National Office 2717 Wentz Ave.
Saskatoon, Sask. S7K 4B6
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The Farm Crisis, Bigger Farms,
and the Myths of
"Competition" and "Efficiency"
National
Farmers Union (Canada)
Saskatoon, Sask. November
20, 2003
Preface
Founded in 1969, the National Farmers Union
directly represents thousands of Canadian farm families. NFU members believe
that the problems facing farmers are common problems, and that farmers
producing diverse products must work together to advance effective solutions.
The NFU works toward the development of economic and social policies that will
maintain the family farm as the primary food-producing unit in Canada.
The NFU believes that agriculture should be
economically, socially, and environmentally sustainable. Food production should
lead to enriched soils, a more beautiful countryside, jobs for non-farmers,
thriving rural communities, and enriched natural ecosystems. The decimation of
rural communities, growing environmental problems, declining farm numbers, and
the present farm income crisis cast doubt on the sustainability of the current
high-input, export oriented, expansionist model.
The NFU is a leader in articulating the
interests of Canada's family farms, in analyzing the farm income crisis, and in
proposing affordable, balanced, and innovative solutions that benefit all
citizens. We hope that this brief continues that tradition.
The NFU welcomes questions and comments. Please
contact the NFU at:
The Farm Crisis, Bigger
Farms,
and the Myths of
"Competition" and "Efficiency"
National Farmers Union
(Canada)
Saskatoon, Sask. November
20, 2003
The plan for Canada's family farms
Governments
and agri-business transnationals have a plan for Canadian farmers. That plan
takes various forms, but its essence is this:
Driven by competition and aided by technology,
Canadian farms must become larger and more efficient, though less numerous.
The embedded assumption is that open,
deregulated, globalized markets will drive our farms to higher levels of
efficiency, raising incomes for farmers and lowering prices for consumers. A
key part of this plan to increase efficiency is to increase farm size. And
increases in farm size will require a decrease in the number of farmers. (While
governments have recently been less explicit about reducing the number of
farmers, they were formerly very explicit, as this report will show.)
The following quotes illustrate the pervasive
focus on efficiency:
To remain competitive, farmers must evolve and adopt new, more efficient
production methods. . . . As . . . farmers strive to compete in a global
marketplace, they continually look for new efficiencies, whether in the form of
economies of scale, new technology, or vertically-integrated operations. Since
the end of the Second World War, agriculture has become increasingly
industrialized. This has meant fewer but more efficient farms. (Ontario
Ministry of Agriculture and Food, Discussion
Paper on Intensive Agriculture Operations in Rural Ontario, January
2000; www.gov.on.ca/OMAFRA/english/agops/discussion.html )
Today,
agriculture demands improved productivity and efficiency. Cutting costs, saving
time, and ensuring the entire agricultural enterprise is more efficient and
accountable is essential to compete in domestic and global markets. (Trimble
Navigation Limited; http://www.trimble.com/agriculture.html )
Efficiency
will be the watchword of successful farming in the new millennium. Considering
what's going on with soybean growers in Brazil, as one notable example, you
have no choice but to become ever more efficient. (Donald R.
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
"Efficiency" Page
1
Margenthaler,
President, John Deere Foundation, National Outstanding Farmer Luncheon Address,
Mobile, Alabama, February 27, 1999)
[T]here
are some who don't understand modern farming and what it takes to survive in a
global marketplace with low commodity prices. . . . The [farmers] who remain in
full-time farming have been forced to use economies of scale. That is, they've
had to become more efficient by using technological advances and raising more
animals. (Bruce L. Hiatt, President, Virginia Farm Bureau Federation, The
President's View, August 1999; www.vafb.com/opinions/1999/op_8_99.htm )
Farmers
must be encouraged and assisted to compete aggressively in domestic and
international markets on the basis of efficiency and quality. . . . (Bob
Speller, Liberal Member of Parliament, "PM's Task Force hopes to work with
Agriculture Minister, rural and farm organizations, consumer groups, to
establish a vision," Hill Times, April
2, 2002)
Producers must become more efficient and competitive in order to survive
in an increasingly global marketplace. (Senator Paul Coverdell, news release,
Georgia Peanut Commission, May 12, 2000)
Liberalizing
trade is part of the prescription to increase the productivity and efficiency
of modern agriculture and ensure technological advances and continued growth in
this sector. . . . Free trade in agricultural products will make agricultural
sectors in both the developed and developing worlds more resilient and thereby
boost food security. Policies that are friendly to R&D and new technologies
will draw capital into agriculture and enhance the sector's productivity and
efficiency. . . . Together, trade liberalization and stronger support for
agricultural technology - including for agricultural biotechnology - will raise
farm productivity, could spark a new "Green Revolution," and form a
solid base for global economic growth and development. (Alan P. Larsen,
Undersecretary for Economic, Business, and Agricultural Affairs, U.S.
Department of State, Reforming the Global
Food System, remarks to the Washington International Trade Association,
January 8, 2002;
www.state.gov/e/rls/rm/2002/7203.htm )
The idea that farmers
must become more efficient is not only widespread; its roots go deep into
Canadian agricultural policy. The following three quotes are taken from the famous
1969 Federal Task Force on Agriculture report, Canadian Agriculture in the Seventies:
[I]n a competitive world, those who are satisfied with yesterday's
standards of performance cannot expect even yesterday's income. The inexorable
pressure of increasing efficiency will not let anyone rest on previous
performance. . . . Being competitive entails being efficient. There is no
alternative. (p. 32)
[Individual
farm enterprises must continuously expand and improve efficiency in order to
maintain or increase incomes. Unfortunately, many farmers have too small
earnings to be able to save or to justify borrowing sufficient amounts to
finance the
The Farm Crisis, Bigger
Farms, and the Myths of "Competition" and "Efficiency" Page 2
required expansion. They fall further behind in the competitive race, even
though they make some improvements in productivity. Those who fall behind tend
to receive declining real and relative incomes and may either become part of
the rural poor with economically ‘unviable' farms or be forced out of
agriculture altogether. (p. 21)
The
primary worldwide force causing change in agriculture is technological
development. Science[,] in the form of a never-ending cornucopia of research
and development innovations, has increased and will continue to increase
dramatically the production per man hour and unit of land. This trend promises
not only to continue indefinitely, but also to accelerate. (p. 6)
The
1969 Federal Task Force went on to recommend that 1/2 to 2/3 of Canadian
farmers be moved out of agriculture.1 The Task Force Report criticized those who "were loathe to recognize
the need for a widespread exodus from farming"2 and the Report went on, in a section entitled "Goals," to state:
Increased
mobility out of farming helps to achieve a higher per capita net farm income
for those left in farming while at the same time obtaining better paid
employment for those who leave agriculture. (p. 32)
In a
1981 report, the Canadian Department of Agriculture and Agri-Food again
returned to the themes of efficiency and competition and the utility of farmer
exit, stating:
Part-time farmers and those soon to retire generally may not be willing
to leverage their operations to the same extent as the more technically
advanced producer. As a consequence, they will not realize the advantages of
economies of scale which may accrue to the more aggressive producer. . . . A
number of farms fail to achieve the optimal level of efficiency. It appears, however, that there is
sufficient transference of farm ownership to facilitate long-term adjustments (emphasis
added). (Agriculture and Agri-Food Canada, Challenge
for Growth: an Agri-Food Strategy for Canada, July 1981, p. 83)
Canada's
Department of Agriculture and Agri-Food revisited these themes again in 1993,
stating:
Global competition for new markets will . . .
intensify, led by technological advances. This could lead to a high degree of
adaptation/diversification in the Canadian farm sector, especially in the grain
and oilseed industry in the west, to enhance productivity and to compete for
new market opportunities. (Agriculture and Agri-Food Canada, Farm Development
Policy Directorate, Multifactor
1 The Task Force's "1990 model
of agriculture" projected a farm population of 3% to 4% of total Canadian
population (p. 9). In 1969, when the Task Force wrote its report, farmers made
up between 7% (1971 Census) and 10% (1966 Census) of the Canadian population.
2 Federal Task Force on Agriculture, Canadian Agriculture in the Seventies, Ottawa,
Queen's Printers, 1969, pp. 3132.
The Farm Crisis, Bigger
Farms, and the Myths of "Competition" and "Efficiency" Page 3
Productivity for Canadian
Agriculture Update to 1990 with Analysis, January
1993, p. 25)
All of the above statements contain the same
basic prescription: Competition (facilitated by globalization, free trade, open
markets, and deregulation) combined with technological innovation will lead to
higher efficiency and fewer but larger farms. However, when we analyze this
prescription and look at the underlying premises, we find that this plan for
restructuring agriculture based on competition and efficiency is constructed of
myths and false assumptions - some would say "lies." This report examines the damaging
myths that form the foundation of Canadian agricultural policy and similar
policies around the world. This report also investigates who is propagating these myths and who is benefiting by
short-circuiting our attempts to understand and remedy the crisis gripping our
family farms and rural communities.
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
"Efficiency" Page
4
Myth 1: Farmers need to
become more efficient
The
graphs below show that the prices farmers receive (the wavy line near the
bottom of each graph) have not increased over the past 25 years. Farmers are
today producing grains, oilseeds, hogs, cattle, and other foods for the same
prices they received a generation ago.
Farmers' ability to continue producing without a price increase for 25
years - despite rising prices for fuel, fertilizer, and other inputs - suggests a
high degree of efficiency. Few others can match farmers' performance: General
Motors, Shell Oil, and Coca-Cola cannot today make and sell their products for
1975 prices. Immediately, the assertion that farmers are inefficient or in need
of efficiency improvements seems suspect, perhaps false.
Figure 1: Selected farm gate and retail prices (not adjusted
for inflation)
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
"Efficiency"
Page 5
Myth 2: Farmers will become
more efficient as farms become larger
Setting
aside the question of whether farmers are or are not efficient enough already,
let's examine the assumption that farmers will become more efficient if they
enlarge their farms.
Economists point out the benefits from
"economies of scale": that larger operations - because of specialization,
division of labour, optimized equipment, access to capital, etc. - can produce
goods and services more cheaply and efficiently than smaller operations can.
For many government and corporate leaders, it is an article of faith that giant
transnational corporations are far more efficient than our relatively small,
family-run farms. This farm inefficiency, they assert, can be solved by
expanding farm size. Unfortunately, the data does not support this theory.
The four graphs in Figure 1 demonstrate that over the past generation,
retail prices for cornflakes, pork chops, bread, and beer have doubled,
tripled, and more. Prices for other grocery-store items have increased
similarly. Since the money from these higher retail prices is not going to
farmers, this extra revenue must be going to cereal makers, meat packers, food
processors, and grocery retailers.
Take
bread as an example. Consider a simple bread production chain made up of
farmers, a grain miller that makes flour (such as Archer Daniels Midland3),
a baking company (such as Maple Leaf's "Canada Bread" subsidiary4),
and a food retailer (such as Weston's "Superstore"5). The retail price
of a loaf of bread has risen from 43¢ in 1975 to $1.39 today (approximately
tripling). Since farmers have received none of this increase, the large and
allegedly-efficient corporations that do the milling, baking, and retailing
must have tripled the amounts they charge for their services. Assuming that
these price increases reflect costs and, thus, efficiency, this evidence
indicates that the largest firms in the bread production chain are the least
efficient and the smallest firms, our family farms, are the most efficient. A
look at the Figure 1 graphs on pork chops, cereal, and beer indicates that
farmers may be the most efficient links in those production chains as well.
While it contradicts economic doctrine, this evidence strongly suggests that Canada's
family farms are the most efficient firms currently operating in the entire
agri-food chain; perhaps in the entire economy. The evidence also suggests that
if farms expand and adopt the corporate model, we can expect lower efficiency and higher food prices.
The
agri-food chain
To understand the economic position of the family farm, one must
understand the farm in its context, within the agri-food chain.
At one end of the chain are fuel, oil, and natural gas
companies. At the next link, fertilizer companies turn
natural gas into nitrogen fertilizer. Next come chemical and seed companies,
machinery companies, and banks. In the middle sits the family farm. Continuing
down the chain we find grain companies and railways, packers and processors, retailers
and restaurants.
Other
than the farmer link, every link of the agri-food chain is dominated by between two
and ten multibillion-dollar transnationals and, perhaps not coincidentally,
every one of these links is characterized by large profits.
3 U.S.-based transnational ADM owns 47% of Canada's flour milling
capacity.
4 Maple Leaf - owned by a branch of the McCain
family - had 2002 sales of over $5 billion and its Canada Bread subsidiary had
sales over $1.1 billion.
5 George Weston Ltd. had 2002 sales of over $27 billion (double its 1997
sales). Stores and affiliates include SuperValu, Extra Foods, Fortinos,
Loblaws, Maxi, Provigo, The Real Canadian Superstore, Valu-Mart, and Zehrs.
Myth 3: Farmers will benefit by becoming more
efficient
In
the preceding pages, this report has cast doubts on the assertion that farmers
are inefficient and on the assertion that farmers would be more efficient if
they had larger farms. Let's push those doubts aside and assume, as do most of
our government and corporate leaders, that farmers are inefficient and that they need to expand their operations to
remedy this inefficiency. We should ask if that plan would work: Will farmers
themselves benefit if they enlarge their farms and become more efficient? By
expanding, will farmers escape the chronic farm income crises?
Fortunately,
we can easily answer these questions because we have decades of experience to
draw upon. Farmers have expanded
their farms. Where there were 300- and 600-acre grain farms a generation or two
ago, today we often see 3,000- and 6,000-acre farms. Some of the largest farms
have surpassed 10,000, and even 20,000, acres. Dairy, potato, vegetable,
cattle, and hog farmers have similarly doubled and redoubled their production.
A generation ago, a big tractor had 100 or 200 horsepower; today, a big tractor
has 300 or 400. Machinery is bigger and barns are bigger. Total acreage,
acreage per farm, animals per farm, production per acre, production per farm,
and total production are all up, and Canada's agri-food exports have doubled in
the past decade. By all measures, farm size and efficiency have increased
dramatically. But getting bigger and more efficient has not helped farmers.
Farmers are not enjoying prosperity. Instead, most are struggling with the
worst farm income crisis since the 1930s.
Figure
2, below, demonstrates that the average per-farm output of grains, oilseeds,
and special crops has doubled over the past 30 years: from less than 200 tonnes
per farm per year, to nearly 400 tonnes. The average potato farm today produces
twice as many tonnes as it did just 11 years ago. On hog farms, the number of
pigs per farm has more than doubled in just the past five years. Cattle,
vegetable, dairy and other farms have similarly increased their output.
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
"Efficiency"
Page 7
Figure
2 also demonstrates, however, that farmers have not been rewarded for these
impressive increases in size and efficiency. To the contrary, Figure 2 suggests
a heretical conclusion: farm size (efficiency) and farm prosperity appear inversely related. While output per farm
has doubled, net incomes have declined.
Even if someone believed,
despite the evidence, that Canada's farms are inefficient; and even if that
person believed that our farms could become more efficient by expanding; it
appears that that person could reasonably doubt the assertion that farm
families would benefit from expanded
production or increased efficiency. The data on farm expansion over the past
decades seems to undermine those who would urge greater expansion in the
future. Returning to the question raised at the beginning of this section - "By
expanding, will farmers escape the chronic farm income crises?" - the evidence
forces a pessimistic conclusion: that after generations of impressive
expansion, the farm crisis today seems even more intense and intractable.
Moreover, for reasons that this report will explore in subsequent sections, the
ways in which farmers have pursued
expansion and efficiency may actually be helping to fuel that crisis.
RNI
# Profit
Realized
Net Farm Income is not the same as profit. Corporate net income (profit) is
calculated after everyone - workers, managers, and the CEO - gets paid. In
contrast, net farm income is calculated before any allowance is made for the
labour and management contributions of farm family members.
Myth 4: Economies of scale are the only way to gain
efficiency
In the name of "efficiency," corporate and government policies push
farmers to expand. Economists endorse this prescription, pointing to "economies
of scale." Here is just one example of this pervasive prescription:
Since the Depression, there have been continuing and clear trends of a
decrease in the numbers of farms and increases in farm size. Increases in acres
or animal units were required to increase efficiency and allow producers to
compete in a climate-dependant environment and in frequently volatile markets.
The response, for many producers, was to expand their operations in order to
take advantage of economies of scale and to improve profitability.
Notwithstanding this, margins remained very thin, particularly for traditional
commodities such as beef, grains, and oilseeds. At the same time, smaller
producers were finding it even more difficult to compete without these
economies of scale. Many of these enterprises were not able to survive. The
result was a primary production component of the industry with fewer farming
operations that were bigger in size. (Alberta Agrivantage Team, Agrivantage Report: Building
Tomorrow Together, Report for the Alberta
Government, Nov. 2002, p. 20;
www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/webdoc6544/$FILE/building_report.pdf )
In
promoting economies of scale as the path to efficiency, economists and
policymakers often forget that there are at least two ways to wring out
increased efficiency: getting larger - gaining economies of scale - is one way;
competition is the other. And these two paths to efficiency are (outside of a
rapidly-expanding sector) mutually exclusive: pursuing economies of scale
requires larger and fewer operations and, thus, it reduces the level of
competition; increased competition requires more-numerous and, thus, smaller
operations.
There
is a good reason to suspect that as competition declines among the tiny number
of transnationals that dominate each link in our agri-food chain, efficiency
also declines. Alternatively, even if efficiency increases, the lack of
competition will greatly reduce pressure on those corporations to pass along
any benefits of efficiency to farmers, workers, or consumers.
When retail bread prices rise, as is shown in Figure 1, the reason may
be that transnational millers, bakers, and retailers are becoming less and less
efficient as they get larger. Alternatively, the reason may be that the large
size of these companies and the low levels of competition they face allow them
to take ever-larger profits and management salaries from the revenue streams
within the agri-food chain. It would appear that one or the other of the
preceding explanations must be true. Both cast doubt on the naive faith in
automatic benefits from economies of scale.
Economists confirm that as corporations merge
and become larger, there is not just one effect - increased efficiency due to
economies of scale - but also a second and countervailing effect:
The Farm Crisis, Bigger
Farms, and the Myths of "Competition" and "Efficiency" Page 9
increased
oligopoly power.6 These researchers note that when increases in
efficiency are smaller than increases in oligopoly power, prices will rise
regardless of efficiency effects. Given the opportunity to charge less, but
also the power to charge more, corporations will act predictably.
Researchers Rigoberto Lopez, Azzeddine Azzam,
and Carmen Liron-Espana have studied 32 U.S. food-processing industries
including meat packing, cereal production, soybean oil milling, and coffee
roasting.7 Lopez et al calculated the magnitude of the efficiency
effects and the oligopoly power effects that would result from mergers and
increased concentration. They conclude: "[Although cost-efficiency effects from
concentration are important in one-third of the industries, in nearly every
case the oligopoly-power effects dominate[,] or reinforce cost inefficiencies,
resulting in higher output prices." In other words, in the 32 food processing
industries that they studied, these researchers found that mergers and
increased concentration would lead to higher prices in nearly every case,
despite any efficiencies that may result from economies of scale. Appendix B
details the findings by Lopez et al.
In
contrast to the agribusiness giants, farmers face very high levels of
competition as nearly one billion farmers worldwide are forced to compete to
supply grains and meats and other foods to highly-concentrated traders and
processors. This intense and forced competition among farmers not only spurs
rapid increases in efficiency, it also compels farmers to pass all the benefits
of that increased efficiency into the system, to the benefit of others: most
often to traders, processors, and retailers. But as retail prices continuously
climb, it appears that traders, processors, and retailers are not only
declining to pass the benefits of their increased
efficiency on to consumers, these transnationals are also absorbing the
financial benefits from efficiencies created on family farms. The oligopoly
power effects mentioned earlier are now so large that they give the
corporations the power to pocket their own efficiency gains and farmers' gains as well. Why would we
destabilize and torment our farm families, ceaselessly pushing them toward
ever-larger economies of scale, making them live in insecurity and worry,
breaking farms and emptying communities, if, in the end, any efficiency gains
will simply be pocketed by powerful transnationals?
To maximize benefits to the economy as a whole
and to ensure that benefits are fairly and properly divided among all
participants, efficiencies and economies of scale created by large size, on the
one hand, and competition levels, on the other, must be properly balanced.
6 "Oligopoly": A market situation with only a few
sellers, each anticipating the others' reactions. (John Black, A Dictionary of Economics, Oxford
University Press)
7 Lopez, Rigoberto A.; Azzam, Azzeddine M.; and
Liron-Espana, Carmen, "Market Power and/or Efficiency: A Structural Approach," Review of Industrial Organization, v. 20,
i. 2, March 2002, pp. 115-126.
The Farm Crisis, Bigger
Farms, and the Myths of "Competition" and "Efficiency" Page 10
Myth 5: Technology will make farmers more efficient
and prosperous
Based on the preceding evidence, bigger farms
won't solve farmers' problems. But surely new technologies offer hope. Or do
they?
Figure 3, above, demonstrates that new technologies have helped Canadian
farmers double their (inflation-adjusted) gross revenue8 - from about
$17 billion in the late 1940s to over $35 billion today. Farmers' net income,
however, fell. Net income fell in the 1940s when many farmers were buying their
first tractors and electrifying their tools, pumps, and barns. It fell
8 "Net income" and "gross revenue" (each without an "s") refer to
aggregate numbers (measured in billions of dollars). "Net incomes" and "gross
revenues" will be used later in this brief to refer to per-farmer revenues and
incomes.
as
farmers doubled and redoubled their fertilizer use. It fell as farmers adopted
new chemicals to control insects and weeds. Adjusted for inflation, overall net
farm income today is one third its 1940s level. While there are fewer farms
today among which to share the net income "pie," even calculated on a per-farm
basis, net income today is far below its 1940s level. On a per-farm basis,
adjusted for inflation, farmers' net income over the past decade has been lower
than at any time since the 1930s.9 To stay on the land, most families must now rely on off farm jobs.
Perhaps
a brief disclaimer is needed: The preceding dismissal of technology as a
farm-income enhancer is not a Luddite position. Nor is it a blanket
condemnation of technology. Most Canadian grain farmers do not want to go back
to using hoes or oxen. Despite the romance, the majority of cattle farmers do
not want to go back to spending long days on horseback and nights under the stars.
Potato and dairy farmers do not want to go back to doing their work by hand.
This report's intent is not that farmers and policymakers should reject
technology outright, but that everyone should move beyond the simplistic
assumption that the financial benefits from technology-enlarged production will
automatically flow to farm families.
Figure
3 shows that while farmers retained (in net income) about one dollar out of
every two that they generated in the late 1940s, today farmers retain just one
dollar in ten. The graph also shows that while new technologies and inputs have
helped farmers increase production by about $18 billion (from about $17 billion
in the 1940s to about $35 billion today), the corporations that sold those
inputs and technologies to farmers swallowed up not only the entire $18 billion
in increased production revenue, but an additional $8 billion as well - driving
farmers' net income down. Farmers
increased their output and gross revenue, but input and technology makers
captured 144% of that additional revenue. Over the past fifty years, for every
dollar that new technologies and inputs have contributed to farmers' revenues,
farmers have been made to pay $1.44.
This
analysis - that farmers have been made to pay far too much for technologies and
inputs - is borne out by current research showing that farmers who minimize
purchased inputs reap higher net returns. Dr. Martin Entz is a University of
Manitoba plant scientist. He also leads the Glenlea Long-Term Crop Rotation
Study.10 For
twelve years, Entz and his team have used test plots to compare costs and
yields for conventional, low input, pesticide-free, and organic crop production
systems. Their findings: farmers achieve their highest net returns per acre
when they use no purchased crop inputs - when they farm organically. Further,
farmers earn these superior returns even if they do not take advantage of
premium prices for their organic crops.
Agricultural technologies and purchased inputs could help farmers increase their net income, but not when the
corporations that sell those products have such overwhelming market power
relative to farmers. In the current system, these corporations use their market
power to price according to what the market will bear. This pricing power means
that these corporations will capture nearly all the economic benefits of
increased production or, as Figure 3 suggests, these corporations will capture
and extract even more than their
technologies and inputs actually contribute.
9 For data on per-farm net incomes, see
Appendix A.
10 Please
see www.umanitoba.ca/faculties/afs/plant_science/glenlea/glenlea.html
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
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Figure 4, below, provides an example of
predatory pricing by input manufacturers. The graph shows the correlation
between Canadian wheat prices and fertilizer prices.
During the first half
of the 1990s, wheat prices rose and fertilizer prices tracked those increases.
In the second half of the 1990s, wheat prices fell and, with a lag, fertilizer
prices tracked wheat prices downward. In 2001, wheat prices again began an
ascent, as did fertilizer prices. When grain prices rise, fertilizer companies
raise their prices to snatch any additional revenue right out of farmers'
pockets. Such pricing tactics are impossible in markets with real competition.
Fertilizer
companies themselves confirm that they price according to what the market will
bear. The graph at right is taken from the 2001 Annual Report of Agrium
Corporation, a leading fertilizer manufacturer. Agrium's title states that
"Nitrogen Prices Follow Grain Prices" and the company helpfully graphs the
correlation between the prices of U.S. corn and urea (nitrogen) fertilizer.
Leading fertilizer companies such as Agrium and
Potash Corporation of Saskatchewan have parlayed this pricing power into
explosive growth. Agrium is seven times larger (on a revenue basis) than it was
nine years ago. Potash Corp. is almost ten times larger, over the same period.
The Farm Crisis, Bigger Farms, and
the Myths of "Competition" and "Efficiency" Page
13
Figure 3, above,
yields one final insight: The relationship between farmers' gross revenue and
net income changes over time. Figure 3A, below, reproduces Figure 3, and also
highlights these changes.
The Farm Crisis, Bigger Farms, and
the Myths of "Competition" and "Efficiency" Page
14
Moreover, farmers
increased their gross revenue significantly in Period 3 - up 42% between 1991 and
2001. This increase, while occurring over a longer period of time, is
comparable to the increase in gross revenue between 1970 and 1975. But in the
current period, there is no corresponding increase in net income, let alone a
repeat of the mid-'70s boom.
The three periods
delineated above coincide with very different levels of corporate concentration
and power. The disconnect between gross revenue and net income in the current
period reinforces the assertion that input and technology manufacturers are now
manipulating their prices to snatch away any farm profits that might result
from higher prices or production. And this disconnect between gross and net
further undermines those who would urge farmers toward increased productivity
and efficiency as a way of increasing their net incomes and escaping the farm
crisis.
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
"Efficiency" Page
15
Myth 6: The rest of the economy is seeking efficiency
through competition
Governments
tell farmers that markets will continue to become more and more competitive.
Recall from this report's introduction the Ontario Ministry of Agriculture's
recommendation:
To
remain competitive, farmers must evolve and adopt new, more efficient
production methods. . . . As . . . farmers strive to compete in a global
marketplace, they continually look for new efficiencies. . . .11
And
recall Canadian Member of Parliament Bob Speller's recommendation:
Farmers must be encouraged and assisted to
compete aggressively in domestic and international markets on the basis of
efficiency and quality. . . .12
But
is "competition" really the guiding principle of today's economy? Are the
transnational corporations that dominate the rest of the agrifood chain
striving to "compete aggressively"? Or are they rapidly merging in order to reduce the level of competition they
face and to increase their market power?
Figure
5, right, shows the rapid pace of corporate consolidation and mergers. The
value of mergers and acquisitions in 1999 and 2000 was over $4.5 trillion per year. While mergers slowed in 2001, they
still totalled $2.5 trillion. This amount is more than double Canada's Gross
Domestic Product (GDP).
Competition and profit are inversely related:
the higher the level of competition, the lower the level of profit. Every
economics textbook will concur: At one end of the spectrum, a high degree of
competition will reduce prices and profits while, at the other end of the
spectrum, the complete lack of competition - a monopoly - will lead to very high
prices and profits. The CEOs of large corporations know: To maximize profits,
minimize competition.
11 Ontario Ministry of
Agriculture and Food, Discussion Paper on
Intensive Agriculture Operations in Rural Ontario, January 2000.
12 Bob Speller MP, quoted in: "PM's Task Force hopes to work with
Agriculture Minister, rural and farm organizations, consumer groups, to
establish a vision," Hill Times, April
2, 2002.
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
"Efficiency" Page 16
As the NFU detailed in The Farm Crisis, EU
Subsidies, and Agribusiness Market Power (February
2000), even as farmers earn small returns and often endure large losses, the
handful of corporations that dominate each of the other links in the agri-food
chain earn large profits. These corporations enjoy large profits because they
have consolidated to an extreme degree in order to avoid competition and its
downward pressure on their prices. They have consolidated with little
interference from government. Instead, Canada's Competition Bureau has granted
approval for merger after merger. As an example of its acquiescence to
corporate giantism and monopolism, the Competition Bureau allowed Canada's two
major propane distributors - ICG and Superior - to merge to form a virtual
monopoly. The Competition Bureau also seems almost certain to approve Maple
Leaf Foods' bid for a near-monopoly on hog slaughter and processing in
Saskatchewan and Manitoba (more on this below). Such evidence indicates that
the government encourages the reduction of competition in most sectors. The
government's policy prescription of aggressive competition is one that it
recommends and applies almost exclusively to family farms.
Of all government policies, the ones that most
affect farmers' competition levels and the levels within the rest of the
agri-food chain are the policies of global integration and so-called "free
trade." As trade and investment agreements have torn down the economic barriers
between nations, these agreements have thrust all the world's farmers into a
single, hyper-competitive market. At the same time, globalization and trade
agreements have spurred the dominant transnationals to merge into ever-larger,
less numerous mega-corporations. Globalization and trade agreements have
increased competition levels for farmers - driving down farmers' prices and
profits - and the effects for the dominant agribusiness transnationals have been
just the opposite.
Other policies similarly increase the level of
competition for farmers and decrease competition among transnationals. For
instance, governments are dismantling farmers' marketing boards. Until the
latter-1990s, hog farmers in Saskatchewan and Manitoba sold their hogs through each
province's farmer-controlled marketing board. Farmers had the benefit of
"single-desk selling": packers that wanted to purchase hogs in that province
had to buy from a single marketing board. Single-desk selling gave farmers
price transparency, equal access to the market, equal prices for products of
equal value, and market power when dealing with packers. Today, those marketing
boards are gone and one company, Maple Leaf Foods, owns 80% of hog processing
capacity in both Manitoba and Saskatchewan.13 The deregulation
policies of the Manitoba and Saskatchewan governments, coupled with corporate
consolidation, has transformed farmers' competitive landscape from one defined
by a single-desk seller to one defined by a single-desk buyer.
Two
transnationals - Cargill and Tyson - kill and pack the bulk of Canadian beef. Three
transnationals make most of our cereal. Five retail most of our food. Farmers
have just three major tractor manufacturers to choose from - half the number that
existed 15 years ago. In Canada, each link of the agri-food chain is dominated
by fewer than ten (and often as few as two) multi-billion-dollar
transnationals. The single exception is the farm link, where nearly a billion
of the world's farmers operate in an intensely competitive sector. The dominant
transnationals retain competition only as a fiction (when they apply the term
to themselves) or as a prescription (to be administered to others - especially to
farmers, workers, and small businesses).
13 Maple Leaf Foods signed an agreement in September 2003 with U.S.-based
Smithfield Foods to purchase that company's Schneider's meat processing
division. This deal will give Maple Leaf 80% of hog slaughter and processing
capacity in Saskatchewan to complement its 80% ownership of Manitoba capacity.
The Farm Crisis, Bigger
Farms, and the Myths of "Competition" and "Efficiency" Page 17
Myth
7: Farmers are producing too little . . . and
too much
Implicit
in the criticism that farmers are not efficient enough is the criticism that
they are not each producing enough: Increased efficiency requires increased
production per farmer.
But
this criticism runs into another: that farmers are overproducing, flooding the markets, and pushing down prices. Seen
another way, the "inefficiency" criticism implies that farmers have not
invested enough in new technology and capital equipment, but the
"overproduction" criticism implies that farmers have invested too much!
Government documents state:
[The decline in crop prices over the last three decades . . . is itself
a continuation of a trend which goes back centuries. The trend is the result of
a number of factors but primarily the
sustained increase of productivity which has consistently outstripped the
growth of demand (emphasis added). (The Federal/Provincial Safety Net
Working Group, Safety Net Review Prepared
for Federal/Provincial/Territorial Ministers of Agriculture, January 2002,
p. 21)
Additionally,
documents explaining our governments' recent and much-trumpeted Agriculture
Policy Framework (APF) state that:
[Technological change has increased productivity, reduced production
costs, and increased total production. One of the most significant effects of
technological change and increased competition is the long-term decline in most
commodity prices. (Agriculture and Agri-Food Canada, Putting Canada First: An architecture for Agriculture Policy in the 21st Century: "Competition and Subsidies in
Global Markets", April 2002, p. 2)
However, in the same document - a document that
clearly states that "One of the most significant effects of technological
change and increased competition is the long-term decline in most commodity
prices" - our government says that:
In the face of declining prices, the challenge for Canadian producers is
to adopt new technologies . . . to remain ahead of international competitors.
(Agriculture and Agri-Food Canada, Putting
Canada First: An architecture for Agriculture Policy in the 21st
Century, "Competition and Subsidies in Global Markets", April 2002, p. 3)
Governments are telling farmers: Technology and
efficiency contribute to overproduction and declining prices; and declining
prices necessitate more technology, higher efficiency, and increased
production. While absurd, such a stratagem might have a tiny chance of success
if powerful transnationals were not poised to skim off any benefits farmers
might gain from increased production. As the system is currently structured,
farmers are just the hamsters in the wheel that powers an expanding
agribusiness empire. And government's solution to the farm crisis is for the
hamsters to run faster.
The Farm Crisis, Bigger Farms, and the Myths of "Competition" and
"Efficiency" Page
18
A
variant of the preceding contradiction - that farmers are producing too much and
also too little - can be found in our governments' fixation on increasing
agricultural export production. In 1993, federal and provincial ministers set
the ambitious target of doubling Canadian agri-food exports to $20 billion by
2000. ….. To those ends, federal and provincial policies have driven rapid
expansion in hog production, mostly to serve export markets. Government
policies and incentives have driven an increase in beef cattle production and
an increased reliance on export markets. Cattle and hog numbers have increased
by 25% and 37% respectively since 1990.14
Our governments are
telling us, however, that "Increasing world supply has added to the pressure on
prices" and that "Increased international competition drives prices down."15 Our governments also tell us that there is
"reduced demand from traditional importing countries as they move toward
self-sufficiency."16 Their confused and confusing message: To help to deal with low prices,
we must produce and export more; and increased production and exports are
driving prices down.
The problem, apparently, is that farmers are
both producing too little and also producing too much: We are both inefficient
and over productive. To hold both of these contradictory understandings in
one's head, even for a short time, is a profound act of cognitive dissonance.
To hold both over the long term betrays an astonishing lack of curiosity about
the causes of the crisis devouring farms…..
14 Agriculture and Agri-Food
Canada, An Overview of the Canadian
Agriculture and Agri-Food System, Pub. No. 2211E, June 2003, p. vii.
15 Agriculture and Agri-Food
Canada, Putting Canada First: An
Architecture for Agriculture Policy in the 21st
Century, "Competition and
Subsidies in Global Markets," March 2002, p. 2.
16 Agriculture and Agri-Food
Canada, Putting Canada First: An
Architecture for Agricultural Policy in the 21st
Century, May 2002, p.2.
www.agr.gc.ca/puttingcanadafirst/pdf/consult2_01_e.pdf
The lie of overproduction
"Low prices are caused by oversupply," farmers are
told. But there is no oversupply. To the contrary, the data may indicate a
looming shortage.
Stocks/use ratios are the most commonly quoted
measures of supply and demand. These ratios compare grain on hand at year-end
(stocks) to the amount used that year (use).
This year's world wheat stocks/use ratio will be 22.27% - the lowest
level in 30 years. The world total grains stocks/use ratio will be 16.87% - the
second-lowest level in 30 years.
There is little evidence of a oversupply, and no evidence
of an oversupply so vast and burdensome that we would expect it to lead to the
grinding farm income crisis that is destroying farmers around the world.
Sources: see wwwm
usda.gov/oce/waob/wasde/wasde.htm and www.fas.usda.gov/psd/intro.asp
The Farm Crisis, Bigger
Farms, and the Myths of "Competition" and "Efficiency" Page 19
Myth 8: Canadians and their economy will be better off
if farmers compete, become more efficient, and become less numerous
While
farmers have not benefited from past increases in scale, output, or efficiency
and while farmers seem unlikely to benefit from future increases in those
areas, perhaps others will benefit as Canada's farms become larger, more
efficient, and less numerous.
Figure
1 demonstrates that increased efficiency at the farm level has not reduced
retail food prices. Quite the opposite has occurred: While farmers held farm
gate prices steady, processors, distributors, and retailers increased grocery
store prices 300%, 400%, and 500%. Clearly, consumers will not be the winners.
Even if farmers could achieve perfect
efficiency - even if they could produce and deliver food for free - Figure 1
reveals that consumers would see little benefit: perhaps a 5% to 10% reduction
in food expenditures. Moreover, routine price increases by processors and
retailers would erase any such savings within a few years. An illustration of
the disconnect between farm gate and retail prices came in 1988. That year, the
federal government terminated Canada's Two-Price Wheat Program. As a result,
the price that Canadian millers paid farmers for wheat fell from about $7 per
bushel (under the Program) to about $5. Bread prices rose.
Perhaps
fewer, more efficient farms will help create employment in the Canadian food
processing sector. However, the opposite has occurred so far. In recent decades
employment in agri-food processing has declined,17 even as food
production has increased.
Perhaps
a policy that reduces the number of farmers and that increases the number of
people available to work at GM or Wal-Mart (North America's largest
private-sector employer) would help alleviate some labour shortage in our
economy. Current unemployment rates make this seem an unlikely benefit.
Moreover, some economists argue that governments and central bankers manage our
economy to maintain a certain range of unemployment (to head off
inflation-triggering wage hikes).
Today, farmers make up about 3% of the Canadian
workforce. This does not seem like an unreasonable portion of our number to
devote to food production: it leaves 97% of Canadians to build cars, run banks,
play hockey, launch dot-com companies, and manage adult-video stores. At one
time, the portion of the Canadian population working on farms was large. Moving
most of those people to the cities allowed Canada to industrialize and may have
increased our standard of living (less certain is whether this change has
increased our quality of life). Given the tiny fraction of the population that
farms today, however, it is unlikely that Canadians or our economy would reap
any similar benefits by moving a portion of that small remaining population
into the urban workforce.
Forcing more farm families into cities will create no benefits, but such
a forced move will create
17 Numbers
based on Statistics Canada's Labour Force Survey. Available on request from
Agriculture and AgriFood Canada. See also: Agriculture and Agri-Food Canada, A Profile of Employment in the Agri-Food
Chain, April 1999.
The Farm Crisis, Bigger
Farms, and the Myths of "Competition" and "Efficiency" Page 20
costs for all Canadians. Expelling more farm
families from the land will kill even more rural communities - leading to an
emptier, lonelier, uglier rural Canada. Reducing the number of people living in
rural Canada will increase the cost of utilities and other services for all
those who remain. Displacing more farmers will mean the erosion of rural
culture and the destruction of a rich and irreplaceable educational system:
that of growing up on a family farm. Reducing the number of farmers will
increase environmental degradation because fewer people will be left to care
for the land and those who remain will be forced to operate in an increasingly
industrial fashion, relying more heavily on chemical fertilizers and
pesticides. As farmers enlarge their farms and become ever more imbedded into
corporate, industrial food production, the transnationals that manufacture farm
inputs will extract more and more of the wealth generated on those farms, with
predictably negative results for local economies. And fewer farmers will mean
reduced food security, as our food system becomes less resilient and adaptable
and as it falls increasingly under the control of alien transnationals. Rural
and urban citizens alike will suffer negative effects without any offsetting
economic or social benefits.
Hogs: a case study
The hog sector provides a valuable
test case to measure the benefits of reducing the numbers of farmers. The
following compares statistical indicators for 1988 to those in 2002.18
1988 2002
Number of hog
farmers in Canada 33,760 11,565
Of the farms that were raising hogs
in 1988, corporate and government policies have since forced 66% out of production.
Pork chops: grocery
store price $6.88/kg $9.54/kg While corporate and government policies have reduced
the number of Canadian hog farmers by 2/3, packers and retailers have increased
grocery store pork chop prices by 39%.
Hogs: farm gate
price $1.44/kg $1.46/kg
While grocery store pork chop prices are up 39%, farm gate prices are up
only 2%. Seen another way, while hog farmers are still receiving about the same
$1.44/kg, packers and retailers have increased their margin (the difference between the price they pay to farmers and
the price they charge consumers) by a whopping $2.64/kg.
Packing plant
pay (representative starting wage) $9.38/hour
$9.65/hour When adjusted for inflation, starting wages at many plants are down
sharply. Packers are using their growing market power to push up prices to
consumers, push down prices to farmers, and push down wages to workers.
If reducing the
number of farmers produces benefits for the economy, those benefits should be
apparent in the hog sector where we have expelled 2/3 of our farmers in just
half a generation. No such benefits exist, however: Consumers are paying more
for pork and workers are getting less for
packing it.
18 These
statistical indicators taken from the NFU's Free
Trade: Is it working for farmers? published in July 2002. That publication
lists sources for the statistics in the boxed section, above. www.nfu.ca/briefs/1988vs2002FINAL.bri.pdf
The Farm Crisis, Bigger Farms, and the Myths of
"Competition" and "Efficiency" Page 21
The truth about farmer efficiency: the data
The
preceding will convince most people that "farmer inefficiency" is a ruse. The
unconvinced need only look at the data. In 2001, Statistics Canada published Productivity Growth in
Canada.19 This
report calculates multifactor productivity measures for Canadian industries.
Multifactor productivity growth is synonymous with increasing efficiency (see
sidebar).
Figure
6, below, is reprinted from Productivity Growth in Canada. The middle set of bars (the lightest grey) show that
for the 23-year period 1973 to 1996, the largest increases in multi-factor
productivity - the largest increases in "efficiency" - were in Agriculture and
Related Services.20 This is also true for the 35-year period 1961 to
1996 (Figure 6, far right set of bars).
Between 1961 and 1996,
agriculture's multi-factor productivity increased by 3.4% per year. The average
increase for all businesses (the "Business Sector" in Figure 6) was just 1.2%
per year. Since
the early 1960s, farmers have increased their efficiency at a rate unmatched by
other sectors and at a rate almost triple that of the Canadian business sector
as a whole.</