CANADA: by Patrick J. ByrneNews Weekly
Exposing the myths behind 'free market' agriculture policy
, February 14, 2004
Patrick Byrne examines a recent important report into the farm crisis in Canada. "Australia" could replace "Canada" in the report, as it describes a parallel crisis in local agriculture.Governments, corporations and free market economists have argued that the crisis facing farmers is the inevitable result of growing farm efficiency - the result of mechanisation, use of fertilisers, pesticides, better genetics and irrigation, etc. Higher efficiency means that food prices have been falling for several hundred years and fewer and fewer farmers have been needed to supply the world's food.
Canada's National Union of Farmers (NUF) has produced a landmark report showing that this is not the cause of the current farm crisis. Rather, policy changes have led to farmers being exploited. Deregulation has seen the creation of farm input, food processing and retailing oligopolies and monopolies that have squeezed the financial margins of farmers, while free trade policies have left farmers to compete on corrupt, highly subsidised world markets.
Founded in 1969, the NFU aims at maintaining the family farm as the primary food-producing unit in Canada and 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 NUF report, The Farm Crisis, Bigger Farms, and the Myths of "Competition" and "Efficiency",
(available at www.nfu.ca/briefs/Myths_PREP_PDF_TWO.bri.pdf) maintains that destruction 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 following is a summary of the NUF report.
The embedded assumption of government and corporate policy is that open, deregulated, globalised markets, combined with technological innovation, 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 reduce the number of farmers. However, when we analyse 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."Myth 1: Farmers need to become more efficient
Farmers are today are producing grain, oilseeds, hogs, cattle, and other foods for the same prices they received a generation ago. The bread and wheat prices (see Figure 1) typify the price differences between farmer and consumer in all rural industries.
The ability of farmers to continue producing without a price increase 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 produce for 1975 prices. Immediately, the assertion that farmers are inefficient or in need of improvement, seems suspect, perhaps false.Myth 2: Farmers will become more efficient as farms become larger
Economists point out the benefits from "economies of scale": that larger operations - because of specialisation, division of labour, optimised 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. However, the data does not support this theory.
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 the corporate model cereal makers, meat packers, food processors, and grocery retailers that have
grown larger but fewer through mergers and takeovers. Clearly growing larger doesn't automatically mean lower prices to consumers.Myth 3: Farmers will benefit by becoming more efficient
This can easily be answered as for decades 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.
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.
Instead, farm size (efficiency) and farm prosperity appear inversely
related. Most farmers are struggling with the worst farm income crisis since the 1930s.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, pointing to "economies of scale."
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.
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. Both cast doubt on the naive faith in automatic benefits from economies of scale.
Researchers Rigoberto Lopez et al1, found that in the 32 food processing industries that they studied, increased concentration from mergers and takeovers would lead to higher prices in nearly every case, despite any efficiencies that may result from economies of scale.
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 destabilise 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?Myth 5: Technology will make farmers more efficient and prosperous
Adjusted for inflation, overall net farm income today is one-third its 1940s level and over the past decade has been lower than at any time since the 1930s. To stay on the land, most families must now rely on off farm jobs.
Farmers are not Luddites. They want to employ the best technologies. However, policy makers should move beyond the simplistic assumption that the financial benefits from technology-enlarged production will automatically flow to farm families.
Figure 2 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.
While new technologies and inputs have helped farmers increase production 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
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.
The Report demonstrated that corporations charge what the market will bear. For example, fertiliser prices have fluctuated almost exactly in proportion to the price of wheat.
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, capturing not only the economic benefits of increased production , but extracting even more
than their technologies and inputs actually contribute.
Figure 2 also highlights the impact of globalisation, the opening up of world markets as a result of policies of governments, and international bodies like the World Trade Organisation and the International Monetary Fund.
From the 1940s until about 1981, Farmers' net income fluctuated in accordance with their gross income. But since then, gross income has increased while net incomes have stagnated.
(Indeed net incomes would have fallen lower if it were not for government payments which kicked in substantially after 1981, and have become an increasing proportion of farmer's net income).Myth 6: The rest of the economy is seeking efficiency through competition
But is "competition" really the guiding principle of today's economy?
World wide, the value of mergers and acquisitions in 1999 and 2000 was over $4.5 trillion
per year. Mergers and takeovers restrict competition and increase the market power of transnational corporations.
Farmers earn small returns and often endure large losses, while a handful of corporations that dominate each of the other links in the agri-food chain earn large profits.
Aiding these ever larger transnationals, 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.
Globalisation 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.
Further aiding these transnationals, governments are dismantling farmers' marketing boards. 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 processors and retailers.
Today, those marketing boards are gone and, for example, one company, Maple Leaf Foods, owns 80% of hog processing capacity in both Manitoba and Saskatchewan. Deregulation policies have transformed farmers' competitive landscape from one defined by a single-desk seller to one defined by a single-desk buyer.
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.Myth 7: Farmers are producing too little ... and too much
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. The Government's solution to the farm crisis is for the hamsters to run faster.
Farmers are told that they are both inefficient and overproductive. To hold both of these contradictory understandings in one's head, even for a short time, is a profound act of cognitive dissonance.Myth 8: Canadians and their economy will be better off if farmers compete, become more efficient, and become less numerous
Figures definitively show that since the 1960s, multi-factor productivity of agriculture increased almost three times as fast as the business sector as a whole.
Numerous studies show this to be the case, confirming that relatively small operations such as family farms are more efficient than the very large transnationals that dominate most of the economy. This is not heresy, but truth.
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 so on.
Forcing more farm families into cities will create no benefits, but such a forced move will create costs for all Canadians.
Expelling more farm families from the land will kill even more rural communities; will increase the cost of utilities and other services for all those who remain; 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; 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 fertilisers and pesticides.Myth 9: We are actually pursuing efficiency
Judged within the analytical framework used by economists, corporations, and governments, farmers seem to be among the most efficient producers in the entire Canadian economy.
If they have shown themselves to be about three times more efficient than other Canadian businesses (on average), then there is simply no justification, in an economy where teachers, bankers, doctors, landlords, and managers can all expect to make a reasonable living, to deny that same benefit to farm families on the spurious claim that they are "inefficient."
To do so is to stand reality on its head, to call black white.
In addition to the creation of pollution problems from some fertilisers and pesticides in our environment that are called "externalities" by economists (and not factored into the cost of production) and the increased use of resources on the farms, we are also using more resources after our food leaves the farm.
Numerous studies document how North American food travels thousands of kilometres to get to our plates. Giant food retailers have centralised their distribution centres so that food is trucked back and forth needlessly.
Would an efficient food system transport vegetables thousands of kilometres by ship, truck, and plane when much of that food could be grown locally?
In the face of polluted rivers and dead zones in our oceans, is it efficient to uproot third-generation farm families from their homes and replace them with megatons of nitrogen and phosphate fertilisers? That we are pursuing real efficiency - in our food system or in our larger economy - is a myth, a lie.
Economists simply create the illusion of efficiency by refusing to factor in resource depletion, biodiversity loss, habitat destruction, water use, pollution, climate change, the degraded nutritional value of some foods, and a host of other "externalities."
Under the pretext of "efficiency," corporate and government policies are simply replacing a farmer-based system with an input-based system.
Farmers in Canada and other developed countries now retain just one dollar from every ten they generate in sales - the transnationals that produce farm inputs and technologies take the other nine.
The energy, fertility, seed, chemical, machinery, transport, and technology corporations that increasingly dominate our food system have no interest in seeing us craft a system that minimizes the use of their products (as efficiency dictates). Rather, these corporations want a system where the use of their products is maximised.
A truly efficient agriculture and food system would be immensely beneficial for farmers, society, and our environment.
Such a system would use a minimum of resources while striving to deliver optimum food and nutrition to the maximum possible number of people, causing the least possible damage to the environment, and preserving and enhancing our land and water for food production for future generations.
Actually working toward efficiency, actually working to minimise the use of chemicals, fertiliser, and energy would have the additional benefit of helping unhook farmers from profit-draining input manufacturers.Conclusion
Inefficiency rhetoric is nothing more than a smokescreen: a propaganda tactic deployed against farm families, workers, and rural communities while corporate and government policies extract the vast wealth we create.
There are other lies told by the powerful. These include blaming the farm income crisis on oversupply or on foreign subsidies.
Our leaders point to salvation through value-added processing. And all the while, no one dares utter the notion that the farm and rural crisis is caused by a too-aggressive bleeding of rural wealth by agri-food giants. No one dares suggest that farmers are making too little because others are taking too much.
The problem isn't too little value-added. The problem is too much value theft.
That agribusiness corporations would rob farmers should be no surprise. But that our democratic governments would so betray us should surprise many Canadians.
Only by peeling away the myths and lies can we understand the rural crisis. To paraphrase the words of folk singer Utah Phillips:The family farm is not dying - it is being killed.
And the people who are killing it have names and addresses.
It is time that family farmers learned those names and addresses so that a united resistance can begin in earnest.
1. Lopez, Rigoberto A.; Azzam, Azzeddine M.; and Lirón-España, Carmen, "Market Power and/or Efficiency: A Structural Approach," Review of Industrial Organisation
, v. 20, i. 2, March 2002 pp. 115-126.