Lawrence Solomon
January 12, 2001
It’s a pleasure being here in Simcoe County, at a conference where so many of the presentations are focused on how to improve your technology and your business, to become competitive. That is the key to the future of the dairy industry, and I commend you and the organizers for it. It will be a bright future if you keep your eye on that ball.
My last speech was also to farmers, but those farmers — about 250 to 300 of them — weren’t as optimistic. That conference was in Brandon, Manitoba, and things couldn’t have been more glum. Prices are down for them, farmers are leaving their land. Things aren’t perfect here but compared with farmers on the Prairies, Ontario farmers are blessed. On average, of course, farmers across Canada are well off. The average farm’s net worth, on average, is about two-thirds of a million dollars and the average dairy farm is worth more like a $1-million. Just the farm, forgetting about your car, your investments, your RRSPs and pensions. Your farm alone is worth four times what the average Canadian household has in the world. So you are truly blessed, and I hope you will always be blessed. And I wish the same for non-farmers, too, especially for those who aren’t quite so well off as you are.
The farmers in Manitoba aren’t as well off as you are, and you know why. They’re competing against heavily subsidized farmers, and that can be tough, especially since they’re used to receiving government help. You have the luxury of supply management. That protects you from competitive pressures. Today. But don’t think that can’t change. It can change overnight. It changed in other dairy producing countries. And it can change here. Bombardier has been making headlines this week, because this one company just received a $1.7-billion loan from Brian Tobin, our new trade minister.
Bob Friesen, the president of the Canadian Federation of Agriculture, made the national press on this story, with a point of view that has probably also occurred to many of you. Why was there a lot of extra money to help a profitable aerospace company but no extra money to help farmers, he wondered.
“One industry shouldn’t be more important than another,” he said. ” … There’s no reason why the government shouldn’t do the same thing for the agriculture industry that it did for Bombardier.”
Mr. Friesen, I agree with you when you say that one industry shouldn’t be more important than another. But I disagree that either industry should be receiving subsidies from government. And, Mr. Friesen, I can explain to you why support to agriculture has been steadily, steadily declining while the government continues to support Bombardier. It isn’t just that farming has cost a cumulative $80-billion in subsidies since 1986, the year the government began systematically counting the costs, although that’s part of it. And it isn’t because you’re now just 3% of the population, so your votes don’t count for that much anymore, although that’s also part of it. No, the real reason that agriculture in Canada will continue to lose subsidies involves something far more profound than that.
We live in an era of high-tech, of globalization, and farming, as practiced in Canada, just doesn’t belong. You can tell yourselves that you’re internationally competitive, but policy makers and politicians know better. Our government is backing high-tech, it’s backing added-value industries that can and do compete on international markets. The Liberals are an urban party. That’s where the votes are. That’s why they encourage more immigration and that’s why they’re slowly withdrawing the subsidy structure that has supported the farm sector.
But even if the Liberals wanted to support you, they couldn’t for long. Here’s why the status quo can’t last , and why there will be a shake out in agriculture. In this era of globalization the consumer is king and governments can no longer protect producers against consumers. This is not unique to farming. Just look at the list of industries that have lost their government protection. The electric monopolies are falling around the world; some are private, some are public. The government was powerless to protect them, even when the government itself owned them. Same for the natural gas monopolies, the mining companies, telephone monopolies, and for the airlines. The walls holding back international trade are crumbling. Consumers want more value, they want more choice, more safety and they also want environmental protection considered. The walls are crumbling.
Look at the auto sector, the North American Auto Pact is being scrapped with the Big Three losing their power to keep imports out. In the financial services sector, consumers want better access to financial markets so the big brokerage houses, such as Merrill Lynch, have lost their grip and now discount brokers dominate the market. Soon the music industry will also lose its hold because of Internet technology, such as Napster. And other protected industries, like textiles, will also lose their traditional industry grip. Don’t think for a moment that agriculture is any different.
Consumers want choice and governments can’t help you. Agriculture will lose its grip. Globalization has taken power out of the hands of governments, out of the hands of producers, and given it to consumers. Globalization has changed the world irreversibly and it has also changed how Canadians see ourselves.
And that is another reason that the status quo won’t last. We no longer see ourselves as hewers of wood and drawers of water. The Internet is spearheading the new economy and Canadians are realizing that the new economy, not the old economy is important to us. Montreal, Toronto, Vancouver are among the leaders in the continent for the new economy. The Toronto stock exchange is now seen as a high tech exchange. It is no longer appreciated for the primary industries that it lists. Because agriculture is passe and the new economy is hip, politicians are rushing to cash in on the new economy. And they are cashing out of the old economy, which can be read in Paul Martin’s speeches. They are now all about the new economy.
That is why the “old economy” has been losing its subsidies and that is why agriculture will continue to lose its subsidies and its protections. Paul Martin’s mini-budget before the election was all about the new economy because that is where the government wants to make its mark. And this occurred even prior to an election when you would think they would be trying to court the farm vote.
Now in this room, and in your circles, some of you might think that agriculture looms large in the national economy. Let me give you the actual statistics, the actual size of agriculture in the Canadian economy is …… 1.6% of GDP. Agriculture is small, the entire resource sector in Canada, in fact, is less than 6% of GDP. The new economy is big. Nortel had a bad day in September, when it lost a quarter of its value. The Globe reported that a quarter of its value amounts to 9% of the country’s GDP. They could also have reported that Nortel’s one-quarter loss is also six times the size of the entire agricultural sector in Canada. Agriculture is not an economic powerhouse. It is a niche in the Canadian economy. The status quo will not last for another reason, too. City industries, and not rural industries, are now seen as the engines of the economy. Some farmers like to argue that people have to eat. As if that argument makes farmers more important than other producers; who provide housing materials, the fuel we need, the clothes we need, the cars we need and the services we all require.
We do need to eat, but we also need other goods and services. The agriculture sector provides 1.6% of Canada’s goods and services. Farmers don’t take precedence over other sectors and politicians know where their bread is buttered.
The status quo won’t last for another reason as well, because of the environment. I work for an environmental group called Energy Probe Research Foundation. It has 30,000 supporters in Canada. My friends and colleagues also work for environmental groups, such as Sierra Club, or for Greenpeace. The general public may think that farming is benign environmentally, but environmentalists know better. We don’t like the energy intensity of a lot of agricultural practices, we don’t like the pesticide and fertilizer use, we don’t like the resulting soil degradation and we don’t like the resulting water pollution and fish kills, such as those we’ve seen in P.E.I. Right now, farmers are far too popular for most environmentalists to go public with their concerns. But that’s for now, and that can change very quickly.
I think we are beginning to see the changes now. We all know about Walkerton, where a farm operation — I think it has 80 head of cattle — contaminated the town’s water supply with E. coli. Public hearings are under way at Walkerton, and my organization is one of several that are intervening in those hearings. The Sierra Club, Pollution Probe, and the Canadian Environmental Law Association are also participating. The environmental groups are now criticizing intensive farming, but they are not criticizing the family farm, because they fear a public backlash.
Eighty head of cattle is not exactly an intensive operation. E. coli 0157H7 — the culprit at Walkerton — is the only deadly form of E-coli. Until recently it was thought to be fairly rare. It turns out that E. coli 0157H7 is in 90% of cattle at one point of their life, and at any point 30% to 40% of cattle have E. coli 0157H7. The general public doesn’t know this yet — the information is relatively new. In fact, public health officers across the country don’t yet know it.
But soon the public will know it, and there is going to be a lot more concern about farm practices. When that happens, public attitudes will change. E. coli exists wherever manure exists. There is a lot of manure which has to be dealt with responsibly in the country. The status quo will not last for another reason as well. Farmers are stepping on a lot of rural toes. The right to farm laws, I believe, are a big mistake. You’re out numbered in the rural areas, you’re upsetting your own neighbours, you’re setting yourself up for a big back lash.
The status quo can change and it can change overnight. In Brandon, my host told me a story about someone he knows in Toronto who doesn’t like to hear farmers always complaining. He says that it reminds him of Quebecers. Now, that was the first I’d heard of that. Actually I was a little bit surprised, because I live in Toronto and I know that Torontonians have enormous respect for farmers. There is just an enormous wellspring of appreciation for farmers.
In fact, even at the National Post, (and newspapers are famous for cynical journalists), other journalists, surprised at my columns on farm issues, have said, “Why don’t you take it a little easier on the farmers?” There is a lot of good will for farmers but the public is fickle, and public sympathy can change very rapidly.
Farm protests may be a good short-term strategy but I think they undermine you very seriously in the long run. You don’t want to present yourself as a charity case to your customer. Customers don’t like to mix business with charity. And you don’t want to strong-arm your customers either; to tell them they have to buy from you and at your price. You want to treat your customers as equals. You’ve got something to sell; they’ve got something to buy.
Farmers have one fundamental decision to make and one decision only. You have to decide who is your customer. If your customer is the government, then you are going to do everything you can to win over the government. You are going to lobby, you are going to threaten. You will ask for lower transportation costs, lower inputs, more subsidies, higher milk prices, more protection. You will get good at that, but you will ignore your real customer.
Who is your real customer? Your real customer is the restaurant that sells your product. Monday, that customer, as represented by the Canadian Restaurant and Food Services Association, is in court suing you, as represented by the Canadian Dairy Commission for charging Canadian restaurants more for their cheese than you charge American companies. Canadian restaurants pay 30% more for Canadian cheese than Americans do.
Mr. Friesen says he wants all Canadian industries to be treated equally. Yet he supports a system that gouges the restaurant industry to benefit the dairy industry. Mr. Friesen may be good at courting governments but he is ignoring your real customer.
Who else is your real customer? Your real customer is the family in the city that can’t afford to buy milk for its kids. These are the families that are worth a small fraction of what you’re worth, and they’re the ones who are expected to pay the most for their milk. You know who gets the best price the Americans. They’re the only beneficiaries of our milk marketing system. They buy Canadian milk for a fair market price, and possibly for less than a fair market price .
The next best price — an above market price — goes to the businesses, like the restaurants that are suing you. And the highest price of all — as if you have it in for them — you reserve for the family with kids, for ordinary Canadians who on average are worth a small fraction of what you’re worth. One day, the real customer — who has a lot more votes than you do — will say, ‘Who needs you?’ And when that happens, the government will also ask the same question.
Things can change very fast. That’s exactly what happened to farmers in New Zealand. That’s who I think Canadians can learn from not Americans, and not Europeans, whose dairy sectors are as uncompetitive as Canada’s. New Zealand is a farming country. It is small — 3.6 million people, about one-third of Ontario’s population.
Like farmers in Canada, New Zealand used to be heavily dependent on government. And that heavy dependence hurt the economy, it hurt the environment and it hurt the farmer. In the early 1980’s, New Zealand faced an incredible economic crisis that we can’t even relate to. Almost overnight, the government was forced to end all subsidies. In 1984, farmers received 40% of their gross income from government subsidy. In 1985 it was gone.
I’m not recommending this for Canada. We are not in the dire straits that New Zealand was, but I am recommending that we look at the effects of the subsidies on New Zealand and how removing the subsidies transformed New Zealand. With the subsidies, agriculture didn’t need to be sustainable. Exports were so highly subsidized that marginal lands were converted to agriculture use. Trees were cut down, with farming occupying some of the steep slopes of the hills and valleys in the countryside. Today over half the country suffers from soil erosion and the erosion is extreme in about 10% of the country.
There is carbon depletion, nutrient depletion, and acidification.
There are many other problems, such as soil compaction and several thousand of the country’s 80,000 farms have contaminated sites.
Farmers are rational individuals who respond to economic signals. Fertilizer was subsidized but fencing was not, so farmers saved money on fencing by fertilizing new pasture areas instead of using the grass efficiently where it was already growing. The farmer’s products also deteriorated. As the volume of sheep increased, the quality decreased. Because of the volume of sheep and their demand on pasture and rangeland, they became so scrawny that they were unfit for western markets. New Zealanders had to sell them into the Middle East, where they are used to bony animals, like goats.
Sheep were basically being sold as goats. In one year, a large number of lambs even had to be rendered down and used as blood and bone fertilizer. That was the world under subsidies. Now for New Zealand without subsidies. The environment bounced back, the erosion prone lands have been taken out of production, and some of the land has gone back to its natural state. About 2 million hectares have gone into commercial forestry. Farmers use fertilizer and other chemicals far more sparingly, and water quality has improved immensely.
It wasn’t just the environment that bounced back, farming bounced back. In the last 10 years the farm sector is up 24% in constant dollars with farming about 6% of GDP. That is about three and one half times Canada’s proportion. New Zealand’s agriculture sector as a whole is about 16% of GDP. Farming is now more important in the New Zealand economy than it was in the early 1980’s. In fact, the economic growth and improved efficiency in the agriculture sector is out-pacing the rest of the growth in New Zealand. Before the subsidies came off, productivity increases in New Zealand averaged 1% a year. Once the subsidies came off, productivity increases were 6% a year.
New Zealand is now the country that is best prepared for the globalized world we live in. In the last decade, New Zealand has increased its share of world dairy production by 50%. And it has become an exporting powerhouse.
In butter, New Zealand accounts for 45% of world exports:
In cheese, 23%:
In skim milk powder, 18.2%:
And in whole milk powder, 27.3%:
Subsidies? Here’s how New Zealand stacks up against Canada and the United States. We are heavily subsidized, as is the U.S. New Zealand, the exporting powerhouse, receives almost no subsidies. Now what does this mean at the individual farm level? Over the last 10 years, the average diary cow produced 35 kilograms or 25% more milk fat per year. Lamb carcass weights have increased 2 kilograms or 16%. When the farm subsidies first came off everyone predicted disaster. Massive de-stocking. De-stocking of livestock did occur it is down 7%. Total numbers of sheep are down 27%, but lambs are up 3% and cattle are up 11%.
There are other changes. Land use became diversified and farmers started to maintain cost structures that reflected the real earning capability of their farms. New products were developed and farmers got closer to their customers. The French have a certain kind of cut that they like for their rack of lambs. In New Zealand they process it now and ship that value-added product.
The most dramatic valuer-added change in New Zealand has been that organically grown produce is up, and it is up dramatically. Now this wasn’t bed of roses. There were a lot of disruptions.
When New Zealand brought in those free market reforms, one of the things that happened was the New Zealand dollar went up. That made it all that much more hard to export any of the country’s products. Interest rates climbed sharply and they stayed high for years. That led to land values plummeting — they had been artificially high. People predicted that 8,000 farms would fail; that’s 10% of New Zealand’s farms.
But actually farmers stuck it out because they saw the potential in the free market. In the end 800 farms failed, that’s 1%. Those land values, which tanked before, are now back to where they were in the early 80’s and that’s after inflation. Those farmers now are sitting on gold; but not fool’s gold. Do they want to go back to the old, subsidized world of government protection? Ask New Zealand’s farm organization its counterpart to Mr. Friesen’s organization and you’ll get a resounding NO. New Zealand farmers like being independent. They don’t want to go back.
And here’s another bottom line. There are 10% fewer farmers in New Zealand, but the rural economy is up. The overall rural population is up 9% over what it was. 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. You can wait for the rest of the world to change. For the U.S. and the E.U. to drop their subsidies. You can wait for the Canadian government to raise their subsidies. You can pray that the government won’t abandon you some day. Or you can take control in your own hands as farmers did in New Zealand.
If you bite the bullet here, I don’t know the end result, I don’t know if the farm population will drop by 10% or 20%. But I do know that the farm population has been dropping with all the subsidies that you are getting. And I don’t know if land prices will bounce back in 5 years or 10 years. But I do know that when they do bounce back, they will be real land values. And here’s something else that I do know; we can do better to provide a real safety net for our farmers than the New Zealand government. Which by the way, the Labour government did not do in New Zealand in the 1980s. Because when New Zealand cut off the subsidies to the farmers overnight, it provided almost no support. There was a one-time grant to farmers who where leaving the farm sector and that was base on two-thirds of the previous year’s income. And apart from that there was some sort of grief counseling that the government offered with some welfare support, but virtually nothing.
We can do a lot better. What I would propose doing, is to leave the subsidies intact for the farmers nearing retirement. I think that it is a blessing that there are so few young farmers in the system. It means that the transition can be easy. For existing farmers, the younger ones I would phase out subsidies perhaps say over 10 years. But for new farmers, people who haven’t yet entered the farm business, not a penny. No one should need encouragement to farm, or to do anything else. And one other thing I’d do is I’d protect existing asset values, as a government insurance policy to protect against land values dropping, so that people can feel secure that they won’t lose their main asset. In the case of quotas, I’d have the government buy them back. At their current value, not at the value that they had when you obtained them.
If you wait until globalization hits you between the eyes, if you wait until our markets are forced open to accommodate international trading rules, you could find that your quotas have become worth a lot less, maybe even worthless. Under globalization, some parts of the farm economy will shrink but others will grow. I’d like to tell you about the most blessed farming region in Canada. It’s called the Greater Toronto Area. The GTA produces 50% more farm output than Nova Scotia, 67% more than P.E.I., and 80% more than New Brunswick. The GTA, as you know, is an industrial powerhouse, but it is also an agricultural powerhouse. And that’s because it services a large urban population, which has given it the most diversified agricultural economy in Canada.
Farmers in the Toronto area are close to their customers, and those customers don’t want just commodities. They want organic produce, they want herbs for the health food stores, and they want exotic grains for the restaurants. The specialty-farming sector in Toronto is fast growing; in fact it now matches the traditional farm production of poultry, pigs and diary.
There is a bright future for farming but it doesn’t include government. 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.
Urban Renaissance Institute 