Urban Renaissance Institute

Lawrence Solomon
National Post
March 22, 2001

Government intervention has reversed the economics of farming, making large-scale monoculture operations more secure than the family farm, says Urban Renaissance Institute’s Lawrence Solomon.

The family farm is inherently economic. Large-scale farming is not. The opposite appears to be the case only because governments reversed the economics of farm production through subsidies, particularly subsidies that reduced the risks that farmers face. Had governments not done so, the fate of the family farm would today be secure while large corporate farms and monoculture operations would be few and far between.

Unlike most industries, which face relatively few catastrophic risks, farms bring with them the risk of widespread damage from droughts, excess rain, pests and a complex of other perils, making them uninsurable by the private sector. “That’s why the government stepped in back in the 1960s,” explained George Pikor, the chief of the Forecasting and Actuarial Unit at Agriculture Canada. “The private sector didn’t make insurance available at any price. There is not one example in the world of an unsubsidized multi-peril crop insurance program that covers any significant number of producers.”

Traditionally, because comprehensive insurance was not available, and because few farmers would want to expose themselves to ruin by planting a single crop that might not materialize, farmers took steps that efficiently managed their risk. Instead of planting one crop, which too much rain at the wrong time could devastate, farmers planted five, 10 or 15, and added some livestock for good measure. The rain that might then come at the wrong time would harm but one of many crops, and perhaps might help several others. The damaged crop — though unfit for human consumption — might still be excellent fodder for their animals.

Farmers in this way self-insured, in North America and throughout the world. With few exceptions — chiefly the Soviet Union’s large-scale collectives and state farms — the farm economy operated in a manner that was both environmentally and economically sound.

Farmers could still count on government help in exceptional circumstances — farmers have always been adept at demanding relief when the elements don’t cooperate — but the level of help was unpredictable and slow in coming, giving farmers an incentive to avoid large risks. Then governments relieved farmers of the inherent risks in farming by providing them with the ultimate safety net — crop insurance — the instrument that became the family farmer’s downfall.

With taxpayers paying two-thirds of the insurance premiums, farmers were no longer subject to the natural limits that the free market had traditionally imposed. Now farmers could turn to monocultures and bet the farm on each and every harvest, and they could double and treble their bets by acquiring larger and larger farms. When the weather behaved, they earned a fist full of dollars. When the weather didn’t, the insurance gave them most of the money — typically 70% to 80%, and in Ontario and Quebec, 80% to 90% — that the monoculture crop would have fetched in the marketplace.

Yet even with the government covering most of the cost, crop insurance doesn’t pay for many farmers. Two-thirds of farmers producing fruits and vegetables for grocery stores, restaurants and other purchasers who desire fresh produce give crop insurance a pass. These predominantly small-acreage farmers can self-insure at lower cost, for example by planting crops that will mature at different times, avoiding catastrophe should bad weather come at a bad time.

In contrast, large scale industrial farming operations — producing tomatoes for ketchup bottles, or green peas for the frozen food section of the supermarket — overwhelmingly rely on insurance. These so-called “processing sectors” depend on large tracts of farmland producing a uniform product that will ripen at precisely the same time to allow for a machine harvest. Because these all-or-nothing operations cannot afford to have anything go seriously wrong — they not only must justify the expense of mammoth machinery that sits idle most of the time, but also the costs of irrigation and chemical sprays that control ripening — up to 90% of them acquire insurance.

Across Canada, governments have set up some 300 to 400 individual crop insurance programs covering more than 100 crops. Some — like Nova Scotia’s — subsidize high-risk areas at the expense of prime, low-risk farms. Other provinces try to spread the subsidies evenly.

But on the whole, explains Mr. Pikor, crop insurance benefits mechanized monoculture operations, inexperienced farmers and farmers who cultivate marginal lands whose crops are likely to fail. Crop insurance has relatively little value for smaller, diversified farm operations, or for savvy farmers generally, who know how to improvise to avoid catastrophe.

Crop insurance is the single most important subsidy tilting farming operations toward large scale, but it is by no means the only one. Governments also provide cheap credit to allow farmers to purchase mechanized equipment and the large fields needed to put the equipment to work; governments remove some or all of the tax on farm fuels for mechanized equipment; and governments subsidize herbicides and other inputs that especially benefit large operations.

The government bias to large-scale agriculture also distorts innovation. To qualify for most government R&D funds, researchers must first get the support of a non-government funder — typically a player in the farm industry. “Almost 80% of my research projects have industry funds,” says Rene Van Acker, a crop scientist at the University of Manitoba, who explains that corporate-backed research is overwhelmingly geared to boosting sales of farm chemicals. “Companies selling farm inputs have no interest in seeing farms develop in ways that capture niche markets that don’t need their products. Monoculture, on the other hand, is biologically fragile and susceptible to pest attack and epidemic.”

Monoculture is also vulnerable to subsidy withdrawal. Should governments ever discontinue farm subsidies, large-scale farming would contract dramatically. Not so small-scale farming. Unlike bulk commodities that compete on price in export markets, and lose bushels of money in the process, small-scale farming largely serves fast-growing local markets in which freshness and quality count, and in which foreign suppliers tend to be at a great disadvantage.

Without subsidies, inexperienced farmers, and those without much savvy, would leave for other occupations, and marginal lands that don’t belong in farming would become forested or return to wilderness. But savvy farmers, who must now often subsidize those who don’t belong in farming, would prosper in their family farms, and more than ever.

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.”

Philip Lee
The Ottawa Citizen
March 15, 2001

Subsidies won’t save Canada’s family farms.

Farmers themselves admit that, despite taking to the streets across the country yesterday to demand that governments more than double their latest $500-million aid package.

Darrin Qualman, the executive secretary of the National Farmers Union in Saskatoon, says farmers need government aid now to survive, but it is more important for Ottawa to respond to their plight with more than money.

“The federal government pays money to farmers, then refuses to do the relatively inexpensive and effective things that would end the crisis and the need for that money,” Mr. Qualman says. “We’re tremendously frustrated. It’s like a doctor who will continue to give you blood transfusions, but won’t cure the disease.”

For both Mr. Qualman and other, more strident critics of farm subsidies, the central question for Canada’s family farms is whether market forces alone should be allowed to determine whether they live or die.

Lawrence Solomon, the executive director of the Urban Renaissance Institute in Toronto, has long argued that farm subsidies should be eliminated in Canada.

In his view, there are too many farms in Canada and too much marginal land in production.

“There are harmful effects for the economy and there are harmful effects for the environment, and there aren’t any beneficial effects to speak of,” Mr. Solomon says. “There would be some disruptions in eliminating the subsidies, but there’s really no public policy rationale for maintaining them.”

An end to subsidies would reduce the number of farms and return marginal farmland to wilderness, he says. The farms that remained would be smaller and clustered primarily around urban centres. They would supply cities with fresh produce and wouldn’t face competition from foreign suppliers.

Canada needs to face the fact that it may not have an advantage over foreign competitors to produce certain types of food and taxpayers shouldn’t prop up unsustainable enterprises, he says.

Farms situated around cities tend to be productive and lucrative. They don’t need subsidies, which encourage large-scale farming.

“The family farm would do very well without all these subsidies,” Mr. Solomon says. “It’s these subsidies that are destroying the family farm.”

However, Mr. Qualman argues that thousands of small family operations in Canada are now being squeezed by a handful of giant agribusiness corporations. In the marketplace, small farmers are suffering from a huge imbalance of power.

“That’s not a radical idea,” Mr. Qualman says. “That’s something you find in every first year economics textbook. If you’ve got a transaction where one entity is huge and has no competitors and on the other side of that transaction you’ve got a relatively tiny buyer and seller with a huge number of competitors, it will be an extremely unfair and unequal transaction.”

He says the federal government refuses to consider the idea that in some areas of farming, the marketplace alone can’t solve all the problems.

“To paper over this market failure, the Canadian government gives taxpayers’ money to farmers hoping against hope that something will change and this problem will just go away,” Mr. Qualman says.

“What people are really saying is that if agribusiness is succeeding in choking farmers economically to death, then maybe the solution is to just let farmers die. There’s so much money in that agrifood chain, farmers could get a fair and adequate chunk and the rest of the trans-nationals would hardly even notice it.

“Farmers are starving economically in an agrifood chain awash with trillions of dollars. When you look at the amount of money that sloshes back and forth in that agrifood chain, from consumers through to processors and restaurants and fertilizer companies and feed companies, everyone in that chain makes huge profits, except the farmers.”

Mr. Qualman insists there are solutions to the farm crisis in Canada apart from reducing all debate to a decision either to subsidize or not.

“That’s the great untold story here,” he says. “What most people in urban centres think is farmers are suffering because they’re inefficient or because of European subsidies, and as Canadians we have to decide whether we want to give them money year after year until the problem is solved somewhere else, and that’s not the case at all. The problem can be solved here and now. The cure costs less than treating the symptoms.”

For example, the Farmers Union argues that the federal government could announce that it intends to double the price of grain by cutting a deal with the United States, the European Union and Australia to take a certain amount of land out of production each year. Simply by announcing this plan to curb production, grain prices would begin to rise, Mr. Qualman says.

Ottawa could also help and encourage farmers to move toward organic agriculture. Now, when grain prices rise, large suppliers of seed and fertilizer take the extra money out of farmers’ pockets. By helping farmers disconnect from these corporations, governments would allow them to keep more of their money at home and in rural communities.

Mr. Solomon’s solution is more straightforward: Canada should make a transition to a market farm economy, eliminate subsidies and use the money to buy out farms and help farmers find a new way to make a living. Older farmers could be eased out through a grandfathering agreement.

While the National Farmers Union maintains that farmers are now losing money on a scale they haven’t seen since the 1930s, Mr. Solomon suggests the picture may not be so bleak.

The average Canadian farm is worth several hundred thousand dollars and many farmers own spreads worth more than a million dollars.

“The average farmer is far, far better off than the average Canadian, and yet it is the average Canadian who is supporting the average farmer,” Mr. Solomon says. “The farmers are complaining about justice, but the justice is all on the other side.”