Making the case against farm subsidies

Philip Lee
Ottawa Citizen
March 18, 2001

In 1985, New Zealand stopped bailing out farmers. Today, its rural areas are thriving. It’s a ‘brutal process,’ experts say, but it would work in Canada. Article quotes URI’s Lawrence Solomon.

What if Canada decided to go cold turkey and eliminated all farm subsidies? Would such a decision mark the end of farming in this country?

Not a chance.

Could it be done?

The simple answer is yes. New Zealand eliminated farm subsidies 16 years ago and has a strong agriculture industry today.

Canada has three choices on the issue of farm subsidies: keep all 270,000 farms in the country afloat, no matter how many billions of dollars it will cost taxpayers; provide partial assistance and let some marginal farms fail, which seems to be the federal government’s current position; or simply say “no more subsidies” and allow the industry to recreate itself.

What would happen if Canada was to choose option three? What would the Canadian farming industry look like in the post-subsidy era?

To seek a measured response to that question, the Citizen turned to a specialist, George Brinkman, a professor in the University of Guelph’s department of agriculture business and economics.

“Would we have farmers in the future? Absolutely yes,” Mr. Brinkman says. “The land would still continue to be farmed. But we might not have the same farmers.

“This would be a brutal adjustment process for the present generation of farmers, but in the long run it would establish a somewhat different, lower-cost industry.”

New Zealand farmers began to go through the brutal process in 1985, and for the first few years felt as though the sky was falling. But most of them survived, and many of them prospered.

“It’s like going cold turkey when you’re a dope addict,” Mr. Brinkman says. “You’ve got to go through a lot of shivers, and not everybody makes it.

“But the (farmers) who are there at the end can expand cheaper than they could before, but they earn less after they expand. The marketplace will work out that relationship. If you can’t make money on land, don’t buy it. Let it fall in price. And that process works its way through.”

To paint a portrait of the Canadian farming industry without subsidies, Mr. Brinkman begins with a quick lesson in farm-subsidy economics.

The crisis on Canadian farms today is one of a lack of net farm income. Most farms are productive, modern and efficient, but they can’t make money.

In 1971, there was about $1.5 billion in net farm income in Canada. In 1973, a Russian grain failure and the collapse of the Peruvian anchovy stocks drove both the price of grain and protein supplements like soy beans through the roof. Net farm income doubled, to $3 billion, and then stalled.

Since 1973, net farm income in Canada has remained at about $3 billion. But the purchasing power of $3 billion in 1973 was about four times what it is today.

Meanwhile, the amount of capital invested in farms has increased from $24 billion to $175 billion during the same period.

Therefore, farm income has been supplemented by governments. Subsidies really took off during the 1980s – $786 million in 1983, $1.4 billion the next year, then $1 billion, $1.9 billion, $2.5 billion, $3.4 billion, until almost 100 per cent of net farm income was being generated from government transfers and rebates.

Between 1987 and 1992, 92 per cent of the net farm income in Canadian agriculture was provided by governments through transfers and rebates.

About that time, the federal government decided that the subsidies were out of hand and Canadian agriculture had to be more competitive.

During the middle to late 1990s, government assistance for farms declined to $900 million.

Then global grain and seed oil prices collapsed, and governments were back in the subsidy business: $1.7 billion in 1999, an amount that represented 57 per cent of net farm income. Today, governments have made commitments of $2.64 billion for farmers, a figure that will amount to more than 80 per cent of net farm income.

There is no question farmers have faced tremendous difficulties during the past 25 years. They have made a huge capital investment. They are in a risky, low-return industry.

However, from a purely economic perspective, the industry today makes no sense.

Mr. Brinkman looks at it in this way. In Canada, farmers have invested $175 billion of capital and they have an equity of about $140 billion. If farmers earned five per cent on their equity, they’d be earning $7 billion, even with no return on labour and farm management. However, net farm income in Canada, including all government transfers and rebates, sits at $3 billion.

“Is that a good industry?” Mr. Brinkman asks. “I’m not trying to put down agriculture. I’m trying to be sympathetic with farmers and say, ‘Look, people aren’t getting rich in agriculture. This is very tough business. It takes tremendous courage and management capabilities to survive in this thing.'”

So what if Canada eliminated transfers and rebates to farmers?

“I’ve heard a lot of farmers say, ‘We’re not going to have any farmers in the future,’ and nothing could be further from the truth,” Mr. Brinkman says. “We will have an agriculture sector. The only difficulty is, it might not be the same farmers. If we don’t have anybody leaving the industry, we can’t change, we can’t make any structural adjustments.”

Without subsidies, less-efficient farmers would go out of business. The farmers who failed would start selling their land. These sales of farmland would depress the land market and the equity of all farmers would fall.

This would cause good farmers who carry high mortgages to have some uncomfortable meetings with nervous bankers.

Canada’s farmers have paid too much for their land. Five years ago, when grain and oil seed prices started to rise, farmers in Saskatchewan were paying 20 times the assessed value for land.

“I was out there saying, ‘Haven’t you guys learned anything?’ People started jumping in and they were willing to pay way too much for land,” Mr. Brinkman says. “Those who wanted to expand, expanded into a higher cost structure.”

In the post-subsidy era, there would be tremendous losses of wealth and income among the farmers who survived, but a new generation of farmers would emerge, who would have a lower cost structure and who would be more competitive. They would end up with about the same level of income farmers in Canada have now, but with far lower costs.

“Eventually the land prices would stabilize at a new price that could support farmers,” Mr. Brinkman says. “And new farmers would come in and buy land at a cheaper price than exists today and they would produce very competitively in an international marketplace.

“The issue today really is about whether or not we are supporting the present generation of farmers, not whether we’re maintaining the competitiveness of the agricultural sector.”

In some cases, farmers would increase the scale of their operations because that would be one of the ways they would increase their competitiveness. Canada would likely have fewer farmers, operating on even lower margins, and they would need a larger land base to be able make that work.

There would be fewer changes in the horticultural industry, which is already operating primarily as a competitive industry.

Lawrence Solomon, the executive director of the Urban Renaissance Institute in Toronto, argues that small farms can be lucrative in areas around cities, providing high quality produce and niche food products to markets and restaurants.

He points out that “most diversified agricultural economy in Canada” is now located in the Greater Toronto Area, producing 50 per cent more farm output than Nova Scotia, 67 per cent more than Prince Edward Island and 80 per cent more than New Brunswick.

Grain and oil seed farmers now receive the bulk of government subsidies. Could these commodity producers be competitive without transfers and rebates, in a global economy awash in agricultural subsidies?

“Sure they’d be competitive without them,” Mr. Brinkman says. “They’re competitive now, they’re just not earning any income. So the present producers have to be competitive. The way they are competitive is that they just receive a very low return on their labour and their capital. And it’s not sustainable.”

Apart from subsidies, the other issue that farmers now face is the future of supply management — government rules instead of subsidies. Supply management in the form of quotas and tariffs at the country’s borders is now supporting a relatively healthy dairy and poultry industry in Canada. However, the World Trade Organization could reduce those tariffs in the next round of negotiations.

While organizations such as the National Farmers Union support the idea of increasing supply management to ease the farm crisis, the country may in fact be facing the unravelling of supply management industries in the future.

What would happen to those industries without supply management?

“If the tariffs were reduced substantially, what we would likely see is that the price and quota would go down,” Mr. Brinkman says. “I have no doubt that we would continue to have dairy farmers in Canada, but I’m not sure about chicken farmers, because you can produce all the chickens we consume in Canada in Arkansas.

“So we might not have chickens, but we definitely would have dairy because it’s land-based. There’s a lot of land in Quebec that is only good for forage.”

Again, land prices would adjust to the point where these farmers would be competitive.

The New Zealand experience should offer Canadian policy makers some pause for reflection.

In 1985, a new Labour party government eliminated farm subsidies. In 1984, subsidies had accounted for 40 per cent of farm income; the next year, nothing. The government offered one-time grants for farmers leaving the industry, grief counselling and some welfare support. Other than that, farmers were on their own.

It was as if a bomb had dropped on the rural economy. Farm incomes fell, profitability declined, input costs such as fertilizer increased, farm debt rose and land values plummeted. There were predictions that 10 per cent of the country’s 80,000 farms would fail.

Within five years, however, the resourceful farmers had picked themselves up and proved the doomsday predictions wrong. About 800 farms, one per cent of the industry, failed.

Farm incomes eventually recovered. Farmers developed niche markets and produced fresh and dried flowers, seeds, plants, fresh and processed vegetables. They diversified the rural economy, producing woven natural wool rugs, wooden toys and furniture, wool and leather clothing. They opened tourism enterprises.

New Zealand has experienced what is being called a “quiet revolution in the countryside.” There have been dramatic changes in land use, a reduction in sheep and beef farms and an increase in dairy farms. There are fewer kiwi fruit farms and more apple orchards. Farmers are planting pine trees on abandoned farmlands.

When he spoke to farmers at Simcoe County Farmer’s Week in Barrie in January, Mr. Solomon described the New Zealand experience.

He pointed out that the end of subsidies has been good for New Zealand’s environment. Lands prone to erosion have been returned to the wild, two million hectares have been converted to commercial forests, farmers use fewer chemicals and water quality is improving.

Since 1985, New Zealand has increased its share of world dairy production by 50 per cent and has become an “exporting powerhouse,” producing 45 per cent of world exports in butter. The production of organic food has risen dramatically.

“New Zealand is now the country that is best prepared for the globalized world we live in,” Mr. Solomon said.

He noted that there are 10 per cent fewer farmers in New Zealand, but the rural population has risen by nine per cent.

“If you care about rural life; if you care about sustainable farming; if you care about getting off the government dole, being independent and efficient; New Zealand points the way,” Mr. Solomon told his audience.

Mr. Solomon thinks Canada could deal with subsidies in a gentler fashion than New Zealand’s there one day, gone tomorrow plan. He thinks Canada should phase out subsidies over 10 years for existing farmers. New farmers coming into the business would receive not a penny from governments.

“There is a bright future for farming but it doesn’t include government,” he said. “You will wilt on the vine with government, but throw government off your back, get close to your customers, scrap the quota system, scrap supply management, get back to your roots, and you will thrive.”

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