on wheat. The first was competition from the European community, which had surpluses of wheat from their own farm programmes, and began to compete in the aid game. European competition caused a trade deficit and a dollar crisis in the US, which some of its advantage in concessional sales. Secondly, the green revolution resulted in import substitutions in some countries like India, which was producing more of its own food.

In 1972-73, Soviet purchases of wheat from the US created sudden shortages in a market used to surpluses. Prices tripled and quadrupled and food aid plummeted. Many developing countries which had abandoned their domestic systems of agriculture, now had to buy grains at high prices, at a time when oil prices also were high. By the late 1970s the surpluses returned, but high oil prices, the debt crisis and export competition prevented a return to the old food aid programmes.

The response to high prices was credit-based expansion by US (and other) farmers and a credit-based shift from subsidised to commercial consumption in developing countries. The double debt exacerbated the problem of chronic dumping of surpluses. World wheat trade dropped in the mid 1980s, with the US share falling from 43 to 29 million tonnes from 1980 to 85. Trade wars resulted in very low prices and national subsidy programs.

6.2 Case Study 2: Canadian Agricultural Policy and Prairie Agriculture. (Reading 13. Rosaasen and Lokken, 1993).

The influence of Canadian agriculture policy on the structure and development of Prairie agriculture has been significant. It began almost before the arrival of settlers, with the Dominion Land System and the Dominion Land Act. The Federal government adopted a regular system of subdivisions, carried out by the Surveyor-General of Canada with a staff of land surveyors in the field and an office staff of draughtsmen and map makers. The Dominion Land System extends uniformly over the western Prairies, makes it easy to locate a given piece of land. The unit of survey is the township (6 mi2 ) which is further subdivided into quarter section units of 160 acres, which was a large enough field size to allow extensive farming operations by mechanical implements. Townships are bounded on the east and west by true meridians, and on the north and south by chords of the parallels of latitude, commencing at the 49th parallel (International boundary).

The national policy developed for the Prairies had European roots. The Dominion Land Act awarded a quarter section to each settler, requiring that the land be Aimproved@, usually by cultivating a certain area and living on the land for 5 and then later 3 years. It was eventually recognized that 160 acres was too small for a viable farm, so an additional 160 acres were offered at reasonable prices. Would Prairie agriculture be different if ranchers had qualified for Homestead land?

By 1921, the Government of Saskatchewan=s Royal Commission of Inquiry into Farming Conditions recognized the fragility of the soil and variability of the Prairie climate.The massive loss of farmers from the driest parts of the Prairies during the 1930s resulted in the formation of the Prairie Farm Rehabilitation Administration (PFRA) to convert the most unsuitable cultivated land to perennial pasture. Since then, government policy has been used to support agriculture in the areas not determined to be too risky in the 1930s. There has never been a well-coordinated set of agricultural policies with clear and defined goals for the Prairies, but rather there have been conflicting policies and ad hoc programs with a common theme - the promotion of annual cultivation, especially for grain production and export, with scant regard for the environmental limitation of the region. That theme reflects the general concerns of the citizens of the Prairies, which has been to maximize production with little awareness of environmental or social costs, the externalities of the system.

The next section describes some of the persistent and ad hoc policies and programs that have shaped Prairie agriculture since its inception.

The Crow Benefit and the Western Grain Transportation Act.

This Act was eliminated in 1995 with a one-time pay out to land owners. The long-term consequences of its elimination is still not known, but farmers share of grain transportation costs will increase.

The Crow Rate, introduced in 1897, was designed to ensure that minerals in Southeastern B.C. were transported, refined and marketed through Canada and not the US. It was used as a subsidy to the CPR for railway construction through the Prairies, for which in return, the CPR agreed to reduce freight rates on grain and flour moving east and settler=s effects moving west. The Act was based on government policies of economic integration of the Canadian economy, encouragement of settlement in the west, and provision of inexpensive resources for the population of central Canada. The benefit was paid to railways based on the volume of eligible grains and distance shipped, to offset the large distance from markets and cost of shipping bulk grains to those markets. The rate (statutory rate) remained fixed. Over time, the railways held that the rate was too low to cover costs, so the federal government began to pay for branch-line maintenance, and federal and provincial governments purchased railway cars.

Due to rising costs associated with the Crow Benefit, the WGTA was passed in 1983, replacing the Crow. Until 1995, it paid about $700 million annually to railways for transportation of eligible grains from the Prairies to Thunder Bay, Churchill, Vancouver and Prince Rupert. If distance to market is the major disadvantage of the Prairies, why not ship more valuable products?

Effects of WGTA and Crow. Livestock producers and grain processors on the prairies who were against the Crow subsidy argued that the low transportation charges increased the price of grain and therefore, the cost of such operations on the prairies. Feed-grain shipments to the east were subsidized under the Feed Freight Assistance Program, reducing the costs of feed grains in the east and supporting an eastern Canadian livestock industry. Feeder cattle were often shipped east from the Prairies for finishing.

The Crow did not benefit farmers who did not ship large volumes of eligible grains, such as livestock, alfalfa seed, or lentils, especially since these are lighter weight or higher value crops. It favoured grain production for export at the expense of diversified, environmentally positive land uses (hay production, pasture) which are ineligible for freight rate subsidies, although dehydrated alfalfa is eligible.

Resource Allocation. Production of eligible grains was high, because they were profitable within the program. By lowering the cost of transportation, the price of grains in the

Prairies was increased, whether the grain was used locally or exported (Table 5-1). This meant that feed grain cost were about $0.10 per bushel higher on the Prairies, which increased costs in the livestock sector. Lower prices without the WGTA should benefit livestock producers through lower prices for feed grains.

International Implications. A higher price (or subsidized price) increased Canadian production and export of eligible grains, and cuts into markets for other competitors. Farmers were able to sell grain on international markets at artificially low prices. However, the effect of the Crow/WGTA has been small, so the effects on production decisions relative to the size of international markets were probably not large, although because of the high visibility of this program, GATT negotiators targeted it as a trade-distorting policy.
Table 5-1. Difference in wheat price with and without Crow/WGTA

Year Price with Price without


(1981 dollars per bushel)

1975 6.14 5.87

1976 4.52 4.32

1977 4.08 3.78

1978 5.15 4.81

1980 6.18 5.78

1982 4.25 3.96

1984 3.98 3.52

1986 2.27 1.86

1987 2.27 1.78

source: Fulton et al., 1989, p.45

Farm Income. If the Crow had not been in place, farmers entering or expanding in the 1970s and 1980s would have paid a lower price for land, because profits in farming tend to be bid into land prices. Thus, in considering the cost of the program, the amount by which debt would have been reduced without the Crow should be taken into account.

If the WGTA were removed without compensation, net farm income from grain would drop by about 40% due to increased transportation costs, and the price of land would fall.

Income Distribution. Benefits from the transporation subsidies were directly proportional to the amount of eligible grain a farmer shipped, so the largest producers benefited the most. If larger farmers had to buy more land, at higher land prices due to the subsidy, the benefit may be off set. On the other hand, higher-priced land would affect small farmers more because land represents a larger proportion of their costs. To the extent that it has increased the production of grains and oilseeds in the west, fertilizer and chemical companies, machinery dealers and the grain handling and transportation firms benefited from the program. The 6-7% increase in production due to Crow/WGTA since 1975 resulted in a 14% increase in input use.
Land Assessment and Property Taxation.

The property taxation system does not penalize farmers who use practices that contribute to soil degradation, because the system of land assessment is based on productivity potential. If two neighbours each own land assessed at $2500, but one used good conservation practices while the other allowed serious soil erosion to occur, subsequent assessments would reflect the reduced productivity potential due to soil degradation by lowering the land assessment, say to $2100, while the good manager may have an assessed value of $2600. Thus, the good manager is punished by having to contribute more to municipal taxes than the poor manager. An assessment and taxation system that rewarded soil conservation (i.e., an organic matter tax credit) could result in improved farming practices.

The Canadian Wheat Board.

This program exists as an export monopoly for wheat and barley put in place to market a large volume of grain to farmers= advantage.

Delivery Quota Regulations. Since 1940, there have been limits on grain delivery per cultivated and/or seeded acre of land, in order to offer equitable delivery opportunities to all farmers. This has encouraged producers to increase their cultivated acreage, since access to more delivery quota is a major concern to farmers. As a result, marginal land has been cultivated and technologies that allow extensive farming practices are used more than they might otherwise have been. Producers have not been encouraged to diversify, since they need to maintain a high level of quota grain acres to receive adequate delivery quota in some years. The result has been a failure to recognize that land quality is varied, with some soils more productive and suited to annual crop production than others. In the quota system, one acre is treated the same as another.

Cash Advances. Farmers with quota books can obtain interest-free loans up to $30,000, using stored grain as collateral. The loan is repaid when the farmers sells the grain to the CWB.

Crop Insurance 1961.

Crop insurance is a voluntary program used to reduce production risk and offset financial losses due to poor yield from drought, frost, floods, fire, hail, insects and plant diseases for wheat, oats, barley, flax, canola, rye, sunflower seeds, mustard, utility wheat, peas, lentils, and canary seed. It functions as a production guarantee, not as income insurance, and is dependent on whether the crops is grown on summer fallow or stubble, on the risk area (class of soil and risk of weather), and on the degree of protection (60-70%) desired by the farmer. The amount of premium paid is linked to the level of coverage desired and previous performance records for each farmer. The prices at which yields can be insured vary according to market conditions.

Effects of Crop Insurance. One common criticism of the crop insurance program is that it has reduced the risk of cropping marginal land by providing insurance against poor yields. Also, natural prairie, forest and wetlands are eligible for support if they are broken and converted to crop production. It has resulted in increased grain production because it has reduced the production risk, such as the effects of poor growing conditions in some years. Because farmers are less worried about getting a return from inputs with insurance protection, input use is higher than it would be without an insurance program. As a result, farm-input suppliers have benefited, as have credit lenders.

Some of the major question critics have asked about the crops insurance program include: Does crop insurance promote poor soil-management practices? Should drought programs be available only to farmers who have taken crop insurance? Should it be based on individual yields, rather than area yields?

Ad Hoc Programs

There have been many ad hoc programs instituted by governments designed to support farmers. Farm incomes have been supported by programmes since the 1950s. Support represented about 15% of income from 1950 to 1985, 25-30% by the 1980s, and 40% in 1986-87. However, realized net farm income would have been negative without government support in 1986-87, indicating that all of the government support programs taken together accounted for more than 100% of positive net income during that time.

Western Grain Stabilization Act 1976-87. This program was designed to stabilize incomes from grain, and to avoid losses for farmers when international grain prices and sales decline. It was a voluntary program to which farmers could contribute a percentage of gross sales, from two to four per cent, up to $60,000, with matching federal government contributions. Eligible crops included wheat, oats, barley, rye, flax, canola, and mustard, and later triticale, mixed grains, sunflower seeds, safflower seeds, buckwheat, peas, lentils, faba beans and canary seed were added. Grain fed to livestock on the farm where it was produced was not eligible for stabilization.

Payouts began if the net cash flow from the seven major grains in the Prairie region was <90% of the previous 5 year average. Large payouts in 1985-87 resulted in a large fund deficit, so a $750 million payment into the fund was made by the federal government in 1987, although there was still a large deficit. Although it was meant to stabilize incomes, it only worked for farmers if a whole region has a bad crop. One farmer with a crop failure would not trigger payment.

Effects. It had little effect on production levels, but stabilized net income for farmers. The WGSA did not encourage production when prices were normal or above normal, so it did not contribute to expansion when prices were strong. However, the WGSA did signal that Canada would protect its farmers from low prices.

Benefits were greater to larger farmers, but with the $60,000 limit the effect was not large. Suppliers of inputs and services benefited from stabilized incomes and the extra economic activity generated during what would otherwise have been a downturn.

Agricultural Credit. Agricultural credit programs include the (federal) and Agricultural Credit Corporation (provincial). The mandate of the Farm Credit Corporation is to enable new farmers to enter agriculture and to supply smaller existing farmers with funds for expansion. It is a major lender in Prairie agriculture. The net impact of agricultural credit programs has been increased agricultural output, mainly livestock and specialty crops using irrigation with loans from special programs, for which commercial loans were not available. It has increased land prices, because subsidized credit tends to be capitalized into land values. Thus, entering farmers and small farmers wanting to expand are penalized.

Lower Inventory for Tomorrow (LIFT) 1971. Surplus wheat stocks on the Prairies occurred in the late 1960s, so LIFT was introduced. A payment was made to permit book holders who reduced wheat acreage in 1970 relative to 1969 levels. There was a full acreage payment for increases in summer fallow plus perennial forage acreage by an amount equal to that removed from wheat. A new quota policy partially offset the bias of the payment system, in that acres seeded to wheat in 1970 did not quality for quota.

The late adjuster was rewarded, because farmers who recognized the market signals indicating that there would be a surplus of wheat and diversified into other crops prior to 1970 (the early adjusters) did not qualify for the large LIFT payments and were thus penalized. Some land was summer fallowed two years in a row, which probably resulted in large losses of mineral N and erosion due to tillage.

Special Canadian Grains Program (SCGP) 1986. The federal government paid a one billion dollar deficiency payment to farmers in response to low grain prices caused by the subsidy war between the European Community and the US. Initially, only wheat, oats, barley, rapeseed, rye, flax, corn, soybeans, mixed grains and sunflowers were covered (lentils, peas, mustard, canary seed and other special crops were excluded). Payment was based on a farmers seeded acreage and representative yield, up to $25000 per farmer.

The program had a major impact on farm incomes and debt repayment. Again, farmers who were alert to the market signals, and acted as the price of wheat was declining by diversifying into other crops prior to 1986 were penalized. Only the late adjusters were rewarded.

Special crops were included in subsequent years in response to the criticism that the trade war was affecting more than the traditional crops. However, except for dehydrated alfalfa, production from cultivated hayland or pasture was ineligible. The payment provided major benefits to agricultural suppliers. Cash flow for purchase inputs without increasing debt was important, and bankruptcies were prevented.

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