Introduction to agricultural systems

Canadian Crop Drought Assistance Program 1988

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Canadian Crop Drought Assistance Program 1988. This was a drought relief program, but skewed in favour of farmers who cultivated the lowest quality land in drought-affected townships and those who ignored dry conditions in 1988 and seeded as usual. Farmers who brought marginal land into production and kept it in production despite low returns to cropping and negative climatic and environmental indications (late adjusters) were rewarded with the same target revenue per acre as good land with higher long-term average yields in the township. Farmers who anticipated a drought in the spring (early adjusters) and did not seed poor quality land to annual crops did not qualify for the assistance.

Permanent Cover Program 1989. This was a PFRA program designed to take poor quality (marginal) land out of annual crop production. The program operated on the Prairies, where farmers could seed perennial forages on low quality land in return for direct financial assistance. Farmers (early adjusters) who had not cultivated their poor quality lands, or had already returned them to permanent cover crops were penalized, whereas farmers (late adjusters) who broke such areas as late as 1987, qualified for the money.

Summary. The impact of these programs has been to increase production slightly, stabilize income, prevent land values from falling in response to returns from farming, and improve economic health regionally. There have been small resource allocation effects, especially in mid-1970s when Crow/WGTA payments were small. Without WGSA, SCGP and crop insurance, the health of the Prairie economy and farm sector would have been worse since 1985. Credit policies have provided the basis for an increase in land prices in the late 1970s, which caused the income and debt problems of the 80s.

6.3 Case Study 3: Canadian agriculture and technological change
6.3.1 Introduction (Troughton, M. 1992, p. 29-42).

Canadian agriculture is restructuring as it shifts to a total 'agrifood' system based on the industrial model. The industrial model took hold as farmers adopted mechanization, technological inputs, economic efficiency and profits as the major measures of farming success.

Farms now tend to resemble industry, with increased scale, capital intensity and specialization of production and strong links to agribusiness. These trends were facilitated by government policy that supported an integrated system through marketing arrangements and policies aimed at increasing output and income stabilization. However, despite increased productivity per farm, per hectare and per person, farmers finances are still precarious.

6.3.2 Mechanization to Industrialization - the Restructuring Process.

From about 1940, two situations triggered structural changes in Canadian agriculture: an increaseed demand for labour in non-agricultural sectors of the economy (industry); and increased mechanization, as both a substitute for labour and means of increasing productivity. The result was a massive migration from farm to urban areas. The greatest impact of mechanization was in Western Canada, where by 1950, horses were replaced by tractors, swathers and combines of increasing size. As machinery size increased, fields and farm size increased. From 1940 to 1960, the numbers of farms decreased by 30% and farm labour declined by 50%. These changes represent the 'modernization' of farming, based on increased productivity and total output. By the 1960s, the system was fairly stable, with an efficient production system, larger farms based on economies of scale, purchased inputs, and relatively high levels of government support. In this environment, the trend to more 'successful' farming continued, and the image of agriculture changed from being a way of life to being a business.

Major gains were made by agribusiness as producer investment in manufactured and supplied machinery, fertilizer and agro-chemicals increased. Farming became more dependent on these inputs, with supply and price controlled by a few manufacturing companies. An increased need for capital resulted, and the federal government became involved in credit provision to farmers through Farm Credit Corporation. Output processing and distribution industries changed from small and local to large and centralized, and eventually a few supermarket chains dominated the retail industry.

A 'cost-price squeeze' developed as productivity increased and commodity prices decreased in an oversupplied market. Farmers need to increase productivity even more to stay ahead. Some estimates suggest that farmers need to increase their efficiency by about 3% each year to stay in business.

6.3.3 Agricultural Industrialization

In the industrial model, agriculture is an input-output system. Farming uses inputs from machinery, fertilizer and chemical companies to produce commodity output for agricultural processors and distributors who control the market for agricultural products. The goals are economic efficiency, which is higher land and labour productivity and lower costs of production, achieved through increased scientific, technological and bio-technology inputs.

The industrialization has not removed many of the problems faced by farmers. There is still large fluctuation in supply and demand for commodities in national and international markets. There is still risk due to weather, pests, and other environmental factors that cannot be controlled. There is still a need to set short-term economic goals in which farm decisions are based on economic and not more long-term ecological or conservation objectives.

Canadian agriculture policy has been aimed at the stabilization of the industry, specifically,

maintenance of incomes and control over output and prices. On the Prairies, that has been attemped with institutions like the Canadian Wheat Board, and programs such as LIFT and GRIP.

In 1969, a Federal Task Force presented economic goals for a streamlined, efficient system based on commodity sectors. It recommended increased specialization of production and processing, and an institutional structure linking government, business and farmer organization in an integrated system. It provided the basis for federal policy in the 1970s, such as the extension of supply management, rationalization of Prairie rail and elevator system, and western grain freight rates. In the early 1970s, increasing global demand for grains led to higher commodity prices, which with inflation led to increased gross farm receipts and land values. Farmers tended to expand, despite high interest rates and rising costs. During the recession that followed, commodity prices and land values fell faster than expenses or interest rates, and many farmers were in financial trouble. Many of those were among the farmers who had been "most efficient".

The crisis also affected the agribusiness sector through less input use, but processors benefited from low prices. Governments provided large subsidies to maintain farming activities, but

global overproduction (relative to demand) and price wars have maintained low prices, although recently prices have increased.

Summary: Mechanization was dominated by change occurring within the farm sector. It cause a farm level reorganization. Industrialization was controlled by the business sector and government policies
6.3.4 Restructuring.

From 1961 to 1981, farm numbers declined by 40% from 480,000 to 293,000. Farm size increased from 250 ha to 420 ha in Saskatchewan, with an increase in the number of farms bigger than 650 ha. A polarization between large and small farms has developed. Most farms are still family farms, but many more, especially large farms, are partnerships and family incorporations. About 40% of farms have a capital value greater than $500,000, and 65% of farms have more than $1.5 million capital value. There is now more rented land, nearly 60% in some parts of Prairies.

Polarization was also seen in financial indicators by 1986. Only 39% of farms had gross receipts greater than $500,000, but they accounted for 87% of total output receipts. Twenty percent of farms with gross receipts greater than $100,000 farms represented 68% of total output, and farms with less than $25,000 (45%) represented 5% of total output.

Capitalization is another indicator of restructuring. Farms with a capital value greater than $500,000 were 21% of the total number of farms, but represented 56% of fixed capital value, 56% of operating expenses and 57% of gross receipts. Farms with a capital value less than $200,000 were 42% of farms, but accounted for only 13% of fixed capital value, 11% of operating expenses and 11% of gross receipts.

Farm incomes are dependent on price and access to markets. Low prices have resulted in declining net farm incomes and asset values. In 1987 dollars, aggregate net farm income increased from $4.7 billion in 1971 to $9.5 billion in 1975, declined to $3.1 billion in 1983 and increased to $5.4 billion in 1987. The actual value of assets declined by $29 billion form 1982-87, whereas debt increased by $18 billion, causing equity levels to drop.

The use of technology and economically efficient production is not a guarantee of financial security. That requires institutional arrangements that protect producers from unfair market competition, inelasticity of demand and oligopolistic businesses.

Environmental Impacts. As agriculture became more mechanized, and larger-scale there develops an increased dependence on non-renewable resource inputs, increased (genetic) uniformity of crops and livestock, increased specialization (monoculture), increased levels of soil erosion and loss of nutrients and soil organic matter, replacement of nutrients with fertilizer can result in nutrient-rich run-off and water pollution, livestock concentration in intensive operations that can cause concentration of wastes and water pollution, and reduced landscape amenity with large uniform fields suited to large equipment.

The 'treadmill' makes it difficult for farmers to adopt alternative systems that involve lower levels of input, smaller fields, more diversified production and smaller equipment. Short-term economic efficiency is the most important consideration in the competitive market.

Social Impacts. Rural farm communities have been affected by the decrease in farm population. As the farm population declines, jobs become even scarce because most industrial jobs are located in urban areas, and services such as education, health care, and retail become more centralized in large towns and cities. The relatively low net incomes of farmers make it difficult for them to support local communities, and the quality of social life becomes diminished.

Changes in agriculture since the 1940s have resulted in many benefits to farmers. There is less physically hard work, and fewer hours of labour, more regular and even harvests and yields, more government support (price supports, supply regulation programs and ad hoc payments for emergencies) and greater ability to increase yields using chemical inputs, such as fertilizers, pesticides and improved varieties. The changes have also resulted in some negatives consequences. Smaller farmers have been unable to compete and larger farms have increased in size, taking over small farms. Reliance on borrowed capital has increased as the capital costs of farming have risen. Control has shifted from the farm level to industry and international markets. Public policy and the use of public money to improve agriculture have declined. The view of agriculture as a way of life and a public good has been replaced by the image of agriculture as a business.

7.1 The Infrastructure of the modern food complex (Street, 1990).

The infrastructure of the third food regime is based on well defined systems of marketing, processing and food distribution. It is the large and complex infrastructure associated with commercial, high-input, highly productive agricultural systems of developed countries. In these systems, producers generally produce cash crops, using very little labour, for consumption in urban areas. Food is generally harvested and moved to the urban areas for processing and for sale to consumers, or it is exported to other countries. Very little of what is produced is consumed on the farm, or in the rural areas where it is grown.

The requirements of these systems are an extensive transportation system of roads and railways, a raw product broker such as the Wheat Pool, Wheat Pool Livestock sales, Sask. Hog Marketing Commission, or Cargill, a commercial food processor, government inspectors, shippers, retailers, and consumers.

Marketing (Smith , 1986, pp. 219-238; Street, 1990, pp. 159-203). All market systems share characteristics that encompass the movement of goods from the farmer to food processors and wholesalers, or directly to individual consumers (Figure 7-1, Street, 1990, p 169). Whether produce moves directly from the farmer to the consumer or through intermediaries, the process is similar, only the number of market agents and their degree of specialization change. Farmers who sell directly to consumers fill the roles of producer, processor, wholesaler and retailer. Generally, as an economy grows, its market chain tends to lengthen and the market agents become increasingly specialized, but the structure shown in Figure 7-1 is not inevitable. For example, in North America there is an increasing trend of people wanting to buy food directly from farmers, i.e., organic food. However, most food bought by consumers from retailers, usually with processing steps in the middle.

Corporate capitalism is increasingly penetrating agriculture throughout the world. In general, market options available to farmers are decreasing, and therefore price competitiveness is decreasing. In some cases, marketing boards and co-operatives act as the wholesalers and processors which can increase farmers' bargaining power, but market options can decrease if supply management rules are statutory.

The decreased world demand for food partly is partly due to the success of agriculture in providing adequate supplies of relatively cheap food. Basic food needs are satisfied. Consumers now often have precise demands about the quality, presentation and degree of processing and convience of the foods they eat.

Market Integration. Processing firms, such as Campbell's and McCain Foods, extend control backwards into farming and forward into wholesaling, retailing and even the restaurant business. This trend is most advanced in western, industrialised countries, which have radically reorganized the retail industry since the 1950s. Market integration is based on a desire of retailers to profit from demand for lower-cost goods sold from centralised sites with few services attached. In an environment of bulk sales and less service, firms can survive on a lower profit margin than is required for smaller traditional retail stores. Compare, for example, a small-town grocery store with Supervalue.

This system works where consumers are mobile and can store food at home - where they have cars and refrigerators. It is also based on good systems of transportation, communication, and advertising and on the consumers' willingness and ability to pay for processed food. In return, consumers get a secure supply of food of uniform quality and type. In Canada=s largest 32 urban centres, the market share of the four largest retail companies is about 98%.

Large corporations tend to dominate more than one sector of the food industry. Retailers have expanded into sugar refining and flour milling, they sell clothing and furniture in their stores, and bakery good manufacturers have expanded into frozen vegetable or canned meat production. Such changes have given corporations more decision-making power, minimize risk by diversifying production, and increase the flexibility of financial planning and control. As a result, the industrial character of agriculture has increased and farmers= decisions are more often determined by corporate control and market demands than by the farmer=s desires. Despite this, most agriculture is still based on numerous, small, scattered family owned farms, mainly because of the high risk involved in agricultural production due to dependence on the physical environment (climate).

Hedging Market Risk. The production and supply of food for the market involves economic risk and uncertainty. Corporations attempt to improve profits and stability by controlling a large market segment, which has resulted in the concentration of the retail, wholesale and processing sectors. Horizontal integration is limited at the farm level by environmental factors that restrict cultivation within specific bounds, and by the risks imposed by climatic and biological uncertainties. These limitations have protected farms from corporate control; corporations such as processing firms or feed companies prefer to exert control through management agreements with farmers (contract integration). This minimizes risk for corporation because the farmer assumes most of the risk.

Horizontal and vertical integration increase profits for the retail and processing sectors through advertising brand names, quality control, and innovations and product development.

It has increased the physical efficiency in marketing, but has reduced public bidding for produce. As a result, it is difficult to establish what is the fair market price for food. It is further complicated because competition at processing and retail levels is based on a range of marketing strategies, such as advertising and product differentiation, of which price is only one.

Because of the high risks of farming, corporate control is through market management and control of supplies, not direct ownership of land and crop production. In 1981, only 0.4% of Canadian and 11% of U.S. farms were owned by non-family corporations. However, farms are too small to have real market power, through a monopoly of sales of a product. Farmers would have to act together to achieve real market power.

Farm-market Links - The Food Chain. Historically, links between farmers and consumers were simple and direct. They were based on price and quality, and farmers could respond rapidly to consumers' needs and preferences. In the modern economy, only a small proportion of agricultural products are consumed in raw state. Producers provide the raw materials and value-added opportunities for the food processing, retailing and catering sectors of the agriculture economy. There are a host of urban-based intermediaries, such as processors, packers, wholesalers, distributors, and retailers who contribute to the flow of information and produce between producers and consumers. They directly affect farm production patterns and consumer demands (Figure 7-2, Street, 1990, p. 160).

There is strong price and supply competition within the food industry. The result has been increased food imports from cheaper markets and product substitution in the food processing industry. For the food processing industry, raw materials must be standardized, quality controlled and delivered on schedule. The industry will get its raw materials from anywhere in the world that can guarantee the quantity and quality of supply.

Farmers are provider of raw materials to the food processing industry, and the farm production sector is weak compared to food processors and manufacturers. Processes have value added options that can be used to increase their profits. Adding value to food is a natural development as consumer requirements about food become more specific and free market forces operate in an oversupplied and highly competitive market. Competition with the food industry has created for consumers lots of new products, advertised to be differentiated based on superior taste, price, quality, design, colour or convenience, but generally not related to quality of raw product delivered by the farmer.

Contracts. In highly industrialized sectors of the agricultural economy, farm-market links have been strengthened through contract agreements between farmers, farm suppliers and processors. Corporations control the quality, volume and type of output, and even schedule of farm activities. For example, contracts with livestock producers may require them to raise only livestock provided by the corporate partner, and to use specified quantities and types of feed and antibiotics that are supplied by the firm. Crop production contracts may specify supply of seed, fertilisers, herbicides and pesticides, date of planting and harvesting. The cost of inputs is usually deducted after the commodities are delivered.

Contracts can have wide-ranging implications socially, depending on how risk is distributed and gains are shared. They can provide for farmers an assured market and income, and flow of capital and technology into farming. Contracts can be used to avoid risk, although much of the production risk still remains with farmer.

Market Power. Market power refers to the ability to influence price. It is based on procurement policies, reaction to competition, and market share. Currently, in no sector in the agriculture-food system does one company of group of companies hold total sway, although in canned soup, livestock or sugar, a few giant corporations dominate. It is difficult for too much concentration of market power, because few foods are essential. Most foods can be substituted (i.e., butter can be substituted for margarine), so consumers can substitute if the price of one food is too high. It is difficult for consumers to know how much competition there really is in the food industry. There are many food brand names on the shelves in grocery stores, but several brands may be owned by the same company. For example, R.J. Renolds and ConAgra each own several brand names, so although it may appear that there is competition among brands, this is often not the case.

Farmers' vulnerability due to their small share of market power has sometimes resulted in farmers pressuring governments to intervene in the market to ensure that they receive adequate prices. Co-operatives and marketing boards are mechanisms of increasing farmers power in the market.

Co-operatives are voluntary associations of producers who combine to increased their buying or selling power. They are often backed by legislation. Their main value is through increasing the economy of scale in handling of farm produce and purchase of capital equipment or farm supplies. Their marketing power is limited because it is difficult to control individual levels of production or release of goods to the market by individuals outside of the co-operative.

Marketing Boards for a given commodity are usually established by legislation that makes them compulsory in order to control output and prices of the commodity. They have the power to regulate supply and price, and are often criticized for that. They aim to ensure stable and equitable returns for farmers and good quality food at reasonable prices for consumers. In Canada, they are established for commodities such as poultry, eggs and dairy products.

Marketing boards are often based on the use of production quotas. At the outset, quotas are freely allocated to producers on basis of previous output. Over time, quotas are increased or decreased as necessary to maintain an appropriate level of supply. They eventually acquire cash value, and may be sold openly on the market, or are incorporated into the value of the farm. They tend to increase farmers' market power, but may result in fewer farms.

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