Economist says the agricultural sector is unique because it is impacted by market volatility and global weather
OTTAWA — Government intervention in agriculture is as important today as it was in the 1930s, says economist Catherine Brodeur.
She said volatility within the sector is still prevalent, even though technology and markets have changed a great deal since the Great Depression.
The vice-president of economic studies at Groupe Ageco told the Canadian Federation of Agriculture’s annual meeting that people question support programs, particularly when agriculture is prospering. However, many of the factors that led to the first programs still persist, she said.
In the 1930s, economists examined the sector and discovered characteristics that didn’t apply to others. For example, businesses typically cut back or closed when prices fell, lessening supply and increasing demand.
However, in agriculture, many farmers stuck with it when prices dropped and even increased supply.
Economists identified demand and supply characteristics that contribute to what Brodeur calls the “farm problem” and the need for government programs. Those still apply, she said.
She said the porcine epidemic diarrhea virus in the United States is an example of inelasticity of demand and corresponding price volatility. Hog slaughter dropped by six percent, which led to a price increase of 40 percent, she added.
“These variations are disproportionate,” she said.
“In this case, this was a benefit.”
Another characteristic is atomistic competition.
“This means that we have a large number of producers who individually have an interest to produce more to increase gross income,” Brodeur said.
The cumulative effect of individual decisions is to increase supply and lower prices. Collectively, participants in another industry might decide to cut supply to raise prices.
Agriculture also faces income inelasticity of demand, in which demand for food rises less rapidly than income, she said.
Buyer concentration and consolidation upstream and downstream of producers also limit producers’ ability to negotiate.
On the supply side, Brodeur said production cycles limit what producers can achieve. For example, a calf comes once a year, and crop choices might not fit conditions when seeding arrives.
Many perishable products can’t be stored to wait for better prices.
She said the impacts of climate change in different regions aren’t canceling each other out, as some economists expected.
Market globalization was also supposed to level out supply and demand. A good year in one area would be balanced by a bad year in another. However, Brodeur said that hasn’t happened, and market sensitivity has increased because producers around the world react and accentuate imbalances.
“Instead of lessening price volatility, the globalization of markets actually combined all this volatility and increased it,” said Brodeur.
As well, farmers have fixed assets that they keep even when prices are low. Production continues as long as variable costs are covered, she said.
“Individually, these characteristics are not unique to agriculture,” Brodeur said.
“But what economists have shown is that especially in agriculture, when all are present, you have the farm problem.”
Exchange risk, geopolitical risk, biosecurity and climate change also add to the problem.
Brodeur said numbers don’t always tell the story because while Canadian agricultural households have far more assets than non-agricultural households, their income is comparable only be-cause of program payments and off-farm jobs.
She showed statistics indicating that Saskatchewan’s net farm income would be negative more than $1 billion since the early 1980s without access to government programs.
Brodeur said the causes of the problem persist and may be inevitable.
“It would seem to confirm that the intervention by the state is still necessary, but it should be re-newed,” she said.
CFA vice-president Marcel Groleau said he believes governments recognize agriculture is a far different industry than others.
“If you look at mining, the biggest cost is in exploration before you find the source and start investing,” he said. “That’s when the government will share the risk with the mining sector.”
In agriculture, the shared risk comes from volatility in the market and weather.
He said recent trade negotiations have not included a discussion about reducing domestic support for agricultural, which shows governments understand what farms need.