Economic reforms

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There has so far been little effective reform in the Ukrainian economy, with the exception of price reform starting in 1992. Otherwise, Ukrainian agriculture continues to operate in much the same way as it did before 1992. State organizations continue to supply farms with inputs, albeit at deregulated prices. Those operating at a loss continue to be supported by the state through budget subsidies and liberal credits. Agricultural producers are free to market commodities outside the state channels, but receive subsidies and inputs and are granted export licences only if they sell part of their output to state processors at state-set prices. According to a government decree of November 1993, they are obliged to sell an average of 40 percent of their output to the state. Finally, there has been almost no privatization of Ukrainian agricultural producers or processors, and private farmers are few and have limited resources.

However, an increasing portion of agricultural commodities are now (primarily) bartered or sold directly to the public- As a result, the percentage of production procured by the state has fallen since 1990. For instance, whereas the state procured nearly 40 percent of grain production in 1988, in 1992 less than 30 percent went directly to state mills. Sunflower procurement dropped from 82 to 60 percent of production over-the same period, while vegetable procurement dropped from nearly 70 percent of production in 1988 to 33 percent in 1992.

Nevertheless, high inflation in Ukraine has forced changes on agricultural producers, just as it has on consumers. Ukrainian farms and processors are chronically short of working capital to purchase inputs and pay workers, not only as a result of an unfavourable movement in the terms of trade for agriculture, but because of high inflation, which has been running at around 2 500 percent in 1992 and 1993. High inflation has prompted agricultural producers to sell more of their output through barter and to lobby constantly for additional credits from the central bank.

Price reforms. Ukraine followed the Russian Federation in beginning deregulation of most retail and producer prices on 2 January 1992. Deregulation meant that most retail prices were freed from direct state control. This, however, did not imply the complete liberalization of retail prices, as maximum profit margins were imposed on many downstream processors, wholesalers and retailers and most factor prices were still controlled centrally. Only about 20 percent of retail prices were fully liberalized in January 1992 in the sense that downstream processors of the goods were not subject to margin regulation.

About 12 percent of retail prices and 17 percent of producer prices remained under direct central control. Centrally controlled retail prices included many basic foods such as bread, dairy products, some cereal products, sugar, salt, vegetable oil and margarine. Producer prices that remained controlled included those for coal, crude petroleum, refined petroleum products, natural gas, electricity, freight transportation and communications.

In the. course of 1992 further price liberalization took place. At the end of March, retail meat and milk prices were decontrolled and, in July, prices for most other foods were deregulated, with the exception of low-quality bread. Retail and producer prices were deregulated further in December 1992, as the scope of centrally fixed retail and producer prices was further reduced. Notably, retail prices for refined petroleum products were freed, although wholesale controls remained. Retail prices for a number of basic foods were also deregulated, and some goods were moved from the fixed price to the regulated price category. Moreover, price levels were raised for a number of commodities for which prices continued to be fixed.

In 1993 there was no significant further deregulation of prices in Ukraine and, fixed prices were raised periodically. The Ukrainian Parliament legislated a moratorium on retail price increases in May, which it subsequently lifted in June. In November, wholesale and retail controls were reimposed on certain prices that had previously been freed.

Despite controls, both retail and producer prices have risen at an increasing rate. Price controls meant that food shortages persisted in Ukraine throughout 1992, although prices in state stores were periodically raised to follow those in free markets, albeit with a lag.

As for farm prices, on 2 January 1992 Agricultural input prices were deregulated and farms were no longer formally required to deliver agricultural production to state enterprises at fixed prices. However, the state maintained a variety of ways of influencing both commodity prices and marketing which effectively means that, to a large extent, farms continue to deliver agricultural commodities to the state at fixed prices.

Price deregulation led to a price-cost squeeze for farms, since farm costs of production rose faster than agricultural commodity farmgate prices. The price-cost squeeze is a result of three factors. First, whereas input prices have been deregulated, output prices are still heavily controlled. Second, many inputs are purchased by the Ukrainian Government from other former Soviet republics and the prices of these purchases have tended to rise towards world levels. Third, subsidies for input suppliers have fallen in the past two years, and they have correspondingly raised their prices to compensate.

The farm price-cost squeeze threatened to cause farms to reduce production and prompted the Ukrainian Government to reintroduce agricultural producer subsidies in June 1992. Moreover, consumer subsidies through payments to agricultural processors (such as flour mills) were maintained. In 1992 the share of subsidies for agriculture and food amounted to about 6 to 10 percent of GDP. The reintroduction of government fiscal support for agriculture is an attempt to counter the effects of price liberalization on production and tends to inhibit the restructuring of production according to price signals.

Both budgetary subsidies and liberal credits to agricultural producers continued in 1993. For instance, in June 1993 farms received 5 trillion karbovanets ($1 .1 billion) worth of credit at an annual interest rate of 30 percent. Such loans, made at highly negative real interest rates, are part of the Ukrainian Government's policy of budgetary and credit support for the economy with scarce attention to the macroeconomic consequences. Thus, in early 1994 the official interest rate of the central bank was 240 percent in spite of a recorded inflation rate in 1993 of 2 600 percent. The result has been hyperinflation and an accelerating downturn in economic performance in the first quarter of 1994.

Land reform. Ukraine has enacted legislation allowing the establishment of limited private landownership. However, this legislation does not provide for clearly delineated and transferable property rights. Moreover, private farms in Ukrainian agriculture are intended as a supplement to collective agriculture, which is still the dominant form of farm organization.

The Supreme Soviet took the first steps towards the establishment of private landownership. in the USSR between November 1989 and March 1990 in the Law on Leasing, the Law on Property and the Law on Land. These laws permitted the long-term lease of land and granted individuals the right to individual proprietorship. Proprietorship was quite limited in that it allowed for lifetime inheritable rights to work the land, without the right to buy, sell or mortgage it.

Subsequent Ukrainian legislation further expanded the right of landownership. The Ukrainian Law on Peasant Farms of 20 December 1991 allowed for lifetime, inheritable rights to land as well as private ownership of land after it has been farmed for six years. The farmer then has the right to transfer the land to another person, but only with the permission of the local council and at a regulated price. The Land Code of 13 March 1992 expanded the provisions of the Law on Peasant Farms. Private owners are allowed to lease their land for agricultural use for a term of up to three years, although more recent legislation has imposed limits on lease payments (Law on Payment for Land of 3 July 1992).

Legislation on landownership. permits the formation of private farms in Ukraine, although the law is highly restrictive. A private farm may be established by an individual, whether currently engaged in farming or not. Nevertheless, a successful application for land requires some training or experience in farming. Land is provided without payment, with a six-year moratorium maximum landholding is 100 ha, 50 ha of which may be arable land. However, farmers may lease additional arable land.

The number of private farms in Ukraine grew from 82 on I January 1991 to 27 700 at the beginning of 1994. The increase in the number of farms in Ukraine has been much less rapid than in Armenia and the Russian Federation, which are the two leaders in the number of private farms in the Commonwealth of Independent States (CIS). Moreover, private farms in Ukraine are small compared with those in the Russian Federation: the average size of a private farm in Ukraine is 20 ha, compared with an average of 42 ha in the latter.

Private farming is a minor part of total private production of agricultural products in Ukraine. Private farms produce less than 1 percent of Ukraine's individual crop and livestock production. Private plot production is much more important as a portion of total production.

Private plots on state and collective farms are quite important for Ukraine's agriculture and have become even more so in the past two years. Production on private plots accounted for 37 percent of total agricultural, 35 percent of crop and 39 percent of livestock output in 1992, up from 27, 22 and 31 percent, respectively, in 1990. In 1992, 85 percent of potatoes, 52 percent of vegetables and 69 percent of fruit and berries were grown on private plots. The proportions for livestock products are also significant: private plot production accounted for 35 percent of total meat production, 32 percent of milk production and 45 percent of egg production in 1992.

State and collective farms in Ukraine are currently reregistering, as in the Russian Federation. State and collective farms have the option of reregistering as joint-stock companies, maintaining their current organization or dividing into a number of private farms, etc. just as in the Russian Federation, however, on the whole, the behaviour of formerly state and collective farms has yet to change appreciably.

Prospects for food and agriculture

The prospects for agriculture in Ukraine in the coming few years depend on a number of economic constraints and policy changes. One primary problem for agricultural production is hyperinflation which, in 1994, has caused a fall in real incomes and the elimination of producer working capital. It also imposes an exorbitant tax on holders of nominal balances and forces all economic agents to expend a great deal of resources in order to avoid the tax. Demand for agricultural and other goods, as well as GDP, will continue to fall as long as hyperinflation continues. Stabilization would not only have the beneficial effects of reducing the tax burden and transaction costs for farms, but would force the government to impose stricter limits on state support for agriculture. Less opportunities for state support would force farms to pay greater attention to reducing costs of production.

Agricultural producers would be likely to benefit from substantial liberalization of the foreign trade regime although such changes are probably not possible without macroeconomic stabilization. Ukrainian crop procurement prices are well below world market prices, while poor-quality agricultural machinery is likely to be overpriced. Thus, agricultural terms of trade could probably be improved by foreign trade liberalization. A major obstacle to receiving the full benefits from foreign trade liberalization is the reluctance of many Western markets to allow access to imports of former Soviet republics' agricultural commodities and the current oversupply of livestock production potential in both the former Soviet republics and Eastern Europe. While consumers would benefit from foreign trade liberalization and the ensuing increased supply of higher-quality imported food, the Ukrainian food industry would be under considerable competitive pressure to improve quality and reduce costs.

Regardless of the above, the livestock sector will probably continue to contract, simply because livestock in Ukraine (and the former USSR in general) is a particularly high-cost industry (compared with world standards). As producer and consumer subsidies continue to shrink as a result of falling government revenues, increasing inflation or macroeconomic stabilization, levels of livestock consumption near those attained in the Soviet period will be found to be unsustainable.

Ukraine possesses a very rich agricultural resource base and has the potential for being a major net exporter of agricultural products. However, the country's full realization of its agricultural potential requires significantly more decisive economic reforms and the implementation of effective macroeconomic stabilization policies.

OECD countries

Within the OECD review, The State of Food and Agriculture has traditionally included a report on changes in agricultural policies in both the European Community (EC) and the United States, since their policies have significant effects on other member countries, mainly through the global trading system. In the case of the EC, again this year some important changes have occurred and are reported below. In the case of the United States, however, the present farm legislation is scheduled to expire at the end of 1995. The State of Food and Agriculture 1993 reported on the likely issues that would drive the 1995 farm bill debate. Since then, little has changed in the implementation of the 1990 farm legislation or in the issues that are likely to come under debate, beginning in the autumn of 1994 and lasting until a 1995 farm bill is passed by the United States Congress, perhaps in late 1995. A section on the United States is therefore not included this year.

Instead, the recent changes in the agricultural situation and policy in Canada have been highlighted. In recent years, Canada has experimented with some innovative policies and programmes, particularly related to social safety nets for farmers, while at the same time finding other aspects of its agricultural policy difficult to reform.

Agricultural policy developments in Canada

Slow-growth high-deficit economy

Three policy issues currently dominate Canadian agriculture - supply management, grain transportation and farm safety nets. The resolution of these issues is likely to be affected considerably by factors external to the country's agricultural sector, including the recent weakness in the Canadian macro economy, falling real prices in world commodity markets and changes in international trading rules.

Canada has emerged from the prolonged recession of 1990 and 1991 into a period of slow growth, especially in the domestic market. Modest GDP growth is expected for the next two years, with the February 1994 federal budget assuming a 3 percent growth in 1994 and 3.8 percent in 1995. In early 1994, the prime lending rate declined to a 30-year low (it has subsequently increased). With slow growth in the economy, very high unemployment levels (more than 11 percent) and low energy prices, the inflation rate is expected to remain well under 2 percent for the next two years. The low inflation rate has occurred despite a 16 percent depreciation in the value of the Canadian dollar against the US dollar, failing from US$0.89 in 1989 to under US$0.72 in the spring of 1994. Domestic demand has remained very weak but cost pressures have also been dampened.

Both federal and provincial governments have continued to run very large annual deficits during the past two decades. The deficit, aggravated by the recession, reached about 7 percent of GDP in 1993. Pressure is mounting on both levels of government to take stronger action to reduce the deficit and to do this via spending cuts rather than continuing the recent practice of raising taxes. The deficit continues to influence government programmes and has, for example, resulted in reductions in subsidies to industrial milk producers and for grain transportation.

The Canadian economy is heavily dependent on trade. As a result of recent trade agreements, the Canada-US Free Trade Agreement (CUSTA) and NAFTA and now the Uruguay Round of GATT negotiations, the economy is becoming even more open to trade. Increased competition following the implementation of these trade agreements has forced restructuring in the food processing sector in particular to compete in North American and global markets. The Canadian economy in total, and increasingly its agricultural and food sector, is heavily tied to trade with the United States market.

Structural adjustment in the primary sector

Structural change in the Canadian agricultural sector continues in response to pressure from declining real prices and reduced government support. The average farm size has continued to increase in the past 20 years, growing by 29 percent to 242 ha, and the number of farms has declined by more than 24 percent. Structural adjustment in the dairy sector has been even faster than the average for the sector as a whole; the number of dairy farms has declined by 42 percent in the past decade. However, despite marked decreases in the number of farms, employment in the agricultural sector declined slowly from about 500 000 in 1970 to about 450 000 in 1991.

Another important aspect of structural adjustment has been the diversification of farm labour to off-farm employment. Off-farm income now accounts for about 60 percent of total farm family income, particularly for the smallest farms. This trend has enabled average farm family incomes to remain very close to the average income for all families in Canada.

Total farm debt rose quickly during the first half of the 1980s, as farm prices were strong from relatively high world cereal prices and a weak Canadian dollar. When these two factors reversed in the mid-1980s, bankruptcies rose by more than 400 percent from the 1979 level to reach their peak in 1985. Since 1986, total farm debt has remained relatively stable and farms in payment arrears have declined from about 12.5 percent of all farms to 6.5 percent in 1993. Bankruptcies have stabilized at an annual level of 0.2 percent of all farms. The improvement in the farm debt situation should continue as the prime interest rate has dropped from 14 percent in 1990 to 5.5 percent in early 1994. More recent increases could slow the recovery.

Agriculture is highly dependent on world trade

Agricultural and food exports are a very important source of income, generating about C$21 000 per full-time farmer. However, there are significant regional differences; exports are much more important in western Canada. In July 1993, recognizing the importance of trade to growth in the sector, the federal and provincial agriculture ministers set an objective to increase agricultural exports to C$20 billion, a 65 percent increase, within the period 1992-2000.

In the past few years, growth in Canadian agricultural exports to the United States has been the most rapid among all export destinations, especially for processed food products: the United States accounted for about 45 percent of agricultural exports in 1992.

On the other hand, the value of Canadian agricultural exports to Japan, other Asian countries and the EC fell during the 1988-1992 period. Also, the former USSR sharply reduced Its imports of Canadian agricultural products in 1992 and again in 1993. As a result, Canadian agricultural and food trade destinations now parallel more closely those for non-agricultural trade, that is they are heavily tied to the United States.

High levels of government assistance for the sector

Expenditures by both federal and provincial governments for support of the agricultural sector in 1992/93 were estimated to be C$7.04 billion, about 60 percent from federal and 40 percent from provincial governments. This represents about 31.5 percent of the agrifood GDP and about 2.9 percent of total federal and 1.9 percent of provincial government expenditures.

In the mid-1980s, government expenditures increased sharply in response to the abrupt decline in world grain and oilseed prices and were highly concentrated in the prairie provinces. For example, in Saskatchewan, federal and provincial government agricultural support expenditures exceeded the total agrifood GDP output in two of the past eight years. In Manitoba and Alberta, federal and provincial government expenditures exceeded 50 percent of the agricultural GDP in four of the past eight years.

Because of low grain prices, most government expenditures are for income support - commodity programmes, transportation and storage subsidies, tax rebates and programme operation. The majority (about two-thirds) of all government payments go to farms with sales of more than C$1 00 000. Relatively little assistance has been directed to new government priorities such as expanding international trade, enhancing market development programmes or protecting the environment. Equally limited are expenditures currently devoted to traditional public sector activities such as research and food safety.

A second important means of support to the agricultural sector is provided through regulations such as import restrictions, production controls and price supports. These instruments are used mainly for the supply-managed commodities (largely dairy products, poultry and eggs). In this case, the agricultural sector receives support through transfers from domestic consumers. An estimate of the importance of this support can be obtained from the value of PSEs. The OECD estimates that, in 1993, the net PSE for dairy, poultry and eggs totalled C$3.1 billion, or 76 percent of the value of production for dairy products and 37 percent for poultry.

Government expenditures, while remaining a large percentage of the agricultural GDP, declined from C$8.93 billion in 1991/92 to C$7.04 billion in 1992/93 and are forecast to drop to C$5.98 billion in 1993/94. Further declines are likely. As part of a general deficit reduction programme, the federal government reduced the subsidy for industrial milk producers and western grain transportation for 1993/94 and 1994/95 by 10 percent. Expectations of generally strengthening world prices, devaluation of the Canadian dollar and support prices based on moving averages will also contribute to reductions in safety net payments.

Policy process

Because agriculture is a shared responsibility between the federal and provincial governments, programmes must often be developed jointly. Under the Canadian constitution, interprovincial and international trade are the responsibility of the federal government, while marketing and education are provincial responsibilities. This division increases the need for consultation to develop national commodity marketing programmes and may result in some duplication of programmes between the two levels of government.

The Agriculture Policy Review (see The State of Food and Agriculture 1991, p. 73-74) initiated a comprehensive reassessment of all facets of Canadian agrifood policy in December 1989, involving extensive consultation with federal and provincial governments and industry. The review introduced two new safety net programmes - the Gross Revenue Insurance Plan (GRIP) and the Net Income Stabilization Account (NISA). Other task forces that reviewed supply management for dairy and poultry production and grain transportation provided a number of recommendations, but there was no broad consensus for their introduction. Furthermore, the delay and uncertainty surrounding the GATT agreement dampened the potential for change in both supply management and grain transportation.

Current policy issues

Dairy and poultry supply management. The marketing of milk and poultry in Canada is regulated through compulsory producer marketing boards. The basic elements of this supply management system are the control of domestic production, border controls and an administered pricing system. Its policy objectives are to maintain a minimum level of domestic self-sufficiency," the regional sharing of production and processing and prices based on the cost of production.

The current form of supply management in Canada was largely introduced in the 1970s. Supply management programmes operate through a complex series of regulations. For example, imports of industrial milk and processed dairy products (with at least 50 percent dairy content) have quantitative restrictions under the Import Control List. There are tariffs on products with fixed import quotas (e.g. 20 400 tonnes of annual cheese imports). Industrial milk producers require production quotas to be eligible to produce milk and receive direct subsidy payments. Prices to producers for industrial milk are set by a cost-of-production formula and these are maintained through dairy product prices which are supported by a government offer-to-purchase programme for butter and skim milk powder. Industrial milk production is based on a national-level quota which is allocated on a historical basis to each province which, in turn, allocates quotas to individual producers. Producer levies are assessed to pay for surplus product disposal, largely for export. Processors pay variable prices for industrial milk depending on its end use. Processed dairy product producers may also face plant allocation quotas.

In the Uruguay Round of GATT negotiations, Canada had sought to maintain the current supply management system through a strengthened Article XI, paragraph 2(c). The level of tariff equivalents replacing quantitative restrictions on imports, however, is not likely to require fundamental changes to the supply management programme. CUSTA includes no specific measures relating to the liberalization of trade in supply-managed products, but discussions with the United States were held regarding the introduction of the new tariffs permitted under GATT and the implementation of the GATT panel (October 1989) which ruled that the Canadian import restrictions on ice-cream and yoghurt were inconsistent with GATT.

A task force on orderly marketing, headed by the Parliamentary Secretary to the national Minister of Agriculture, is currently studying options that are compatible with GATT and address the industry's ability to respond and compete. Recently, ministers reaffirmed their commitment to the maintenance of orderly marketing systems for dairy products and poultry. They established ad hoc review committees for each commodity to address the operation of tariff rate quotas under the Uruguay Round Agreement, future federal-provincial agreements, institutional structure and other operational and programme issues. The task force plans to submit recommendations to ministers in the autumn of 1994.

Grain transportation. The majority of Canadian cereals and oilseeds are produced in the prairies and exported as primary commodities. Regulated transportation of grains and oilseeds from western Canada has a long history and now forms an integral part of agricultural policy in Canada. In 1983, the Western Grain Transportation Act (WGTA) institutionalized several ad hoc compensation programmes of the Crow Benefit with payments made directly to the railroads. The WGTA also required the producers' share of the freight cost, 42.8 percent of the total in 1993/94, to increase gradually through time.

The federal government commitment under the WGTA will be decreased by 10 percent in crop years 1993/94 and 1994/95. The February 1994 budget further reduced its commitment by 5 percent to C$615 million.

A number of studies have shown that the WGTA subsidy has resulted in higher on-farm prices for cereals in western Canada. As a result, livestock production in western Canada has been reduced. To offset the negative impact of this cereal transportation subsidy on livestock producers, provincial governments introduced subsidies for livestock producers .70 The last of these programmes, however, was terminated in 1994 as a result of provincial budget pressures and the expectation of a change in the method of payment for the WGTA programme.

In June 1993, the federal government proposed (but did not pass) legislation to change the current method of payment from that of paying the subsidy to the railroads (in compensation for reduced producer rates) to that of paying the subsidy directly to the producer through the farm safety net system. This would result in transportation rates to producers increasing to the full compensatory level. The Producer Payment Panel was established to make recommendations on how the WGTA benefit should be delivered to producers. It proposed that payments to producers be made initially on an acreage basis and eventually (after seven years) be part of a national farm safety net programme for all producers in Canada. The conclusion of the Uruguay Round of GATT negotiations has given an additional incentive to change the WGTA. This is because the transportation subsidy for cereals that go through the west coast and Churchill ports is classified as an export subsidy under GATT.

Safety net programmes. The Farm Income Protection Act (1991) established the basis for current safety net programmes in Canada. The programmes are: i) voluntary (producers agree to participate); ii) cost-shared through producer premiums and cofunded by the two levels of government; iii) market-oriented, using triggers based on moving averages of market variables; iv) based on performance triggers for payments such as prices, costs, gross revenue or net income; and v) actuarially sound, with premiums set to maintain the integrity of the fund for the programmes.

There are three main types of programme which support grains, oilseeds, red meats and horticultural products. The first type of programme, the National Tripartite Stabilization Programme (NTSP), makes payments to cattle, hog and lamb producers and a number of horticultural and speciality crop producers when market prices adjusted for costs drop below 80 percent of a five-year moving average.

The second type of programme is the Gross Revenue Insurance Plan (GRIP) which consists of a yield protection (crop insurance) and price/revenue protection. GRIP makes payments to cereal, oilseed and speciality crop producers when the producer gross revenue from the market falls below a certain percentage (which varies by region from 70 to 90 percent) of the target revenue. This target revenue is based on the previous 15-year moving farmgate average price (with a three-year lag), adjusted for inflation, and on individual long-term average yields. Premium rates are set by an independent actuary and fluctuate from year to year depending on historical payouts and future price trends. Net payouts from the programme (i.e. total payouts less premium) were C$1.586 billion in 1991/92, C$972 million in 1992/93 and are estimated to be C$350 million in 1993/94. However, payouts are likely to increase slightly in 1994/95.

The third type of programme, the Net Income Stabilization Account (NISA), enables producers to make cash withdrawals from their individual accounts when their net income from eligible products (currently cereals, oilseeds, speciality crops and horticultural products) falls below the previous five-year average or when their taxable income falls below C$1 0 000. Producer contributions to their individual accounts of 2 percent of eligible sales are matched by federal and provincial governments. In addition, producers can contribute up to another 20 percent of their eligible sales (to a maximum of C$250 000), which is not matched by the government.

Budget pressures, loss of international competitive performance, substantial inequities among products and regional coverage and trade actions by the United States have led governments and producers to seek better solutions for safety net programmes. The Uruguay Round Agreement also emphasized the need to move from commodity-specific, coupled price support programmes to a support that is broadly based and decoupled In response to these concerns, federal and provincial agriculture ministers proposed that all safety net programmes be converted to a whole farm approach similar to a NISA programme. Several programmes have already ended - the NTSPs for beef, lamb and pork producers were terminated in 1994. Red meats are to be added as eligible commodities for NISA. The province of Saskatchewan has indicated that it will opt out of GRIP in 1995.

At a major industry policy conference on safety nets in February 1993, it was agreed that the industry would move from the current GRIP and NTSP to include all commodities (except those under supply management) in a whole farm income protection programme. Companion programmes, such as disaster assistance and price supports, would also be part of the safety programme. A National Safety Nets Consultation Committee was established with a secretariat, steering committee and technical working groups. In July 1994, the Minister of Agriculture agreed as an interim measure that, for the 1994 year, NISA would be extended to all commodities except those under supply management, in provinces wishing to extend this coverage. A further refinement of options will be proposed to ministers in November 1994.

The red meat NTSPs are being terminated at the request of producers. A key factor has been the trade actions or threat of trade actions by the United States. A significant share of Canadian production of live cattle and hogs and red meats is exported to the United States. A countervailing duty on Canadian live hogs entering the United States since 1988 has meant that little of the government subsidy is retained by Canadian hog producers. Programmes for Canadian beef producers have also been the subject of a Section 22 investigation by the United States International Trade Commission but no further action has occurred.

Canadian beef producers have proposed replacing the NTSP by a whole-farm approach programme (similar to NISA). A companion programme will be the Risk Management Agency which will operate commodity futures market programmes. A pilot project is expected in the autumn of 1994. Pork producers are considering this option and other cost-of-production or enhanced NTSP approaches.

Impact of policies

The Canadian economy is adjusting to the trade liberalization which has resulted from CUSTA, NAFTA and the Uruguay Round as well as previous rounds of GATT. Also, the globalization of markets for investments, services and information as well as the trend towards more deregulation all increase the pressure on the economy to adjust and compete. To meet the agricultural export target of C$20 billion in 2000, the agrifood processing sector must also become more competitive. Essential actions are to improve integration of the primary sector within the total food system and to provide an adequate supply of competitively priced products. Income support programmes have not always furthered this objective.

Supply management. Supply management for poultry and dairy products in Canada was instituted to improve producer prices, production stability, producer bargaining power and regional equity. Programmes have been effective in promoting these goals but, at the same time, they may have increased production costs, reduced efficiency and restricted growth in demand and consumption.

Under supply management programmes, the quotas for the right to produce have generated high values, requiring considerable capital investment. These values are bid up, as the most efficient farmers purchase quotas from the less efficient. An industrial milk producer would require an investment of about C$13 000 per cow or C$600 000 for an average farm. With the higher risk and restrictions on credit available to the enterprise, this is probably one of the main reasons for the smaller average herd size in Canada (34 cows) compared with many of its competitors such as New Zealand (164 cows), Australia (104 cows), the United Kingdom (63 cows), the United States (50 cows) or the Netherlands (41 cows). Data on production costs show that important economies of size exist. Thus, quotas reduce competitiveness because of the smaller herd size.

Productivity estimates using yield per cow show that Canada remains significantly below the United States. Comparisons of the cost of production in adjoining areas of Canada and the United States indicate that the average total cost of production is about 25 percent higher in Canada. However, the cost of production among producers is quite variable. For example, the lowest-cost 20 percent of Canadian producers have costs below the average United States producer.

Future reductions in the tariff equivalents established under GATT could result in lower domestic producer prices for supply-managed commodities. An initial adjustment would be a decline in the value of production quotas. As a result, the adjustments to obtain economies of size would be made easier by the reduced investment requirements under the production quota regime.

Production quotas for supply-managed products cannot be traded among provinces, which prevents production shifting to the most efficient producers and regions. Proposals by a national committee" to have a national milk pool for both producers and processors were not accepted by industry stakeholders. Neither have the national supply management supervisory agencies been able to devise acceptable principles for reallocating quotas among regions. Some minor regional adjustments have been made to accommodate markets where population has expanded the fastest, such as the province of British Columbia, and where quota cuts would have affected the viability of the processing sector (e.g. the Maritime Provinces). The Ontario Chicken Marketing Board substantially increased its production quota (by 24 percent) in 1994. British Columbia has already opted out of the national quota programme and has increased its market share. These extreme measures appear to be required to make regional production reallocations.

The poultry boards have been very conservative in the allocation of production quotas, despite a rapidly growing demand for poultry meat. Per caput poultry consumption in Canada has remained at about 75 percent of the United States level during the past few years. The conservative setting of quotas has limited promotions by supermarkets and new product development by the processing sector because there is no guarantee of adequate supplies. The highly processed products have had the highest growth but the supply management programme has reduced opportunities for participation.

The high support prices for milk have been an important factor in reducing dairy product consumption and hence milk production quotas (industrial milk quotas were reduced by 17 percent prior to the 1993/94 dairy year). Retail dairy product prices were 15 to 40 percent higher in Canada than in the United States (1991 estimates), resulting in significant cross-border shopping by Canadian consumers. Retailers in some provinces have also been prevented from using special prices for milk.

The pricing system for dairy products has limited the extent of the market orientation in the sector. For example, it has tended to encourage the production of butterfat, despite a clear preference by consumers for low-fat products. In all other OECD countries, the price of butter relative to skim milk powder has declined much more rapidly, reflecting this shift in consumer preference. This results in distorted consumer signals being sent throughout the whole inputs, production and processing sector. Producers have resisted a shift to multiple component pricing, which would allow a much more market-oriented pricing of milk.

The regulatory environment at the primary level has also had an impact on the downstream industries which have been protected against imports of processed dairy products and faced considerable regulation of pricing practices, sources of supply and ability to export. The liberalization of the manufacturing sector of North American markets will enable increased imports of processed food products containing dairy and poultry ingredients and Canadian food processing firms will find themselves at a cost disadvantage when purchasing these agricultural inputs. The competitiveness of the sector will be most affected in the further processing of dairy and poultry products where there has been little incentive or ability to expand.

Grain transportation subsidies. The WGTA was introduced to maintain low transportation costs for cereals and oilseeds and to improve the bargaining power of producers. It has been an important means of income transfer to cereal and oilseed producers, but it has undoubtedly been capitalized into land prices. At the same time, however, it has created a number of production distortions and increased costs. It is central to a series of changes required to lower costs and improve the efficiency, viability and competitiveness of the entire grain transportation and handling system in Canada.

The WGTA increases domestic cereal and oilseed prices, shifts production in western Canada towards unprocessed bulk commodity exports - the slow-growth component of international trade - and reduces opportunities for value added processing and employment in the prairies. It has also limited adjustment to commodities which are not eligible for the transportation subsidy but which would be of higher value to the economy. As a result, structural adjustment in the prairies has been delayed, diversification has been limited, economic returns have been reduced and rural outmigration has been accelerated.

If the WGTA compensation was paid as a decoupled, direct payment to producers instead of to the railroads, the result would be a decline in farmgate prices for cereals and oilseeds. This decline in prices, coupled with the projected reduction in government safety net assistance, could substantially reduce the area currently devoted to cereals and oilseed production. It has been estimated that, under those conditions, up to 2 million ha currently in cereal and oilseed production could no longer even cover the cash costs of production." This land is likely to shift either to forage production for cow and calf operations or to new, lower-cost management for cereals and oilseed production which would increase total economic benefits. This change in the WGTA benefit payment would also improve the grain producers' competitive position in the eastern prairies compared with the adjoining areas in the United States, which would increase the potential for exports from Canada to this region.

Safety nets. Because of the differences in support levels among commodities and the fact that the NTSP and GRIP are commodity-based programmes, the safety net programmes in Canada have caused some production and marketing distortions. Producers have shifted production to crops with relatively higher support levels, regardless of current or expected market prices.

For example, the introduction of GRIP increased wheat area at the expense of feedgrains because of the relatively higher support level (based on 15-year moving average prices) compared with expected market prices. For certain speciality crops with thin markets, the potential oversupply has required changes in support levels to prevent major market disruptions. The province of Saskatchewan moved to a "basket of commodities" approach to avoid such problems.

The current safety net programme has affected the competitiveness of Canadian agriculture. High levels of support for certain commodities have maintained those commodities at the expense of both the search for more profitable alternatives and structural adjustments in the sector.

The movement of safety nets from commodity-based support programmes such as GRIP and the NTSP to income-based programmes would improve equity among products and regions and remove many of the production and marketing distortions. The NISA programme, which is the first attempt to design an income programme in Canada, permits the targeting of a more desirable performance measure than prices. Moreover, because of its sector-wide availability and non-distortive impact, NISA is likely to be considered a "green" programme in terms of future trade actions.

Conclusion

In summary, much of the emphasis in Canadian agricultural policy during recent years has been to ensure equity and stability for producers. While achieving these objectives, the programmes have affected structural adjustment for the industry and reduced its competitive position in domestic and international markets. This lack of competitiveness has been most noticeable in the rapidly growing international trade in processed food products. moreover, the large income-support expenditures are difficult to maintain in a period of sizeable fiscal deficits and there Is a recognized need to provide programmes that improve competitiveness and environmental sustainability.


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