Wednesday, January 18, 2023

The agriculture treadmill eliminates both farmers and profit

Despite enormous increase in productivity, farming is in general not profitable and the strategy of international competitiveness that dominates the farm sector in many countries is doomed to lead to ever decreasing profits and ever decreasing number of farmers.

This article draws on the four number-crunching articles posted here the last month and adds some analysis, particularly economic.

The development of productivity in farming is mind-boggling. 200 years ago the time spent to harvest and thresh one ton of grain was around 30 workdays. The job is now done in five minutes with a modern combine harvester – and John Deere X9 actually can harvest up to 100 ton in one hour if conditions are optimal. Not only has work productivity increased a lot, the yield per area unit has increased as well. As demonstrated here, world agriculture output of crops, measured in tons, has increased with 268% since 1961. The population increased with 151%, i.e. the production per person increased with 43%. This has been accomplished with an increase in cropping area with “just” 20 percent. The work force increased until 2003 when it amounted to 1.06 billion people, but after that it dropped considerably and is now around 0.84 billion.

In high income countries, the agriculture work force dropped from 66 million persons 1961 to just 16 million 2020, i.e. three out of four farm jobs have disappeared, most of them being farmers. Meanwhile the output doubled, which means that value per person employed increased 700 percent. Still farming is not a very profitable venture in most countries. There are always some exceptions to this rule either as a result of a specific policy environment or as a result of some individual farmer being superior managers or business people, or just happen to be in a sweet spot at the right time.

Looking a bit closer on Sweden, my home country, we can see that the share of the GDP originating in farming has shrunk from above 6% to just 0.4% in seventy years and that the total contribution to the GDP (i.e. value added in production) has dropped considerably. Value has dropped despite the fact that total output in volume has increased, roughly by 10%. 

Looking at the situation from a farm business perspective, the overall picture shows a remarkable shift around 1990. Until then, Sweden pursued a policy of self-sufficiency through a combination of tariffs and support. That was abolished in the end of the 1980s and was followed by EU membership in 1995. That increased competition a lot and prices dropped. The situation has improved a bit but profitability is still very low as prices of inputs used have also increased. The net farm income corresponds more or less to the subsidies through the EU Common Agriculture Policy.

The development in Sweden and other high-income countries confirms the accuracy of the agricultural treadmill as observed by the American agricultural economist, Willard W. Cochrane.

The agricultural treadmill begins to spin when new technology is developed and implemented by pioneering farmers. These early adopters gain an economic advantage from the new technology, because they can produce at lower costs at unchanged selling prices. As more and more farmers use the new technology, production increases and prices fall, however. The economic advantage gained by early adopters disappears as it is offset by falling prices. This is then repeated again, again and again. The early adopters may be profitable for a while, but they have to continually innovate to remain that. The laggards park their tractors for good and the big majority of farms live on rust and rot (as we say in Swedish meaning they can’t afford to re-invest in their farms, just making ends meet a year at the time).

Ironically it is not even countered by subsidies as they lead to lower prices or higher land prices or any combination of them. For the farm sector as a whole there is actually little point in all that innovation and increase of productivity as it is the buyers and consumers that will reap the benefits and not the farmers as a collective.

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