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Feed costs, policy and development in Nova Scotia Robinson, David E., 1986

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FEED COSTS, POLICY AND DEVELOPMENT IN NOVA SCOTIA by DAVID E. ROBINSON A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE i n THE FACULTY OF GRADUATE STUDIES (Dept. of A g r i c u l t u r a l Economics) We accept t h i s t h e s i s as conforming to > the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA © May, 19 86 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree a t the U n i v e r s i t y o f B r i t i s h Columbia, I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and study. I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the head o f my department or by h i s o r her r e p r e s e n t a t i v e s . I t i s understood t h a t c o p y i n g or p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be allowed without my w r i t t e n p e r m i s s i o n . Department of fjr/cu The U n i v e r s i t y o f B r i t i s h Columbia 2075 Wesbrook P l a c e Vancouver, Canada V6T 1W5 Date £)c/ r, n?£ m r _ £ I 9 /-7Q N Abstract The aim of t h i s research i s to evaluate the economic e f f e c t s of transforming f r e i g h t subsidies on feed grain shipments to Nova Scotia into equivalent output based payments to l i v e s t o c k and poultry producers. Changes i n the long term f e d e r a l p o l i c y of feed f r e i g h t equalization (and recently other elements of the domestic feed grain policy) have negatively impacted upon the economic p o s i t i o n of farms i n the province. The purpose of the p o l i c y change considered here would be to a l l e v i a t e the harmful consequences of reduced f r e i g h t e q u a l i z a t i o n and to f a c i l i t a t e adjustment. (Producers, farm organizations, regional p o l i t i c i a n s , and f e d e r a l ministers have a l l stated t h i s as a shared p o l i c y objective.) The analysis i s also applicable to any planning or decision making with respect to minimizing the negative e f f e c t s of any future termination of the program e n t i r e l y . A p a r t i a l equilibrium s t a t i c analysis i s c a r r i e d out at the i n d i v i d u a l subsector l e v e l to estimate the gains i n producer welfare brought about by the removal of feed input p r i c e d i s t o r t i o n s . S t a t i c welfare gains are found to a r i s e both from the u t i l i z a t i o n and the production of feed s t u f f s . The p r i c e e l a s t i c i t y of feed grain production i n Nova Scotia i s estimated as e l a s t i c i n the intermediate term. A number of leakages of program benefits with the current system of payments are also found and assessed. Producers would r e a l i z e corresponding benefit transfers as a r e s u l t of the proposed change. The incremental p u b l i c administration costs are estimated on the basis of current c a p a c i t i e s and agencies i n place. Such estimated costs are below the value of p r i c e e f f i c i e n c i e s . The additional presence of transfer benefits for producers further increase the cost effectiveness of addressing the unsatisfactory position of producers in this manner. The implications which the policy change (and an undistorted input price environment) would have on the rates and directions of technical change in the agricultural industry are also considered. The induced innovation hypothesis is reviewed with related theories, models, and empirical research. A survey i s made of the prospects for wide ranging, and frequently location specific, technical change which could over time reduce the industry's competitive disadvantage with respect to feed costs. Evidence of past induced technical change in the industry's production and util i z a t i o n of feed inputs is reported. The removal of feed input price distortions is seen as neither a necessary nor sufficient condition for the accelerated technical progress which would restore the industry's competitive position. However, i t is argued to be a necessary condition for any public program to be cost effective in achieving this end or related targets. A sensitivity analysis is made of the induced technical change benefits which could be expected to arise i f the policy were changed for the next fifteen years. The proposed policy change is analyzed and found to be a low cost, high pay-off regional development project. It is found that i t could significantly contribute to the alleviation of the serious problems which have arisen from the unplanned manner in which feed freight equalization was reduced in Nova Scotia. - i i i -TABLE OF CONTENTS ABSTRACT i i TABLE OF CONTENTS iv LIST OF TABLES v i i LIST OF FIGURES x i i ACKNOWLEDGEMENTS xiv Chapter Page 1. INTRODUCTION 1 Background 2 The Problem Statement 11 Objectives of the Study 12 Research Procedures 14 Guide to Thesis 15 2. THEORETICAL FRAMEWORK 16 Derived Demand 16 The Effects of Input Subsidies on Input Choices . . . 18 Measurement of Producer Welfare 21 Theoretical Models of the Policy Change 26 Disaggregated Sector Models 29 Some Related Studies 36 Summary 45 3. PRICE EFFICIENCIES, TRANSFERS AND COSTS 46 Overview of Agriculture in Nova Scotia 47 Provincial Feed Grain Supply 48 Econometric Model of Grain Acreage 51 Interpretation for Policy Analysis 56 Long Run Supply and Price Efficiencies 59 - iv -TABLE OF CONTENTS continued P r i c e E f f i c i e n c i e s I n F e e d i n g 6 1 D a i r y F e e d i n g 64 P o u l t r y a n d E g g P r o d u c t i o n 76 H o g F e e d i n g 80 B e e f C a t t l e F e e d i n g 88 T r a n s f e r s o f P r o g r a m B e n e f i t s 9 1 U . S . C o r n 9 2 O t h e r E f f e c t s f o r O n t a r i o a n d W e s t e r n G r a i n G r o w e r s 97 P r o v i n c i a l C a s h C r o p S u p p l i e s 98 T r a n s f e r s f r o m H o b b y F a r m s 1 0 0 E x p o r t e d F e e d 1 0 2 M i l l f e e d s 1 0 2 I n t r a s e c t o r T r a n s f e r s 1 0 5 C o s t s 1 0 6 A d m i n i s t r a t i o n C o s t s 1 0 7 I n t e r e s t C o s t s 1 1 2 S u m m a r y 1 1 3 4 . IMPLICATIONS FOR TECHNICAL CHANGE 1 1 5 I n t r o d u c t i o n 1 1 5 I n n o v a t i o n , T e c h n i c a l C h a n g e , a n d B i a s 1 1 6 T h e I n d u c e d I n n o v a t i o n H y p o t h e s i s 1 1 8 S t r a t e g y a n d Q u a l i t a t i v e C o n c l u s i o n s 1 2 9 P o t e n t i a l B e n e f i t s 1 3 4 S u m m a r y 1 4 0 5 . RESULTS FROM POLICY EVALUATION 1 4 1 E v a l u a t i o n R e s u l t s 1 4 1 P r i c e E f f i c i e n c i e s 1 4 1 T r a n s f e r s 1 4 2 I n d u c e d T e c h n i c a l C h a n g e 1 4 3 C o s t s 1 4 3 N e t B e n e f i t s 1 4 4 B e n e f i t s b y T y p e o f F a r m 1 4 6 S u m m a r y 1 4 9 - v -TABLE OF CONTENTS continued 6 . Summary, Conclusions and Recommendations 150 Summary 150 Conclusions 151 Recommendations for Further Study 153 BIBLIOGRAPHY 155 APPENDICES A Historical Summary 170 B. A Note on the Determination of Product Payment Rates and the Mechanics of Transforming the Subsidy. . . . 177 C. Monthly Average Corn Prices, Gulf Ports, Chicago, Chatham, and Truro with Price Spreads, 1978-85 ($Can.tonne) 180 D Total FFA and Millfeed Shipments and the Price of FFA Grains and Soyameal by Month, Nova Scotia, 1978-84 183 E Survey of Feed Cost Reducing Technical Change, Prospects and Economic Influences 185 Feed Stuffs & Nutrition 186 Grain Production Technologies 192 Land Resource Technologies 201 Hog Feeding Technologies 206 Poultry Feeding Technologies 217 Forage and Dairy Feeding Technologies 224 Summary 234 - v i -TABLE OF CONTENTS continued LIST OF TABLES Table Page 1 . 1 R a i l F r e i g h t R a t e s , F F A R a t e s a n d P r i v a t e C o s t o f F e e d G r a i n S h i p m e n t s , 1 9 7 3 - 8 4 . . . . 4 1 . 2 R a i l F r e i g h t R a t e s , F F A R a t e s a n d P r i v a t e C o s t o f F e e d G r a i n S h i p m e n t s i n C o n s t a n t D o l l a r s , 1 9 7 3 - 8 4 5 1 . 3 L i v e s t o c k R e c e i p t s a n d F e e d E x p e n d i t u r e s , M a r i t i m e P r o v i n c e s a n d E a s t e r n C a n a d a 1 9 7 6 - 8 3 . . . . 8 2 . 1 P r i c e E f f i c i e n c y B e n e f i t s i n L o c a l G r a i n P r o d u c t i o n A n d L i v e s t o c k F e e d i n g ( S u p p l y M a n a g e d S e c t o r s O n l y ) F r o m R e s t r u c t u r i n g F F A a t Two D i f f e r e n t S u b s i d y L e v e l s 33 3 . 1 G r a i n A c r e a g e , Y i e l d s , F a r m P r i c e , F o d d e r A c r e a g e , t h e G r o s s N a t i o n a l E x p e n d i t u r e I m p l i c i t P r i c e I n d e x a n d a W e i g h t e d G r a i n I n p u t s P r i c e I n d e x , N o v a S c o t i a , 1 9 6 7 - 8 4 53 3 . 2 O L S R e g r e s s i o n o f T o t a l G r a i n A c r e a g e N o v a S c o t i a 1 9 6 7 - 8 4 55 3 . 3 C h a n g e i n G r a i n P r o d u c t i o n a n d P r o d u c e r W e l f a r e A s s o c i a t e d w i t h T h r e e L o n g R u n G r a i n S u p p l y E l a s t i c i t i e s a n d Two S u b s i d y L e v e l s S u b s e q u e n t t o F F A P o l i c y C h a n g e 60 - v i i -LIST OF TABLES Table Page 3.4 Dairy Feed (14-16%) Prices, Annual Per Cent Change in Milk Production, and Selected Dairy Herd Analysis Service Statistics 1970-83 66 3.5 Estimated Own-Price and Cross Price E l a s t i c i t i e s of Factor Demand With Respect to Feed Prices and Partial E l a s t i c i t i e s of Substitution For Feed in Milk Production 68 3.6 OLS Regression Equations of Concentrate Feeding Per Milk Cow, DHAS Dairy Farms, Nova Scotia 1970-83 72 3.7 Changes in Feed Grain Demand and Producers Welfare in the Nova Scotia Dairy Sector Associated with Three Long-Run Demand E l a s t i c i t i e s and Two Subsidy Levels Subsequent to FFA Policy Change 75 3.8 Mean Value of Own-Price E l a s t i c i t i e s of Demand for Concentrates and Feed Grains, E l a s t i c i t i e s of Substitution and Cross-Price E l a s t i c i t i e s of Demand Between Concentrates and Feed Grains . . . 77 3.9 Change in Feed Grain Demand and Producers Welfare in Nova Scotia Poultry and Egg Sector Associated With Three Long Run Demand E l a s t i c i t i e s and Two Subsidy Levels Subsequent to FFA Policy Change 79 3.10 Change in Producer Welfare of Nova Scotia Hog Sector Subsequent to FFA Policy Change with Varying Own and Cross-Price E l a s t i c i t i e s of Hog Supply and with Two Subsidy Levels 87 - v i i i -LIST OF TABLES continued Table Page 3.11 Change in Producer Welfare of the Nova Scotia Cattle Sector Subsequent to FFA Policy Changes With Varying Own and Cross-Price E l a s t i c i t i e s of Cattle Supply and with Two Subsidy Levels . . . . 90 3.12 OLS Regression of Millfeeds Prices on FFA Grain Prices and Shipments Shares 104 3.13 Administration Expenses and Program Activity, Agricultural Stabilization Board, 1976-83 109 3.14 Administration and Program Expenses and FFA Shipments, Livestock Feed Board of Canada, 1973-83 . I l l 4.1 Benefits From Induced Technical Change Resulting From FFA Restructuring at the Current Subsidy Level at Three Assumed Rates 136 4.2 Benefits From Induced Technical Change From FFA Restructuring After An Increase of $10/tonne in the Subsidy Level at Three Assumed Rates 137 5.1 Present Value of Indicated Price Efficiencies at Low, Medium, and High Long Run Price E l a s t i c i t i e s of Feed Grain Demand and Local Supply, at Three Discount Rates and at the Current Subsidy Level and After an Increase in FFA Rates of $10/tonne ($million) 142 - ix -LIST OF TABLES continued Table Page 5.2 Present Value of Estimated Transfers Resulting From the Policy Change at Three Discount Rates at the Current Subsidy Level and After an Increase of $10/tonne in FFA Rates ($ million) . . . 142 5.3 Present Value of Three Levels of Induced Technical Change Over Twenty years at Three Discount Rates ($million) 143 5.4 Present Value of Increased Public Administration and Industry Financing Costs at Two Subsidy Levels and Three Discount Rates ($thousand) . . . . 144 5.5 Present Value of Net Industry Benefits From Restructuring FFA Over Fifteen years at Three Discount Rates and Two Subsidy Levels ($million) 145 5.6 Ratio of Industry Benefits (Excluding Transfers) to Public Administration Costs at Three Discount Rates and Two Subsidy Levels ($million) 145 5.7 Net Present Value (Discount Rate of 7%) of Industry Benefits Resulting From the FFA Policy Change at the Present Subsidy Level, Estimated by Source and by Type of Farm ($ million) 147 5.8 Net Present Value (Discount Rate of 7%) of Industry Benefits Resulting From the FFA Policy Change with a Subsidy Level $ 10 tonne Higher than at Present Estimated by Source and by Type of Farm ($ million) 148 - x -LIST OF TABLES continued Table Page E.l Rye Production, Acreage, and Commercial Marketings, 1976, 1979-84 199 E.2 Estimated Returns to Agricultural Land And Ratio of Agricultural Land Utilization to Cropping Capability by Province, 1981 . . . . . . . 204 E.3 Cost of Feed, Hog Returns, and Feed to Carcass Weight Ratio, Seven Hog Feeder Operations, Nova Scotia 1966-79 211 E.4 OLS Regressions of Year to Year Change In Feed Consumption to Carcass Weight, Seven Hog Feeder Operations, Nova Scotia 1966-79 213 E.5 Reported Provincial Average Feed Consumption for Broiler Chicken 1979 and 1982 . . . . 219 E.6 Broiler and Layer Feed Price Differences, Nova Scotia and Ontario 1977-83 221 E.7 Amounts of Grain Required for a 10 Month Lactation According to Forage Quality 226 E.8 Forage Samples Submitted to the Provincial Chemistry Lab and Dairy Feed Prices, 1977-84 232 - x i -LIST OF FIGURES Figure Page 2.1 Production Isoquants and Factor Prices Showing the Effect of Input and Output Subsidies on Production 20 2.2 Producer Surplus Measured in the Product Market . . . 23 2.3 Producer Welfare Measurement in Input and Output Markets 24 2.4 Supply of Local Feed Grains and Provincial Demand for Feed Grains 28 2.5 Price Efficiency Gains Measured in Output (Product) and Input Markets with Fixed Output . . . . 30 2.6 Three Models of Producer Welfare Changes 34 3.1 Price Efficiency Gains and Losses in Local Grain Production With Changes in Subsidy Adminsitration 57 3.2 Frequency Distribution of Monthly Price Differences Between Ontario Corn (No. 2 C.E.) Landed at Truro and U.S. Corn (No. 2 Yellow) Gulf Ports, 1978-85 ($Can.tonne) 94 3.3 Frequency Distribution of Monthly Price Difference Between Ontario Corn (No. 2 C.E.) Landed at Truro and U.S. Corn (No. 2 Yellow) Gulf Ports with FFA Subsidy Removed Expressed in Constant 1981 Dollars, 1978-85. ($Can/tonne) 94 - x i i -LIST OF FIGURES continued Figure Page 4.1 Ahmad's Induced Innovation Model 121 4.2 Induced Innovation with Many Possible Research Activities 125 4.3 Research Resource Allocation to Commodities 128 4.4 Purchased Feed Saving Technical Change 131 4.5 Subsidy Administration and a Strategy for Technical Change 132 E . l Technical Efficiency and Price Efficiency 209 E.2 Annual Milk Production Per Cow and Concentrate Feeding Per Unit of Milk Production, DHAS Annual Averages, 1970-84 233 - x i i i -" ACKNOWLEDGEMENT " I w o u l d l i k e t o e x p r e s s my a p p r e c i a t i o n t o t h e m e m b e r s o f my c o m m i t t e e f o r t h e i r c o n t r i b u t i o n s . T h e a s s i s t a n c e a n d a d v i s e r e c e i v e d f r o m J o h n G r a h a m h a s b e e n p a r t i c u l a r l y v a l u a b l e a n d a p p r e c i a t e d . My e d u c a t i o n a n d t h i s u n d e r t a k i n g h a v e b e n e f i t e d f r o m t h e l e c t u r e s , c o n v e r s a t i o n s a n d r e a s o n e d p e r s p e c t i v e s o f R i c h a r d B a r i c h e l l o . I am f u r t h e r m o r e i n d e b t e d t o t h e s e r v i c e o f B i l l K e r r a n d h i s k e e n i n t e r e s t i n a r e g i o n a l f a r m p r o b l e m s o f a r r e m o v e d . F i n a l l y , t h e e n c o u r a g e m e n t a n d s u p p o r t I h a v e a l w a y s r e c e i v e d f r o m my w i f e A r l e n e made t h e c o m p l e t i o n o f t h i s t h e s i s p o s s i b l e . - xiv -Chapter 1 Introduction An important policy affecting the economics of livestock and, feed grain production in Nova Scotia has been Feed Freight Equalization or what is now termed the Feed Freight Assistance Program (FFA) of the Federal Government. FFA has subsidized either a l l or part of the cost of transporting prairie feed grains to other provinces since 1941 (and Ontario corn eastward since 1967). The investment decisions of farms and related businesses have been influenced in this period. The policy may have also affected regional agricultural technologies in regard to their directions and rates of change. In the past decade there have been reductions in the real rates of assistance provided by FFA for shipments of feed grain into Nova Scotia. Feed costs as a result have risen relative to other livestock production areas in Canada and the U.S. These cost increases resulting from policy changes were unanticipated. They also occurred simultaneously with short term public incentives for livestock expansion which increased feed grain demand. Segments of the industry now face substantial farm a t t r i t i o n as a direct result of these policies. One policy option that may address the immediate feed cost problems of the industry (and the need to accelerate adjustment and development) is the restructuring of the FFA Program from an input to an output based payment system. This was requested in 1982 by the - 1 -Nova Scotia Federation of Agriculture.1 The Maritime Farmers Council2 later called for a partial restoration of assistance to the historic (real) levels which prevailed in the past (1975-76) and a restructuring of the FFA Program from a freight/input to be a product/ouput basis. The disincentives for crop development and adjustment resulting from freight subsidies were a major concern. It was f e l t that FFA restructuring together with increased public technical support would result in the region moving steadily towards a position where the subsidy could be eventually eliminated with minimal negative consequences.3 1.1 Background FFA today is a relatively minor element of the agricultural p o l i c y 4 of the Federal Government. It was at one time however, a major national program.5 in 1976 following the development of corn 1 Nova Scotia Federation of Agriculture, "The Domestic Feed Grain Policy and Nova Scotia Agriculture." Submission to the Technical Consultations on the Domestic Feed Grain Policy, Halifax, August 25, 1982. 2 Maritime Farmers Council. "Maritime Agriculture and Grain Transportation." Submission to the House of Commons Transport Committee, August, 1983. 3 Three 5 year programs were visualized with the goal of subsidy removal by the year 2000. 4 It is also considered by some to be an aberration to the current policy. For example see: Groenewegen, J.R. "Feed Grain Policy Objectives in Canada," Agriculture Canada, July 1982. Canada Grains Council, "Domestic Feed Grain Policy Study, Report to the Advisory Committee," October, 1979. 5 Kerr, T. C , "An Economic Analysis of the Feed Freight Assistance Policy", Agriculture Economics Research Council of Canada, Ottawa, 1966, p. 139. - 2 -production in Southern Ontario and Western Quebec the geographic scope of the program was reduced such that only shipments to Northern Ontario, Eastern Quebec, the Atlantic Provinces, and British Columbia were eligible for assistance.6 Since that time freight rate increases combined with only minor adjustments in the assistance rates have reduced the level of "price equalization" for Western feed grains in Eastern Canada and that of Ontario corn prices with the rest of Eastern Canada (see tables 1.1 and 1.2). Feed grain price equalization has been of most importance to the Maritime Provinces.? The competitive basis for livestock feeders in Southern Ontario and Western Quebec had largely shifted to corn before the 1976 policy changes. During the 1970's Ontario moved from a net corn importing to a net exporting position. This transition resulted in Ontario corn prices f a l l i n g relative to U.S. corn prices and this benefited feeders. Increasingly competitive U.S. corn supplies have also been a factor in offsetting the impact of feed grain policy changes in Quebec. Reductions in the Canadian t a r i f f on corn were a factor in this improved market access. Lower protein feed ingredient prices and greater progress in increasing local feed grain production have further differentiated the Eastern Quebec situation compared with that of the Maritime Provinces. 6 A more complete historical summary of the policy is outlined in appendix A. 7 Following a series of meeting across Canada in 1982 as part of the "technical consultations" for the Domestic Feed Grain Policy Review, Agriculture Canada o f f i c i a l s reported that concerns about feed freight assistance were only expressed in the Maritimes. - 3 -Table 1.1 Rail Freight Rates, FFA Rates, and Private Cost of Feed Grain Shipments Ex. Thunder Bay and Chatham to Truro and Port Williams, NS 1973-84 ($ per tonne as of July 31) Truro Port Williams Year Rail Freight FFA Private Rail Freight FFA Private Rate Rate Cost Rate Rate Cost Western Grains Ex. Thunder Bay 1973 11.46 10.36 1.10 14.33 12.57 1.76 1974 11.90 10.36 1.54 14.27 12.57 2.20 1975 17.86 10.36 7.50 21.38 12.57 8.81 1976 20.50 10.36 10.14 24.03 12.57 11.46 1977 22.48 10.40 12.08 26.00 12.60 13.40 1978 24.91 10.40 14.51 28.00 12.60 15.40 1979 28.22 10.40 17.82 31.31 12.60 18.71 1980 32.62 10.40 22.22 35.71 12.60 23.11 1981 36.81 10.40 26.41 39.90 12.60 27.30 1982 42.77 10.40 32.37 45.85 12.60 33.25 1983 45.41 10.40 35.01 48.49 12.60 35.89 1984 47.63 10.40 37.23 50.94 12.60 38.34 1985 50.27 12.40 37.87 53.58 15.60 37.98 Ontario Corn Ex. Chatham 1973 11.47 5.29 6.18 11.03 7.50 3.53 1974 11.91 5. 29 6.62 11.47 7.50 3.97 1975 13.23 5.29 7.94 15.44 7.50 7.94 1976 16.54 5.29 11.25 19.40 7.50 11.90 1977 19.18 6.00 13.18 22.71 8.20 14.51 1978 20.73 6.00 14.73 24.48 8.20 16.28 1979 23.37 6.00 17.37 27.12 8.20 18.92 1980 27.12 6.00 21.12 30.87 8.20 22.67 1981 31.09 6.00 25.09 35.06 8.20 26.86 1982 35.94 6.00 29.94 39.91 8.20 31.71 1983 38.81 6.00 32.81 43.22 8.20 35.02 1984 40.79 6.00 34.79 45.42 8.20 37.22 1985 42.34 8.00 34.34 47.19 11. 20 35.99 1986 44.98 8.00 36.98 50.05 11.20 38.85 S o u r c e : A t l a n t i c P r o v i n c e T r a n s p o r t a t i o n C o m m i s s i o n . - 4 -Table 1.2 Rail Freight Rates, FFA Rates, and Private Cost of Feed Grain Shipments Ex. Thunder Bay and Chatham to Truro and Port Williams, Nova Scotia 1973-84 (Constant 1971 Dollars per tonne as of July 31) Truro Port Williams Year Rail Freight FFA Private Rail Freight FFA Privat Rate Rate Cost Rate Rate Cost Western Grains Ex. Thunder Bay 1973 10.00 9.04 0.96 12.50 10.97 1.53 1974 9.01 7.84 1.17 10.80 9.52 1.28 1975 12.21 7.08 5.13 14.61 8.59 6.02 1976 12.78 6.46 6.32 14.98 7.84 7.14 1977 13.05 6.04 7.01 15.09 7.31 7.78 1978 13.55 5.66 7.89 15.23 6.86 8.37 1979 13.92 5.13 8.79 15.45 6.22 9.23 1980 14.48 4.62 9.86 15.86 5.60 10.26 1981 14.77 4.18 10.59 16.02 5.06 10.96 1982 15.60 3.79 11.81 16.72 4.60 12.12 1983 15.66 3.59 12.07 16.72 4.34 12.38 1984 15.73 3.43 12.30 16.82 4.16 12.66 1985 15.84 3.91 11.93 16.89 4.92 11.97 Ontario Corn Ex. Chatham 1973 10.01 4.62 5.39 9.62 6.54 3.08 1974 9.02 4.00 5.02 8.68 5.68 3.00 1975 9.04 3.62 5.42 10.55 5.13 5.42 1976 10.31 3.30 7.01 12.09 4.68 7.41 1977 11.13 3.48 7.65 13.18 4.76 8.42 1978 11.04 3.19 7.85 13.04 4.46 8.58 1979 11.53 2.96 8.57 13.38 4.05 9.33 1980 12.04 2.66 9.38 13.71 3.64 10.07 1981 12.48 2.41 10.07 14.07 3.29 10.78 1982 13.11 2.19 10.92 14.56 2.99 11.57 1983 13.38 2.07 11.31 14.90 2.83 12.07 1984 13.98 1.98 12.00 15.58 2.71 12.87 1985 13.34 2.52 10.82 14.87 3.53 11.34 - 5 -Farm prices received by Maritime livestock and poultry producers are at most slightly above Central Canada prices (chickens, eggs, turkey, f l u i d milk). For some commodities farm prices are essentially the same (hogs, industrial milk) and there are regional market circumstances for which farm prices are below the levels in Ontario and Quebec (particular classes of cattle, fowl, lambs). Dairy products, poultry and egg prices are not market determined although regional price differences are determined by transport and other transaction costs in the case of the later two commodities. The reductions in feed grain price equalization combined with public incentives for substantial nonrumminant livestock expansion (hogs) and other economic developments have resulted in the Maritime Provinces accounting for an increasing share of eastern Canada feed expenditures. Furthermore, these are increasingly disproportional to livestock receipts (See table 1.3). Farm feed expenditures in the particular case of Nova Scotia are the highest of any province relative to total farm operating expenses or to gross farm income. In 1984 provincial feed expenditures were $64.7 million accounting for 36% of total industry operating expenses. Increases in the comparative costs of the industry's largest purchased input has had serious consequences for agriculture in the province. Farm organizations have accordingly given this policy issue their highest priority. In recent years the Nova Scotia Federation of Agriculture has made more special trips to Ottawa on these matters than for a l l other issues combined. - 6 -A major p o l i t i c a l issue at this time involves the historic guarantee of feed grain price equalization. The Livestock Feed  Assistance Act** ensures the "fair equalization of feed grain price in Eastern Canada".9 Between 1976 and 1984 freight rates for feed grain shipments to the Maritimes increased by $30/tonne. This occurred for both Western grains and Ontario grains. The only adjustment in the FFA Program, however, was a $2-3/tonne increase in FFA rates made in 1984. Freight rate increases in 1985-86 have now more than offset the small 1984 increases in assistance rates. A high level of price equalization with Thunder Bay was maintained by the policy until feed grain self-sufficiency was approached in Ontario and western Quebec. The policy statements in I974IO a n ( j 1976II which introduced the "New Feed Grain Policy" simply reaffirmed that FFA to the Maritimes (and other peripheral areas) would be maintained until these regions (like southern Ontario and western Quebec) achieved a high level of "feed grain sel f -sufficiency" . The increase in the private shipment cost of western feed grains has been roughly similar to a l l major livestock producing areas of Eastern Canada. However with increased Ontario corn production and lower relative corn prices (compared with U.S. markets) the cost of western feed grains is no longer an important factor to producers in Central Canada. Such offsetting developments 8Canada, Livestock Feed Assistance Act, R.S., c. L-9, Office Consolidation, August 1980. 9 The Act defines Eastern Canada as a l l that part of Canada east of Thunder Bay. m Minister of Agriculture. New Feed Grain Policy, Government of Canada Release, May 22, 1974 and Minister of Agriculture, New Feed Grain Policy to Begin on August 1, 1974, Government of Canada Release, July 26, 1974. 11 Minister of Agriculture. Minister responsible for the Canadian Wheat Board, Joint Announcement on Domestic Feed Grain Policy, May 31, 1976. Table 1.3 Livestock Receipts and Feed Expenditures Maritime Provinces and Eastern Canada 1976-83 Livestock Receipts Feed Expenditures Maritimes/Eastern Canada Eastern Eastern Livestock Feed Maritimes Canada Maritimes Canada Receipts Expenditures - $ Million - % 1 9 8 3 3 7 3 . 4 5 , 6 0 1 . 3 1 2 1 . 3 1 , 4 6 5 . 5 6 . 6 6 8 . 27 1 9 8 2 3 8 0 . 0 5 , 8 1 3 . 2 1 1 2 . 9 1 , 4 4 0 . 4 6 . 5 3 7 . 83 1 9 8 1 3 4 9 . 2 5 , 4 1 9 . 6 1 1 7 . 0 1 , 4 7 7 . 3 6 . 4 4 7 . 9 1 1 9 8 0 3 0 6 . 7 4 , 8 7 6 . 9 9 7 . 2 1 , 2 9 4 . 3 6 . 2 8 7 . 50 1 9 7 9 2 9 0 . 5 4 , 4 2 9 . 8 7 6 . 3 1 , 0 7 6 . 6 6 . 5 5 7 . 0 8 1 9 7 8 2 4 5 . 6 3 , 8 0 2 . 5 6 2 . 8 9 2 0 . 5 6 . 4 5 6 . 8 2 1 9 7 7 2 0 0 . 7 3 , 1 0 3 . 4 6 0 . 5 8 2 5 . 9 6 . 4 6 7 . 32 S o u r c e : N e t F a r m I n c o m e C a t . N o . 2 1 - 2 0 2 , i S t a t i s t i c s C a n a d a . h a v e n o t b e n e f i t e d o r p r e s e r v e d t h e c o m p e t i t i v e p o s i t i o n o f M a r i t i m e f e e d e r s . I n 1 9 6 7 f e e d f r e i g h t e q u a l i z a t i o n h a d b e e n e x t e n d e d t o O n t a r i o c o r n e a s t w a r d . H T h i s a s s i s t a n c e h a s h o w e v e r , b e e n r e d u c e d i n t h e s a m e m a n n e r ( i . e . , b y r a p i d i n f l a t i o n a r y e r o s i o n ) a s t h e p r i c e e q u a l i z a t i o n w i t h T h u n d e r B a y f o r w e s t e r n g r a i n . T h e i n c r e a s e d p r a i r i e - e a s t e r n p r i c e s p r e a d s f o r w e s t e r n g r a i n may n o t b e i n c o n s i s t e n t w i t h t h e s p i r i t o f t h e L i v e s t o c k F e e d A s s i s t a n c e A c t . M a r i t i m e f a r m o r g a n i z a t i o n s h a v e a r g u e d , h o w e v e r , t h a t s u b s t a n t i a l p r i c e d i f f e r e n c e s f o r e a s t e r n c o r n t h r o u g h o u t t h e l i v e s t o c k p r o d u c t i o n a r e a s o f E a s t e r n C a n a d a i s c o n t r a d i c t o r y w i t h i t s p r i n c i p l e s . 1 2 C a n a d a , H o u s e o f C o m m o n s . D e b a t e s , O c t o b e r 1 3 , 1 9 6 7 , p p . 3 0 6 5 -3 0 6 6 . - 8 -T y c h n i e w i c z i n 1 9 7 6 1 3 i n t e r p r e t e d t h e " N e w F e e d G r a i n P o l i c y " t o m e a n t h a t t h e p o s i t i o n o f M a r i t i m e l i v e s t o c k a n d p o u l t r y p r o d u c e r s w i t h r e s p e c t t o f e e d g r a i n w a s s e c u r e . T h i s v i e w w a s w i d e s p r e a d a n d i m p a c t e d s u b s t a n t i a l l y u p o n a g r i c u l t u r a l p l a n n i n g i n t h e r e g i o n . F o l l o w i n g t h e M a y 1 9 7 6 F e e d G r a i n P o l i c y S t a t e m e n t , t h e P r o v i n c e o f N o v a S c o t i a s i g n e d t h e A g r i c u l t u r a l D e v e l o p m e n t A g r e e m e n t w i t h t h e G o v e r n m e n t o f C a n a d a ( D e p a r t m e n t o f R e g i o n a l E c o n o m i c E x p a n s i o n ) . P r o g r a m s i m p l e m e n t e d u n d e r t h i s a g r e e m e n t e n c o u r a g e d e x p a n s i o n o f t h e p r o v i n c i a l h o g s e c t o r . T h e n e t c o s t o f m o v i n g f e e d g r a i n f r o m T h u n d e r B a y t o T r u r o d u r i n g t h e 1 9 7 5 - 7 6 g r a i n m a r k e t i n g y e a r w a s $ 8 / t o n n e . I n 1 9 8 3 - 8 4 t h i s h a d i n c r e a s e d t o $ 3 6 / t o n n e . I n r e a l t e r m s ( 1 9 7 1 d o l l a r s ) t h e i n c r e a s e w a s f r o m $ 5 . 4 3 t o $ 1 2 . 1 2 / t o n n e . S i m i l a r i n c r e a s e s o c c u r r e d i n t h e c o s t o f i m p o r t i n g O n t a r i o c o r n s u p p l i e s ( s e e t a b l e s 1 . 1 a n d 1 . 2 ) . i n t h e c a s e o f h o g s , g i v e n a n o p e n N o r t h A m e r i c a n p o r k m a r k e t a n d common p r i c e s t h r o u g h o u t E a s t e r n C a n a d a , t h e i n c r e a s e s i n f e e d g r a i n t r a n s p o r t c o s t s h a v e r e d u c e d t h e v i a b i l i t y o f t h e s e o p e r a t i o n s a n d s u b s t a n t i a l f a r m a t t r i t i o n i s now e x p e c t e d l 4 . Some o t h e r p r o v i n c i a l c o m m o d i t y s e c t o r s o p e r a t i n g w i t h i n m a r k e t i n g p l a n s w i t h q u o t a s a n d a d m i n i s t e r e d p r i c e s , h a v e b e e n a b l e t o p a r t l y c o m p e n s a t e 1 3 T y r c h n i e w i c z , E . W . " T r a n s p o r t a t i o n P r o b l e m s i n C a n a d i a n A g r i c u l t u r e w i t h S p e c i a l R e f e r e n c e t o G r a i n . " P r o c e e d i n g s o f  t h e C a n a d i a n A g r i c u l t u r a l E c o n o m i c s S o c i e t y , 1 9 7 6 , p g . 2 9 - 3 0 . 1 ^ M a r i t i m e F a r m e r s C o u n c i l . S u b m i s s i o n t o t h e H o n o u r a b l e J o h n  W i s e , M i n i s t e r o f A g r i c u l t u r e , J a n . 1 7 , 1 9 8 5 . - 9 -for higher relative feed costs. Nevertheless, these producers (and related industries) are now vulnerable to structural market and institutional changes. In the 10 years since the "New Feed Grain Policy" was introduced other changes in the region have also occurred. Since 1974 Nova Scotia grain production has increased from 32,000 to 63,400 tonnes. Unique and potentially high paying technological advances have been a feature of this expansion. The Province was the f i r s t in North America to commercially use intensive cereal management.15 These new technologies are specific to the physical environment of the province with regard to high moisture growing conditions. 1*> To a large degree such technological directions and advances have been initiated and carried out by the private sector. The entire domestic feed grain policy as i t relates to Maritime problems (and opportunities) and equity considerations is currently under review by the Federal Government. Changes in the overall policy to date have included the recent suspension of Canadian Wheat Board domestic sales of feed grain at corn competitive 1 5 The national farm publication Country Guide (November 1984) did a cover feature "Intensive Cereal Management Comes to Canada" which reported on progress in Nova Scotia. The quarterly publication of the Michigan State University Agricultural Experimental Station Futures (Vol. 3, No. 1, September 1984) reported on work underway in Michigan. This included the planning on a February 13, 1985 Crops Day with an anticipated audience of 1,500 farmers. The meeting was to feature a Nova Scotia grain farmer. 16 The widespread use of grain varieties developed for prairie conditions was common in Nova Scotia despite the maritime climate until recently. - 10 -formula prices.17 This has resulted in increased feed price spreads*** in the Maritimes compared with Central Canada. 1.2 The Problem Statement The reduction in the level of feed grain price equalization has affected the competitive position of specific sectors of the agricultural industry in Nova Scotia. This has been more serious then might otherwise have been the case because of the misdirection given to industry investment. High comparative feed costs are a major cause of financial problems in the hog sector. Segments of the industry operating within supply management programs do not face immediate prospects of business failures but are now vulnerable to institutional and structural changes in their product markets. These sectors have lost national market share as a direct result of their high comparative feed costs. Farm groups, regional politicians, and federal ministers have a l l stated that the position of these livestock and poultry producers with regard to feed costs and policy is unsatisfactory. While seeking measures which would immediately reduce their high relative feed costs, farm groups have also sought a comprehensive medium term plan to reduce dependency on the subsidy. These two approaches can of course be conflicting. Furthermore, longer term action has frequently been discussed by farm groups and 17 Minister responsible for the Canadian Wheat Board. Domestic  Feed Grain Sales Suspended by Canadian Wheat Board, Government of Canada Release, December 11, 1984. 18 Maritime Farmers Council. Submission to Hon. John Wise,  Minister of Agriculture, January 17, 1985. - 11 -public agencies in narrow terms restricted to measures to expand local grain production and frequently biased toward cash crop production. In addressing the immediate feed cost problems of the industry and i t s movement to a position where the FFA Program could be discontinued with minimal (or less severe) consequences for livestock production and related businesses, the unintentional distortion effects of the FFA Program are a problem. In the short term the policy may distort input allocation decisions resulting in significant reduction in net b e n e f i t s 1 9 . in the longer term the FFA Program may negatively impact upon the technical developments and other adjustments which could fundamentally address the feed cost situation of the industry over time. Efforts to direct and promote technical change in an a r t i f i c a l l y low feed cost environment may also become disorientated and misdirected. 1.3 Objectives of the Study This thesis w i l l analyze the economic effects of an i n i t i a t i v e which would transform FFA in Nova Scotia from an input subsidy to an output based subsidy payment. (Details on the mechanics of such a transformation are given in appendix B.) The purpose of such a policy change would be to increase benefits to the industry in the short and intermediate terms and to orientate and accelerate adjustment and development so as to reduce the negative Output distortions resulting from the policy change evaluated here are less of a factor on the other hand because of the high proportion of livestock and poultry production covered by (supply management) production quotas. - 12 -effects of the reduction in feed grain price equilization and/or i t s eventual termination. The operational objectives of the study are: 1. To present theoretical concepts concerning input versus output subsidies and to relate these to aspects of the current and proposed policy and to the individual agricultural sectors which would be affected. 2. To measure the inefficiencies of feed input price distortions on the livestock and grain sectors of Nova Scotia and the price efficiency gains that could arise from the policy change. 3. To assess the implications of the proposed policy for technical change in the agricultural industry in Nova Scotia and to appraise the corresponding benefits which may arise from restructuring the FFA Program. 4 . To measure the producer welfare gains resulting from the shift in feed assistance payment from an input to a product/output basis over a fifteen year period and to draw conclusions based upon these evaluations. This analysis is relevant i f the Federal Government attempts to minimize the cost of achieving regional development goals (as they relate to sustaining livestock production and feeding margins) or alternatively i f the government attempted to maximize regional development objectives at any given expenditure level. Effects w i l l be estimated for the current level of the subsidies as well as for a level $10/tonne higher corresponding closer to the increases requested by farm organizations and more consistent with the Livestock Feed Assistance Act. - 13 -1.4 Research Procedure The research procedures which w i l l address the specific objectives of the study are outlined below. 1. The relevant price theory with respect to the producer response to input price changes and the measurement of producer welfare is reviewed. Theoretical models are presented of the policy change at the aggregate level and for specific sub-sectors of the industry. The parameters required for a static partial equilibrium welfare analysis are identified. 2. A supply function for provincial grain production is estimated to obtain the price e l a s t i c i t y of supply for competitive local grain. Existing estimates of short term feed demand and livestock supply parameters and a range of long run e l a s t i c i t i e s are used to estimate price inefficiencies associated with the current policy. These are utilized for estimation purposes in accordance with the specified theoretical models. 3. Theory related to the influence of economic variables (prices) on technical change is reviewed. The current state and past changes in the province's agricultural technology is surveyed for evidence of relative prices having influenced directions and rates of change. Prospects for technologies which would make the industry less dependant on subsidies and imported feed grains are also considered. A sensitivity analysis is presented based on a range of rates of induced technical change and indicating implied industry benefits. - 14 -4. The net present value of estimates of producer welfare gains from transfers, the recovery of program benefits from price inefficiencies and from induced technical change resulting from the policy change over a fifteen year period are presented. These are also compared with estimates of the incremental public costs of changing the administration of the FFA Program. 1.5 Guide to Thesis In the next chapter the theoretical basis for the partial equilibrium static welfare analysis is given. This analysis is subsequently undertaken in chapter 3. A number of industry transfer gains arising from the elimination of current program leakages are also estimated in chapter 3 as are the incremental public costs of the policy change. Chapter 4 considers the implications for technical change. Theory and past research are reviewed and applied to the consideration of the proposed policy. In chapter 5 the the quantitative results from the evaluation of the proposed change are presented. Finally in chapter 6, conclusions are stated and recommendations made. - 15 -Chapter 2 Theoretical Framework T h i s c h a p t e r w i l l r e v i e w t h e o r y w h i c h f o r m s t h e b a s i s f o r t h e p a r t i a l e q u i l i b r i u m s t a t i c w e l f a r e a n a l y s i s u n d e r t a k e n i n c h a p t e r 3 . A n a g g r e g a t e m o d e l g i v i n g a n o v e r v i e w o f t h e p o l i c y c h a n g e a n d i t s e f f e c t s a c r o s s t h e e n t i r e i n d u s t r y i s p r e s e n t e d . D i s a g g r e g a t e d s e c t i o n s o f t h e m o d e l r e p r e s e n t i n g t h e c h a n g e s a t t h e s u b - s e c t o r l e v e l a n d u s e d i n t h e a c t u a l a n a l y s i s a r e d i s c u s s e d . T h e r e q u i r e d p a r a m e t e r s a r e i d e n t i f i e d . 2 . 1 Derived Demand T h e m i c r o e c o n o m i c s o f p r o d u c t i o n a n d e s p e c i a l l y t h a t o f d e r i v e d d e m a n d w i l l f o r m m u c h o f t h e f o u n d a t i o n f o r t h i s a n a l y s i s . I n r e v i e w , t h e t e c h n i c a l r e l a t i o n s h i p b e t w e e n i n p u t s a n d o u t p u t c a n b e e x p r e s s e d a s a p r o d u c t i o n f u n c t i o n , y = f ( X l f X 2 X n ) 2 . 1 W h e r e y = o u t p u t a n d X ] _ , X 2 . . . • X n a r e t h e i n p u t q u a n t i t i e s . T h e c o s t o f p r o d u c i n g o u t p u t Y u s i n g t h e i n p u t s X j _ , X 2 . . . . X n c a n b e e x p r e s s e d a s a c o s t f u n c t i o n ; T C = F C + W i X i 2 . 2 W h e r e T C = t o t a l c o s t o f p r o d u c t i o n , F C = f i x e d c o s t s w h i c h a r e i n v a r i a n t w i t h r e g a r d t o o u t p u t l e v e l a n d W^ = p r i c e o f i n p u t X ^ . T h e p r o f i t f u n c t i o n o f t h e p r i c e s c a n t h e n b e e x p r e s s e d a s , P = P y Y - T C 2 . 3 W h e r e P = p r o f i t , P y = o u t p u t p r i c e , Y = t h e l e v e l o f o u t p u t d e t e r m i n e d b y 2 . 1 a n d T C = t o t a l c o s t g i v e n b y 2 . 2 . - 16 -A firm maximizes i t s profits when, Wi W2 Wn MR = MC = = = 2.4 MPL MP 2 MPn Where MR and MC are marginal revenue and marginal cost and Wi and MPi are the price and marginal product respectively of input i . For a firm or industry facing perfectly elastic demand for it s output y, MR w i l l equal product price P y. (Perfectly elastic supply of inputs is assumed in 2.4 with the price of input i equal to i t s marginal cost per unit). Equation 2.4 requires that, Wi = (MR) (MPi) or Wi =Py (MPi) 2.5 when Py is given. The short run derived demand function for input Xi then becomes, Xi* = f (P y, Wi, W2 Wn) i = 1 . . • . n 2.6 The substitution of the input demand function into the production function yields the optimal output as a function of input and output prices; i.e. the firm's supply function. The total effect of a change in the price of an input upon its demand is composed of expansion and substitution effects. A lower price for Xi lowers the firm's marginal cost by a magnitude determined by i t s share of marginal cost and the price change. This, therefore, increases equilibrium output. The reduced price can also result in input substitution in favour of Xi- Unlike the substitution and income effects in consumer theory both of these effects w i l l increase (decrease) the quantity demanded of the input as i t s price decreases (increases). - 17 -A condition which w i l l occur in this analysis involves the production quotas in place for some livestock and poultry sectors. The difference between total revenue and total cost (profit) w i l l then be maximized only i f costs are minimized in maintaining the given production level. Profit maximization w i l l then require the firm to, minimize TC = FC + x^ 2.7 subject to f (X 1 ( x 2 Xn) = Y Q 2.8 The input demand functions of a profit maximizing firm then become, Xi = Xj* (Y Q, Wi, W2 Wn) i = 1 . . . n 2.9 This equation, (2.9), is different from 2.6 in that demand is a function of output level (Y0) and input prices instead of output price (Py) and input prices. Changes in the demand for an input in response to a price change only arise from the substitution effect in this case. 2.2 The Effect of Input Subsidies on Input Choices A conceptual model depicting the use of an input or output subsidy to achieve a given production from an industry using two substituable inputs is shown in figure 2.1. In the absence of a subsidy, the industry isocost position is ab. The desired output level is given as l]_. Total outlays required for this level of production, however, surpass returns. To induce a production level represented by isoquant 1^ the government could introduce an input subsidy on factor A. Measured in units of factor A the value of government subsidies required to achieve this production level is ae. Measured in units of factor B the public cost is fg. The price of - 18 -factor B doesn't change so the new isocost line (with equivalent industry costs to ab) is now eb and the output level represented by II is undertaken. This input subsidy situation may be contrasted with an output subsidy case. An output subsidy would f a l l on a l l inputs equally and not change the least cost mix of inputs. In the diagram the new isocost line resulting from the introduction of an output subsidy i s parellel to ab, i.e. the price ratio of factor A and factor B is not changed. In this case, production could be induced at the 1^ level by an output subsidy which measured in terms of units of factor B would cost the government ih. The distance along the factor B axis between the i n i t i a l isocost and the tangency of the isoquant with the subsidized isocost indicates the value of the government subsidies. These are respectively fg and ih for the input and output subsidy cases. Subsidizing the input for the desired production causes an increase in the use of the subsidized input. A production subsidy would cost the government less. In the graphical representation ih is less than fg. If the government had resources equivalent to fg with which i t wanted to maximize i t s regional objectives, i t could introduce an output subsidy equivalent to i j . This option would induce a greater regional production represented by the isoquant I2. - 19 -0 a o factor 3 Figure 2.1 Production Isoquants and Factor Prices Showing the Effect of Input and Output Subsidies on Production The welfare gain of utilizing an output versus an input subsidy depends largely on the degree to which factor/factor, output/output and input/output substitutions could occur. The more convex the isoquant the greater will be the factor/factor substitution effect in the event of changes in relative prices. If the subsidized input has a fixed coefficient in the production process, (L shaped isoquants) there are no gains to be ra ade. - 20 -If the public objective in subsidizing production relates specifically to increasing output as opposed to the welfare of producers, a single (or more l i k e l y multiple) input subsidy can be cost-effective compared to an output subsidy. In the case of production with decreasing returns inputs are used more intensively at the margin. In such circumstances a subsidy on an input(s) w i l l have a larger impact on marginal costs than on average costs. Consequently, a desired level of production can be achieved with a lower subsidy. 2.3 Measurement of Producer Welfare In evaluating the welfare effects of restructuring the FFA Program as i t applies in Nova Scotia, producer benefits w i l l be of primary interest. Given the small size of agriculture in Nova Scotia compared with the provincial economy and with agriculture in North America, perfectly price elastic supply curves for variable inputs w i l l be assumed for the partial equilibrium analysis. In measuring producer benefits, the area above the industry supply curve and under price has frequently been used in partial equilibrium analysis. Marshall defined this as "producer's surplus."^ Mishan2 has argued that for policy purposes the long run supply curve of an industry is more relevant than the short run supply curve. The long run supply curve with a l l factors variable represents the lowest average cost for each industry output level. As such, he asserts that i t includes a l l factor prices and a l l rents for a competitive industry and "the area above the rising industry supply curve carries no economic significance." 1 M a r c h a l l , A l f r e d . Principles of Economics, 8th edition, MacMillan Company, 1948. 2 Mishan, E.J. "What is Producer's Surplus?" American Economic Review, 58, 1968, pp. 1269-82. - 21 -Supply curves of relevance for "producer surplus" are for the period in which "the output of the good in question can be increased only by adding to fixed-factors amounts of other factors that are imperfect substitutes for i t but are perfectly elastic in supply with respect to their money price."3 Producer surplus is then the economic rent accruing to the fixed factors and Mishan makes the case that the money sum involved is better understood i f i t is referred to as economic rent. Mishan notes that "the term 'producer's surplus' is misleading and otiose". An advantage he adds, of the suggested terminology is that i t obliges the analyst to identify the particular factor that is for some time period inelastic in supply and, therefore, rent earning to the factor owners. Economic rents are in this case identical with what Marshall called "quasi-rents" - the excess of gross receipts over total variable cost. The question of whether producer welfare changes could be measured in either factor or output markets was f i r s t explored by Mishan, E. J. "What is Producer's Surplus?" American Economic  Review, 58, 1968, p. 1275. - 22 -Surplus 0 F i g 2 . 2 P r o d u c e r S u r p l u s M e a s u r e d i n t h e P r o d u c t M a r k e t S c h m a l e n s e e 4 a n d b y W i s e c a r v e r ^ who b o t h c o n c l u d e d t h a t e x c e p t i n t h e c a s e o f a t e c h n o l o g y w i t h f i x e d c o e f f i c i e n t s m e a s u r e m e n t i n t h e o u t p u t m a r k e t w o u l d u n d e r s t a t e t h e s o c i a l c o s t o f i n p u t m a r k e t d i s t o r t i o n s . S u b s e q u e n t w o r k b y A n d e r s o n ^ a n d S c h m a l e n s e e 7 d e m o n s t r a t e d e r r o r s i n t h e e a r l i e r a n a l y s i s . S c h m a l e n s e e s h o w e d t h a t p r o d u c e r w e l f a r e c h a n g e s r e s u l t i n g f r o m i n p u t p r i c e c h a n g e s c o u l d b e m e a s u r e d i d e n t i c a l l y i n e i t h e r t h e i n p u t m a r k e t i n v o l v e d o r t h e o u t p u t m a r k e t . F o r a f i n a l g o o d s i n d u s t r y w i t h p e r f e c t l y e l a s t i c 4 S c h m a l e n s e e , R . " C o n s u m e r * s S u r p l u s a n d P r o d u c e r 1 s G o o d s , " A m e r i c a n E c o n o m i c R e v i e w 6 1 , 1 9 7 1 , p p . 6 8 2 - 8 7 . 5 W i s e c a r v e r , D . " T h e S o c i a l C o s t s o f I n p u t - M a r k e t D i s t o r t i o n , " A m e r i c a n E c o n o m i c R e v i e w 6 4 , 1 9 7 4 , p p . 3 5 9 - 7 2 . 6 A n d e r s o n , J . E . " T h e S o c i a l C o s t o f I n p u t D i s t o r t o n s : A Comment a n d a G e n e r a l i z a t i o n , " A m e r i c a n E c o n o m i c R e v i e w 6 6 , 1 9 7 6 , p p . 2 3 5 - 3 8 . 7 S c h m a l e n s e e , R. " A n o t h e r L o o k a t t h e S o c i a l V a l u a t i o n o f I n p u t P r i c e C h a n g e s , " A m e r i c a n E c o n o m i c R e v i e w , 6 6 , 1 9 7 6 , p p . 2 3 9 -4 3 . supply of it s inputs, even with non-zero quasi-rents, the consumer surplus in i t s input market is equal to the producer and consumer surpluses in i t s output market. The area underneath a derived demand curve for inputs used for producer welfare measurement assumes constant inputs and output prices. This is also true for the case of "producer surplus" measurement with respect to the supply curve (output market). The duality of surpluses in factor and product markets is reviewed extensively by Just, Hueth and Schmitz.8 Pries: Prica S Producer Rents :r Rents 0 Quantity Q u a n t i t y INPUT MARKET OUTPUT MARKET Figure 2.3 Producer Welfare Measurement in Input and Output Markets 8 Just, R.E., D.L. Hueth and A. Schmitz. Applied Welfare  Economics and Public Policy, Englewood C l i f f s , N.J. Prentice -Hall Inc. 1982. J u s t a n d H u e t h 9 h a v e e x a m i n e d t h e d i s a g g r e g a t e d w e l f a r e i m p a c t s o n e a c h a f f e c t e d m a r k e t g r o u p i n t h e c a s e o f a " m u l t i - m a r k e t f r a m e w o r k " . T h e i r a n a l y s i s s h o w e d t h a t t h e a r e a b e h i n d a g e n e r a l e q u i l i b r i u m d e m a n d c u r v e i n a n i n t e r m e d i a t e m a r k e t d o e s n o t m e a s u r e b e n e f i t s t o t h e p u r c h a s e r s i n t h a t m a r k e t o n l y b u t i n c l u d e s t h e sum o f r e n t s t o p r o d u c e r s s e l l i n g i n a l l h i g h e r m a r k e t s p l u s f i n a l c o n s u m e r s s u r p l u s . S i m i l a r l y t h e a r e a b e h i n d t h e g e n e r a l e q u i l i b r i u m s u p p l y c u r v e i n a n i n t e r m e d i a t e m a r k e t m e a s u r e s n o t o n l y r e n t s f o r p r o d u c e r s s e l l i n g i n t h a t m a r k e t b u t a l s o t h e r e n t s a c c r u i n g t o a l l p r o d u c e r s s e l l i n g i n m o r e b a s i c m a r k e t s p l u s i n i t i a l r e s o u r c e s u p p l i e r ' s s u r p l u s . I n b o t h m u l t i - m a r k e t s t r u c t u r e s i t i s a s s u m e d t h a t n o i n t e r v e n i n g m a r k e t h a s p e r f e c t l y e l a s t i c s u p p l y . I n t e r p r e t a t i o n o f t h e u s u a l s u r p l u s t r i a n g l e s f o r m a r k e t p a r t i c i p a n t s c o n s e q u e n t l y c h a n g e s w i t h m a r k e t l e v e l . I n t h e c a s e o f g r a i n p r o d u c t i o n i n N o v a S c o t i a t h e r e n t s a c c r u i n g t o r e n t i n g l a n d o w n e r s a r e i n c l u d e d a b o v e t h e s u p p l y c u r v e ( a n d u n d e r p r i c e ) , a s may r e n t s t o c u s t o m c o m b i n e s e r v i c e o p e r a t o r s , l i m e s u p p l i e r s , a n d l o c a l f e r t i l i z e r b l e n d e r s e t c . R e n t s t o p u r c h a s e r s o f b y - p r o d u c t s w o u l d b e r e f l e c t e d a s w e l l . M a r k e t s f o r s t r a w h a v e b e e n a f a c t o r i n t h e e c o n o m i c s o f N o v a S c o t i a g r a i n p r o d u c t i o n . T h i s d e m a n d f o r s t r a w h a s a l o w p r i c e e l a s t i c i t y a n d J u s t , R . E . a n d D . L . H u e t h . " W e l f a r e M e a s u r e s i n a M u l t i - m a r k e t F r a m e w o r k , " A m e r i c a n E c o n o m i c R e v i e w 6 9 , 1 9 7 9 , p p . 9 4 9 - 5 4 . - 25 -c o n s e q u e n t l y i s a d e t e r m i n a n t o f t h e u p w a r d s l o p i n g s u p p l y c u r v e o f l o c a l g r a i n p r o d u c t i o n . 1 ° T h e a r e a b e l o w t h e d e r i v e d d e m a n d c u r v e f o r m i x e d f e e d s m a n u f a c t u r e d b y t h e f e e d i n d u s t r y i n N o v a S c o t i a s i m i l a r l y d o e s n o t m e a s u r e b e n e f i t s t o ( f e e d p u r c h a s i n g ) l i v e s t o c k a n d p o u l t r y p r o d u c e r s o n l y . I t w o u l d a l s o i n c l u d e t h e r e n t s o f p r o c e s s o r s , a n d c o n s u m e r s ' s u r p l u s e s . I n t h e p r o v i n c i a l m a r k e t s f o r t h o s e l i v e s t o c k a n d p o u l t r y p r o d u c t s w h e r e p r o d u c t s u p p l y i s p e r f e c t l y e l a s t i c ( b e c a u s e o f e x t e r n a l s u p p l i e s ) t h e r e i s n o c o n s u m e r s u r p l u s r e s u l t i n g f r o m l o c a l p r o d u c t i o n a n d t h i s i s r e f l e c t e d u n d e r t h e p r o v i n c i a l d e m a n d c u r v e f o r f e e d s . I f t h e o n l y s o u r c e o f e g g s f o r e x a m p l e w a s w i t h i n t h e p r o v i n c e t h e d e m a n d c u r v e f o r l a y e r f e e d s w o u l d h a v e a v e r y h i g h i n t e r c e p t . S i n c e t h i s i s n o t t h e c a s e t h e i n t e r c e p t r e f l e c t s o n l y t h e p o i n t w h e r e t h e r e a r e n o r e n t s r e m a i n i n g f o r p r o v i n c i a l e g g p r o d u c e r s , e g g g r a d i n g o p e r a t i o n s , e t c . E g g c o n s u m e r s may s t i l l e n j o y s u r p l u s e s i n t h e c o m p l e t e a b s e n c e o f s u c h r e n t s o r o f a n y l o c a l e g g p r o d u c t i o n . 2 . 4 Theoretical Models of the Policy Change A n a g g r e g a t e m o d e l i l l u s t r a t i n g t h e s t a t i c e f f e c t s o f c h a n g e s i n t h e h i s t o r i c F F A p o l i c y i n N o v a S c o t i a a t t h e a g g r e g a t e d s e c t o r l e v e l i s s h o w n i n f i g u r e 2 . 4 . T h e p r o v i n c i a l d e r i v e d d e m a n d a n d s u p p l y c u r v e s f o r f e e d g r a i n s a r e g i v e n b y DD a n d S S r e s p e c t i v e l y , w h i l e I f h i g h e r g r a i n p r i c e s r e s u l t e d i n i n c r e a s e d g r a i n p r o d u c t i o n t h e b e n e f i t s t o s t r a w b e r r y g r o w e r s f r o m g r e a t e r s t r a w s u p p l i e s ( l o w e r p r i c e s f o r t h e i r s t r a w r e q u i r e m e n t s ) a r e p a r t o f t h e i n c r e a s e d a r e a u n d e r t h e g r a i n s u p p l y c u r v e . - 26 -p l p l represents the supply curve for imported FFA grains. It is assumed that this supply is perfectly elastic. I n i t i a l l y provincial feed grain production is Qi and total u t i l i z a t i o n is Q5. A subsidy equivalent to P1P2 I s paid on imported feed grains. FFA grain ut i l i z a t i o n is represented by the differences between provincial production and util i z a t i o n or QiQs- The public expenditures for the subsidy are abde. Complete removal of the subsidy would result in a loss of rents from livestock feeding equivalent to PiefP2« Rents accruing from local feed grain production, however, increase by PiacP2» leaving a net loss of producer welfare equivalent to acfe. Mishan's recommendation is to identify the fixed factors to which lower rents accrue. In this case they would include physical assets (including those at the farm level and those of slaughtering plants and feed mills) livestock production quotas, and any rent accruing to specialized human capital s k i l l s . Most of the feed grain produced in Nova Scotia is utilized on the farms where i t is produced. While there is a shift in the fixed factors to which rents accrue, the producer welfare benefits depicted as P^acP2 are largely received by grain growing livestock producers reducing their individual net welfare loss. Part of the producer welfare gains depicted by PiacP2» however, accrue to cash crop grain growers and many livestock feeders do not produce any of their feed grain requirements. In such cases transfers within the provincial agricultural industry are involved. - 27 -Figure 2.4 Supply of Local Feed Grains and Provincial Demand for Feed Grains - 28 -The policy change considered in this paper, i.e. the payment of the FFA benefit on livestock product, would result in a shift in the aggregate demand curve for feed grains. The new demand schedule is represented here by D^D1. The livestock product payments are shown as increasing feed grain demand by Q3Q4 compared to the situation i f the subsidy were completely eliminated. Total feed grain use is shown as decreasing from quantity Q5 to Q4 as a result of the policy change and feed grain imports decrease from Q1Q5 to Q2Q4- While the public cost of the subsidy has been abde, net producer welfare benefits are only acfe. The triangle abc represents producer welfare benefits from the increased feed grain production with undistorted prices. The shaded area between the two demand curves, above the new price P 2 and extending to the origin (not shown) represents producer welfare gains from the direct feed assistance paid on a product basis. The net change in producer welfare from the policy change is this area minus acfe. If feeding technologies involve fixed feed grain/product output ratios then there would be no efficiencies realized in livestock feeding. The subsidized input in such a case must be used in fixed proportion with other inputs hence the effects of the subsidy would be identical to an ouput based subsidy. Fixed proportions do not characterize the feeding technologies of agriculture in Nova Scotia. This is most apparent in the case of ruminant livestock production. 2.5 Disaggregated Sector Models In the previous section an aggregate model showing the overall effects of the policy change was presented. For the purpose - 29 -o f e s t i m a t i o n a n d t o s e p a r a t e t h e i m p l i e d e f f e c t s o n t h e d i f f e r e n t s e c t o r s o f t h e i n d u s t r y i t w i l l b e p r e f e r a b l e t o u n d e r t a k e t h e a n a l y s i s o n a d i s a g g r e g a t e d b a s i s . T h e r e a r e t h r e e d i f f e r e n t s i t u a t i o n s w h i c h w i l l b e e n c o u n t e r e d i n t h e e s t i m a t i o n o f t h e w e l f a r e e f f e c t s o f t h e p o l i c y c h a n g e . T h e s e i n v o l v e t h e p r i c e e f f e c t o n t h e l o c a l g r a i n s u p p l y , t h e d e r i v e d d e m a n d p r i c e e f f i c i e n c i e s w h e n l i v e s t o c k o r p o u l t r y o u t p u t i s h e l d c o n s t a n t , a n d c h a n g e s i n f e e d g r a i n d e m a n d w h e n l i v e s t o c k o r p o u l t r y o u t p u t i s v a r i a b l e . T h e f i r s t o f t h e s e w a s d e p i c t e d o n t h e l e f t h a n d s i d e o f f i g u r e 2.4 a n d i s s h o w n i n f i g u r e 2 . 5 ( p a n e l a ) . T h e r e m o v a l o f t h e s u b s i d y P1P2 l e a d s t o a n e q u i v a l e n t p r i c e i n c r e a s e f o r l o c a l g r a i n . P r o d u c t i o n i n c r e a s e s f r o m QltoQ.2. T h e r e s o u r c e c o s t o f t h i s i n c r e a s e i n p r o d u c t i o n i s t h e a r e a u n d e r t h e s u p p l y c u r v e a n d b e t w e e n Q± a n d Q 2 . Q1.Q2 Q u a n t i t y % Q\ Q u a n t i t y ( a ) •. ( b ) Figure 2.5 Price Efficiency Gains Measured in Output-Product and Input Markets with Fixed Output - 30 -T h e s h a d e d t r i a n g l e A r e p r e s e n t s t h e p r i c e e f f i c i e n c y g a i n . T o e s t i m a t e t h i s g a i n r e q u i r e s t h e l o c a l p r i c e e l a s t i c i t y o f g r a i n s u p p l y , t h e p r i c e c h a n g e , a n d t h e i n i t i a l p r o d u c t i o n l e v e l . T h e s e c o n d s i t u a t i o n c a n b e a n a l y z e d s i m i l a r l y o n t h e b a s i s o f a m o v e m e n t a l o n g a " c e t e r i s p a r i b u s " c u r v e b e c a u s e o f i n s t i t u t i o n a l c o n s t r a i n t s . I n t h i s c a s e i t i s t h e d e r i v e d d e m a n d c u r v e f o r f e e d . M o s t o f t h e f e e d g r a i n u t i l i z e d i n N o v a S c o t i a i s b y c o m m o d i t y s u b -s e c t o r s h a v i n g s u p p l y m a n a g e m e n t a n d p r o d u c t i o n q u o t a s 1 ! . F e e d g r a i n p r i c e c h a n g e s o f t h e m a g n i t u d e c o n s i d e r e d h e r e w o u l d h a v e n o p r o d u c t o u t p u t e f f e c t ^ 2 i n t h e s e s e c t o r s , a l l e l s e b e i n g e q u a l 1 ^ . T h e s l o p e o f t h e r e l e v a n t p a r t o f t h e d e m a n d c u r v e f o r f e e d g r a i n f r o m s u c h s e c t o r s i s d e t e r m i n e d o n l y b y s u b s t i t u t i o n o p p o r t u n i t i e s . F o r t h i s s e g m e n t o f t h e i n d u s t r y t h e r e w o u l d b e n o s h i f t i n t h e d e m a n d c u r v e f o r f e e d g r a i n s . T h e p a r a m e t e r r e q u i r e d f o r e a c h c o m m o d i t y s e c t o r i n t h i s c a s e i s t h e f i x e d o u t p u t p r i c e e l a s t i c i t y o f f e e d g r a i n d e m a n d . 1 1 I n 1 9 8 0 63% o f f e e d w a s u s e d i n e g g , p u l l e t , c h i c k e n , t u r k e y , a n d d a i r y p r o d u c t i o n . 1 2 T h i s d o e s n o t m e a n t h e s u b s i d y c o u l d b e e n d e d w i t h o u t a f f e c t i n g t h e w e l f a r e n o r p e r h a p s e n d a n g e r i n g t h e s u r v i v a l o f i n d i v i d u a l f a r m b u s i n e s s e s . M a n y p r o d u c e r s h a v e r e c e n t l y p u r c h a s e d q u o t a p a y i n g t h e c a p i t a l i z e d v a l u e o f e x p e c t e d f u t u r e r e n t s . T h i s s i t u a t i o n i s a n a l o g o u s w i t h t h e w e a l t h r e d i s t r i b u t i o n ( l a n d v a l u e s ) c o n s i d e r a t i o n o f t h e c h a n g e s t o p r a i r i e a g r i c u l t u r e b r o u g h t a b o u t b e t h e W e s t e r n G r a i n T r a n s p o r t a t i o n A c t . ( A l l l i v e s t o c k p r o d u c t i o n q u o t a s i n N o v a S c o t i a a r e o w n e d h o w e v e r , b y p r o d u c e r s w h i l e a t h i r d o f p r a i r i e f a r m l a n d i s r e n t e d . ) 13 A H n a t i o n a l c o m m o d i t y p l a n s h a v e p r o v i s i o n s f o r s h i f t i n g p r o d u c t i o n c o n s i s t e n t w i t h c o m p a r a t i v e a d v a n t a g e . - 31 -The effect of the policy change is depicted in figure 2.5 (b) . The increase in the price of feed grain is shown as decreasing quantity demanded from Qi to Q2. The gain represented by the shaded triangle B occurs only from input substitution (and not from the curtailment of production levels for which the value of marginal product is less than marginal costs). For these two situations the parameters of the model can be interpreted readily in regard to the price efficiency benefits from the policy change. The gains to producer's welfare from direct payment of the feed assistance for different supply and (fixed output) demand e l a s t i c i t i e s are shown in table 2.1. For the changes considered linear approximations of the social cost triangles are used. The more inelastic are both the demand and local supply of feed grain with respect to own price the lower the gains to be realized from restructuring the subsidy program. No benefits are included in the i l l u s t r a t i v e example for economies in hog and beef cattle feeding. The hog sector is the most important case where output would not necessarily be invariant with respect to the policies considered. The change in producers welfare from the restructuring of FFA in the case of hogs (and cattle) must be assessed both with respect to the product price and feed grain price changes. With the duality of producer welfare measurements in the input and output markets there are three options for this assessment. The entire welfare change could be measured in either the feed grain or the hog market. In the f i r s t case the parameters which are required are the price e l a s t i c i t i e s of feed grain demand with respect to feed grain and hog - 32 -prices. This is depicted in Figure 2.6 (a). Removal of the FTA subsidy shifts the supply curve for hogs from SB to S'S» and production f a l l s from Qi to Q2» With the payment of the equivalent assistance on hogs directly, however, production Increases from to Q3 consistent with th# new s'S1 supply schedule. The producer welfare gain is equal to area B minus area A. Table 2,1 Pric© Sfficieaey Ban®fits in Loeal GKaift FeoSuction and Livestock Feefiteg (Supply Kaassc^a Sectors Only) Psca R#st£tectusing at feo Differ^at Subsidy Levels ($000) Peiee Ela s t i c i t y of fwifeh Cs&stan'c Output) 0,75 E^ie& Elas t i c i t y of Local Feed Grain Supply 2.25 >0,20 -0.40 -0.60 50 73 96 Subsidy. = $15/tonne 78 101 123 105 128 151 -0.20 •0.40 -0.60 149 216 2B3 Subsidy = S25/tonne 230 297 364 312 379 446 MOTE; Calculated on the basis of a feed grain price before the change of $166/tonne with local production of 55,000 tonneB and supply «sanagea»nt sector grain utilisation of 170,000 tonnes. Q2 Qi Q3 Quantity Q2 Q3Q1 Quantity A. P r o d u c e r W e l f a r e Changes (B-A) Measured i n Output Market B. Producer W e l f a r e Changes (D-C) Measured i n I n p u t Market Price Q2 Q1 Q3 Quantity Q2 Q3 Qi Quantity C. Producer Welfare Changes (E - F) Measured in Output and Input Markets Figure 2.6 Three Models of Producer Welfare Changes Source: Just, R. E., D. L. Hueth and A. Schmitz, Applied Welfare  Economics and Public Policy, Englewood C l i f f s , N. J. Prentice-Hall Inc. 1982, pp. 59-60. - 3 4 -A l t e r n a t i v e l y t h e h o g s u p p l y o w n p r i c e e l a s t i c i t y a n d t h e h o g s u p p l y e l a s t i c i t y w i t h r e s p e c t t o f e e d g r a i n p r i c e s c a n b e u s e d f o r e s t i m a t i o n i n t h e o u t p u t m a r k e t . I n f i g u r e 2 . 6 (b) r e m o v a l o f t h e F F A s u b s i d y i n c r e a s e s t h e p r i c e o f f e e d g r a i n f r o m P]_ t o P2 a n d t h i s r e s u l t s i n a d r o p o f u t i l i z a t i o n f r o m t o Q.2- W i t h t h e i m p l e m e n t a t i o n o f e q u i v a l e n t p a y m e n t s o n o u t p u t t h e d e r i v e d d e m a n d s c h e d u l e s h i f t s t o t h e r i g h t f r o m DD t o D ' D ' . F e e d g r a i n d e m a n d a c c o r d i n g l y i n c r e a s e s f r o m Q2 t o Q3. T h e n e t c h a n g e i n p r o d u c e r w e l f a r e i s a r e a D m i n u s a r e a C . I n b o t h t h e s e c a s e s g o o d e s t i m a t e s o f t h e d e m a n d o r s u p p l y s c h e d u l e n e a r t h e a x i s a n d o f t h e i n t e r c e p t s a r e n e e d e d . ( T h e s e p o s i t i o n s a r e o u t s i d e t h e r a n g e o f o b s e r v a t i o n s i n t h e c a s e o f t h i s a n a l y s i s . ) T h e t h i r d p o s s i b i l i t y i n v o l v e s s e q u e n t i a l l y e v a l u a t i n g p r o d u c e r s w e l f a r e c h a n g e s i n t h e i n p u t a n d o u t p u t m a r k e t s . T h e o w n -p r i c e a n d c r o s s - p r i c e e l a s t i c i t i e s o f b o t h d e m a n d a n d s u p p l y a r e r e q u i r e d . I n P a r t C o f F i g u r e 2 . 6 r e m o v a l o f t h e F F A s u b s i d y r e s u l t s i n d e m a n d f a l l i n g f r o m Q± t o Q2 a n d a l o s s o f p r o d u c e r w e l f a r e e q u i v a l e n t t o a r e a F . I n t h e o u t p u t m a r k e t t h e s u p p l y s c h e d u l e s h i f t s f r o m S S t o S ' S ' a n d p r o d u c t i o n f a l l s f r o m Q± t o Q2. W i t h t h e s u b s e q u e n t p a y m e n t o f t h e o u t p u t s u b s i d y o f P3.P2 p r o d u c t i o n i n c r e a s e s f r o m Q2 t o Q3 a n d p r o d u c e r w e l f a r e i n c r e a s e s b y a r e a E . T h e n e t w e l f a r e g a i n i s e q u a l t o E m i n u s F . I t d o e s n o t m a t t e r f o r t h e p u r p o s e s o f m e a s u r e m e n t i n w h i c h o r d e r t h e s e q u e n t i a l p r i c e c h a n g e s o c c u r . - 35 -These models have not incorporated public administration costs, nor features of the restructuring related to benefit transfers from noncommercial feeders and others to producers. These tranfers result from leakages of program benefits from the beneficiary target group that arise from the current program structure. Estimates of the transfer of assistance from hobby horse owners and other nonagricultural feed grain user to commercial producers w i l l be based in the analysis only on estimates of expenditure for these purposes now. Millfeeds of local origin are paid FFA subsidies as "milling in transit". These products are not, however, perfect substitutes for feed grains and the direct payment of assistance on product output would not result in f u l l y equivalent millfeed price changes. There i s , as a result, another small transfer to commercial feeders. The possibility of provincial imports of U.S. corn occuring as a result of the policy change introduces the prospects of transfers from Ontario corn growers. These matters are dealt with in chapter 3. 2.6 Some Related Studies There are many published studies in the economic literature on the economic effects of various means of industry subsidization. Many of these are in the context of domestic support in the presence of foreign competition. Corden1^ has shown for the case where there is no monopoly power in trade that a production subsidy policy w i l l be superior to a t a r i f f policy in achieving a given production level at least cost in terms of the u t i l i t y derived from goods and services. Corden, W. M. "Tariffs, Subsidies, and the Terms of Trade," Economica (August 1957) Bhagwati and SrinivasanlS showed that subsidies were the optimal p o l i c y i n the pursuit of such a non-economic objective with respect to the domestic production of importables. Superiority was demonstrated against a factor - subsidy p o l i c y . They s i m i l a r l y showed the s u p e r i o r i t y of a production subsidy i n achieving non-economic objectives related to s e l f - s u f f i c i e n c y . Bhagwati and RamaswamilG further argued that an optimum subsidy was necessarily superior to any t a r i f f even i n the presence of domestic d i s t o r t i o n s . They also discussed the non-economic aspects of such a p o l i c y choice. Much of the applied published analysis with respect to input subsidies or taxes i n a g r i c u l t u r e pertains to f e r t i l i z e r . H s u 1 7 found that important economic gains could have been r e a l i z e d i n Taiwan i f the government had lowered the tax on f e r t i l i z e r inputs and r a i s e d , i f necessary, the tax on r i c e output instead. The favourable e f f e c t s of such a s h i f t were dependent on the f a c t that the value of f e r t i l i z e r ' s marginal p h y s i c a l product was higher than the i n t e r n a t i o n a l f e r t i l i z e r - r i c e p r i c e r a t i o . Barker and Hayami 1^ demonstrated the p o s s i b i l i t y that to achieve s e l f - s u f f i c i e n c y i n food l b Bhagwati, J . and T. Srinivasan. "Optimal Intervention to Achieve Non-Economic Objectives", Review of Economic Studies 1969, pp. 27-38. 16 Bhagwati, J . and V. K. Ramaswami. "Domestic D i s t o r t i o n , T a r i f f s and the Theory of Optimum Subsidy," Journal of  P o l i t i c a l Economy. 71, 1963, pp. 44-50. 17 Hsu, Robert C. " F i r s t - B e s t and Second-Best P o l i c i e s of P r i c i n g on Imported Input: The Case of F e r t i l i z e r i n Taiwan, 1950-1966," American Journal of A g r i c u l t u r a l Economics. 1974, pp. 314-322. 1 8 Barker, Randolph and Y u j i r o Hayami. "Price Support Versus Input Subsidy for Food S e l f - S u f f i c i e n c y i n Devleoping Countries," American Journal of A g r i c u l t u r a l Economics. Nov. 1976, pp. 617-628. - 3 7 -g r a i n s i n t h e P h i l i p p i n e s , a s u b s i d y a p p l i e d t o m o d e r n i n p u t s s u c h a s f e r t i l i z e r b e i n g u s e d b e l o w o p t i m u m c o u l d b e m o r e b e n e f i c i a l t h a n s u p p o r t i n g p r o d u c t p r i c e s . N i e u w o u d t 1 9 s i m i l a r l y e s t i m a t e d t h a t s o c i a l g a i n s g e n e r a t e d b y f e r t i l i z e r s u b s i d i e s i n S o u t h A f r i c a o u t w e i g h e d t h e s o c i a l c o s t s i n v o l v e d . P a r i s h a n d M c L a r e n 2 0 c o m p a r e d a s u b s i d y o n a s i n g l e i n p u t w i t h a n o u t p u t s u b s i d y a s a m e a n s o f s t i m u l a t i n g o u t p u t . T h e y a l s o e x p l o r e d t h e c o n d i t i o n s u n d e r w h i c h t h e s i n g l e i m p u t s u b s i d y i s m o r e c o s t e f f e c t i v e a n d m o r e s o c i a l l y e f f i c i e n t . W i t h o u t c o n s i d e r i n g t h e w a l f a r e c o n s e q u e n c e s f o r p r o d u c e r s o r o t h e r s , C h a m b e r s 2 1 c o n s i d e r e d t h e l e a s t c o s t s u b s i d y a l t e r n a t i v e s t o a c h i e v e p o l i c y g o a l s r e l a t e d s o l e l y t o t h e e c o n o m i c s u r v i v a l o f a p a r t i c u l a r c l a s s o f f a r m e r s . I t w a s s h o w n t h a t o u t p u t s u b s i d i z a t i o n a l o n e w i l l g e n e r a l l y n o t i n v o l v e l e a s t g o v e r n m e n t e x p e n d i t u r e s o r s u b s i d i e s . I f s u c h a s u b s i d y s c h e m e i s t o b e l e a s t c o s t i t w i l l r e q u i r e t h a t a n y i n p u t t h a t m a r g i n a l f i r m s u s e d i s p r o p o r t i o n e l y r e c e i v e h i g h e r o r l o w e r ( a s a p p r o p i a t e ) e n c o u r a g e m e n t . I n p e r t a i n i n g t o r e g i o n a l o b j e c t i v e s , s i m i l a r t o t h i s s t u d y ' s o r i e n t a t i o n , W o o d w a r d 2 2 d e m o n s t r a t e d u s i n g o n l y w e a k a s s u m p t i o n s t h a t a g i v e n l e v e l o f o u t p u t c o u l d b e i n d u c e d a t l e s s c o s t t o g o v e r n m e n t i n a h i g h c o s t r e g i o n ( N o v a S c o t i a ) w i t h a p r o d u c t i o n N i e u w o u d t , W . L . " M e a s u r e s o f S o c i a l C o s t s ( o r B e n e f i t s ) o f a n I n p u t S u b s i d y a n d t h e V a l u e o f I n f o r m a t i o n , " J o u r n a l o f  A g r i c u l t u r a l E c o n o m i c s , 3 0 , 1 9 7 9 , p p . 1 3 - 2 0 . P a r i s h , R . a n d K . M c L a r e n . " R e l a t i v e C o s t - E f f e c t i v e n e s s o f I m p u t a n d O u t p u t S u b s i d i e s , " A u s t r a l i a n J o u r n a l o f A g r i c u l t u r a l  E c o n o m i c s 2 6 , 1 9 8 2 , p p . 1 - 1 3 . C h a m b e r s , R . G . " L e a s t C o s t S u b s i d i z a t i o n A l t e r n a t i v e s , " A m e r i c a n J o u r n a l o f A g r i c u l t u r a l E c o n o m i c s " , 6 7 , M a y 1 9 8 5 , p p . 2 5 2 - 2 5 6 . W o o d w a r d R . S . " E f f e c t i v e L o c a t i o n S u b s i d i e s : A n E v a l u a t i o n o f D R E E I n d u s t r i a l I n c e n t i v e s , " C a n a d i a n J o u r n a l o f E c o n o m i c s . V I I , 1 9 7 4 , p p . 5 0 1 - 5 1 0 . , - 3 8 -s u b s i d y c o m p a r e d w i t h i n p u t s u b s i d i e s f o r c a p i t a l , l a b o u r , o r t r a n s p o r t a t i o n . E m p l o y m e n t o b j e c t i v e s w e r e b e s t a c h i e v e d , h o w e v e r , w i t h a l a b o u r s u b s i d y . E x i s t i n g D R E E i n d u s t r i a l i n c e n t i v e s w e r e f o u n d t o c r e a t e f e w e r j o b s p e r f i r m a n d f e w e r j o b s p e r d o l l a r o f i n c e n t i v e s t h a n a l t e r n a t i v e s u b s i d i e s . F e e d F r e i g h t A s s i s t a n c e i n v o l v e d l a r g e p u b l i c e x p e n d i t u r e s i n t h e 1 9 6 0 ' s a n d e a r l y 1 9 7 0 ' s a n d i m p a c t e d u p o n v i r t u a l l y a l l C a n a d i a n l i v e s t o c k p r o d u c t i o n a n d a s u b s t a n t i a l p o r t i o n o f C a n a d i a n f e e d g r a i n p r o d u c t i o n . C o n s e q u e n t l y , i t i s n o t s u r p r i s i n g t h a t t h e r e w e r e m a n y s t u d i e s o f i t s e f f e c t s . T h e s e a r e m o s t l y o f h i s t o r i c a l i n t e r e s t t o d a y . K e r r ^ 3 u s e d t r a d e a n d l o c a t i o n t h e o r y t o p r e d i c t t h e p r o b a b l e e f f e c t s o f t h e l o n g t e r m p o l i c y a n d c o m p a r e d t h e s e w i t h h i s t o r i c a l d e v e l o p m e n t s . He c o n c l u d e d t h a t t h e p o l i c y h a d d i s r u p t e d t h e b a s i c c o m p a r a t i v e a d v a n t a g e o f l i v e s t o c k p r o d u c t i o n r e g i o n a l l y a c r o s s C a n a d a . T h i s w a s m o s t a p p a r e n t i n t h e c a s e o f h o g a n d t u r k e y p r o d u c t i o n , t w o r e l a t i v e l y " f o o t l o o s e " s e c t o r s w i t h r e s p e c t t o b o t h i n p u t s o u r c e s a n d m a r k e t a r e a s . T h e l o c a t i o n o f c a t t l e p r o d u c t i o n , p a r t i c u l a r l y c o w - c a l f o p e r a t i o n s , h a d b e e n l e s s i n f l u e n c e d . I n t h e c a s e o f p o u l t r y a n d e g g p r o d u c t i o n , h e f o u n d t h a t t h e s e h i g h l y m a r k e t o r i e n t e d s e c t o r s w e r e n o t g r e a t l y a f f e c t e d w i t h r e s p e c t t o l o c a t i o n a n d t h a t c o n s u m e r s i n t h i s c a s e h a d b e n e f i t e d f r o m t h e s u b s i d y . I n t o t a l h o w e v e r , h e r e p o r t e d t h a t t h e n e t b e n e f i t s t o C a n a d i a n a g r i c u l t u r e a n d c o n s u m e r s w e r e m i n i m a l . 2 3 K e r r , T . C . A n E c o n o m i c A n a l y s i s o f t h e F e e d F r e i g h t A s s i s t a n c e P o l i c y . A g r i c u l t u r a l E c o n o m i c s R e s e a r c h C o u n c i l o f C a n a d a , O t t a w a , 1 9 6 6 . T h e K e r r s t u d y w a s p u b l i s h e d b e f o r e t h e L i v e s t o c k A s s i s t a n c e A c t e s t a b l i s h i n g t h e L i v e s t o c k F e e d B o a r d o f C a n a d a w a s i n t r o d u c e d i n P a r l i a m e n t . H i s r e c o m m e n d a t i o n r e g a r d i n g s u c h a n a g e n c y h a d b e e n t h a t i t s b a s i c o r i e n t a t i o n s h o u l d b e t o w a r d s r a t i o n a l i z a t i o n o v e r t i m e a n d t o w a r d s l i v e s t o c k i n d u s t r y p r o d u c t i v i t y . W i l s o n a n d W o o d 2 4 a n a l y z e d t h e o p t i m u m l o c a t i o n o f l i v e s t o c k p r o d u c t i o n i n C a n a d a u s i n g a n i n t e r - r e g i o n a l m o d e l . T h e y t o o f o u n d t h a t F F A h a d d i s t o r t e d t h e n a t u r a l c o m p a r a t i v e a d v a n t a g e o f l i v e s t o c k p r o d u c t i o n i n C a n a d a . P o u l t r y a n d h o g p r o d u c t i o n w a s f o u n d t o b e m o s t a f f e c t e d . T h e y c o n c l u d e d t h a t n e t s o c i a l w e l f a r e h a d b e e n d e c r e a s e d b y t h e p o l i c y . I n a b a c k g r o u n d s t u d y p r e p a r e d f o r t h e F e d e r a l T a s k F o r c e o n A g r i c u l t u r e , H e a d y e t . a l . 2 ^ r e p o r t e d t h a t t h e p o l i c y h a d a n e g a t i v e e f f e c t o n t h e i n t e r - r e g i o n a l d i s t r i b u t i o n o f g r a i n a n d l i v e s t o c k p r o d u c t i o n a n d r e g i o n a l c o m p a r a t i v e a d v a n t a g e . T h e y p r e s e n t e d a c o n c e p t i o n a l a r g u m e n t a g a i n s t a t t e m p t i n g t o i n c r e a s e i n c o m e t h r o u g h a n i n p u t s u b s i d y ( T h i s a p p l i e d t o t h e w i d e s c a l e F F A p o l i c y a s i t W i l s o n , A . G . a n d A . W . W o o d . " R e g i o n a l L i v e s t o c k P r o d u c t i o n a n d F e e d F r e i g h t A s s i s t a n c e , " C a n a d i a n J o u r n a l o f A g r i c u l t u r a l  E c o n o m i c s . 1 7 , 1 9 6 9 , p p 7 7 - 9 0 . A c r e s R e s e a r c h a n d P l a n n i n g L t d . " F i n a l R e p o r t P r o b l e m s P o l i c i e s a n d P r o s p e c t s f o r t h e F e e d G r a i n L i v e s t o c k S e c t o r , " ( p r e p a r e d b y E . 0 . H e a d y , a s s i s t e d b y J . W. K n o x , R . W. C r o w n , B . G . M a c F a r l a n e , a n d E . C . B a u m ) , T o r o n t o , M a y , 1 9 6 9 . - 40 -e x i s t e d . ) O t h e r s t u d i e s b y W i l s o n a n d D a r b y , 26 a n < j G a i n e r 27 r e a c h e d s i m i l a r c o n c l u s i o n s w i t h r e s p e c t t o t h e n e g a t i v e e f f e c t s o f t h e p o l i c y o n h o g a n d p o u l t r y p r o d u c t i o n o n t h e P r a i r i e s a n d t h e p o s i t i v e e f f e c t s f o r B . C . a n d E a s t e r n C a n a d a . L e r o h l , M a c E a c h e r n , a n d V a n d e r m u e l e n 2 8 e s t i m a t e d t h e " m u l t i p l i e r e f f e c t s " o n p r a i r i e i n c o m e f r o m t e r m i n a t i n g F F A u s i n g d i f f e r e n t a s s u m p t i o n s w i t h r e s p e c t t o p r a i r i e p r i c e c h a n g e s , l o s t d o m e s t i c s a l e s a n d a s s u m e d r e d u c t i o n s i n p r a i r i e g r a i n p r o d u c t i o n . T h e e f f e c t o f t h e p r o g r a m o n t h e l o c a t i o n o f l i v e s t o c k p r o d u c t i o n w a s n o t c o n s i d e r e d . G r o e n e w e g e n 2 9 u n d e r t o o k a n e v a l u a t i o n o f t h e M a r i t i m e F a r m e r s ' C o u n c i l ' s p r o p o s a l t o r e s t r u c t u r e F F A . F e a t u r e s o f t h i s p r o p o s a l i n c l u d e d t h e r e s t o r a t i o n o f t h e 1 9 7 6 r e a l s u p p o r t l e v e l ( w h i c h i n v o l v e d s l i g h t l y o v e r a d o u b l i n g o f f u n d i n g ) , t h e l o n g t e r m c o n t i n u a t i o n o f s u c h a p r o g r a m u n t i l t h e r e g i o n a c h i e v e d a h i g h 26 W i l s o n , G . W. a n d L . D a r b y " T r a n s p o r t a t i o n o n t h e P r a i r i e s , " S u p p o r t i n g S t u d y N o . 2 , p r e p a r e d f o r t h e R o y a l C o m m i s s i o n o n C o n s u m e r P r o b l e m s a n d I n f l a t i o n , 1 9 6 8 . 27 G a i n e r , W . D . e t . a l . " E c o n o m i c A n a l y s i s o f t h e E f f e c t o f T r a n s p o r t R a t e s o n P r o d u c t s o f t h e I n d u s t r i a l , C h e m i c a l , a n d M e a t P a c k i n g I n d u s t r y w i t h S p e c i a l R e f e r e n c e t o E d m o n t o n , " R e s e a r c h R e p o r t p r e p a r e d f o r t h e C a n a d i a n T r a n s p o r t C o m m i s s i o n , O t t a w a , J u n e , 1 9 7 7 . 2 8 L e r o h l , M . L . , G . A . M c E a c h e r n a n d H . V a n d e r m e u l e n . " T h e B e n e f i t s a n d B u r d e n s o f F e e d G r a i n T r a n s p o r t a t i o n P o l i c y , " A g r i c u l t u r a l E c o n o m i c s R e s e a r c h C o u n c i l o f C a n a d a , O t t a w a , F e b r u a r y , 1 9 7 0 . 29 G r o e n e w e g e n J . " A n E v a l u a t i o n o f t h e M a r i t i m e F a r m e r s ' C o u n c i l ' s P r o p o s a l t o R e s t r u c t u r e F e e d F r e i g h t A s s i s t a n c e , " L i v e s t o c k F e e d B o a r d o f C a n a d a a n d A g r i c u l t u r e C a n a d a , F e b r u a r y , 1 9 8 4 - 41 -l e v e l o f f e e d g r a i n s e l f - s u f f i c i e n c y , a n d u n i f o r m p r o d u c t p a y m e n t s t h r o u g h o u t t h e t h r e e p r o v i n c e s . T h e l a t e r f e a t u r e w o u l d h a v e r e s u l t e d i n s u b s t a n t i a l a s s i s t a n c e " d i l u t i o n " u n f a v o u r a b l e t o t h e c u r r e n t r e c i p i e n t s , i . e . l i v e s t o c k p r o d u c e r s p u r c h a s i n g a l l o r m o s t o f t h e i r f e e d g r a i n s . W i n d f a l l g a i n s w o u l d h a v e b e e n p a r t i c u l a r l y common t o l i v e s t o c k p r o d u c e r s i n P r i n c e E d w a r d I s l a n d w h e r e m a n y f a r m s p r o d u c e a l l o r m o s t o f t h e i r f e e d g r a i n s . He r e p o r t e d t h a t , e v e n w i t h a d o u b l i n g o f s u b s i d y e x p e n d i t u r e s , n o i m p r o v e m e n t i n t h e p o s i t i o n o f t o t a l l y g r a i n p u r c h a s i n g l i v e s t o c k p r o d u c e r s w o u l d b e r e a l i z e d b e c a u s e o f t h e p a y m e n t s b e i n g a p p l i e d t o a l l l i v e s t o c k p r o d u c t i o n i n c l u d i n g t h a t p r o d u c e d f r o m l o c a l a s w e l l a s i m p o r t e d g r a i n . A s s u m i n g a 0 . 5 0 p r i c e e l a s t i c i t y o f s u p p l y f o r l o c a l g r a i n a n d u s i n g a p r i c e c h a n g e o f $ 1 1 . 9 6 / t o n n e , G r o e n e w e g e n a l s o c o n c l u d e d t h a t t h e r e g i o n a l g r a i n s u p p l y r e s p o n s e w o u l d n o t b e s i g n i f i c a n t i n a c h i e v i n g t h e s i n g u l a r g o a l o f f e e d g r a i n " s e l f - s u f f i c i e n c y . " W h i l e t h e " d i l u t i o n " o f b e n e f i t s i s a s u b s t a n t i a l p r o b l e m w i t h s u c h a r e s t r u c t u r i n g o n a M a r i t i m e r e g i o n a l b a s i s , G r o e n e w e g e n g r e a t l y o v e r - e s t i m a t e d t h i s e f f e c t . H i s e r r o r i n t h i s r e g a r d w a s t o c o n s i d e r o n l y e s t i m a t e s o f r e g i o n a l g r a i n p r o d u c t i o n a n d F F A s h i p m e n t s . He d i d n o t a d j u s t f o r t h e m u c h h i g h e r g r a i n / o u t p u t r a t i o s w h e n l o c a l g r a i n ^ O i s f e d ( o f w h i c h l o w e n e r g y o a t s i s a h i g h N o v a S c o t i a , f o r e x a m p l e , r e c e i v e s 58% o f M a r i t i m e F F A p a y m e n t s w h i l e u t i l i z i n g 38% o f g r a i n f e d i n t h e r e g i o n ( F F A s h i p m e n t s p l u s l o c a l p r o d u c t i o n ) . S u b s t a n t i a l u n f a v o u r a b l e d i l u t i o n c o u l d b e e x p e c t e d w i t h a c u r s o r y i n s p e c t i o n o f t h e s e n u m b e r s . T h e p r o v i n c e , h o w e v e r , a c c o u n t s f o r 47% o f l i v e s t o c k a n d p o u l t r y s a l e s . A d e t a i l e d a n a l y s i s o f g r a i n u t i l i z a t i o n b y p r o d u c t a n d o u t p u t c o n f i r m s t h a t 5 8 / 4 7 = 1 . 2 3 i s t h e o r d e r o f t h e i n t e r p r o v i n c i a l d i l u t i o n a g a i n s t N . S . a n d n o t 5 8 / 3 8 = 1 . 5 3 . - 42 -p r o p o r t i o n ) n o r d i d h e u s e t h e p r o p o s e d u s e o f c o m m o d i t y b l o c k f u n d s a n d a v e r a g e F F A e x p e n d i t u r e s p e r u n i t o f p r o d u c t o u t p u t f o r e a c h s e c t o r a s t h e b a s i s f o r t h e p a y m e n t s . T h i s p a y m e n t s t r u c t u r e w o u l d h a v e c o n t a i n e d t h e " d i l u t i o n " e f f e c t a s c a l c u l a t e d c o n s i d e r a b l y ( s e e a p p e n d i x B ) . T h e 0 . 5 r e g i o n a l g r a i n s u p p l y e l a s t i c i t y u s e d i n t h e a n a l y s i s w a s a s s u m e d a n d i t w a s n o t c l e a r w h e t h e r t h i s w a s m e a n t t o r e p r e s e n t t h e s h o r t r u n o r l o n g r u n r e s p o n s e . I t w a s p a r t l y b a s e d , h o w e v e r , o n t h e u n d e r s t a n d i n g t h a t t h e e c o n o m i c s o f f e e d g r a i n p r o d u c t i o n f o r o n - f a r m f e e d i n g ( "home g r o w n g r a i n " ) w o u l d n o t c h a n g e w i t h t h e r e s t r u c t u r i n g ; " F F A d o e s n o t d i s a d v a n t a g e t h i s o n - f a r m p r o d u c t i o n . I t o n l y d i s a d v a n t a g e s g r a i n d e s t i n e d f o r t h e c o m m e r c i a l m a r k e t " 3 1 T h i s m i s u n d e r s t a n d i n g o f t h e r o l e o f o p p o r t u n i t y c o s t s o r s h a d o w p r i c e s i n i n f l u e n c i n g e c o n o m i c a c t i v i t y e x c l u d e d t h e p o s i t i v e e f f e c t s f o r t h e t y p e o f f a r m i n g s y s t e m w h i c h a c c o u n t s f o r t h e b u l k o f M a r i t i m e g r a i n p r o d u c t i o n . F u r t h e r m o r e , t h i s s e g m e n t i s s e e n b y m a n y a s t h e m o s t l i k e l y t o d e v e l o p . T h e u s e o f a $ 1 1 . 9 6 p r i c e e f f e c t a l s o d i d n o t a d j u s t f o r t h e l o w e r s u b s i d y o n c o r n a n d i t s s m a l l p r o p o r t i o n o f r e g i o n a l g r a i n p r o d u c t i o n . T h e w e i g h t e d a v e r a g e p r i c e c h a n g e ( f o r G r o e n e w e g e n , J . A n E v a l u a t i o n o f t h e M a r i t i m e F a r m e r s C o u n c i l ' s  P r o p o s a l T o R e s t r u c t u r e F e e d F r e i g h t A s s i s t a n c e , A g r i c u l t u r e C a n a d a , F e b . 1 9 8 4 , p . 9 . - 43 -t h e t y p e s o f g r a i n s g r o w n r e g i o n a l l y ) w o u l d h a v e b e e n $ 2 . 0 0 h i g h e r a n d t h i s w a s s u b s e q u e n t l y i n c r e a s e d b y $ 2 - 3 / t o n n e w h e n c h a n g e s w e r e made t o t h e a s s i s t a n c e r a t e s i n S e p t e m b e r 1 9 8 4 . T h e r e g i o n a l c o m p e t i t i v e d i s a d v a n t a g e w i t h r e s p e c t t o f e e d g r a i n s c o m p a r e d w i t h O n t a r i o w a s e s t i m a t e d a n d r e p o r t e d b y G r o e n e w e g e n a s $ 2 - 4 / t o n n e . T h i s w a s d e t e r m i n e d b a s e d u p o n t h e l a n d e d c o s t o f w e s t e r n g r a i n o n l y . T h e c o m p e t i t i v e p o s i t i o n o f p r o d u c e r s i n O n t a r i o , h o w e v e r , i s now c l e a r l y b a s e d o n c o r n f o r w h i c h t h e r e i s a c u r r e n t $ 3 7 / t o n n e p r i c e a d v a n t a g e o v e r t h e M a r i t i m e s . T h i s i m p o r t a n t c o m p e t i t i v e c o n s i d e r a t i o n w a s o v e r l o o k e d b y G r o e n e w e g e n . T h e F F A P r o g r a m o f f i c i a l l y r e c o g n i z e d t h e i m p o r t a n c e o f c o r n t o c o m p a r a t i v e f e e d g r a i n c o s t s i n e a s t e r n C a n a d a i n 1 9 6 7 w h e n t h e e q u a l i z a t i o n p o l i c y w a s e x t e n d e d t o i n c l u d e O n t a r i o c o r n . 3 2 r C a n a d a , H o u s e o f Commons D e b a t e s , O c t o b e r , 1 3 , 1 9 6 7 , p p . 3 0 0 6 5 - 3 0 0 6 6 . 2.7 Summary The payment of an input factor subsidy can be expected to lead to the misallocation of resources in the production process. Except in the case of an input used in fixed proportions producers would (assuming perfect information) be better off and public objectives, related to their welfare better realized, with an equivalent subsidy on output. The static welfare theory and empirical models required to investigate the effects of the transformation of the FFA subsidy from an input to an output based payment have been presented. This analysis is contained in chapter 3. - 4 5 -Chapter 3 P r i c e E f f i c i e n c i e s , Transfers, and Costs The following sections w i l l deal with measuring the s t a t i c welfare e f f e c t s for producers of the proposed p o l i c y change. This w i l l be done on a disaggregated industry basis. E x i s t i n g estimates of the relevant supply and derived demand parameters i n most cases w i l l be u t i l i z e d . when th i s i s not possible or prudent econometric models are s p e c i f i e d and estimated to y i e l d the required parameters. In the case of longer term e f f e c t s a s e n s i t i v i t y analysis i s presented using a range of parameter values. A b r i e f general overview of the a g r i c u l t u r a l sector i n Nova Scotia i s given i n section 3.1. Welfare gains r e s u l t i n g from the removal of the p r i c e d i s t o r t i o n as i t e f f e c t s l o c a l grain production i n the short, intermediate, and long runs are considered i n section 3.2. Short run feeding e f f i c i e n c y gains from the removal of d i s t o r t i o n s i n feed input p r i c e s for i n d i v i d u a l l i v e s t o c k subsectors are considered i n section 3.3. A range of long run p r i c e e l a s t i c i t i e s of feed grain demand are also considered i n t h i s section together with t h e i r corresponding implications for producer welfare. The t r a n s f e r s and costs r e s u l t i n g from the proposed p o l i c y changes are considered i n sections 3 .4 and 3.5 r e s p e c t i v e l y . - 46 -3 . 1 O v e r v i e w o f A g r i c u l t u r e i n N o v a S c o t i a T h e g r o s s v a l u e o f a g r i c u l t u r a l p r o d u c t i o n i n N o v a S c o t i a i n 1 9 8 4 w a s $ 2 5 3 . 2 m i l l i o n . L i v e s t o c k a n d p o u l t r y p r o d u c t s a c c o u n t e d f o r a l m o s t t h r e e - q u a r t e r s o f t o t a l f a r m s a l e s . D a i r y i n g i s t h e l a r g e s t f a r m s e c t o r w i t h m i l k a n d c r e a m s a l e s i n 1 9 8 4 t o t a l l i n g $ 7 3 . 9 m i l l i o n . O t h e r m a j o r s e c t o r s i n c l u d e , h o r t i c u l t u r e ( $ 3 9 . 1 m i l l i o n ) , p o u l t r y a n d e g g s ( $ 4 8 . 6 m i l l i o n ) , h o g s ( $ 3 1 . 5 m i l l i o n ) , c a t t l e ( $ 2 3 . 8 m i l l i o n ) , a n d f u r ( $ 9 . 2 m i l l i o n ) . C a s h f i e l d c r o p p r o d u c t i o n i s l i m i t e d l a r g e l y t o p o t a t o e s ( $ 4 . 5 m i l l i o n ) , t o b a c c o ( $ 2 . 6 m i l l i o n ) , a n d g r a i n ( $ 2 . 3 m i l l i o n ) . M o s t g r a i n i s n o t p r o d u c e d b y s p e c i a l i z e d g r a i n f a r m s a n d i s g e n e r a l l y u t i l i z e d a s " h o m e g r o w n " f e e d g r a i n . I n 1 9 8 4 g r a i n p r o d u c t i o n w a s e s t i m a t e d a t 6 0 , 0 0 0 t o n n e s . T h e p r o v i n c e i m p o r t e d 2 1 7 , 0 0 0 t o n n e s o f f e e d g r a i n d u r i n g t h e 1 9 8 3 - 8 4 g r a i n m a r k e t i n g y e a r . F a r m f e e d e x p e n d i t u r e s i n 1 9 8 4 t o t a l l e d $ 6 2 . 7 m i l l i o n a n d a c c o u n t e d f o r 3 5 p e r c e n t o f t o t a l o p e r a t i n g e x p e n s e s . T h i s e x p e n d i t u r e s h a r e w a s t h e h i g h e s t o f a n y p r o v i n c e ( e x c l u d i n g N e w f o u n d l a n d ) i n C a n a d a . G r a i n i n p u t / o u t p u t r a t e s a r e h i g h e r t h a n t h e n a t i o n a l a v e r a g e s f o r m i l k , e g g s , a n d h o g s , w h i l e t h e y may b e l o w e r f o r p o u l t r y . A t t h e t i m e o f t h e 1 9 8 1 C e n s u s o f A g r i c u l t u r e t h e r e w e r e 1 , 0 0 0 s p e c i a l i z e d c o m m e r c i a l 1 l i v e s t o c k a n d p o u l t r y f a r m s i n t h e p r o v i n c e . T h e p r i n c i p l e r e l a t e d s e c o n d a r y i n d u s t r i e s a r e t h e m e a t a n d p o u l t r y p r o d u c t s i n d u s t r y w i t h s h i p m e n t s v a l u e d a t $ 7 0 . 3 m i l l i o n a n d e m p l o y m e n t o f 5 2 3 i n 1 9 8 2 a n d t h e d a i r y p r o d u c t s i n d u s t r y w i t h A c o m m e r c i a l f a r m i s d e f i n e d h e r e a s h a v i n g h a d a g r i c u l t u r a l p r o d u c t s a l e s o f $ 2 5 , 0 0 0 o r m o r e i n 1 9 8 0 . - 4 7 -1982 shipments valued at $150.8 million and 1292 employees. The provincial feed industry made shipments valued at $61.9 million and had 201 employees in 1982. An institutional aspect of the industry involves over two-thirds of livestock and poultry production being fixed under production quotas. This is a significant feature from the perspective of designing a subsidy program with minimal distortions. 3.2 Provincial Feed Grain Supply When policies distort the producer price of a good the greater the el a s t i c i t y of supply the greater w i l l be the cost of the distortion.2 There w i l l , of course, be no deadweight loss i f supply is perfectly inelastic with respect to price. In the case of grain prices and feed freight assistance in Nova Scotia both grain production and the current per unit price distortions are relatively small. Furthermore, i t has been widely perceived that grain production in the Martimes Provinces is highly inelastic^ with respect to price. Wallace, T.D. "Measures of Social Costs of Agricultural Programs," Journal of Farm Economics 44, 1962, pp. 580-94. The only published source of these perceptions appears to be Sorflaten who conducted an analysis of factors which influenced Maritime feed grain acreages over the period 1942 to 1974. He did not report his numerical estimates but concluded: "the price of western feed grain...appeared to be a less significant explanatory variable. The relationship was consistently positive meaning that a high price of western feed grains one year would encourage local production the following year. Nevertheless, the magnitude of the relationship was so limited that any variation in western feed grain prices would exert no more than a minor influence." Sorflaten, A. Feed Grain and Livestock Agriculture in the  Maritimes Province, Canadian Livestock Feed Board, July 1977. p. 31. - 48 -A b r i e f r e v i e w o f some o f t h e c i r c u m s t a n c e s w h i c h c h a r a c t e r i z e g r a i n p r o d u c t i o n i n N o v a S c o t i a a n d p r o d u c e r s r e s p o n s e t o p r i c e c h a n g e s i s p r e s e n t e d b e l o w . A s u p p l y f u n c t i o n i s t h e n h y p o t h e s i z e d a n d e s t i m a t e d f o r t h e i n t e r m e d i a t e t e r m t o a s s e s s t h i s c o m p o n e n t o f t h e c o s t o f F F A p r i c e d i s t o r t i o n s . U s i n g t h e i n t e r m e d i a t e t e r m e l a s t i c i t y a s a l o w e r b o u n d , a r a n g e o f l o n g r u n s u p p l y e l a s t i c i t i e s a n d t h e c o r r e s p o n d i n g c o s t s ( o r b e n e f i t s ) w h i c h t h e y i m p l y a r e t h e n c o n s i d e r e d . S p e c i a l i z e d g r a i n f a r m i n g o p e r a t i o n s a c c o u n t f o r o n l y a s m a l l p r o p o r t i o n o f t h e g r a i n g r o w n i n N o v a S c o t i a . T h e b u l k o f t h e g r a i n c r o p i s a l s o n o t g r o w n f o r c a s h s a l e s b u t i s f e d o n t h e f a r m s w h e r e i t i s p r o d u c e d . A t t h e t i m e o f t h e 1 9 8 1 C e n s u s o f A g r i c u l t u r e 80% o f t h e t o t a l g r a i n a c r e a g e w a s r e p o r t e d b y l i v e s t o c k f a r m s . A n o t h e r c o n d i t i o n w h i c h i s n o t t y p i c a l o f m a n y o f t h e r e g i o n s f o r w h i c h g r a i n s u p p l y f u n c t i o n s h a v e b e e n e s t i m a t e d i s t h e a b s e n c e o f a n y s i g n i f i c a n t c o m p e t i t i v e c a s h c r o p . O v e r t w o t h i r d s o f t h e p r o v i n c e ' s c r o p l a n d i s u t i l i z e d f o r h a y a n d f o d d e r a n d t h i s p r o d u c t i o n i s n o t n o r m a l l y m a r k e t e d . G r a i n c r o p s a c c o u n t e d f o r 12% o f t h e i m p r o v e d a g r i c u l t u r a l l a n d u t i l i z e d i n 1 9 7 1 a n d 11% i n 1 9 8 1 . I n t h e s h o r t a n d i n t e r m e d i a t e t e r m s a n y i n c r e a s e i n g r a i n a c r e a g e w o u l d a r i s e p r i m a r i l y f r o m a s h i f t i n u s e o f l a n d w h i c h w o u l d o t h e r w i s e b e i n f o d d e r p r o d u c t i o n . 4 T h i s d o e s n o t i n f e r n e c e s s a r i l y a d e c r e a s e i n f o d d e r p r o d u c t i o n a s s u b s t a n t i a l y i e l d i n c r e a s e s a r e a c h i e v a b l e w i t h t h e g r e a t e r u s e o f l i m e , f e r t i l i z e r , d o u b l e c r o p p i n g , r e s e e d i n g e t c . - 49 -In the longer term land currently not used for farm production could become available. Nowland, Dumanski, and Stewart^ estimated that there are 2.9 million acres in the province moderately suitable or better for barley production. This estimate is over 6.5 times the total current agricultual land utilization and over 50 times the current grain acreage.^ Conditions which could be expected to limit the short term supply response to grain price increases include the availability of specialized planting and harvesting equipment and storage capacity. Conditions which could impose an upward sloping supply function in the longer term include the inelastic demand for straw, fixed manure supplies 7, and the supply of higher quality land. Weather variability is an important influence on crop production in the province. The low degree to which current grain production technologies are specific to the region is a factor in the susceptibility to weather. This has direct implications for supply estimation. The production effects of weather preclude the use of output as a proxy variable for planned production (see table 3.1). ^ Nowland, J.L., Dumanski, J. and Stewart, R.B. "National Resource Base," Part I of Production Base and Production  Potential of the Eastern Grains Industry, Eastern Grain Production Seminar, Canada Grains Council, 1982. 6 Nowland et. al.'s estimates of the land supply of Nova Scotia capable of producing grain were the largest of any province's relative to current grain acreage. (In appendix E (p. 201) brief consideration is given to how the economics of technical change in a small region with unique conditions may impact upon this and other bio-physical assessments of the land resource). 7 The supply of commercial or chemical f e r t i l i z e r s is of course perfectly elastic. - 50 -3.2.1 Econometric Model of Grain Acreage For the purposes of this policy evaluation an estimate of the supply response to grain price changes is required. The supply function for grain in Nova Scotia can be postulated as, Qxs = f ( P X F P Y , P I , T, W). Where, Qxs = Total acreage planted to a l l grains, P x = Expected farm price of grain (+), Py = Price of competitive products (-), Pi = Price of inputs (-), T = Technology (+), and W = Weather. For the estimation, the 1967-84 period was selected to lessen the importance of the extensive structural and technological changes, which have occurred in the industry over the last three decades. (The estimated equation was based on 18 annual observations.) The total acreage of wheat, oats, barley, mixed grain, rye, and grain corn represented the planned producer supply. These cereals are close substitutes in production supporting the use of an aggregate supply function. The Statistics Canada estimated farm value of each of these crops was similar i l y totaled and the mean per tonne farm value for a l l grains was derived and used for the price variable. The payments received by farmers from three short term subsidy programs was incorporated into the farm price variable, (see note under table 3.2). A l l price variables were deflated by the gross national expenditure implicit price index. A dummy - 51 -variable was considered to represent the establishment of commercial grain marketing channels in the late 1970's. While this development has been associated with grain expansion the influence was through the higher prices returned to producers. In place of unobserved expected prices^ a distributed three year lag of the actual prices was utilized. This distributed lag also incorporated the intermediate term constraints faced by producers in adjusting their crop production. It is assumed that the adjustment of cereal outputs to their optimum level may occur over a number of years because of the f i x i t y of certain resources and other constraints. Hay and silage corn production comprise two thirds of the cropland in Nova Scotia and these are the chief competitive crops. Since fodder prices are either not available or are unreliable, fodder acreage was used directly as a proxy measure in the estimation in lieu of the price of production substitutes. 9 A weighted composite of farm input price indexes for eastern Canada was used as a proxy for input p r i c e s 1 0 (see table 3.1). a Grain production decisions must be based in part upon price, yield, and cost expectations before planting rather than the known value of these variables. 9 In similar circumstances Candler used fodder acreage directly in explaining wheat acreage in New Zealand. See: Heady, Baker, et. a l . , 1961, p 88. 10 weights for this composite index were farm machinery 0.188, hired farm labour 0.053, mixed f e r t i l i z e r 0.203, grain seed 0.115, custom work 0.206, lime 0.025, interest 0.097, and chemicals 0.113. These weights were obtained from the Nova Scotia Farm Management Advisory Manual. Eastern Canada farm input price indexes were used as reported by Statistics Canada, Farm Input Price Index, Cat. No. 62-004. - 52 -Table 3.1 Grain Acreage, Y i e l d s , Farm Pric e , Fodder Acreage, the Gross National Expenditure Implicit Price Index and a Weighted Grain Inputs Price Index Nova Scotia 1967-84 Grain Acreage 3 Average Per Tonne Farm Value b Bay & Silage Corn Acreage Yi e l d Per Current Year Acre (tonne) Prev. 3 Yr. Average GNB Implicit Price Index Weighted Grair Inputs Price Index 0 1984 54,000 . N.A. 182,500 1.17 1.05 303 307 1983 50,900 172 184,000 1.15 0.99 290 295 1982 47,995 150 185,000 1.01 0.94 274 298 1981 48,734 168 184,000 0.99 0.95 249 288 1980 42,491 184 185,300 0.97 0.90 225 253 1979 41,357 136 189,500 0.87 0.92 203 220 1978 36,997 113 193,000 1.00 0.83 184 192 1977 36,573 103 193,100 0.83 0.84 172 179 1976 37,093 106 193,500 0.93 0.74 160 170 1975 36,959 106 191,000 0.74 0.81 146 166 1974 37,686 100 184,000 0.85 0.79 132 149 1973 38,313 100 173,500 0.64 0.87 115 115 1972 39,440 59 163,000 0.94 0.86 105 102 1971 44,708 55 158,400 0.78 0.88 100 100 1970 46,368 55 159,600 0.88 0.81 97 100 1969 47,997 55 177,400 0.92 0.82 93 100 1968 47,426 61 191,900 0.85 0.76 89 98 1967 48,175 66 205,000 0.66 0.81 86 94 1966 65 Source: Derived from Nova Scotia Department of Agriculture & Marketing. A g r i c u l t u r a l S t a t i s t i c s , various editions and S t a t i s t i c s Canada. Farm  Input Price Index, various editions, Ottawa: S t a t i s t i c s Canada. Includes wheat, oats, barley, rye, nixed grains and grain corn. Average per tonne values incorporate grants made as feed grain incentives as follows: 1965, $64,000, 1966 $137,000, 1967 $154,000, 1968 $135,000, 1969 $166,000, 1977 $190,000, 1978 $143,000, 1979 $226,000, 1980 $365,000, and 1983 $247,000. The weights for this composite input price index were farm machinery.188, hired farm labour .053, mixed f e r t i l i z e r .203 grain seed .115, custom work .206, lime .025, interest .097, and chemicals .113. To reflect the impact of technical change on production costs the deflated composite price index for crop inputs was divided by the three year moving average of per acre grain yields. In the event of a curvilinear supply function the estimated equation may be regarded as a linear approximation. The estimated supply function (see table 3.1) suggests the intermediate term (three years) price e l a s t i c i t y of total grain acreage in Nova Scotia over this period was 1.89 calculated at mean values. A $l/tonne price change (1971 dollars) was estimated to have a grain acreage response of 508 acres in the f i r s t year, and 410 and 416 acres respectively in years two and three. The estimated equation explained 79% of the total variation in grain acreage over the 18 year period. A l l coefficients had the expected signs and a l l variables were significant, using one-tailed t tests, at better than the 0.05 level. The level of significance for the lagged prices was in a l l cases greater than 0.025. Yields for grain crops over the period averaged 0.9 tonne. Recently average yields have been over one tonne per acre. Based on the 1.06 tonne/acre average for the 1980-84 period a $1.00 (1971 dollars) change in the farm value of a tonne of grain can be associatd with an intermediate term change in local grain supply of 1,334 tonnes. This does not assume any positive relationship between expected value of the crop and subsequent yields although this may indeed be the case. High amounts of f e r t i l i z e r , lime, and other inputs are required for grain production in Nova Scotia. Extended low yields in the early 1970's are often associated - 54 -Table 3.2 OLS Regression of Total Grain Acreage, Nova Scotia, 1967-84 Constant Fodder Acreage CIPI/3YMAY Distributed Lag P-l P-2 P-3 R.SQ. 1.1 C o e f f i c i e n t (t-value) 62,987 (3.97) -.17 (-2.03) -57887 (-5.43) 507.6 (3.00) 410.3 (2.59) 415.8 (3.04) 0.79 df=9 E l a s t i c i t y at Means -.72 -1.66 .72 ,58 .59 Where, Fodder Acreage = hay + silage corn acreage. CIPI = a composite of re a l input price indexes weighted to r e f l e c t r e l a t i v e expenditure shares in Nova Scotia grain crop production costs. 3YMAY = the three year moving average of per acre grain y i e l d s . P - l , P-2, P-3, = average per tonne farm value of p r o v i n c i a l grain crop lagged for one, two, and three years respectively. both with poor growing seasons and escalating input costs. Houck and Gallagher^ 1 have for example shown that taking acreage response estimates as approximations for total supply el a s t i c i t y is to seriously underestimate the price responsiveness of corn production when f e r t i l i z e r price is held constant. Input/output price ratios in the case of grain in Nova Scotia could also be expected to influence grain supply. Substantial weather var i a b i l i t y , however, and the small time series sample made acreage preferable to production for estimating price responsiveness in this case. If in fact the el a s t i c i t y of yields with respect to price is positive, then the estimated gains from the policy change made below are understated. 3.2.2 Interpretation For Policy Analysis The elimination of freight subsidies for shipments of feed grains into FFA geographic Zones III to VI and the equivalent rate reductions into the higher zones would increase the farm price of feed grains in Nova Scotia by approximately $16/tonne12. Such a price increase could be expected to increase plantings in the intermediate term by 7,200 acres. Alternatively a $10 tonne increase in freight assistance could be expected to reduce grain crop production by 4,500 acres in the same period. Houck, J.P., and P.W. Gallagher. "The Price Responsiveness of U.S. Corn Yields." American Journal of Agricultural  Economics. 58, 1976, pp. 731-734. This estimate is a weighted average based on the composition of the provincial grain crop with respect to types of grain produced and the grain production distribution within the province with respect to freight subsidy zones. - 56 -The expected changes in production and producer welfare are depicted in figure 3.1. In Panel A, restructuring the subsidy results in a feed grain price increase equivalent to P1P2 and local production increases by QiQ2» Since most, feed grains are utilized as home grown feed on N.S. farms P]_abP2 is largely a transfer between crop and livestock enterprises on the farms involved. The industry as a whole would however benefit by the triangle abc. This benefit would be worth an estimated $57,600 annually to those farms producing feed grain. This gain is estimated from equation 3.1 and assumes a 1.0 tonne/acre crop yield. Welfare gain = ^A^AQ 3.1 Qi Cb Quar.ci.ty Qz Q., Q3 Quantity Part A Part B Figure 3.1 Price E f f i c i e n c y Gains and Losses i n Local Grain Production with. Changes i n Subsidy Administration and Level - 57 -Panel B of figure 3.1 shows the situation i f the freight subsidy-is increased by P1P2 which equates with $10/tonne in the calculations below. Local production decreases from Qi to Q2. Compared with the situation where producers could realize the same total subsidy expenditure but were free to secure their feed grain supplies at least cost, (i.e. were not exposed to input price distortions), producers are less well off by the triangle abc. At the end of the intermediate term of three years, this is estimated to represent $152,300 annually. 1 3 The recent introduction of par t i a l compensating payments on some local feed grain production modifies the welfare gains from the proposed policy change. In the above analysis the FFA Program as i t had existed for 43 years prior to September, 1984, has been used to calculate welfare gains. Under the new program some offsetting payments on local grain are made on product marketed through certain commercial channels and i t is expected that less than 20% of a l l grain w i l l qualify. The per tonne payments are equivalent (on a weighted average basis) to about 75% of the negative price distortion imposed upon local grain growers. Correspondingly, the gains from the change in administration of the subsidy now with respect to local feed grain production and price efficiencies are calculated to be approximately $49,000 and $129,500 respectively. These correspond with the situations discussed above with subsidy levels of $16 and $26/tonne, and weighted for the types of grain grown provincially and for the geographic distribution of grain production by FFA subsidy zones. 1 3 Based on equationJTl, a $26/tonne price change and a 11,715 acres change in grain production. 3.2.3 Long Run Supply and Price Efficencies The longer term grain production response to the proposed policy change i.e., beyond 3 years is highly speculative. In this section the magnitude of the associated benefit of the longer term crop adjustment is estimated using a range of assumed long run price e l a s t i c i t i e s . Published estimates of long run supply parameters for crops are frequently highly elastic and several times larger than those estimated for shorter periods (1, 2, or 3 years). In selecting low, medium, and high values for this assessment consideration was given to the estimates made for the intermediate term which served as a lower bound. In review, provincial grain acreage was found in section 3.2.1. to be price elastic in the intermediate term of three years. The estimated e l a s t i c i t y was 1.89.14 Assuming a positive yield response to price, which appears l i k e l y , the corresponding supply (tonnage) el a s t i c i t y for the same period would be higher. For longer term responses the sustained nature of the price change is of relevance. The three year acreage response was discerned from the fluctuations in commodity market prices. The price change considered here would be of a permanent nature. Other factors to be considered include the resource and management bases. Grain acreage accounts for a relatively low percentage (11%) of the improved farmland in the province. Bio-physical evaluations furthermore report that the land base suitable for grain production This proportional response is substantially above those estimated for major grain growing regions and reflects the relatively greater supply e l a s t i c i t y of grain growing resources in the province. Related to this, of course, is the small magnitude of the absolute change and the relatively small proportion of farm resources now committed to grain production in Nova Scotia. - 59 -Table 3.3 Change in Grain Production and with Three Long Run Grain Supply Subsequent to Grain Producer Welfare Associated Elast i c i t i e s and Two Subsidy Levels FFA Policy Change Price Elasticty of Grain Supply Price Distortion Prior to  Policy Change of $16/tonne Change in Change in Production(tonne) Producer Welfare Price Distortion Prior to  Policy Change of $26/tonne Change in Change in Production(tonne) Producer Welfare 2.50 3.25 4.00 +9,520 +12,380 +15,230 $+76,160 +99,040 +121,840 +16,460 +21,400 +26,340 $+213,980 +278,200 +342,420 NOTE: An i n i t i a l feed grain price of $168 and sl58/tonne is assumed for the $16/tonne and $26/tonne distortions cases respectively. is 50 times the present grain acreage. Agronomists also report that yields with present technology can be increased substantially. In table 3.3 the production and producer welfare implications of the selected range of long run price e l a s t i c i t i e s of supply are shown. These are interpreted both for the current level of FFA payments/price distortions and for a level corresponding with a $10/tonne increase in the subsidy.15 &t the present level of the subsidy the producer welfare gain is calculated at between $76,000 and $122,000 annually. With an increase in the subsidy rate of $10 tonne the difference in producer benefits from the program escalate to between $214,000 and $342,000. 3.3 Price Efficiencies in Feeding The previous section considered the price efficiency implications of FFA policy alternatives with respect to the Nova Scotia's agricultural industry's own feed grain production. This section w i l l consider price efficiencies in the utilization of feed grain inputs. Adjustments were made to account for the recent introduction of partially compensating FFA payments on some local grain production. - 61 -Many studies have estimated derived input demand el a s t i c i t i e s for feed grains (Brandow16, Ahalt and Egbert 1 7, and Egbert and Reultingear 1 8, and Meilke 1 9). Frequently the aggregate demand for feed grain from a l l livestock and poultry production sectors has been considered. Richardson and Ray20 and Gitu21 have, however, reported separate e l a s t i c i t i e s for the different livestock and poultry sectors. Cost function studies for particular regions have also reported feed demand parameters for particular sectors (Hogue and Adelaja22, Grisley and Gitu 23). Since the mix of livestock and poultry output in Nova Scotia is not the same as that for Canada, for the U.S. nor for any other region, the aggregate input demand e l a s t i c i t i e s that have been estimated for other locations may not be representative for the l b Brandow, G.E. "Interrelations Among Demands of Farm Products on Implications for Control of Market Supply." Pennsylvania  Agricultural Experimental Station Bulletin. 680, 1961. 1 7 Ahalt, J.D. and A.C. Egbert, "The Demand for Feed Concentrate: A S t a t i s t i c a l Analysis," Agricultural Economic Research. 17, April 1965, pp. 41-49. 1 8 Egbert A.C. and S. Reutlinger. "A Dynamic Long-Run Model of the Livestock-Feed Sector," Journal of Farm Economics 47,1965, pp. 1288-1305. 1 9 Meilke, K.D. "An Aggregate U.S. Feed Grain Model" Agricultural  Economic Research 27, 1975, pp. 9-18. 20 Richardson, J.W. and D.E. Ray. "Demand for Feed Grain and Concentrates by Livestock Category." Western Journal of  Agricultural Economics 3, 1978, pp. 23-30. 2 1 Gitu, K.W. "The Structure of Production and the Derived Demand for Inputs in the United States Livestock and Poultry Industries," Phd. Thesis, Pennsylvania State University, August, 1983. 22 Hogue, A. and A. Adelaja. "Factor Demand and Returns to Scale in Milk Production: Effects of Price, Substitution and Technology," Northeastern Journal of Agricultural and Resource Economics, 13, 1984, pp. 237-244. 23 Grisley A. and K.W. Gitu. "Production Structure of Dairy Farm," Northeastern Journal of Agricultural and Resource  Economics 13, 1984, pp. 245-252. - 62 -province. Consequently, derived feed grain demand changes and associated economic gains are considered here on a sector by sector basis (i.e. dairy, poultry, hogs, cattle). In the special cases of chicken, turkey, egg and dairy production, aggregate output in Nova Scotia is invariant with respect to the feed grain price changes considered in this analysis. The changes in the uti l i z a t i o n of feed grain in response to price changes arise only from the input substitution effects in these sectors. This situation results from the supply management and production quota systems in place and these quota levels are invariant with respect to feed grain prices. Fixed output price e l a s t i c i t i e s w i l l therefore be used to estimate the price efficiency gains for these segments of the industry. In the hog and cattle sectors, where output is not restricted, changes in the derived demand for feed grain are composed of both output and substitution effects. Restructuring an input subsidy to an output basis, in such cases, w i l l lead to both a shift and a movement along the derived demand curve for feed grains and the supply curve for livestock output. Invoking the duality between producer surpluses in factor and output markets the estimation of producer welfare changes can be based at convenience on either the feed grain or product (livestock) markets. This includes sequentially measuring the effect of multiple price changes (of both product output and feed grain inputs) using the supply curve in the product market and the demand curve in the feed grain market. - 63 -The relevant parameters for the measurement of producer welfare changes in livestock markets are the ela s t i c i t y of supply with respect to feed grain prices and the e l a s t i c i t y of supply with respect to livestock prices. (There are published estimates of the hog supply function for the Maritime region). The parameters required for measurement of welfare changes in the feed grain market are the e l a s t i c i t y of demand with respect to feed grain price and the el a s t i c i t y of derived feed grain demand with respect to product (hogs, cattle, etc.) prices. In summary, estimates of product supply and derived input demand parameters are used below to analyze the producer welfare effects of the proposed policy change in dairy, poultry and egg, hog and cattle production in Nova Scotia. Short run estimates are f i r s t considered for the individual feeding sectors and then a range of long run effects corresponding both with the short run estimates and with any long run estimates available are considered. 3.3.1 Dairy Feeding Dairy producers have a relatively wide range of adjustment po s s i b i l i t i e s in responding to feed grain price changes. Demand for feed grain in this sector consequently is more elastic than in other livestock feeding sectors. This situation may be explained by the ruminant capability of cattle versus the more restricted feeding requirements of nonruminant animals. Dairy feeding programs vary widely 2 4 depending on the relative costs of feed grains, concentrates, grain substitutes and various roughage feeds including pasture. 2 4 The national average grain input per unit of milk output for 23 developed countries in 1973 ranged from 0.06 to 0.30 and averaged 0.16 for a l l OECD countries and Oceania. See, Regier, D.W. "Livestock and Derived Feed Demand in the World GOL Model," USDA Foreign Agricultural Economics Report No. 152, p. 31. Compared with other areas of Canada, dairy production in Nova Scotia is characterized by higher utilization of feed grains. The 210 dairy farms participating in the Dairy Herd Analysis Service (NSDAM) , in 1983, fed an average 2,363 kg of meal per cow, per year and had an average meal to milk ratio of 0.38. Individual farms ranged from a low of 683 kg of meal fed per cow to a high of 3,869. During the 1970-83 period the annual average milk (3.6 b.f.) to meal ratio ranged from 0.43 (1980) to 0.33 (1970). This range represents a 30% difference in the average annual ut i l i z a t i o n of this input per unit of output. (See table 3.4) The DHAS participating farms are believed to have higher productivities than the remaining 550 farms in the provincial dairy sector. Faced with changes in dairy feed concentrate costs dairy producers can respond by varying their output and rates of hay and concentrate feeding. Many studies have shown that the optimum level of feeding is dependent on the relative prices of hay, concentrates, and milk, and that the marginal physical product of concentrates (hay) is increased with hay (concentrates) held constant at some l e v e l . 2 5 2 5 see for example, Hoover L.M., P.L. Kelley, G.M. Ward, A.M. Feyerherm, and R. Chaddha. "Economic Relationship of Hay and Concentrate Consumption to Milk Production," Journal of Farm  Economics Vol I, February, 1967, pp 64-78. Heady E.O., N.L. Jacobson, J.P. Madden and A.E. Freeman. "Milk Production Function in Relation to Feed Inputs, Cow Characteristics and Environmental Conditions," Iowa  Agricultural and Home Economics Experimental Station Bulletin 529, July 1964. Heady E.O., J.A. Schnittker, N.L. Jacobson, and S. Bloom. "Milk Production Functions, Hay/Grain Substitution Rates and Economic Optimum in Dairy Cow Rations," Iowa Agricultural  Experimental Station Research Bulletin. 444, October, 1956. Young M.L. "Effects of Changing Milk and Feed Prices on Management Practices and Incomes, New York Dairy Farms 1974-78," Cornell University, Agricultural Economic Research 80-81, May 1980. - 65 -Table 3.4 Dairy Feed (14-16%) Prices, Annual Percent Change In Milk Production and Selected Dairy Herd Analysis Service S t a t i s t i c s 1970-83 Dairy Feed 3 Ratio Milk to Meal Fed Ave. Meal %N.B. Roughage Ave. Return Milk Production Per Cow Production 14-16* Actual Adj. 3.6% bf. Per Cow Meal Ave. Rate b Overfluld M l l k c Actual Adj. 3.6% bf. Change % d ($/tonne) (Kg Milk to Kg Meal) kg $/hl 1983 261 2.63 2.63 2, 363 41 2.30 36.00 6,207 6,207 -3.9 1982 257 2.51 2.49 2,410 42 2.30 36.85 6,055 6,005 +0.6 1981 262 2.55 2.44 2,317 42 2.30 36.25 5,913 5,666 +1.4 1980 235 2.45 2.35 2, 470 45 2.20 34.30 5,860 5,632 +3.7 1979 191 2.53 2.43 2,308 47 2.20 31.68 5,847 5,603 +5.1 1978 196 2,59 2,48 2,201 46 2.30 29.55 5,693 5,456 +7.2 1977 196 2.62 2.51 2,102 46 2.30 28.29 5,514 5,284 +2.5 1976 193 2.65 2.49 2,148 47 2.20 28.30 5,695 5,362 +6.5 1975 192 2.57 2.47 2.101 46 2.20 28.12 5, 398 5,188 +7.4 1974 194 2.64 2.60 1.928 44 2.30 20.90 5,083 5,012 + 2.0 1973 152 2.73 2.72 1,856 43 2.35 11.08 5,060 5,102 -1.1 1972 110 2. 70 2.74 1,915 44 2.35 9.65 5,164 5,322 +5.8 1971 108 2.77 2.85 1,874 44 2.39 9.66 5,182 5,340 +4.9 1970 108 2.83 3.00 1,907 41 2.46 9.20 5,112 5,424 +1.5 Source: Various annual reports of the Dairy Herd Analysis Service, Livestock Services Branch, NSDAM. a LFBC reported. b Kg of roughage fed per 100 kg of body weight per day. c Total market return for o v e r f l u l d milk plus subsidies less levies paid, d Annual change In milk shipments. Published production and cost function estimates for milk are considered to be characterized by (what are now) low productivity cows and by U.S. mid-west cropping conditions. (Hoover, Kelley, et. a l . , Heady, Jacobson, et. a l . , Heady, Schnittker, et. a l . ) . Recently, however, a study by Hogue and Adelaja^S estimated a translog cost function using pooled time series and cross section data from dairy farms in five northeastern U.S. states. Their estimates of the Allen partial e l a s t i c i t i e s of substitution for feed and other inputs and of the own-price el a s t i c i t y of feed and cross-price e l a s t i c i t i e s of demand for other inputs with respect to feed prices, are shown in table 3.5. Based on Hoque and Adelaja's fixed output own-price el a s t i c i t y of demand for feed (-0.3160) the removal of freight assistance on feed grains in Nova Scotia could be expected to decrease the demand for dairy feeds in the short run by 1.36%.27 With an i n i t i a l u t i l i zation of 87,500 tonnes this implies that demand would f a l l by 1360 tonnes. This leads to a year one price efficiency gain of only $6900. i f the freight subsidy were increased by $10/tonne (prior to the policy change) the welfare gain would be $20,200. Feed demand in this later case would f a l l by 2,104 tonne with the removal of the price distortion. Hogue, A. and A. Adelaja. "Factor Demand and Returns to Scale in Milk Production: Effects of Price, Substitution and Technology," Northeastern Journal of Agricultural and Resource  Economics. 13, 1984, pp 237-244. This assumes that feed grain prices are $168/tonne i n i t i a l l y and increase to $182/tonne. Dairy feed prices increase from $260 to 271.20/tonne or by 4.3%. - 67 -Table 3.5 Estimated Own-Price and Cross Price E l a s t i c i t i e s of Factor Demand with Respect to Feed Prices and Allen Partial E l a s t i c i t i e s of Substitution for Feed in Milk Production Demand E l a s t i c i t i e s With Allen Partial E l a s t i c i t i e s of Respect to Feed Prices Substitution for Feed Feed -0.3160 -0.8031 Labour 0.0640 0.0793 U t i l i t i e s -0.0259 -1.6207 Fuel O i l 0.0155 0.5523 Machinery 0.1299 1.9990 Capital 0.0704 0.2657 Other Inputs -0.1950 -1.4105 Source: Hogue, A. and A. Adelaja: "Factor Demand and Returns to Scale in Milk Production: Effects of Price, Substitution and Technology," Notheastern Journal Agricultural and  Resource Economics, 13 No. 2, October 1984, pp. 237-244. Estimates in table 3.5 indicate that labour, fuel o i l , machinery, and capital are a l l substitutes for purchased dairy feed. There are currently 1,800 person years 2 8 Q f labour employed in dairy farm production in Nova Scotia. A 4.3% increase in dairy feed prices could, based on the 0.064 labour demand elas t i c i t y with respect to feed prices, be expected to directly create the equivalent of 5 person years of employment in dairy farming in the f i r s t year. Increasing the input subsidy by $10/tonne without restructuring the program would alternatively reduce employment in the sector by 4.4 person years in the short run. While these numbers are small i f the incremental administration cost of restructuring the program are low 2 8 Derived from Statistics Canada. 1981 Census of Canada,  Agriculture, Nova Scotia, Ottawa, Cat. No. 96-904. - 68 -enough such employment gains could possibly be cost effective compared with other public measures to increase employment in the region.29 To test whether Hogue and Adelaja's estimates were representative of the magnitude of the derived demand response to price an estimate for the Nova Scotia industy was made. The theoretical model explaining the derived demand for concentrates was postulated as, QxD = f (P c, P m, P r, T) Where, QXD = amount of concentrates fed per cow, P c = price of dairy concentrates (-), P m = expected marginal price of milk (+), P r = price of roughage (+), and T = technology. The estimated empirical model varied from the postulated theoretical model as the measures of variables available were different from the "ideal" measurements. Published regional average prices for dairy concentrates (14-16% CP) were available. .Roughages, however, are not marketed in quantity and dependable price series were not available. Furthermore the supply (and quality) of roughages, including pasture conditions on dariy farms in a given season, is largely predetermined and/or determined by weather. 29 The Atlantic and East Grain and Flour Subsidy Program for which the principle objective is employment and economic activity in New Brunswick and Nova Scotia has been found to create employment at an estimated annual cost of $86,700 per job. Direct employment programs on the other hand can create employment at a cost in the $15 - 20,000 range per job. See: Canadian Transport Commission. Report on the Evaluation Study  of the Atlantic and East Grain and Flour Subsidy Program, Ottawa, June, 1984. - 69 -Pasture conditions are included here. Grisley and Gitu30 have for example reported that "treating farm-produced roughage feeds as variable inputs in a short-run feeding program may not be a r e a l i s t i c assumption in the milk production process." Halverson 3! similarly included forage supplies as predetermined for short run milk supply analysis. An accurate measurement of the supply of roughage on dairy farms is not available. Therefore, the variable was either l e f t out of the regression completely or was represented by the proxy variable of the reported roughage feeding rate of dairy cows. This later procedure, of course, clearly uses an endogenous variable and results in simultaneous equation bias in the estimates. Both options gave similar results in regard to the dairy feed ela s t i c i t y demand possibly resulting from the short run dominance of external events over the control a b i l i t y of producers with regard to roughage supplies. To represent the expected marginal product return the calculated average per unit return from overfluid milk shipments adjusted for a l l levies and subsidies was used as an approximation. To allow for technical change the genetic change in cows over the period was also represented by a proxy variable. This was the DHAS annual average (rolling herd) production per cow for farms 3 0 Grisley, A. and K. W. Gitu. "Production Structure of Dairy Farms," Northeastern Journal of Agricultual and resource  Economics 13, 1984, pp. 245-252. 3 1 See: Heady, E.O., CB. Baker, H.G. Diesslin, E. Kehrberg, and S. Stanforth, Agricultural Supply Functions, Iowa State University Press, Ames, 1961, p. 84. - 70 -lagged one year. Bloom, Jacobson, McGilliard, Homeyer and Heady32 have found that the genetic effect usually outweighted the effects of differences in feeding intensity, even when these differences were large. Equations 1.1, 1.2, and 1.3 shown in table 3.6 explained 70.6%, 81.3%, and 83.5% of the annual variation in concentrate feeding rates over this period. The proxy variable for genetic change had the correct sign but was found not to be s t a t i s t i c a l l y significant and was omitted from equations 1.1. and 1.2. Calculated at their respective means a 1% change in dairy feed prices was estimated to result in a 0.337% to 0.394% change in concentrate feeding. These e l a s t i c i t i e s are not significantly different from the 0.3160 estimate reported by Hogue and Adelaja. It should be noted however, that for part of the estimated period, milk production in Nova Scotia was increasing to f i l l available market share quota (M.S.Q.) Therefore the demand changes resulting from decreasing feed prices would have been composed of both substitution and output effects during this time. The major short term response which producers can make to higher dairy feed prices are adjustments in roughage feeding. The specifications used for the estimation of the price response in these results held this control variable constant or did not account for variations at a l l in roughage supplies. It is surprising that the 32 Bloom, S., N.L. Jacobson, L.D. McGilliard, P.G. Homeyer and E.O. Heady. "Effects of Various Hay - Concentrate Ratios on Nutrient Utilization and Production Responses of Dairy Cows. Relationships Among Feeding Level, Predicted Producing Ability, and Milk Production," Journal of Dairy Science, 1957, pp 81-93. - 71 -Table 3.6 OLS Regression Equations of Concentrate Feeding Per Milk Cow, DHAS Dairy Farms, Nova Scotia 1970-83 Dependant Variable Constant RPDF RROP RGB ROL Ave-1 R SQ. (1. .1) Coe f f i c i e n t Concentrate 2375.4 -7.464 +40.531 0.706 (t-value) Per Cow (10.187) (-3.819) (3.921) df=10 E l a s t i c i t y -0.394 0.272 (1. 2) Co e f f i c i e n t Concentrate 5365.4 -6.306 +26.663 -0.631 0.813 (t-value) Per Cow (3.604) (-3.433) (2.214) (-2.064) df=10 E l a s t i c i t y -0.337 0.177 -1.400 (1. 3) Coef f i c i e n t Concentrate 5499.7 -6.686 +23.629 -0.664 +0 .020 0.835 (t-value) Per Cow (3.713) (-3.607) (1.928) (-2.180) (1. 087) df=10 E l a s t i c i t y -0.357 0.157 -1.472 0. 050 Note: Concentrates per cow = annual average kg. in meal fed per cow on DHAS herds. RPDF = re a l annual average p r i c e of dairy feed (14-16% CP) ($ tonne) RROF = re a l annual average farm returns from o v e r f l u i d milk sales adjusted for a l l subsidies and levies ($/hl) RGH = roughage rate X average body weight X 365 ROLAVE - 1 = o v e r a l l r o l l i n g average production per cow lagged one year (used here as a proxy for genetic change) estimated e l a s t i c i t y was so similar to the published estimates. A further specification problem included the aggregation of feed grains, and protein supplements as "dairy feed". This precluded one of the most immediate price efficiency adjustments which can be made by the industry. The expected marginal returns from milk production did apparently influence concentrate feeding over the 1970-83 period. Higher milk returns resulting from the payment of feed assistance on a product (output) basis would not however be expected to effect any change in feeding practices at present. During part of the estimation period production was expanding to f i l l the provincial M.S.Q. This has now been achieved. Payments of feed assistance restricted to fl u i d milk and in-quota MSQ production furthermore would not affect marginal returns from over-quota production in any event. Hogue and Adelaja used annual data in their study as was the case above. Large changes in the quantity of inputs demanded due to price changes in such a short period might not be expected. The policy and price changes under consideration would be long term and a one year period would be insufficient for a l l adjustments. The response of feed input ut i l i z a t i o n to price changes estimated above were f a i r l y substantial despite substitution opportunities being restricted to the short term. - 73 -The implications for feed grain use and producer welfare from a range of long term price e l a s t i c i t i e s of derived feed grain demand are given in table 3.7. For comparison purposes in assessing the magnitude of the selected long run e l a s t i c i t i e s a study by Ferris et. al.33 n a s estimated feed grain demand for a span of five years for manufactured feed in the United Kingdom. They reported a demand ela s t i c i t y of -0.21 for year one, -0.33 for year two, -0.46 for year three, and -0.55 for year five. Longmire using aggregative programming analysis estimated a long run e l a s t i c i t y for feed grain demand in Britain of 1.9 which he compared to one-year e l a s t i c i t y estimates of between -0.29 and -0.50.34 The range of values selected for table 3.7 is considered conservative. They imply that the change in producer welfare that would result from an assistance policy which did not distort feed input prices is between $16,000 and $28,000. This applies to the existing subsidy level. With a $10/tonne increase in the subsidy rate the welfare "triangle" or opportunity cost for not undertaking the change would increase to between $51,100 and $89,000 annually. Ferris, J., T. Josling, B. Davey, P. Weightman, D. Lucey, L. O'Callaghan, and V. Sorenson. "Impact on U.S. Agricultural Trade of the Asccession of the U.K., Ireland, Denmark and Norway to the European Community," Research Report 11. Michigan State University. East Lansing Michigan: 1971. Longmire, J.L. "Demand for Concentrate Feed in British Agriculture: An Aggregative Programming Approach," Journal of  Agricultural Economics. 1980, pp. 163-173. - 74 -Table 3.7 Changes i n Feed Grain Demand and Producer Welfare i n Nova Scotia Dairy Sector Associated with Three Long-Run Demand E l a s t i c i t i e s and Two Subsidy Levels Subsequent to FFA P o l i c y Change Price D i s t o r t i o n Prior to Price D i s t o r t i o n P r i o r to Policy Change of $14/tonne P o l i c y Change of $24/tonne E l a s t i c i t y of Change in Change i n Changes in Changes i n Feed Grain Demand Demand (tonne) Producer Welfare Demand (tonne) Producers Welfare -0.40 -2310 $+16,170 -4270 $+51,240 -0.55 -3220 +22,540 -5880 +70,560 -0.70 -4060 +28,420 -7420 +89,040 Note: Based upon average i n i t i a l feed grain demand of 87,500 tonne prices of $168 and $158/tonne. Price changes d i f f e r from those u t i l i z e d for grain production e f f e c t s because of compositional and l o c a t i o n a l differences. 3.3.2 Poultry and Egg Production Gitu^ 5 has estimated the constant output e l a s t i c i t i e s of substitution between concentrates and feed grains, the own-price e l a s t i c i t i e s of demand for concentrates and feed grain and the cross-price e l a s t i c i t i e s of demand between the two, for turkey, broiler, and egg production on a quarterly basis for the U.S. The mean values are shown in table 3.7. The estimates of the ela s t i c i t i e s of substitution between feed grain and concentrates were found to be above zero in a l l cases. Poultry and egg feeding technologies are not therefore characterized by fixed input proportions or fixed input-output coefficients. Protein concentrates and feed grain are substitutes (at normal price ratios). Output in the case of Nova Scotia broiler, turkey, and egg production is not affected by changes in feed prices of the magnitude which would result from the policy change considered here. The own-price e l a s t i c i t i e s of demand for feed grain which indicates the proportionate change in the demand for feed grain resulting from a proportionate change in price when output and a l l other input prices are fixed, should consequently be used in calculating the welfare loss (gain) triangle. Price efficiency gains in these sectors w i l l arise only from input substitution and not output effects. 3 5 Gitu, K.W. "The Structure of Production and the Derived Demand for Inputs in the United States Livestock and Poultry Industries," Ph.D. thesis, Pennsylvania State University, August 1983. - 76 -Table 3.8 Mean Values of Own-Price E l a s t i c i t i e s of Demand for Concentrates and Peed Grains, Elasticites of Substitution, and Cross-Price E l a s t i c i t i e s of Demand Between Concentrates and Feed Grains Turkey Production Broiler Production Egg Production E l a s t i c i t y of Substitution 0.0617 0.0587 0.0450 Own Price E l a s t i c i t y (c) -0.0346 -0.0402 -0.0350 Own Price E l a s t i c i t y (f) -0.1136 -0.0868 -0.0586 Cross Price E l a s t i c i t y (cf) 0.0397 0.0238 0.0213 Cross Price E l a s t i c i t y (fc) 0.0238 0.0350 0.0254 Source: Gitu, K.W. "The Structures of Production and the Derived Demand for Inputs in the United States Livestock and Poultry Industries," Ph.D Thesis, Pennsylvania State University, August 1983. The own-price ela s t i c i t y of demand for feed grain (with fixed output) in the case of broiler production was estimated at -0.09 by Gitu. Using a feed grain price of $170/tonne removal of the current FFA subsidies would increase the price of feed grain by $14/tonne or by 8.2%. This would decrease the demand for feed grain by 0.71%. Based on annual feed grain ut i l i z a t i o n of 31,200 tonnes demand would f a l l by 222 tonnes and the welfare gain for producers from adjusting their feeding practices would be $1,554. (This assumes they received the same subsidy expenditure as before but paid on output.) For eggs and turkey production the short run welfare gain would be $1,197 and $287. Feed grain utilization for - 77 -egg production is assumed at 35,600 tonnes i n i t i a l l y and turkey feed u t i l i z a t i o n at 4,400 tonnes. The total welfare gain from poultry and egg producers minimizing costs consistent with the market value of feed grain at the current level of the subsidy in the short run is indicated at $3,038. If the FFA subsidy was increased by $10/tonne the corresponding efficiency gains would be $4,942 for broilers, for egg production $3,802, and for turkey production $912. The total efficiency gain for the poultry and egg sector from these short run adjustments would be $9,700. The feed demand parameters estimated by Gitu for the poultry and egg sectors were quarterly e l a s t i c i t i e s . Only partial adjustment to price changes can occur over this short period. Substitution opportunities for feed grain in modern poultry production are, however, more restricted than in the case of other sectors and especially compared with ruminant livestock. The longer run implications for feed grain demand and producer welfare of the policy and price changes considered here (shown in table 3.9) are based on a range of low, medium, and high e l a s t i c i t i e s which reflect this circumstance. At the present subsidy level the annual gains from the change in subsidy administration over the long run are implied at between $6200 and $14,500. Such gains given a $10/tonne increase in the subsidy level prior to the policy restructuring increase to between $19,500 and $45,400 annually. - 78 -Table 3.9 Change i n Feed Grain Demand and Producer Welfare i n Nova Scotia Poultry and Egg Sector Associated with Three Long Run Demand E l a s t i c i t i e s and Two Subsidy Levels Subsequent to FFA Pol i c y Change Price D i s t o r t i o n Prior to Price D i s t o r t i o n Prior to E l a s t i c i t y of Policy Change of $14/tonne P o l i c y Change of $24/tonne Feed Grain Demand Change i n Change in Changes i n Changes i n (with Fixed Output) Demand (tonne) Producer Welfare Demand (tonne) Producers Welfare -1623 $+19,480 -2706 +32,470 -3788 +45,460 Note: Based upon average i n i t i a l feed grain u t i l i z a t i o n of 70,000 tonne and prices of $168 and $158/tonne. -0.15 -889 $+6,220 -0.25 -1483 +10,380 -0.35 -2076 +14,530 3.3.3 Hog Feeding Nova Scotia hog producers have historically shared an open continental market with the remainder of the North American hog industry. Within this highly competitive sector they are currently faced with higher relative costs for their largest input (feed) and lower relative output prices. Lower relative hog prices have resulted primarily from Eastern Canada shifting from a net importing to a net exporting position for pork since the mid-1970's. The large scale hog expansion in the province of Quebec 3 6 was the major cause for the structural change in Eastern Canada's position in the North American pork market. While Nova Scotia and the Maritime Provinces are a net pork importing region, the local price for hogs is only equivalent to the Ontario price. A more cost effective administration of the public resources committed to the sector could play a role in the sector's survival. The transformation of FFA from an input to an output subsidy could improve feeding margins for Nova Scotia hog producers. Whether or not there are substitutes for feed grain (and/or purchased feed grain) in hog production and i f so to what degree substitution is economic at the new price ratios are important questions. If the feed grain/output (and/or purchased feed grain/output) relationships are invariant then the economic situation of producers would not be changed. 3 6 Hog marketings in the Province of Quebec increased from 2.3 million to 4.6 million between 1976 and 1984. - 80 -While there are numerous studies which have reported e l a s t i c i t i e s of supply for hogs with respect to own price and feed grain prices, for the U.S., Canada, and for particular regions, these can not be applied to the Nova Scotia case. The provincial industry's position, with respect to the utilization of purchased feed, is not common. It is estimated 37 that in 1980 "home grown" grain accounted for only 8% of the grain utilization in hog production in the province. Integrated hog-crop farms typically account for much larger proportions of the hog production in other regions. (Van Arsdall and Nelson 3 8 have reported that in 1980 nearly 90% of a l l grain used in farrow-to-finish and feeder pig finishing operations in the U.S. North Central region was produced on the same farm as the hogs.) Feed grain is an input in hog production (and largely a purchased input in N.S.) but i t is frequently also a substitute for pork production in other regions. This is particularly noticeable at high grain prices. 37 Robinson, D. E. The Arithmetic of Restructuring FFA, Maritime Farmers Council Working Paper, November, 1982. 3 8 Van Arsdall, R.N. and K.E. Nelson. U.S. Hog Industry USDA Economic Research Service, Agricultural Economic Report No. 511, June 1984, p. 27. - 81 -\ Given the high incidence of purchasing feed on Maritime hog farms, and the restricted substitution opportunities for feed grains i t could be expected that the relative magnitude of estimates of the hog price and feed price e l a s t i c i t i e s of demand would reflect the revenue share of feed costs. (i.e. assuming largely fixed feed coefficients and feed costs equivalent to 50-60% of revenue, i t could be expected that a 1% change in feed prices would have a similar output response as a 0.5-0.6% change in hog prices), In other regions with feed grain both an input and a competitive output such a relationship would not be expected a p r i o r i . There are many estimates in such cases of the hog supply e l a s t i c i t y with respect to feed grain prices which are higher than the own price ela s t i c i t y for hog supply, for example Meilke.39 Existing regional estimates, however, do not show such relative responses to hog and feed price changes. Estimates by Chin, Pando, and West 4 0 and by Chin and Spearin 4 1 yield conflicting information on producer adjustment to changes in feed grain and hog prices and in both cases the grain price variable was s t a t i s t i c a l l y insignificant. 39 Meilke, K.D. "Another Look at the Hog-Corn Ratio," American  Journal of Agricultural Economics. 59, 1977, pp 216-219. 4 0 Chin, S.B., J.L. Pando, and D.A. West. National and Regional  Hog Supply Functions, Agriculture Canada, Economics Branch Pub. No. 74115, September 1974. 4 1 Chin, S.B. and M. Spearin. "An Analysis of Quarterly Provincial and Regional Hog Supply Functions," contained in Commodity Forecasting Models For Canadian Agriculture Vol. 1, coordinated by Z. A. Hassan and H. B. Huff Agriculture Canada, Publication No. 7812, 1978. - 82 -Chin, Pando, and West's estimates were based on the 1961-72 period using semi-annual data. They reported a 0.28 supply e l a s t i c i t y with respect to hog price and a -0.25 elasticity for the price of barley (used as a proxy for a l l feed inputs) for the Maritimes. The price of hogs was significant, however, only at the 10% level and the price of barley was not s t a t i s t i c a l l y significant. A $l/cwt increase in the price of hogs was estimated to increase marketing 18 months later by 1,376 hogs, while a $l/ton increase in the price of barley reduced marketing by 794 hogs in the same period. The relative magnitudes of the price coefficients combined with an average feed input per cwt of pork of approximately 0.30 ton infer that converting a $14/tonne feed freight subsidy to a $2.47/cwt product payment (current dollars) would reduce hog production in the short term. Barley prices nevertheless explained a larger percentage of the variation in hog marketings than did the price of hogs. And the model as a whole explained a high proportion of the variation in marketings over the period. Commenting on the difference with the rest of Eastern Canada (where the price of hogs was the most influential economic factor effecting the level of hog marketings) Chin, Pando, and West suggested that hog producers in the Maritimes are more dependent on purchased feed and hence more affected by i t s price. The Maritime supply e l a s t i c i t y with respect to feed grain price at -0.25 was comparable to the estimates for Ontario (-0.29) and Quebec (-0.30). - 83 -Chin and Spearn also estimated a quarterly supply equation for the Atlantic Province for the 1966-77 period. Results showed a $l/cwt change in the price of pork increased marketing five quarters later by 166 hogs. A $l/ton change in the price of barley reduced marketing in the same period by 18 hogs. (while not reported these coefficients implied elasticites of supply calculated at mean values of 0.10 with respect to hog prices and -0.02 for barley.) Based on an average $14/tonne freight subsidy and an equivalent product payment of $2.47/cwt (current dollar) these estimates infer that hog production would increase in the short term with the change in the administration of FFA subsidies. The price of barley was again not s t a t i s t i c a l l y significant. The Nova Scotia hog industry is currently faced with many uncertainties. Decisions such as with regard to stabilization policy and countervailing U.S. duties on Canadian live hogs and pork exports may be expected to greatly impact upon the province's hog production. In such circumstances estimates of the per hog feeding efficiency gains resulting from FFA restructuring are useful and avoid d i f f i c u l t i e s related to output level. - 84 -G i t u 4 2 reported a mean value for the constant output own-price e l a s t i c i t y for feed grain in hog production of -0.03 calculated on a quarterly basis. Assuming the feed grain input per hog is 292 kg this results in a 0.25% or 0.7 kg decrease in the use of this input in the quarter following a $14/tonne or 8.2% ( i n i t i a l price of $170) price increase. The efficiency saving would be 0.5C per hog. At current hog production levels this could represent only $1,250 in feeding efficiencies for the entire sector. These gains are for the short run of a single quarter. If the freight subsidy were increasd by $10/tonne prior to the restructuring of the payment system the subsequent f i r s t quarter decrease in feed grain u t i l i z a t i o n per hog would be 1.3 kg. The efficiency saving would then be 1.6C per hog and at a production level of 250,000 hog would total $4000. Gitu had suggested in discussing his comparatively low e l a s t i c i t y values that only partial adjustment to price changes can occur in a single quarter. These efficiency estimates could, therefore, be considered as the lower bounds for such gains. Given the very low values of Gitu's estimates reference was made to a second source. Boggess, Olson, and Heady 4 3 using Cobb-Douglas isoquants estimated that for live weight hogs grown from 60 4 2 Gitu, K.W. "The Structures of Production and the Derived Demand for Inputs in the United States Livestock and Poultry Industries," Ph.D. Thesis. Pennsylvania State University, August 1983. 4 3 Boggess, W.G., K.D. Olson, and E.O. Heady, "Gain Isoquants and Production Functions for Swine" contained in Livestock Response  Functions ed. E.O. Heady, and S. Bhide, Iowa State University Press, 1984, p. 267. - 85 -to 215 lbs the least cost ratio changed from 412 lbs of corn and 90 lbs of protein supplement to 424 lbs of corn and 83 lbs of protein supplement when the soya/corn price ratio changed from 1.75 to 2.00. Assuming i n i t i a l soyameal and corn prices of $325 and $168 the soya/corn price ratio would change from 1.93 to 1.79 with the FFA restructuring. Interpolating Boggess et. al.'s estimates this would suggest a l l else being equal that feed grain demand on a per hog basis would f a l l by 6.7 lbs or by 3.0 kg. Using the equation 3.1 the price efficiency gains would be 2.1<;/hog and $5,250 for the total sector with production at 250,000 hogs. If the feed grain subsidy were increased by $10/tonne the efficiency saving would be 7.1*/hog and $17,750 for the overall sector at the same aggregate output level. While Gitu's quarterly estimates represented short term adjustments, those of Boggess, Olson and Heady were presented as complete responses. Other adjustments besides the substitution of soyameal to economize on more expensive feed grains may be possible in the long run. In Nova Scotia for example feed wastage in the hog sector has been estimated at 5-7% overall with a range on individual farms of between 2% and 10%. 4 4 In a sustained higher feed cost environment i t may be expected that producers would allocate more resources to reducing this wastage then would otherwise be the case. In table 3.10, the producer welfare implications of the policy change associated with three long run price and varying cross price e l a s t i c i t i e s of hog supply are shown. For each own price e l a s t i c i t y a cross e l a s t i c i t y of feed grain is given for which Communication with Donald Cox, Swine Supervisor, NSDAM. - 86 -Table 3.10 Change i n Producer Welfare of NS Hog Sector Subsequent to FFA Policy Changes with Varying Own and Cross-Price E l a s t i c i t i e s of Hog Supply and with Two Subsidy Levels Own Price Cross Price E l a s t i c i t y Change i n Producer Welfare E l a s t i c i t y of Hog Supply of Hog Supply Respect to Feed (With Grain) Price D i s t o r t i o n P r i o r to Policy Change of $14/tonne Price D i s t o r t i o n P o l i c y Change of Prio r to $24/tonne 1.00 -0.357 -0.355 -0.353 -0.351 $+5,700 +11,500 +17,000 $+9,800 +19,700 +29,500 1.50 -0.536 -0.532 +7,600 +13,000 -0.529 +13,400 +23,000 -0.526 +19,100 +32,800 1.75 -0.625 -0.620 -0.617 -0.614 +8,200 +13,100 +18,000 +14,000 +22,500 +30,900 NOTE: Calculated on the basis of feed grain price of $168/tonne, hog pri c e of $81/cwt, production of 250,000 hogs and an i n i t i a l average feed gain/hog output r a t i o of 0.292/tonne. neither output nor producer welfare would change. If the negative supply response to the feed grain price change (increase) is below this level and is less than the positive output response from higher product returns in absolute terms, however, input substitution is implied and hog production and producer welfare would both be higher with an equivalent subsidy per unit of output. Consistent with the above discussion the conservative values selected imply very limited substitution opportunities even in the long run. The annual economic gains implied for producers range from $5700 to $17,000 at the existing subsidy level. If the subsidy were to increase by $10/tonne then the implied gain from changing the basis of payments increases to a range of $9,800 to $32,800. 3.3.4 Beef Cattle Feeding Excluding dairy cows, 72% of the cattle reported on farms in Nova Scotia at the time of the 1981 Census of Agriculture were on small, part-time, and hobby farms with total annual sales of agricultural products of less than $25,000. There are a few commercial cattle feeding operations but grass-fed beef and feeder cattle account for the bulk of the sector's output. In 1980 cattle operations utilized approximately 15,000 tonnes of purchased feed and the "home grown" grain production on these farms was approximately 8,400 tonnes. - 88 -Richardson and Ray45 reported a price ela s t i c i t y of demand for feed grain for cattle and calves of -0.95. G i t u 4 6 reported a constant output e l a s t i c i t y for fed beef of -0.63 and for non-fed beef of -1.79. Given the high proportion of Nova Scotia beef cattle on non-commercial farms and their relatively low expenditure share for feeds i t could be expected that the feed grain demand in this sector would not be highly sensitive to price. Using a price elasticity of demand for constant output of 0.90 (which is half of the non-fed beef mean figure reported by Gitu) the elimination of the freight subsidy would be expected to reduce feed grain demand by 1730 tonne in this sector. The efficiency saving (ignoring any output effect) is indicated at $12,100. If the freight subsidy were increased by $10/tonne prior to the restructuring the saving would be $37,900. Even in the special case of constant output and in the short run Gitu reported an elastic demand for feed grain for non-fed beef. For fed beef and non-fed beef combined, Richardson and Ray reported near unitary elasticity with output variable. With i t s output characterized to a large extent by grass fed (slaughter) beef and feeder cattle the response to grain prices in the Nova Scotia cattle sector could be expected to be more typical of estimates for the non-fed sector. 4 5 Richardson, J.W. and E.E. Ray. "Demand for Feed Grain and Concentrates by Livestock," Western Journal of Agricultural  Economics. 1, 1978, pp 23-30. 4 6 Gitu, K.W. "The Structure of Production and the Derived Demand for Inputs in the United States Livestock and Poultry Industries," Phd. Thesis, Pennsylvania State University, August 1983. - 89 -Table 3.11 Change in Producer Welfare of NS Cattle Sector Subsequent to FFA Policy Changes with Varying Own and Cross-Price E l a s t i c i t i e s of Cattle Supply and with Two Subsidy Levels Own Price Cross Price E l a s t i c i t y Change i n Producer Welfare E l a s t i c i t y of of Cattle Supply (With Price D i s t o r t i o n P r i o r to Price D i s t o r t i o n Prior to Cat t l e Supply Respect to Feed Grain) Policy Change of $14/tonne Po l i c y Change of $24/tonne 1.50 -.1575 -.1450 $16,700 $28,600 -.1400 23,300 40,000 -.1300 36,650 62,850 2.00 -0.2100 -0.1950 15,000 25,700 -0.1900 20,000 34,300 -0.1800 30,000 51,400 2.50 -.2630 -.2450 14,350 24,600 -.2350 22,400 38,300 -.2250 30,300 52,000 NOTE: Calculated on the basis of feed grain price of $168/tonne, i n i t i a l cattle returns of $480/head and a feed grain/head output ratio of 0.3/tonne. In table 3.4 the producer welfare gains from price efficiencies implied by a range of long run e l a s t i c i t i e s are given. Producer welfare is implied as increasing by between $14,350 and $36,650 with the assumed values and at the current subsidy level. At the higher subsidy level the welfare gain from an input price neutral assistance policy is indicated at between $24,600 and $62,850. 3.4 Transfers of Program Benefits In addition to price efficiencies the effects of transforming FFA from an input subsidy to an output based payment system would include some transfers of program benefits. Such transfers include subsidies currently accruing to horse owners and other hobby farms, transfer benefits to local cash grain growers, transfer benefits arising from the "milling-in-transit" subsidies paid on local supplies of millfeeds, and the p o s s i b i l i t y that subsidies may occassionally be paid on feed grains which are exported in manufactured feed. Another transfer issue involves whether Ontario corn growers receive benefits which may be lost as a result of U.S. corn imports occurring into the province. In a l l of these instances the transfers would favour commercial farms in Nova Scotia and may be desirable. This section considers such transfer issues and where possible the value of corresponding benefits to commercial agriculture are quantified. It is assumed that the expenditure committment (or lump-sum settlement) from which the new payments are made is based on past expenditures. - 91 -3.4.1 O.S. CORN One concern about proposals to restructure FFA into an output payment system has been the possibility of U.S. corn imports occurring into the region. Groenewegen47 expressed this as a potential problem but did not report any analysis in this regard. Livestock Feed Board o f f i c i a l s have stressed that such a prospect would threaten the national i n t e r e s t . 4 8 The analysis in this section w i l l consider the prospects for U.S. corn imports and the conditions under which such a trade may arise. The economic implications are then assessed. No significant quantities of U.S. corn have entered the Maritime Provinces since the introduction of FFA in 1941. With the lower t a r i f f on U.S. corn (resulting from the last GATT) increased imports into Quebec in the past decade have reduced the negative effects of reduced FFA in that province. With the substantial inflationary erosion of FFA in Nova Scotia the basis for such imports has improved and i t is perceived that the removal of the freight subsidy applicable to Canadian product would result in imports displacing domestic grains in this market. This would also reduce the price incentive for local development created from any restructuring of the program. The least cost origin of U.S. imports into Nova Scotia would be the eastern seaboard. 4 9 In the 1978-85 period the price 4 7 Groenewagen, J~. An Evaluation of the Maritime Farmers' Council  Proposal to Restructure Feed Freight Assistance, Livestock Feed Board of Canada and Agriculture Canada, February . 1984. 4 8 Livestock Feed Board of Canada, Preliminary Observations  Concerning the Maritime Farmers Council Proposal, Paper Presented to Feed Committee MFC, Amherst, Nova Scotia, July 26, 1983. 4 9 H i l l L.D., M.N. Leath, and S.W. Fuller. "Corn Movements in the United States," I l l i n o i s Bulletin 768, Agricultural Experimental Station College of Agriculture, University of I l l i n o i s at Urbana-Champaign and; Leath, M.N. , L.H. Meyer, L.D. H i l l U.S. Corn Industry. USDA Economic Research Service, Agricultural Economics, Report No. 479, 1982. - 92 -difference between loaded U.S. corn at the Gulf ports and track prices in Truro (Chatham price carried forward) ranged from -$12.40 to $47.00.50 Typically the price difference was $4-14/tonne (See figure 3.3 ). Based on current transportation costs of approximately $34-38/tonne51 i t is evident from the frequency distributions shown in figure 3.3 and figure 3.4 that the removal of the freight subsidy would not result in any steady corn movement from the U.S. It might, however, create opportunities in unusual market circumstances from time to time. The seasonal period which histo r i c a l l y experienced the most favourable market situations for U.S. corn imports was June to September. These months are the t a i l end of the marketing season and the product involved would be "old corn". Martin, Groenewegen, and Pidgeon 5 2 similarly reported a high seasonal price basis for Ontario for the months of June to September. The Halifax grain elevator does not have aeration equipment. This precludes the handling of new crop corn and increases the risk of larger shipments (longer periods in storage). The demand for corn during such market instances would furthermore be depressed depending on alternative western feed grain markets. Purchases of U.S. corn for u t i l i z a t i o n at the end of the season in Canada and especially 5° See appendix C. 51 Including ocean shipping, inward and outward elevation, the t a r i f f and land transport to mills. 5 2 Martin L, G.L. Groenewegen, E. Pidgeon. "Factors Affecting Corn Basis in Southwestern Ontario," American Journal of  Agricultural Economics 62, 1980, pp. 107-112. - 93 -A . !! u 1 act f» !¥ -3.-1 „ •1 1 •> •V 3LT !3 \1 L, j T1 1 !« *f \ */' ! S M.j, 'f 1 t» v.* \t ?/ M \0 15 *•/ 1» la Figure 3.2 Frequency D i s t r i b u t i o n of Monthly Price Difference Between Ontario Corn (No. 2 C.E.) Landed at Truro and U.S. Corn. (No. 2 Yellow) Gulf Ports 1978-85. ($Can/tonne) ^, \ o.. ! ••» i f V » ! A * " ^_ ; A* -7.. ,. . -"' r> •?? ?- ! J*/ *^"» x>< »? T3 7 - TV «v i . n A» 'V- T./ My. 91 ?r »1 J . it n ?» V W ,V»>r 1 r ' . s~ j * . 71 s-» ! Tt 71 ro il f/ ?/ Out V' * | —.. -•>*'' "•1 -r.. If ti ! i , Tl 7 T l )• It f» 1 7 " I « ; j t /© /a a / r 3" 1C 3. It-Figure 3.3 Frequency D i s t r i b u t i o n of Monthly Price Difference Between Ontario Corn (No. 2 C.E.) Landed at Truro and U.S. Corn (No. 2 Yellow) Gulf Ports with FFA Subsidy Removed1 Expressed i n Constant 1981 Dollars, 1978-35. ($Can/tonne) 1 I t i s assumed in c a l c u l a t i n g the pr i c e differences, i n the absence of the FFA subsidy, that the removal of f r e i g h t assistance would not have had an e f f e c t on r a i l f reight rates. - 9 4 -spanning two marketing years also cannot usually be hedged very securely.53 Shipments of approximately 12,000 tonnes would seem the most probable and would represent 8-11 weeks each of total provincial usage at average corn utilization rates. Based on a $34-38/tonne (Gulf ports to feed mill) transport cost, historic price movements suggest that the removal of the $8-ll/tonne subsidy on shipments of Ontario corn to principle milling locations, might create brief instances when the local trade could profitably import U.S. corn. The price savings appear small, however, and the risks significant. The market conditions which give rise to the occasions of improved competitiveness for U.S. corn are important considerations for this analysis. The most significant grain market variable affecting the position of U.S. corn (against the alternative Ontario corn) on Nova Scotia markets is the price basis between U.S. and Canadian corn in southwestern Ontario. 5 4 The factors which are associated with changes in the Ontario corn price basis (against the dominant U.S. market) have been investigated by Martin, Groenewegen, and Pidgeon. 5 5 They report that the existence of an Ontario price premium reflects central Canada being in a net importing position for corn and that the degree of any price premium reflects the extent of 5 3 Ibid, p. 111. 5 4 For an analysis of the variability of oceaning shipping rates for grain see: Brinkley, J.K. and B. Harrer. "Major Determinants of Ocean Freight Rates for Grains: An Econometric Analysis," American Journal of Agricultural Economics 63, 1981, pp. 47-57. Martin L., G.L. Groenewegen, E Pidgeon. "Factors Affecting Corn Basis in Southwestern Ontario," American Journal of  Agricultural Economics. 62, 1980, pp. 107-112. corn imports from the U.S. 5 6 S i m i l a r l y Martin and Hope 5 7 state "Basis has tended to strengthen during the summer i n years when Eastern Canada's corn crop has been i n s u f f i c i e n t for l o c a l demand so that U.S. imported corn i s required." Meilke and d e G o r t e r 5 8 have also analysed the Chatham-Chicago p r i c e r e l a t i o n s h i p reporting "the ( r e l a t i v e ) Chatham corn p r i c e i s a key indica t o r of the surplus-d e f i c i t p o s i t i o n of eastern Canada". The conditions i n which Nova Scotia would import U.S. corn, therefore, involves a substantial p r i c e premium on Ontario corn and extensive imports of U.S. corn i n t o eastern Ontario and Quebec. Accordingly, such Nova Scotia imports would not l i k e l y a f f e c t the Canadian trade balance with respect to g r a i n . Supplies a v a i l a b l e for u t i l i z a t i o n i n Central Canada would increase (as a r e s u l t of N.S. purchases of U.S. corn) and would displace a comparable volume of U.S. corn imports which would otherwise take place (less advantageously) into Eastern Ontario and Quebec. 5 9 56 During the f i f t e e n months shown i n fi g u r e 3.3 as the most favourable for imports, t o t a l Canadian imports of U.S. corn averaged 97,500 tonnes per month. 5 7 Martin, L., and D.G. Hope. "An Analysis of Strategies For P r i c i n g Corn in Ontario", U n i v e r s i t y of Guelph, A g r i c u l t u r a l Economics and Extension Education A p r i l 1983, p 13. 5 8 Meilke, K.D. and H. deGorter, "A Quarterly Econometric Model of the Feed Grain Industry," Commodity Forecasting Models for  Canadian A g r i c u l t u r e . Vol. I. ed. Z. Hassan and H.B. Huff, No. 7812 Economics Branch, A g r i c u l t u r e Canada 15-42, 1978, pp 13-42. 5 9 I t i s also s i g n i f i c a n t that i n 14 out of the 21 months shown i n f i g u r e 3.3 as the most favourable for purchases of U.S. corn that the Canadian wheat Board sold feed grain to the domestic market at formula prices which were under market p r i c e s . This p r a c t i c e was based on the Corn Competitive P r i c i n g Component of the Domestic Feed Grain P o l i c y . - 96 -There are consequently no apparent reasons to be concerned with costs being imposed on other Canadian producers as a result of the improved position for U.S. corn imports in the Nova Scotia market resulting from the restructuring plan. In the circumstances in which these imports might occur i t is possible this trade would be of net benefit to the Canadian economy.60 Given the remote possibility of U.S. corn shipments into Nova Scotia, however, no industry benefits are assigned. 3.4.2 Other Effects for Ontario and Western Grain Growers The achievement of "feed grain self-sufficiency" is frequently presented as the answer to the feed cost problems of agriculture in the Maritime Provinces.61 while the policy change considered here could be a cost-effective component of a program, to achieve such a policy goal i t would be unlikely to result in this achievement a l l else being equal. The strategy of restructuring FFA is to give greater inducement to a wide range of developments which would help to reduce the negative effect of reduced and/or terminated subsidies. The policy could be economically worthwile even though grain continued to be shipped into the province. 6 0 W h i l e i t i s outsidethe scope of consideration for this analysis the variable cost of freight shipments of Canadian corn would be an important consideration of the effect on the total economy. The Halifax Elevator's variable costs compared with i t s revenue would be an offsetting factor as would the economics of the r a i l or truck shipments of grain from Halifax to the mills and the revenue to the Government from the t a r i f f . The benefit to Nova Scotia livestock feeders would of course be unambiguously positive. 61 Many of the adjustment programs which have resulted from such an orientation have been biased towards cash crop grain expansion (compared with home-fed grain grown on livestock farms) and have generally overlooked lagging feed productivity rates and grain substitutes such as quality forage and potato wastes. - 97 -Nevertheless, i f the policy change were to result in the complete curtailment of import feed grain demand this would represent only 0.3 percent of current national grain production. Since feed grain prices are set in a world market the decrease in demand from Nova Scotia would have no discernible effect on prices in other parts of Canada. It is possible that the additional economic inducements provided for the commercial development of intensive cereal management (ICM) technologies in the province (see appendix E, p. 192) could result in significant benefits for other Canadian grain growers. Researchers and growers in other regions have already received technical information and insights from the Nova Scotia experience. 3.4.3 Provincial Cash Crop Grain Supplies Marketings of local feed grain in Nova Scotia are approximately 12,000 tonnes annually. The remaining locally grown feed grain supplies representing more than three quarters of total production is utilized on the farms where i t is grown. The market value of local grain is reduced by the amount of the FFA subsidy and removal of this freight assistance would accordingly result in cash grain growers receiving prices consistent with the f u l l alternate cost of importing grain. If freight subsidy expenditures were simply reallocated on livestock output, these payments would not compensate livestock producers for the benefit they previously received from the negative distortion to local feed grain - 98 -p r i c e s . 5 2 The restructuring of the historic FFA Program would have consequently involved a transfer from livestock producers to cash grain growers of roughly $187,500.63 A recent modification to the FFA Program 6 4 has, however, made commercially marketed local grain eligible for partially compensating FFA subsidies. The new payment scheme on locally produced grain marketed through commercial channels provides for f u l l FFA subsidy compensation in the case of grain corn. For barley, rye, wheat, and oats the payment is $4.40/tonne less than what is paid as freight assistance on the competitive imported grains. Consequently i f these current program expenditures were included with the current freight subsidies in calculating the new producer product payments the previous benefit to feeders from the reduced price of local grain would be largely preserved (and cash grain growers would be able to market their grain at undistorted market prices). The transfer arising from livestock producers to cash barley, oats, rye, and feed wheat producers would then be approximately $44,000^5 annually. Faced with a similar "dilution" problem for western grain growers concerning changes in the method of payment of the "Crow Benefit" Gilson, (1982) recommended that the Federal Government cover part of the difference. 63 Based on an average price reducing subsidy of $15/tonne. This is calculated on a weighted basis to account for the types of grain grown and the location of grain production in the province with respect to geographic subsidy zones. 64 Livestock Feed Board of Canada, Revisions of Feed Freight  Assistance Rates and Ammendment to the Regulations. Release, August 28, 1984. 65 Calculated on the basis of 10,000 tonne of local barley, mixed grain, rye, wheat and oats increasing in cost to feeders by $4.40/tonne net of redirected compensating payments. - 99 -The restructuring plan would also eliminate the diseconomies inherent with the expected dislocation of grain movement which may result from the restriction of compensation payments to marketed grain. 3 .4 . 3 Transfers from Hobby and Non-Commercial Farms 3enefits from FFA as currently administered also accrue to hobby farm operators. Hobby horse owners are the most significant such group. The 1980-82 "Province of Nova Scotia Equine Survey" 6 6 estimated the provincial horse population at 12,700. Whole grain purchases for horses were reported at $3.4 million and mixed feeds at $1.1 million annually. Assuming average r e t a i l prices for whole grain of $220/tonne and for mixed feeds of $270/tonne (and 85% grain composition in the mixed feeds) then the annual grain consumption is indicated at 19,700 tonnes. This level of horse feed sales was, however, believed to be high. This assessment was supported by feed trade personnel. A more conservative estimate of hobby horse grain utilization is 15,000 tonnes. Product payments in lieu of freight subsidies would therefore involve a transfer of approximately $225,000 annually in favour of commercial producers. If FFA subsidies were increased by $10/tonne this transfer from hobby horse owners to commercial farms would increase to $375,000. There are some horses in the Animal Science Department. "Province of Nova Scotia Equine Survey", Nova Scotia Agricultural College, Truro, 1983. - 100 -province used in commercial primary production, principally the yarding of logs. Feed subsidies would not be significant to the annual cost and returns associated with this activity. There are also a large number of other small and hobby farms who based upon past program experiences would not claim direct feed assistance in lieu of the indirect FFA subsidies from which they currently benefit. In 1981 there were 1704 farms in Nova Scotia with gross agricultural product sales under $5,000 who reported feed expenditures (1213 of these had sales of less than $2,500). 6 7 These farms would qualify in total for approximately $68,000 at the current subsidy level based upon their product sales. If the subsidy were to increase by $10/tonne equivalent they would qualify for approximately $113,000. Assuming 700 of the 1,704 farms did not submit claims this would involve a transfer of $28,000 at the current subsidy level and $46,000 at the higher l e v e l . 6 8 The product sales of these farms are disproportionaly small relative to their feed expenditures. The census farms with sales under $2,500 reported 2.6% of total farm sales in 1981 but a higher 3.5% of feed expenditures. Consequently even i f they claimed a l l of the payments that their livestock output would qualify, their level of subsidy would s t i l l be reduced. The difference in this regard would largely be the result of horses and this part of the transfer has been considered above. 6 7 Statistics Canada, 1981 Census of Canada, Agriculture Nova  Scotia, Cat. No. 96-904, Ottawa: Statistics Canada. 6 8 These levels of nonparticipation are considered understated. Such levels were used in estimating administrative expenses (see p. 110) so as not to error in underestimating such incremental costs of the program change. - 101 -3 . 4 . 4 Exported Feed There are significant amounts of manufactured feeds exported from the province to off-shore markets. In 1983 Nova Scotia laden exports of ground cereals, by-product feeds, complete feeds, and feed concentrates totalled 2,230 tonnes valued at $1.1 million. Any under reimbursement of FFA subsidies paid on feed grains shipped into the province and sold externally increases FFA expenditures without benefit to provincial feeders. Restructuring of the payments based on historic program expenditures would avoid such leakages of benefits. 3.4.5 Millfeeds One aspect of the current FFA Program is the payment of a "milling-in-transit" subsidy on the local production of millfeeds (mainly bran and shorts) which are by-products from flour milling. There is one flour m i l l in Nova Scotia located in Halifax and in 1983-84 within province sales of millfeeds totalled 10,000 tonnes. This product receives the western product freight assistance rate applicable to which ever FFA zone the millfeed shipments are u t i l i z e d . Milling-in-transit payments are intended to compensate mills for the lower market value of their byproducts caused by the subsidization of competitive (imported) feed grains. Other FFA grains, i.e. wheat, oats, barley, corn, and screenings, are not however, perfect substitutes for millfeeds. These m i l l by-products are commonly included in rations for very specific reasons. They are highly palatable, have high fat content and are twice as bulky as oats. The relatively high protein of bran and shorts is of better quality than that of corn or of entire wheat - 102 -grains, although not as good as soyameal or fish meal. Especially in the case of bran, medicinal properties related to laxative effects are important elements in their demand. These feeds are often associated with particular uses such as for farrowing sows and g i l t s . Since the demand for millfeeds is not based solely on their relative costs compared with other FFA grains, removal of Feed Freight Assistance would not result necessarily in increases in millfeed prices f u l l y equal to the recovered "milling-in-transit" payments. The "milling-in-transit" payments may overcompensate for the price depressing effect FFA subsidies have on the millfeeds market. The reported composite price of millfeeds at Halifax was regressed on the local cost of western wheat, oats, barley, Ontario corn, and soyameal and on the millfeeds proportion of FFA product ut i l i z a t i o n over the 1978-83 period. 6 9 The volume of millfeeds relative to the aggregate demand for feed inputs was included to account for situations where millfeed extended normal usage and had to be more price competitive. The resulting equation (See table 3.12) explained 88% of the variation in millfeed prices. T-ratios were low for the less perfect substitutes feed ingredients and for the highly collinear variables generally. A $12.40 tonne increase in the cost of western wheat, oats, and barley together with a $8.00/tonne increase for corn (soyameal See appendix D for data. - 103 -Table 3.12 OLS Regression of M i l l f e e d Prices on FFA Grain Prices and Shipments Share Intercept P.Wheat P.Oats P.Corn P.Soya P.Bar ProMF Co e f f i c i a n t 29.408 +0.114 +0.266 +0.031 +0.015 +.359 -35.912 .88 (t-value) (3.17) (0.78) (1.89) (0.28) (0.37) (3.48) (-1.39) df=79 Note: - P wheat, P oats, P corn, P soya, P bar = Monthly o r i g i n prices respectively for wheat, oats, corn, soyameal, and barley plus the net transport cost to Nova Scotia. ProMF = Millfeeds as a proportion of to t a l monthly FFA product Shipments. costs would not increase), was associated with a $9.41/tonne increase in the price of millfeeds. Low ava i l a b i l i t y of millfeeds relative to the general ut i l i z a t i o n of feed ingredients or aggregate demand for feed grain resulted in higher prices reflecting the unique features of the demand for this product. This variable was not, however, s t a t i s t i c a l l y significant. It should be noted that the current cost of FFA grains receivable in 6 to 8 weeks time have been used here in forming prices for millfeed products immediately available. Feed mills, generally price their inventories at current replacement values and these form the immediate competitive environment for local ingredients. Based upon these estimates livestock producers would benefit by a transfer of $29,900 under FFA restructuring. This amount is currently accruing to the provincial flour m i l l as over compensation for the negative effects of FFA on their market returns from milling by-products. 3 .4.6 Intrasector Transfers Using average FFA grain u t i l i z a t i o n per unit of output in each livestock sector ie. hogs, dairy, poultry, as the basis for the product payments eliminates any intersector transfer of benefits. The grain grown currently on dairy and cattle farms would not affect payments in the poultry and egg sectors where l i t t l e grain is grown, e t c . 7 0 This in effect recognizes that there are different degrees Groenowegen (1984) did not adjust for such considerations. - 105 -of complementarities between types of livestock production and grain production. In addition to differences in the amounts of home grown grain produced relative to livestock output, within a given sector, the differences in total grain (purchased and grown) input/output ratios would also create intrasector transfers. In the case of nonruminant production these would mainly reflect feeding efficiencies, i.e. differences in feed to product conversions. Numerous factors such as the quality of forage would create a wider range of differences in the dairy sector. The degree of transfers within each livestock sector would directly correspond with the demonstrated and potential a b i l i t y of that sector to adjust to higher grain prices. Intrasector transfers w i l l be greatest in sectors (such as dairy) where one group of farms have significantly lessened i t s u t i l i z a t i o n of imported/subsidized grain while another group in the same sector have not. Such low level transfers which are partly offset by price efficiencies and transfer gains have been accepted by producers in their requests for restructuring. 3.5 Costs The higher costs which apply against the benefits and any desirable transfers from the FFA restructuring in Nova Scotia involve administration and the delayed delivery of assistance to program beneficiaries. The higher administration costs associated with the change in the method of payment represent a depletion of the real resources of the federal government. These of course must be compared against the expected efficiency gains to be realized by - 106 -producers. The interest expenses involved with the greater short term financing requirement of farms are, on the other hand, in the nature of a transfer from the perspective of the overall economy or total income of Canadians. These incremental costs which would result from the policy change are estimated in sections 3.5.1. and 3.5.2. 3.5.1 Administration Costs The extra administration associated with restructuring of the FFA Program, arising from the increase in the number of claimants, is the major cost which must be weighted against the welfare gains (and with any expected regional development benefits). If a new administrative infrastructure had to be put in place such costs could be prohibitive. Given the administrative capacities, structures, and agencies in place, however, marginal costs could be very low. The reported administrative expenses of the Agricultural Stabilization Board (ASB) are shown in table 3.19. Payments made to producers and the number of claimants over the 1976-83 period are included. This agency might not be the least cost option for the administration of the new payments.71 It has, however, been used for numerous commodity deficiency payments and a wide variety of special payments. This later group has recently included payments to western grain producers to compensate for Canadian Wheat Board sales of feed grains under the Domestic Feed Grain Policy, payments related to the Grains Embargo Conpensation Program, the 1980-81 7 1 The Livestock Feed Board may also be able to accommodate this program at low marginal costs. FFA claims have trended downward while the real cost of administration has remained at past levels. - 107 -Weaner Pig Program, the Fodder and Livestock Transportation Assistance Program, and feed purchase assistance paid in Manitoba as the result of flooding. It is evident from the va r i a b i l i t y of the data in table 3.13 that there are rapid average cost reductions per claimant as the number of claims increase. (In 1981-82 claims paid increased by 132% while expenses increased only 44%. In the next year claimants were reduced to only 17% of the 1981-82 level, while expenses only f e l l to 73% of the year before level.) Of special consideration to the proposed Nova Scotia payment system, is the multi-year nature of these payments. The ASB can not normally plan on such a degree of regularity. Their other payments are never as routine as this from year to year and there may be economies to this feature. Also, over 90% of the Nova Scotia payments would apply to products marketed through marketing boards or commissions. This could greatly simplify audits, policing, and other aspects of administration compared to other commodity sectors where payments have been made. A regression of the reported administration expenses of the ASB expressed in 1982 dollars on the number of claimants estimated the marginal cost per claimant at $12.95.72 This was for the 1976-83 period shown in table 3.13. The equation explained 96% of the annual variation in administration costs while the number of claims variable was significant at .001. - 108 -Table 3.13 Administration Expenses and Program Activity Agricultural Stabilization Board 1976-83 Year Administration Expenses Deficiency and Other Payments Number of Claimants Number of Payment Programs -$000-1982-83 l , 3 1 7 a 6 , 1 3 6 ° 1 0 , 9 6 6 ° 1 0 ° 1981-82 1 , 7 9 2 C 1 4 6 , 0 2 3 ° 6 3 , 3 5 8 ° 9° 1980-81 l , 2 4 6 d 5 1 , 4 4 4 6 2 7 , 2 7 2 « 1 0 ® 1979-80 990f 3 0 , 7 9 8 1 7 , 3 8 8 9 1978-79 l , 0 4 3 f 4 7 , 0 6 8 2 8 , 1 1 7 13 1976-77 88 29 3 1 , 2 3 9 h 33 , 531" 1 2 n Source: Annual Reports of the Agricultural Stabilization Board. a Administration expenses of the Agricultural Products Board in the amount of $76,206 have been excluded. Costs however, include administration of the agreement between the Canadian Wheat Board and Agriculture Canada to compensate western grain producers for C.W.B. sales of feed grain under the Domestic Feed Grain Policy. b Includes Grain Embargo Compensation Program. c Agricultural Products Board expenses of $50,384 have been excluded. d Agricultural Products Board expenses of $25,543 have been excluded. e Includes Weaner Pig Program and the Fodder and Livestock Transportation Assistance Program. f Includes expenses of the Agricultural Products Board. g Includes expenses related to the payment of consumer subsidies on skim milk powder, services provided to the Canadian Dairy Commission "without charge", and the operation of the Agricultural Products Board. h Includes the feed purchase assistance paid in Manitoba as the result of flooding. - 109 -In the 1981 Census of Agriculture 3,701 farms in Nova Scotia reported feed expenditures. Included were 1,213 farms with gross sales of agricultural products under $2,500 and another 491 with farm sales of between $2,500 and $4,999. Total feed expenditures for those two classifications were $1,442,240 and $836,529 respectively. Based on current FFA expenditures the f i r s t group would be eligible for approximately $32,000 in direct feed assistance and the second group $36,000. With a $10/tonne increase in subsidy levels these figures would increase to $53,000 and $60,000. With such low eligible payments, i t could be expected that a substantial number of these producers would not submit claims. This has been the experience with deficiency payments and other programs. Assuming that producers were able to submit claims for direct feed assistance at six month intervals and that 3,000 farms made claims, the ASB would process 6,000 claims annually. With marginal costs in the v i c i n i t y of $15 per claim, the administration costs for the term restructuring would be $90,000 annually. This cost would be reduced by 50% i f annual payments were made. Livestock Feed Board administrative expenses have shown no tendency to f a l l as FFA claims have fallen (see table 3.20). Consequently, no significant saving can be expected from their reduction in claim processing based upon past experiences. The recent extension of off setting FFA subsidies to locally marketed grain has, however, increased administration costs of the current FFA Program. - 110 -Table 3.14 Administrative and Program Expenses and FFA Shipments, Livestock Feed Board of Canada, 1973-83 Year Ending Mar. 31 Program Expenses FFA Other Programs Admin. Expenses FFA Shipments3 Ratio Admin, to Program Expenses -$000- -•000 tonnes-1984 15,154 498 1,356 2,143 0.09 1983 13,800 535 1,209 1,720 0.08 1982 14,769 1,236 1,075 1,943 0.07 1981 15,309 1,211 984 2,068 0.06 1980 15,244 1,017 878 2,247 0.05 1979 14,042 17 873 2,287 0.06 1978 11,036 - 800 1,782 0.07 1977 11,977 - 718 1,694 0.06 1976 20,055 - 686 2,207 0.03 1975 20,479 - 669 2,578 0.03 1974 22,273 822 542 2,624 0.02 1973 20,950 — 502 2,808 0.02 Source: Livestock Feed Board of Canada, Annual Report of the Livestock  Feed Board of Canada, Various Editions, Montreal. a Marketing year ending July 31. - I l l -C o n s e q u e n t l y i t w i l l b e a s s u m e d t h a t L i v e s t o c k F e e d B o a r d e x p e n s e s w o u l d b e r e d u c e d b y $ 1 0 , 0 0 0 a n n u a l l y . T h i s i s b e l e i v e d t o b e a c o n s e r v a t i v e e s t i m a t e . E v e n w h e n t h e L F B C a n n u a l r e p o r t i s a v a i l a b l e i t w i l l b e d i f f i c u l t t o d i s c e r n t h e e x t r a c o s t o f t h e new p r o g r a m f r o m t h e i n i t i a l e x p e r i e n c e . B a s e d o n b i a n n u a l p a y m e n t s t h e i n c r e m e n t a l a d m i n i s t r a t i o n c o s t s a r e t h e n e s t i m a t e d a t $ 8 0 , 0 0 0 a n d f o r a n n u a l p a y m e n t s $ 3 5 , 0 0 0 . F o r c o m p a r i s o n t h e C o m m i t t e e o f I n q u i r y o n C r o w B e n e f i t P a y m e n t 7 3 e s t i m a t e d t h e a d m i n i s t r a t i o n o f t h e ( p a r t l y i n d e x e d ) $ 6 5 8 . 6 m i l l i o n C r o w B e n e f i t i n W e s t e r n C a n a d a w o u l d c o s t a n e x t r a $ 6 0 0 , 0 0 0 u n d e r t h e i r r e c o m m e n d e d G r a i n T r a n s p o r t a t i o n R e f u n d s y s t e m a s c o m p a r e d w i t h p a y m e n t t o t h e R a i l w a y s d i r e c t l y . T h e i n c r e m e n t a l c o s t o f a n a c r e a g e b a s e d p a y m e n t o f t h e C r o w B e n e f i t w a s e s t i m a t e d a t $ 8 5 0 , 0 0 0 . 3.5.3 I n t e r e s t C o s t s ( P r i v a t e ) B a s e d o n a $ 3 . 2 m i l l i o n p r o g r a m , s e m i - a n n u a l p a y m e n t s a n d a 14% o p p o r t u n i t y c o s t t o p r o d u c e r s , t h e a v e r a g e t h r e e m o n t h d e l a y ( f r o m t h e d a t e o f f e e d p a y m e n t s t o t h e r e c e i p t o f d i r e c t a s s i s t a n c e ) w o u l d c o s t p r o d u c e r s $ 1 1 2 , 0 0 0 a n n u a l l y . I n t h e c a s e o f a $ 5 . 3 m i l l i o n p r o g r a m , ( c o r r e s p o n d i n g w i t h a $ 1 0 / t o n n e i n c r e a s e i n t h e s u b s i d y ) t h e s e c o s t s w o u l d i n c r e a s e t o $ 1 8 5 , 0 0 0 . B a s e d o n a 11% o p p o r t u n i t y c o s t t o t h e g o v e r n m e n t , h o w e v e r , t h e r e w o u l d b e c o r r e s p o n d i n g p u b l i c s a v i n g s o f $ 5 8 , 0 0 0 a n d $ 1 4 6 , 0 0 0 r e s p e c t i v e l y . S u c h s a v i n g s o n t h e p a r t o f t h e g o v e r n m e n t , i f n o t a p p l i e d t o p r o d u c e r p a y m e n t s , w o u l d d i s s i p a t e t h e i n c r e a s e d p u b l i c a d m i n i s t r a t i o n c o s t s . I t w i l l b e a s s u m e d h e r e t h a t t h e s a v i n g s t o t h e g o v e r n m e n t o f t h e d e l a y i n p a y m e n t s w i l l b e a p p l i e d t o t h e ' J S e e : T h e R e p o r t o f t h e C o m m i t t e e o f I n q u i r y o n C r o w B e n e f i t  P a y m e n t M a r c h 1 9 8 5 , C a t . N o . T 2 2 - 6 6 / 1 9 8 5 E C a n a d i a n G o v e r n m e n t P u b l i s h i n g C e n t r e , p . 1 1 1 . - 112 -payment fund. 7 4 The increased financing cost of producers w i l l be reduced to $23,000 and $39,000 respectively for the two program expenditure levels. 3.6 Summary The supply function for local feed grain (acreage) was estimated and the response to price was found to be elastic even in the short and intermediate terms. Numerous studies have reported feed grain demand (even at constant output and for nonruminant livestock and poultry production) to vary with respect to price. Significant leakages of benefits to others (as opposed to those taken to be the target group or intended beneficiaries, i.e. commercial feeders) were also found to result from the current input subsidy payment system. The price efficiencies and benefit transfers were estimated for the current level of the subsidy and for the situation with the subsidies increased by $10/tonne. Incremental public administration costs were calculated on the basis of both semi-annual and annual payments. Using a conservative range of long run e l a s t i c i t i e s i t has been estimated that through input substitution, increased local feed grain production, and superior delivery of feed assistance payments to the program target group that program benefits to the commercial agricultural industry in Nova Scotia could be increased by between This could result from a lump sum compensation payment from which the terminating feed assistance payments would be drawn. - 113 -$0.4 and $0.5 million annually with the change in administration. If the subsidy were increased by $10/tonne the producer benefits arising from the proposed policy change are estimated at between $0.7 and $0.9 million. The restructuring could therefore play a positive role in addressing the feed cost problems of producers resulting from the changes in feed freight equalization policy. Price efficiency gains alone were estimated to outweigh the incremental public costs involved. Since feed grain is an export commodity with a clearly defined opportunity cost for the Canadian economy the social benefits from transforming the subsidy could be expected to outweigh the social costs of the policy option. - 114 -Chapter 4 Implications for Technical Change 4.1 Introduction Industry representatives have sought FFA restructuring partly as a component of a concerted approach for the development of local feeding and grain production technologies.! Apart from domestic feed grain policy issues, producers have argued that s o i l and crop research has been particularly neglected in the region. Livestock Feed Board o f f i c i a l s , Groenewegen,2 and others have also suggested that attempts to restore the competitive position of Maritime producers, with respect to feed costs, should focus on technology development. This course of action has, however, been seen as separate from FFA policy. 3 In this section economic theories regarding technical change and economic variables w i l l be reviewed. Of particular relevance is the induced innovation hypothesis which suggests that innovations are biased towards inputs that become more expensive. 4 The static welfare analysis in chapter 3 focused on the response of producers to adjust input mixes in a cost minimizing See: Maritime Agriculture and Grain Transportation, Submission to the House of Commons Transport Committee, MFC, NSFA, PEIFA, NBFA, August, 1983. Comments to Maritime Farmers Council Feed Grain Committee, Amherst, N.S. May 14, 1984. Kerr (1966) had recommended that productivity be a major objective of the then proposed feed grain agency. The term is now widely used for a l l theories explaining the rate and bias of technical change as endogenous to the economic system. - 115 -manner as a r e s u l t of an input p r i c e change. The tendency for firms (or p u b l i c research i n s t i t u t i o n s ) , to d i r e c t t h e i r innovation towards those inputs with r i s i n g or increased costs can reinforce the e a r l i e r conclusions. If innovation i s responsive to p r i c e , a d d i t i o n a l welfare gains (losses) are indicated. Frequently such welfare e f f e c t s have been found to outweigh the comparatively minor s t a t i c welfare costs such as those measured i n chapter 3. S p e c i f i c a l l y , the l a r g e s t b e n e f i t of the proposed term r e s t r u c t u r i n g of FFA i n Nova Scotia could be as an inducement for technologies which r e s u l t i n p r o d u c t i v i t y gains i n feeding and crop production. If t h i s i s the case the competitive p o s i t i o n of producers i n the province could be expected to become less dependant over time on p u b l i c assistance: t e c h n i c a l change being cost-reducing by d e f i n i t i o n . 4.2 Innovation, Technical Change, and Bias SchumpeterS made the d i s t i n c t i o n between invention (latent technology), innovation (from what was t e c h n i c a l l y and economically f e a s i b l e ) and d i f f u s i o n (the adoption of new technology by industry). He r e s t r i c t e d "entrepreneurial innovation" to the a c t i v i t i e s of p r i v a t e business as apart from " t e c h n i c a l innovation" or " s c i e n t i f i c innovation." Recent usage of the term innovation has been more general embracing "the e n t i r e range of processes r e s u l t i n g i n the emergence of novelty i n science, technology, i n d u s t r i a l management and economic o r g a n i z a t i o n . " 6 Schumpeter, J.A. Capitalism, Socialism and Democracy New York: Harper & Row, Publishers, Inc., 1942. p. 82-83. Hayami, Y. and V.W. Ruttan. A g r i c u l t u r a l Development: An  International Perspective, The John Hopkins Un i v e r s i t y Press, Baltimore and London, 1971, p. 54. - 116 -The term "technical change" is defined here in accordance with Binswanger*s definition of "changes in techniques of production at the firm or industry level that result both from research and development and from learning by doing." 7 Correspondingly technological change is considered by Binswanger as "the result of the application of new knowledge of s c i e n t i f i c , engineering or agronomic principles to techniques of production across a broad spectrum of economic a c t i v i t y . " 8 These definitions exclude changes in factor productivity or output compostition, resulting from movement to new, but previously known techniques, as a result of changes in factors prices or output prices. Technical change implies an increase in the efficiency of production and can be measured by the decrease in production costs with constant factor prices when both the i n i t i a l and the new technology operate at their respective optimal input combinations. Whether or not a technical change is biased is based on the sh i f t in input shares at constant input prices with both the old and the new techniques operating at their optimal input combinations. If changes in technology result in changes in the ratio of marginal products then the change is "non-neutral." Binswanger, H.P. "Induced Technical Change: Evolution of Though," in Induced Innovation, ed. H. P. Binswanger and V.W. Ruttan. The John Hopkins University Press, Baltimore and London, 1978, p.19. Ibid, p. 19. - 117 -Technical development at the farm level can result from advances in the general state of technology, from the acquisition of existing technical knowledge, or from innovative efforts. In the case of the diffusion of technical knowledge, i t is only from the individual farm's perspective that a new production function is achieved. The term "technological development" is normally used in the more restrictive case of increases in the technical knowledge generally. The new production function that arises in this case reflects the overall state of technology rather than only the technical pos s i b i l i t i e s known to the farm. The technical advances which would reduce the effects of lower feed grain price equalization in Nova Scotia of course includes both these types. Non-neutral (biased) technical changes which would change feed/output ratios, thus increasing the marginal product of feed to other factors, are of particular relevance. Feed grain and other feedstuffs are also intermediate outputs of the industry. Consequently a wide range of technologies in cropping and feeding need to be considered. These include modified intensive cereal management systems, new protein saving or soyameal substituting techniques in broiler production, methods to deal with regional s o i l fragipan problems, increased and speedier adoption of existing technology, and so forth. 4 . 3 The Induced Innovation Hypothesis The induced innovation hypothesis states that the direction of technical change is influenced by changes in relative input and - 118 -output prices and hence the state of technology becomes partly endogenous to the economic system. A firm in any given period i s limited in i t s input-output combinations by the state of technology. In subsequent periods i t may be able to change i t s state of knowledge and increase i t s f l e x i b i l i t y with respect to input and output combinations. The source of this new knowledge can be the firm's own research, public research, or other firms. The essential question for this analysis is whether new knowledge is directed partly by forces in the economy and particularly by relative factor prices (or factor expenditures shares). There are of course influences which are noneconomic in nature. For example, properties of nature and the advancement of the basic sciences determine what is possible. Hicks 9 f i r s t noted the influence of economic variables on technical change. Solow's 1 0 identified technical change rather than capital formation as the major source of economic growth in the U.S between 1909 and 1949. S a l t e r 1 1 questioned the hypothesis in 1960. The debate and theory were advanced by among others, F e l l n e r 1 2 , Hicks, J.R. The Theory of Wages, 1st ed. MacMillan and Co. Ltd., London, 1932. Solow, R.M. "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39(3), 1957. Salter, W.E.G. Productivity and Technical Change, Cambridge University Press, Cambridge Mass, 1960. Fellner, W. "Two Propositions in the Theory of Induced Innovation," Economic Journal 71, p. 305-308. - 119 -Kennedyl3, Samuelson 1 4, Ahmad 1 5, Hayami and R u t t a n 1 6 , and Binswanger 1 7. Ahmad1^ in 1966 presented a model of the microeconomics of induced innovation. He used the concept of a h i s t o r i c innovation p o s s i b i l i t y curve (IPC) defined as the envelope of a l l possible isoquants which could r e s u l t from the development of a l l possible processes given the state of the basic sciences. Each process i n the set required a given quantity of resources i n order to be developed and the t o t a l amount of research and development resources was also given. This l a t t e r feature made the determination of the rate of te c h n i c a l change exogenous. Ahmad's IPC may s h i f t inward non-ne u t r a l l y and could therefore be biased without economic forces inf l u e n c i n g i t , i . e . depending on the e l a s t i c i t y of s u b s t i t u t i o n of the IPC. (See figure 4.1) 1 J Kennedy C. "Induced Bias i n Innovation and the Theory of D i s t r i b u t i o n , " Economic Journal 74, 1964, p. 541-47. 1 4 Samuelson, P.A. "A Theory of Induced Innovation Along Kennedy-Weisacker Lines," The Review of Economics and S t a t i s t i c s 47(4), 1965, p. 343-56. 1 5 Amhad, S. "On the Theory of Induced Invention." Economic  Journal 76, 1966, p. 344-57. 1 6 Hayami, Y. and Ruttan, V.W. "Factor Prices and Technical Change i n A g r i c u l t u r a l Development: The USA and Japan 1880-1960," Journal of P o l i t i c a l Economy 78, 1970, p. 115-41. 1 7 Binswanger, H.P. "A Micro-Economic Approach to Induced Innovation," Economic Journal 84, 1974, p. 940-57. 1 8 Ahmad, S. "On the Theory of Induced Invention," pp. 344-57. - 120 -C a p i t a l L a b o u r F i g u r e 4.1 Ahmad's Induced Innovation Model - 121 -Demand induced innovation at the firm and industry level was f i r s t studied empirically by G r i l i c h e s 1 9 and Schmookler 2 0. Griliches's work is of particular relevance to this assessment of FFA payment changes. The technical progress of agriculture in Nova Scotia and the Maritime Provinces is largely dependent on technology transfers from other regions and subsequent adaption, and diffusion. There is a vast amount of new technology constantly being generated in North America, in Europe, and elsewhere. The unique s o i l and crop conditions of the maritime region, combined with the small size of the industry and the province's location (removed from the major centres of agricultural production and research), a l l impact upon the transfer, adaption, and diffusion processes. Griliches incorporated location and adaptive research in a diffusion model of technology for the case of hybrid corn. He explained regional variation in the timing of i n i t i a l hybrid corn production by the size and density of the potential hybrid seed market. It was hypothesized that private seed companies and public research stations allocated their efforts to the development of regional hybrid corn varieties where corn production was most concentrated. Thus, the potential rate of return to research investment was increased. Griliche's research further explained the rate of adoption and level of acceptance of the innovation by the 1 9 Griliches, A. "Hybrid Corn: An Exploration in the Economics of Technical Change," Econometrica 25, 1957, p. 501-22. 2 u Schmookler, J. Invention and Economic Growth. Cambridge, Mass: Harvard University Press, 1966. - 122 -a b s o l u t e p r o f i t a b i l i t y o f t h e s h i f t 2 1 i n t h e p r o d u c t i o n f u n c t i o n . H y b r i d c o r n w a s f i r s t g r o w n o n a s u b s t a n t i a l c o m m e r c i a l s c a l e i n t h e e a r l y 1 9 3 0 ' s w h i l e G r i l i c h e s p u b l i s h e d h i s a n a l y s i s i n 1 9 5 7 . G r a i n c o r n p r o d u c t i o n i n N o v a S c o t i a d i d n o t i n c r e a s e o v e r i t s l o w 1 9 3 1 l e v e l u n t i l t h e l a t e 1 9 6 0 ' s . I t ' s r o l e i n p r o v i n c i a l f a r m i n g s y s t e m s i s s t i l l u n c l e a r w i t h s i g n i f i c a n t f a r m l e v e l i n n o v a t i o n a n d e x p e r i m e n t a t i o n c o n t i n u i n g w i t h r e s p e c t e s p e c i a l l y t o h i g h m o i s t u r e c o r n p r o d u c t i o n a n d s t o r a g e s y s t e m s . G r i l i c h e s ' m o d e l , a n d c o n s i s t e n t w i t h i t t h e d e l a y e d h y b r i d c o r n e x p e r i e n c e o f t h e M a r i t i m e P r o v i n c e s , i m p l i e s t h a t t h e s m a l l s i z e o f M a r i t i m e a g r i c u l t u r e , c o m b i n e d w i t h t h e u n i q u e c l i m a t i c a n d s o i l c o n d i t i o n s i n t h e r e g i o n , w i l l f r e q u e n t l y i m p o s e t e c h n i c a l d i s a d v a n t a g e s f o r t h e r e g i o n . T h e r e g i o n s s h a r e o f f e e d g r a i n o u t p u t i n N o r t h A m e r i c a h a s f a l l e n s t e a d i l y s i n c e W o r l d War I I a n d t h i s w o u l d n o t b e a n t i c i p a t e d b a s e d u p o n b i o - p h y s i c a l e v a l u a t i o n s o f t h e r e g i o n s a g r i c u l t u r a l l a n d r e s o u r c e . ( S e e p . 201} S i g n i f i c a n t l y , G r i l i c h e s a n a l y s i s a l s o i m p l i e s t h a t t h e i n n o v a t i v e e f f o r t o f f a r m s , a n d s e e d a n d s u p p l y c o m p a n i e s ( a n d p o s s i b l y , e v e n o f t h e p u b l i c s e c t o r ) , w i t h r e s p e c t t o t h e d e v e l o p m e n t o f i n t e n s i v e c e r e a l m a n a g e m e n t s y s t e m s , w i l l b e p a r t l y a f u n c t i o n o f e x p e c t e d g r a i n p r i c e s . T h e c u r r e n t o u t l o o k f o r l o w i n t e r n a t i o n a l g r a i n p r i c e s w i l l r e t a r d t h i s p r o c e s s w h i l e t h e r e s t r u c t u r i n g o f F F A c o u l d b e e x p e c t e d t o , a l l e l s e b e i n g e q u a l , a c c e l e r a t e t h e r e g i o n a l a d a p t i o n a n d d i f f u s i o n o f t h e s e new t e c h n o l o g i e s . G r a i n C o r n A c r e a g e , N o v a S c o t i a O n t a r i o a n d M a n i t o b a , 1 9 3 1 - 8 1 Year Manitoba Ontario Nova Scotia 1 9 8 1 2 2 1 , 0 9 5 2 , 1 7 1 , 7 7 7 4 , 5 6 2 1 9 7 6 1 6 , 5 6 2 1 , 5 8 0 , 2 2 8 2 , 8 8 7 1 9 7 1 9 , 0 8 8 1 , 2 6 3 , 1 8 7 2 , 9 6 9 1 9 6 6 2 , 9 6 1 7 8 6 , 1 9 4 77 1 9 6 1 4 , 0 5 2 3 9 5 , 7 1 4 89 1 9 5 1 2 4 , 9 6 9 2 8 9 , 2 6 3 19 1 9 4 1 7 6 , 9 0 6 2 5 0 , 9 8 4 21 1 9 3 1 9 5 7 1 2 5 , 1 1 7 24 S o u r c e : S t a t i s t i c s C a n a d a , C e n s u s o f A g r i c u l t u r e , v a r i o u s e d i t i o n s , O t t a w a , S t a t i s t i c s C a n a d a . - 1 2 3 -Hayami and Ruttan 2 2 studied the role of factor prices in directing the extensive technical changes which occurred in Japanese and American agriculture over the eighty year period between 1880 and 1960. Their empirical tests of the theory of induced innovation supported the theory's a b i l i t y to significantly contribute to the understanding of economic development. L a t e r 2 3 they extended the theory to an induced development model which included public investment in agricultural research, the adaption and diffusion of agricultural technology, and the direction of institutional infrastructure. A model of induced innovation in terms of the selection of research projects, and useful to this analysis, has been presented by Binswanger. 2 4 The model is depicted in figure 4.2. It is based on research processes/activities that have a cost and specific implications for factor proportions. Research administrators or firms have a choice of several research activities with different effects on the factor intensity of production. Changes in factor prices, scale of output, research costs, product prices, and market size are analyzed with respect to their influences on research project mix and the technology developed with the optimal research mix. 2 2 Hayami, Y, and V.W. Ruttan. "Factor Prices and Technical change in Agricultural Development: The United States and Japan, 1880-1960," Journal of P o l i t i c a l Economy 78, 1970, pp 1115-41 2 3 Hayami, Y., and V.W. Ruttan, Agricultural Development: An  International Perspective, Baltimore, The John Hopkins University Press, 1971. 2 4 Binswanger, H.P. "The Microeconomics of Induced Technical Change," in Induced Innovation, ed. H. P. Binswanger and V.W. Ruttan. Baltimore and London, John Hopkins Press, 1978. - 124 -C a p i t a l z 2 Figure 4.2 Induced Innovation with Many Possible Research A c t i v i t i e s (Source: Binswanger, H.P. "The Microeconomics of Induced Technical Change," i n Induced Innovation, ed. by H.P. Binswanger, and V.W. Ruttan 1978). In figure 4.2 point P i s the e x i s t i n g input-output combination and the set of p a r a l l e l l i n e s are factor p r i c e s . The s i t u a t i o n of r e l a t i v e l y cheap labour and expensive c a p i t a l i s represented by XX and the reverse, expensive labour and cheap c a p i t a l , by ZZ. YY i s the intermediate s i t u a t i o n . The arrows at q, s, n, and ra represent four d i f f e r e n t research p r o j e c t s , each of which can change the optimum input-output combination. Note that m i s extremely c a p i t a l saving (and increases labour demand). The intermediate research projects of q and s reduce c a p i t a l and labour re s p e c t i v e l y but to lesser degrees. - 125 -Binswanger i l l u s t r a t e d the content of the model as follows: " I f labour i s cheap (factor p r i c e l i n e XX) , i t i s quite cl e a r that the r e l a t i v e l y labor-using a c t i v i t i e s q and m w i l l lead to a larger cost reduction than w i l l the labor-saving a c t i v i t i e s n and s. The graph i s drawn such that, at XX, research a c t i v i t e s m and q lead to an i d e n t i c a l cost reduction. However,should wage rates f a l l further from XX, a c t i v i t y m would lead to a larger cost reduction and would thus be preferred over q, despite the f a c t that moving from q to m w i l l increase absolute labor requirements. When the r e l a t i v e wage rate r i s e s from X to Y, research approaches s and q lead to larger cost reduction than does m, that i s , extremely labour-using research i s eliminated as a possible choice. When the r e l a t i v e wage rate r i s e s even further, to ZZ, the r e l a t i v e l y l e s s labour-saving a c t i v i t y q i s also superseded by n and s, and should the r e l a t i v e wage rate r i s e beyond ZZ, n w i l l be preferred over s because i t leads to the la r g e s t cost r e d u c t i o n 2 5 . " For the purposes of p o l i c y implications related to the administration of feed assistance i n Nova Scotia i t i s important to note that the model applies equally to pri v a t e firms and to pu b l i c research when pu b l i c researchers or administrators are responsive to be n e f i t s . Expected benefits i n these cases are the cost reductions. Input p r i c e s are a determinant of the optimal research strategy. The d i r e c t i o n of te c h n i c a l change as depicted i n figure 4.2 i s h i g h l y responsive to factor p r i c e s . 2 5 Binswanger, H.P. "The Microeconomics of Induced Technical Change," i n Induced Innovation, ed. H. P. Binswanger and V.W. Ruttan. Baltimore and London, John Hopkins Press, 1978, p. 99. - 126 -Binswanger has also represented the r o l e of the economic environment or r e l a t i v e p r i c e s i n the a l l o c a t i o n of research resources among commodities.26 j n f i g u r e 4.3 the transformation curve TQTO represents the output l e v e l s of two commodities i n i t i a l l y achievable i n a region that has fi x e d resources and faces p e r f e c t l y e l a s t i c demand. By developing a technology that favors the output of commodity X movement to T2T2 i s po s s i b l e . A l t e r n a t i v e l y movement to T2T2 i s possible with alternate research programs. The P i l i n e s represent a r e l a t i v e l y high p r i c e s i t u a t i o n for X and the P2 l i n e s represent a high p r i c e for Y. The influence of output prices on the returns from research a c t i v i t i e s which have d i f f e r e n t e f f e c t s on the p r o d u c t i v i t y of d i f f e r e n t commodities i s i l l u s t r a t e d as follows. Point s i s the output mix at the i n i t i a l l e v e l of technology and with the high p r i c e for Y. With the development of T^ the optimal ouput mixes changes to Q**. This change represents mainly an increase i n the output of X. A l t e r n a t i v e l y , T2 would r e s u l t i n the production point s* which involves mainly an increase i n the output of Y. The welfare los s from a decision to develop T i despite a high p r i c e of Y and the te c h n i c a l opportunity as assumed and measured i n terms of commodity X, i s the distance from P2** to P2*. There i s now a large body of l i t e r a t u r e on the multiple paths of t e c h n i c a l change i n a g r i c u l t u r e and on how differences i n input and output p r i c e s over time and over space have appeared to influence innovation, invention, and the d i f f u s i o n of t e c h n i c a l change. The theory has been extensively tested and normally not rejected. 26 i b i d . , P. 109. - 127 -Figure 4.3 Research Resource A l l o c a t i o n to Commodities Source: Binswanger, H.P. "Microeconomics of Induced Technical Change" i n Induced Innovation, ed. by H. P. Binswanger and V. W. Ruttan, 1978. - 128 -4 . 4 Strategy and Qualitative Conclusions Empirical studies have generally supported the p o s i t i o n that farmers and others are induced by s h i f t s i n r e l a t i v e prices to search for t e c h n i c a l a l t e r n a t i v e s which reduce the importance of the more expensive factor inputs i n production. The q u a l i t a t i v e implications of the introduction of the induced t e c h n i c a l change hypothesis to t h i s p o l i c y evaluation are c l e a r . A further p r a c t i c a l consideration i s whether the p r i c e changes involved are s u f f i c i e n t to have an influence on technical change biases or rates of change 2 7. Related to t h i s question i s the degree to which a g r i c u l t u r a l technology i s responsive over periods of time to l o c a l factor p r i c e r a t i o s and the prospects for technical advances which would a l l e v i a t e comparative disadvantages i n Nova Sco t i a . In appendix E the state of production technology i n Nova Sc o t i a , including the prospects for reducing feed costs and past experiences regarding t e c h n i c a l change and the possible influence of economics v a r i a b l e s , i s reviewed and discussed. There i s some evidence reported that feed grain p r i c e s have influenced research d i r e c t i o n s and the d i f f u s i o n , adaption, and adoption of relevant a g r i c u l t u r a l technologies. The prospects for te c h n i c a l change, which would lessen the i n t e n s i t y of imported (subsidized) feed grain u t i l i z a t i o n , are reported as s i g n i f i c a n t . 2 7 Binswanger has found for biases i n technical change with respect to land labour, machinery, and f e r t i l i z e r i n U.S. a g r i c u l t u r e between 1948 and 1964 that "the d i r e c t i o n of t e c h n i c a l change may respond only to massive changes i n r e l a t i v e p r i c e s . " Binswanger, H.P. "The Measurement of Technical Change Biases with Many Factors of Production," American Economic Review 64, 1974, pp. 964-976. - 129 -A conceptual model of the use of induced t e c h n i c a l change i n a l l e v i a t i n g feed cost problems i n Nova Scotia i s presented i n figure 4.5. In terms of purchased feed and other inputs, the o r i g i n a l output isoquant of the industry i s Ql. (Purchased feed includes both FFA grains and l o c a l cash grain while other inputs would include, among numerous other f a c t o r s , the inputs which would be used i n home grown feed grain production.) The i n i t i a l input p r i c e r a t i o i s PQPO (which i s the same as P2P2 and P3P3). The increased per unit cost of purchased feed r e s u l t s i n the input p r i c e r a t i o PoPi« Technological change r e s u l t s i n a new isoquant Q which i s biased towards saving purchased feed. Given the i n i t i a l input prices r a t i o the other inputs/purchased feed r a t i o at B i s higher than at A. With r e l a t i v e input p r i c e s , as represented by PnPi, the point of tangency w i l l be to the l e f t of B. Whether the input p r i c e r a t i o environment of PQ.P1/ as opposed to PQPQ, n a s a n appreciable impact upon the rate or bias of te c h n i c a l change i s at issue. Theory, the empirical l i t e r a t u r e , and the technology s i t u a t i o n of the province as reviewed i n appendix E (with respect to hog feeding technologies, grain production technologies, n u t r i t i o n and feedstuffs research, poultry feeding technologies and dairying-forage technologies) and the generally f l u i d nature of the technical environment suggests that i t does. This i s highly s i g n i f i c a n t i n that accelerated and focused te c h n o l o g i c a l change would reduce the negative e f f e c t s on the province of reduced feed p r i c e equalization or of any future termination of the FFA program. - 130 -Other Purchased Feed Figure 4.4 Purchased Feed Saving Technical Change - 131 -The strategy of transforming the FFA subsidy to add momentum to induced technical change i s depicted i n figure 4.5. With the removal of the f r e i g h t subsidies the l i v e s t o c k supply curve s h i f t s from SS to S'S'. The equivalent P].P2 product payment, however, sustains the production l e v e l at Qj_. The industry's new circumstance, with respect to feed input p r i c e s , becomes more orientated towards technical change which w i l l reduce the e f f e c t s of the reduction i n f r e i g h t e q u a l i z a t i o n and/or i t s eventual termination. The objective i s to move the supply curve to the r i g h t with t e c h n i c a l change as, or before, the subsidy benefit i s terminated. A l l else being equal, the province's competitive p o s i t i o n would be restored i f the Qi production l e v e l could be achieved with zero output subsidy. P r i c e Q2 °1 Quantity Figure 4.5 Subsidy Administration and a Strategy for Technical Change - 132 -Producers have been c r i t i c a l of the general l e v e l of p u b l i c research and technology development i n Nova Scotia and the rest of the Maritime region. The small s i z e and unique conditions of the region together with the scarce nature of these technical and s c i e n t i f i c resources and the competing demands from areas i n Canada with much larger industries (and more homogeneous phys i c a l resources) make i t d i f f i c u l t to secure the l o c a l l y desired l e v e l of resource committment from the federal government.28 AS a low cost, unique opportunity for regional technology a c c e l e r a t i o n (and t e c h n i c a l change broadly defined) over the e x i s t i n g l i f e of the FFA Program the change i n the method of FFA payments could be highly relevant i n addressing the fundamental feed cost problems of the province. The wide range of the technologies and the many aspects of t e c h n i c a l change which could be induced are of s i g n i f i c a n c e . Nonprice means of accelerating technology development, while highly important, are not l i k e l y to influence t e c h n i c a l change so b r o a d l y 2 9 and i f so, not cost e f f e c t i v e l y . The p r i c e inducement to technical change could nevertheless be h i g h l y complementary with the usual p u b l i c means of increasing p r o d u c t i v i t y , i . e . research, extension, and a g r i c u l t u r a l education. If the same l e v e l of such resourses were The comparative feed cost p o s i t i o n of c e n t r a l Canada was changed d r a s t i c a l l y with the t e c h n i c a l change o r i g i n a t i n g from the development of hybrid corn. Much of t h i s research and development was done i n the U.S. In regional p o l i c y discussions with A g r i c u l t u r e Canada and the LFBC, technology development has often been discussed very narrowly i n terms of l o c a l g r a i n production technology, excluding such s i g n i f i c a n t areas as feed inputs augmenting t e c h n i c a l change. - 133 -applied to t e c h n i c a l problems i n the undistorted feed input market p r i c e environment i t could reasonably be expected that projects would be better selected 3* 5, d i f f u s i o n more rapid, and farm l e v e l adaption more immediate. 4.5 P o t e n t i a l Benefits The p o t e n t i a l benefits from p o l i c y modifications which create an improved environment or inducements for te c h n i c a l change can be appraised from the basis of the value of the inputs subject to induced e f f o r t s to increase p r o d u c t i v i t y and lower costs. Based on Agriculture Canada's medium term f i v e year forecasts for the average value of western grain and Ontario corn at current l e v e l s of u t i l i z a t i o n , the feed grains fed on Nova Scotia farms have an expected annual farm and track value of $45 m i l l i o n 3 ^ . The farm value i s for home grown grain and the track value i s used for imported/subsidized grain. The r e a l opportunity cost of these inputs (adjusted for f r e i g h t subsidies only) i s $49.8 m i l l i o n . This would be the cost faced by the Nova Scotia industry for these inputs with r e s t r u c t u r i n g of the subsidy payments. Other components of the cost of f i n i s h e d feeds, i . e . p r o t e i n supplements and other 3 0 An example of t h i s r elates to l o c a l research which has been c a r r i e d out on increasing the use of screenings i n poultry r a t i o n s . (See pp. 189-192 ). This project was an e x p l i c i t response to the province's unusually high corn/screenings p r i c e environment. This r e l a t i v e p r i c e s i t u a t i o n i s l a r g e l y due to differences i n FFA subsidies. Therefore t h i s research, while meaningful i n the current p r i c e environment, i s not nec c e s s a r i l y one of the many l o c a t i o n s p e c i f i c innovations which could restore the province's competitive p o s i t i o n i n l i v e s t o c k and poultry production. 3 1 Farm value has been used for home grown grain and track value for imported feed grain. - 134 -p r o t e i n supplements and other ingredients, and m i l l i n g and l o c a l transport cost, add approximately $25 m i l l i o n to aggregate feed costs. The aggregate p r o d u c t i v i t y gains discussed below r e l a t e to feed inputs with an opportunity cost of $75 m i l l i o n . The assumed induced feed p r o d u c t i v i t y gains have been selected at low l e v e l s p a r t l y i n recognition of the smaller s i z e of the percentage cost increases of f i n i s h e d feeds. Even i f c o n s e r v a t i v e 3 2 rates of induced t e c h n i c a l change are assumed the benefits indicated are highly s i g n i f i c a n t r e l a t i v e to the p u b l i c marginal costs involved. Assuming no change i n the value of the feed inputs (which would otherwise be u t i l i z e d ) an induced p r o d u c t i v i t y gain of only 0.05% annually would involve benefits of $37,500 i n the f i r s t year. Calculated on the basis of the i n i t i a l 0.05% induced rate of technical change, moderating i n proportion with the reductions i n feed costs achieved, p r o d u c t i v i t y gains would increase to $183,000 by the f i f t h year, to $354,000 by year ten and to $515,000 i n year f i f t e e n . A 0.10% i n i t i a l induced rate of p r o d u c t i v i t y gains, with respect to feed inputs (moderating over time as before), would y i e l d benefits of $75,000 i n the f i r s t year increasing to $356,000 i n year f i v e , $669,000 i n year ten, and $942,000 i n year f i f t e e n . A s e n s i t i v i t y analysis with respect to assumed induced rates of t e c h n i c a l change and for d i f f e r e n t circumstances with regard to the l e v e l of feed input p r i c e d i s t o r t i o n s i s shown i n tables 4.8 and 4.9. See appendix E. - 135 -Table 4.1 Benefits From Induced Technical Change Resulting From FFA Restructuring at Current Subsidy Level and Three Assumed Rates 3 I n i t i a l Rate of 0.05 I n i t i a l Rate of 0.10 I n i t i a l Rate of 0.20 Induced Rate Benefit Induced Rate Benefit Induced Rate Benefit Year of Technical Change Stream of Technical Change Stream of Technical Change Stream $000 $000 $000 1 0.050 38 0.100 75 0.200 150 2 0.049 74 0.097 148 0.190 292 3 0.049 111 0.095 219 0.181 427 4 • 0.048 147 0.093 289 0.172 556 5 0.048 183 0.091 356 0.163 677 6 0.047 218 0.088 422 0.155 792 7 0.046 252 0.086 486 0.148 902 8 0.046 287 0.084 549 0.141 1007 9 0.045 320 0.082 610 0.134 1106 10 0.045 354 0.080 669 0.127 1199 11 0.044 387 0.078 727 0.121 1289 12 0.044 420 0.076 783 0.115 1374 13 0.043 452 0.073 837 0.110 1455 14 0.043 484 0.071 890 0.104 1531 15 0.042 515 0.070 942 0.099 1604 16 -0.008 509 -0.033 917 -0.106 1524 17 -0.007 504 -0.030 870 -0.096 1373 18 -0.007 499 -0.028 802 -0.087 1156 19 -0.006 494 -0.025 715 -0.078 881 20 -0.006 490 -0.023 610 -0.069 554 Calculated on the basis of feed costs of $75 m i l l i o n i n the absence of the inducement for technical change and with i n i t i a l rates moderating i n correspondence with the lower feed cost resu l t i n g from induced productivity gains r e l a t i v e to the i n i t i a l cost increase. Table 4.2 Benefits From Induced Technical Change From FFA Restructuring After An Increase of $10/tonne i n Subsidy Levels and Three Assumed Rates 3 I n i t i a l Rate of 0.10 I n i t i a l Rate of 0.20 I n i t i a l Rate of 0.25 Induced Rate Benefit Induced Rate Benefit Induced Rate Benefit Year of Technical Change Stream of Technical Change Stream of Technical Change Stream $000 $000 $000 1 0.100 75 0.200 150 0.250 187 2 0.099 149 0.194 295 0.241 368 3 0.097 222 0.189 436 0.232 541 4 0.095 293 0.183 573 0.225 708 5 0.094 363 0.178 705 0.216 869 6 0.093 433 0.173 834 0.208 1,023 7 0.092 501 0.168 959 0.201 1,172 8 0.090 568 0.163 1,079 0.194 1,315 9 0.089 635 0.159 1,197 0.187 1,453 10 0.088 700 0.154 1,310 0.180 1,585 11 0.087 764 0.150 1,421 0.174 1,713 12 0.085 828 0.145 1,528 0.168 1,836 13 0.084 890 0.141 1,631 0.162 1,955 14 0.083 951 0.137 1,732 0.156 2,069 15 0.082 1,012 0.133 1,829 0.151 2,179 16 -0.020 997 -0.070 1,777 -0.099 2,104 17 -0.018 968 -0.064 1,676 -0.090 1,963 18 -0.017 927 -0.059 1,531 -0.081 1,760 19 -0.015 875 -0.053 1,347 -0.074 1,502 20 -0.014 812 -0.048 1,126 -0.065 1,195 a Calculated on the basis of feed costs of $75 m i l l i o n i n the absence of the inducement for technical change and with i n i t i a l rates moderating in correspondence with the lower feed cost r e s u l t i n g from induced productivity gains r e l a t i v e to the i n i t i a l cost increase. A 0.10% i n i t i a l induced rate of t e c h n i c a l change would make the r e s t r u c t u r i n g a very high pay-off p u b l i c investment. Higher rates could conceiveably p r e v a i l e s p e c i a l l y i f the economic inducements were to i n t e r a c t with a higher l e v e l of l o c a l research. Estimates of t o t a l factor p r o d u c t i v i t y for Canadian ag r i c u l t u r e are t y p i c a l l y between 1.0% and 1.5%.33 The rates of t e c h n i c a l progress achievable i n Nova Scotia feeding and feed crop production may be s i g n i f i c a n t l y above t h i s l e v e l . While p r o d u c t i v i t y rates discussed here are applied only to the value of feed inputs (excluding roughages) they would correspond with even smaller rates of t o t a l factor p r o d u c t i v i t y increases which could be applied to the t o t a l value of factors u t i l i z e d by the p r o v i n c i a l l i v e s t o c k s e c t o r . 3 4 If a l l of the induced p r o d u c t i v i t y gains occurred as feed augmenting t e c h n i c a l change (and none i n feed production) the 0.10% rate i s equivalent to feeders achieving the same output from 999 kg. of feed that required 1,000 kg the year b e f o r e . 3 5 This rate i s 3 3 See for example; Brinkman, G.L. An Analysis of Sources of  M u l t i f a c t e r P roductivity Growth i n Canadian A g r i c u l t u r e , School of A g r i c u l t r u a l Economics and Extension Education, U n i v e r s i t y of Guelph, December, 1984. 3 4 Assuming annual factor p r o d u c t i v i t y gains of 1.5% for Nova Scotia a g r i c u l t u r e and feed inputs with a 25% contribution to output, the induced 0.10 p r o d u c t i v i t y increase for feed inputs represents only a 1.7% increase i n the rate of p r o d u c t i v i t y gain for the industry i . e . the industry p r o d u c t i v i t y gain would increase from 1.5% to 1.5255% i n i t i a l l y . 3 5 In appendix E the induced rate of feeding p r o d u c t i v i t y gain estimated for the hog sector (with the current subsidy level) was equivalent to the producer i n i t i a l l y achieving the same output with 993.3 kg that they d i d the year before with 1,000 kg. (see p. 215) - 138 -considered in addition to the increases in productivity which would otherwise have occurred in the absence of the autonomous development-adjustment measure. It also excludes changes in feed productivity resulting from input substitution. An incremental 0.30% constant rate of productivity gain would translate into a $3.3 million improvement in the cost position of the provincial industry by year fifteen.36 such an achievement would be as important to the competitive position of the province as the FFA subsidy is today. It would require, a l l else being equal, roughly a 0.60% rate of autonomous productivity gains in feeding and feed input production (over and above the gains made elsewhere) to restore the livestock sector to the relative position i t had in 1975-76. It is possible to make such gains but, of course, the availa b i l i t y of technical resources w i l l be a limiting factor. Transforming the FFA subsidy is consequently considered as a valuable component of any concerted approach to deal with regional feed cost problems and opportunities. 36 This calculation assumes feed costs would otherwise be $75 million throughout this period. - 139 -4.7 Summary The theory of technical change and the influence of economic var i a b l e s was reviewed. (A survey was also made separately of the prospects for feed cost reducing t e c h n i c a l change i n Nova Scotia and of evidence that feed grain p r i c e s have influenced such technologies i n the past.) Numerous indications were found of the relevance of the concept of induced innovation to the proposed p o l i c y change being assessed here. I t i s possible that induced technical change be n e f i t s , r e s u l t i n g from the res t r u c t u r i n g of FFA, could surpass p r i c e e f f i c i e n c y gains. In addition to a l l e v i a t i n g the f i n a n c i a l e f f e c t s of reduced f r e i g h t e q u a l i z a t i o n such benefits would be of greater long term s i g n i f i c a n c e as they would fundamentally address the high feed cost problems of the province. The r e s t r u c t u r i n g of the FFA program i s c l e a r l y neither a necessary nor s u f f i c i e n t condition for the rapid technical program needed to restore the p o s i t i o n of the industry. I t appears, however, to be a necessary condition for the achievement of maximum te c h n i c a l progress, at any given l e v e l of public investment i n regional feed crop and feeding technologies. Targets i n t h i s area are also not l i k e l y to be achieved at l e a s t cost under the influence of the current program. The p o l i c y change (compared with the current situation) can be assessed as a unique, low cost opportunity to stimulate wide ranging economic development which would tend to o f f s e t the negative e f f e c t s of past national p o l i c y changes on producers, and others, i n the province. - 140 -Chapter 5 Results from P o l i c y Evaluation In chapters 3 and 4 the long run p r i c e e f f i c i e n c y and induced t e c h n i c a l change benefits from the p o l i c y change are calculated for what were considered conservative ranges of parameter values. The corresponding present values are given below for a f i f t e e n year period of p r i c e e f f i c i e n c y benefits and for a twenty year period of induced t e c h n i c a l change benefits. I t i s assumed that the program i s terminated a f t e r the f i f t e e n t h year. The curtailment of technical change benefits beyond year 20 i s purely a r b i t r a r y . The long run p r i c e e f f i c i e n c i e s are considered achieved by the f i f t h year and the gains for the years between the short and long runs are interpolated. The present values for benefit transfers and costs are also presented i n t h i s chapter. 5.1 Evaluation Results 1. P r i c e E f f i c i e n c i e s . Based upon the current r e a l l e v e l of feed grain subsidies-price d i s t o r t i o n s and on the low and high long run parameters values shown i n sections 3.3 and 3.4, the present value of benefits from pr i c e e f f i c i e n c i e s (calculated with a 7% discount rate) r e s u l t i n g from the change i n administration over a f i f t e e n year period i s between $1.1 and $1.7 m i l l i o n . I f the subsidy were increased by $10/tonne p r i o r to the change i n administration the increase i n producer welfare was indicated at between $2.8 and $4.2 m i l l i o n and under the same conditions. - 141 -Table 5.1 Present Value of Indicated Price Efficiencies at Low, Medium, and High Long Run Price E l a s t i c i t i e s of Feed Grain Demand and Local Supply, Three Discount Rates at the Current Subsidy Level, and After an Increase in FFA Rate of $10/tonne ($ Million) Discount Current Subsidy Level Increased Subsidy Level Rate Low Medium High Low Medium High 5% 1.3 1.6 1.9 3.2 4.0 4.9 7% 1.1 1.4 1.7 2.8 3.4 4.2 9% 1.0 1.2 1.5 2.4 3.0 3.6 2. Transfers. The present value (7% discount rate) of the estimated transfers in favour of the commercial a g r i c u l t u r a l industry over a f i f t e e n year period and at the current r e a l subsidy l e v e l i s $2.6 m i l l i o n . The present value of such transfers would increase to $4.1 m i l l i o n i f the FFA rates were increased by $10/tonne p r i o r to the p o l i c y change. Table 5.2 Present Value of Estimated Transfers Resulting From the Policy Change at Three Discount Rates at the Current Subsidy Level and After an Increase of $10/tonne in FFA Rates ($ Million) Discount Rate Current Subsidy Increased Subsidy 5% 2.9 4.7 7% 2.6 4.1 9% 2.3 3.6 - 142 -3. Induced Technical Change. Based upon the low and high rates of induced t e c h n i c a l change presented i n section 4.5 the present value of industry benefits (with a 7% discount rate) over 20 years with the current l e v e l of subsidies p r e v a i l i n g u n t i l year 15 i s between $2.9 and $9.2 m i l l i o n . I f the subsidy were increased by $10/tonne and based upon the corresponding rates of induced t e c h n i c a l change given i n chapter 4, the present value of such benefits would be between $5.7 and $12.5 m i l l i o n . Table 5.3 Present Value of Three Levels of Induced Technical Change Over Twenty Years at Three Discount Rates ($ M i l l i o n ) Discount Current Subsidy Increased Subsidy Rate Low Medium High Low Medium High 5% 377 £76 11.3 7Tl 12.9 15.4 7% 2.9 5.3 9.2 5.7 10.4 12.5 9% 2.4 4.4 7.6 4.6 8.5 10.2 4. Costs. The present value (with a 7% discount rate) of the estimated incremental administration costs to the government of the p o l i c y change over 15 years with biannual payments i s $727,000. With payments made to producers on an annual basis the public administration costs are approximately 50% of the bi-annual l e v e l . With payments made to producers on an annual basis, the pub l i c administration costs are approximately 50% of the bi-annual l e v e l . The present value of the estimated incremental financing costs on the part of the industry i s $209,000 with the current l e v e l of the subsidy and $355,000 following a $10/tonne increase i n rates. - 143 -Table 5.4 Present Value of Increased P u b l i c Administration and Industry Financing Costs Resulting from the FFA P o l i c y Change at Two Subsidy Levels, Two Payment Periods and Three Discount Rates ($thousand) Public Administration Costs Industry Financing Costs Discount Annual Biannual Current Increased Rate Payments Payments Subsidy Subsidy 5% 830 415 239 404 7% 727 364 209 355 9% 646 323 186 315 5. Net B e n e f i t s . The present value (discount rate of 7%) of industry benefits from p r i c e e f f i c i e n c i e s , t r a n s f e r s , and induced t e c h n i c a l change, net of increased financing costs and at the current subsidy l e v e l was estimated at between $6.6 m i l l i o n and $13.5 m i l l i o n . Following a $10/tonne increase i n FFA rates the present value of net industry benefits from r e s t r u c t u r i n g the program was estimated at between $12.6 m i l l i o n and $20.8 m i l l i o n . The r a t i o of net industry benefits (excluding transfers) to incremental p u b l i c costs with payments made on an annual basis ranged between 5.2 and 14.7 at the current subsidy l e v e l and with the low and high values for long run p r i c e e l a s t i c i t i e s of demand and supply and for the induced rates of t e c h n i c a l change as discussed. If the transformation i n the basis of the subsidy occurred a f t e r an increase of $10/tonne then the indicated r a t i o of net industry benefits (excluding transfers) to incremental p u b l i c costs would be between 11.2 and 22.5. With bi-annual payments these r a t i o s are twice as large. With bi-annual payments these r a t i o s were twice as large. - 144 -Table 5.5 Present Value of Net Industry Benefits From Restructuring FFA Over Fifteen years 3 at Three Discount Rates and Two Subsidy Levels ($ Million) Discount Rate Current Subsidy Increased Subsidy Low Medium High Low Medium High 5% 7.7 10.9 15.9 14.6 21.2 24.6 7% 6.4 9.1 13.2 12.2 17.5 20.4 9% 5.5 7.7 11.2 10.3 14.8 17.1 Note: Low, medium and high estimates correspond with values used for long run e l a s t i c i t i e s and induced rates of te c h n i c a l change. aInduced t e c h n i c a l change, benefits are r e a l i z e d over a twenty year period. Table 5.6 Ratio of Industry Benefits (Excluding Transfers) to Public Administration Costs at Three Discount Rates and Two Subsidy Levels ($ Million) Discount Rate Current Subsidy Increased Subsidy Low Medium High Low Medium High Annual Payments 5% 5.7 9.6 15.6 11.9 19.9 24.0 7% 5.2 8.9 14.7 11.2 18.5 22.5 9% 5.0 8.4 13.8 10.3 17.3 20.9 Biannual Payments 5% 11.4 19.2 31.2 23.8 39.8 48.0 7% 10.4 17.8 29.4 22.4 37.0 45.0 9% 10.0 16.8 27.6 20.6 34.6 41.8 - 145 -6. Benefits By Type of Farm. The estimated industry benefits which would r e s u l t i f the p o l i c y were changed for 15 years allocated by type of farm and by source are presented in tables 5.7 and 5.8. These were calculated based upon the current subsidy l e v e l and for the case i f the subsidy were increased by $10/tonne p r i o r to the change i n the method of payment. In the case of e f f i c i e n c i e s r e a l i z e d i n grain production the benefits have been assigned to farms according to t h e i r reported grain acreages.1 Transfer benefits from the recovery of previous leakages have been al l o c a t e d according to the proportion of FFA expenditures assigned to the commodity sectors. The breakdown of induced p r o d u c t i v i t y gains i s highly te n t a t i v e and should be considered only in terms of a rough approximation. These benefits have been a l l o c a t e d on the basis of the estimated p r i c e e f f i c i e n c i e s i n l i v e s t o c k feeding and grain production. The d i s t r i b u t i o n of such t e c h n i c a l gains could of course vary s u b s t a n t i a l l y from t h i s pattern. 1 S t a t i s t i c s Canada, "Census of A g r i c u l t u r e , Nova Scotia - 1981", Ottawa, October 1982. - 146 -Table 5.7 Net Present Value (Discount Rate of 7%) of Industry Benefits Resulting From the FFA P o l i c y Change 3 at the Present Subsidy Level, Estimated by Source and by Type of Farm ($ m i l l i o n ) Low 0 Medium53 H i g h D P r i c e E f f i c i e n c i e s c Cash Grain Growers 0.14 0.17 0.19 Dairy Farms 0.37 0.45 0.52 Poultry & Egg Farms 0.10 0.14 0.16 Hog Farms 0.21 0.28 0.35 C a t t l e Farms 0.28 0.37 0.48 Transfer Benefits* 3 (less p r i v a t e financing costs) Cash Grain Growerse 0.37 0.37 0.37 Dairy Farms^ 0.65 0.65 0.65 Poultry & Egg Farms f 0.55 0.55 0.55 Hog Farmsf 0.74 0.74 0.74 C a t t l e Farmsf 0.09 0.09 0.09 Induced P r o d u c t i v i t y Gains9 Cash Grain Growers 0.37 0.63 1.04 Dairy Farms 0.97 1.71 2.81 Poultry & Egg Farms 0.26 0.50 0.88 Hog Farms 0.56 1.07 1.85 C a t t l e Farms 0.74 1.38 2.62 Implied T o t a l Industry Benefits Cash Grain Growers Dairy Farms Poultry & Egg Farms Hog Farms C a t t l e Farms T o t a l n 0.88 1.17 1.60 1.99 2.81 3.98 0.91 1.19 1.59 1.51 2.09 2.94 1.11 1.84 3.19 6.40 9.10 - 13.2 a I t i s assumed that the p o l i c y i s changed for a f i f t e e n year period. D Low, medium and high estimates correspond with the value used for long run e l a s t i c i t i e s and for rates of induced technical change. c Includes p r i c e e f f i c i e n c i e s a r i s i n g from l o c a l grain production and l i v e s t o c k feeding adjustments. Grain supply e f f e c t s on li v e s t o c k farms have been al l o c a t e d on the basis of grain acreages reported by type of farm i n the 1981 Census of Agriculture for Nova Sc o t i a . ^ Transfer losses are sustained by hobby horse and other hobby farms and by a l o c a l f l o u r m i l l . See p. 100 and p. 102. e See p. 98. f Proportioned according to FFA payments by commodity sector. See Robinson (1982). 9 Proportioned on the basis of estimated p r i c e e f f i c i e n c i e s a r i s i n g i n each sector. The d i s t r i b u t i o n of such benefits i s of course highly speculative. Induced t e c h n i c a l change benefits are r e a l i z e d over a twenty year period. h Columns may not sum to t o t a l s due to rounding. (See table 5.5.) - 147 -Table 5.8 Net Present Value (Discount Rate of 7%) of Industry Benefits Resulting from the FFA P o l i c y Change 3 with a Subsidy Level $10 tonne Higher than at Present. Estimated by Source and by Type of Farm ($ m i l l i o n ) Lowc Medium 0 H i g h b P r i c e E f f i c i e n c i e s 0 Cash Grain Growers Dairy Farms Poultry & Egg Farms Hog Farms C a t t l e Farms 0.36 0.94 0.25 0.53 0.71 0.41 1.09 0.34 0.68 0.90 0.47 1.28 0.39 0.86 1.18 Transfer B e n e f i t s ^ (less p r i v a t e financing costs) Cash Grain Growers e 0.37 Dairy Farmsf 1.05 Poultry & Egg Farmsf 0.98 Hog Farmsf 1.15 C a t t l e Farms f 0.20 0.37 1.05 0.98 1.15 0.20 0.37 1.05 0.98 1.15 0.20 Induced P r o d u c t i v i t y Gainst Cash Grain Growers Dairy Farms Poultry & Egg Farms Hog Farms C a t t l e Farms 0.73 1.91 0.51 1.08 1.44 1.25 3.33 1.04 2.08 2.70 1.40 3.83 1.16 2.56 3.53 Implied T o t a l Industry Benefits Cash Grain Growers 1.46 Dairy Farms 3.90 Poultry & Egg Farms 1.74 Hog Farms 2.76 C a t t l e Farms 2.35 T o t a l h 12.20 03 47 36 91 80 24 16 53 57 91 17.50 20.40 I t i s assumed that the p o l i c y i s changed for a - f i f t e e n year period. Low, medium and high estimates correspond with the value used for long run e l a s t i c i t i e s and for rates of induced technical change. Includes p r i c e e f f i c i e n c i e s a r i s i n g from l o c a l grain production and l i v e s t o c k feeding adjustments. Grain supply e f f e c t s on li v e s t o c k farms have been a l l o c a t e d on the basis of grain acreages reported by type of farm i n the 1981 Census of Agri c u l t u r e for Nova Sc o t i a . Transfer losses are sustained by hobby horse and other hobby farms and by a l o c a l f l o u r m i l l . See p. 100 and p. 102. See p. 98. Proportioned according to FFA payments by commodity sector. See Robinson (1982). Proportioned on the basis of estimated p r i c e e f f i c i e n c i e s a r i s i n g i n each sector. The d i s t r i b u t i o n of such benefits i s of course highly speculative. Induced t e c h n i c a l change benefits are r e a l i z e d over a twenty year period. Columns may not sum to t o t a l s due to rounding. (See table 5.5.) e f - 148 -5.2 Summary The expected industry benefits r e s u l t i n g from the proposed p o l i c y change are s u b s t a n t i a l l y i n excess of costs. The net present value (calculated with a 7% discount rate) of such benefits i n the case of a f i f t e e n year restructuring program and at the current l e v e l of subsidies i s estimated at between $6.4 m i l l i o n and $13.2 m i l l i o n . If the value of the subsidy were to increase the benefits from transforming the basis of payment would be expected to increase at an increasing rate. The l a r g e s t gains are anticipated to a r i s e from induced p r o d u c t i v i t y increases i . e . , t e c h n i c a l change. S i g n i f i c a n t l y these gains over-time would lessen the industry's dependance on the subsidy program. - 149 -Chapter 6 Summary, Conclusions and Recommendations The objectives of t h i s study were to present the relevant t h e o r e t i c a l concepts, to measure p r i c e e f f i c i e n c i e s , to consider implications for technical change, and to estimate producer welfare gains which could r e s u l t from the proposed p o l i c y change. This chapter summarizes the economic considerations with regard to r e s t r u c t u r i n g the FFA Program i n Nova Scotia from an input to an output based subsidy. I t also presents the conclusions drawn from the study and makes recommendations for further study. 6.1 Summary An input based subsidy, except i n the s p e c i a l case of a f i x e d input-output production technology, i s of l e s s benefit to producers than an equivalent output based subsidy. Feed grain demand i n the d i f f e r e n t l i v e s t o c k subsectors was found to be responsive to p r i c e even i n the cases of monogastric animals and under the constant output conditions that characterize the poultry, egg and dai r y sectors i n Canada. P r o v i n c i a l feed g r a i n production (which i s undertaken p r i m a r i l y by l i v e s t o c k farms) was furthermore found to be p r i c e e l a s t i c . Consequently, the mediuum and long run demand for imported feed grains i n Nova Scotia i s more p r i c e s e n s i t i v e than aggregate feed grain demand. In addition to p r i c e e f f i c i e n c i e s , s i g n i f i c a n t benefit t r a n s f e r s to producers were found to be achievable at given program expenditure l e v e l s with the p o l i c y change. These could help to address the unsatisfactory feed cost s i t u a t i o n of producers in the - 150 -province. Administration cost increases which would r e s u l t from the p o l i c y change were estimated on the basis of current c a p a c i t i e s i n place and were found to be les s than short run pri c e e f f i c i e n c y gains. The induced innovation hypothesis and extensive empirical i n v e s t i g a t i o n s s p e c i f i c to a g r i c u l t u r e suggest that the changes i n input p r i c e s and expenditure shares r e s u l t i n g from the p o l i c y change could influence the tec h n i c a l progress of the industry. A review of p r o v i n c i a l experiences and s i t u a t i o n s with respect to a g r i c u l t u r a l technology and of economic variables was supportive of the concept of t e c h n i c a l change being p a r t l y endogenous to the economic system. There i s widespread evidence that r e l a t i v e p r i c e s and/or expenditure shares have s i g n i f i c a n t l y influenced the province's a g r i c u l t u r a l technology with respect to d i r e c t i o n s and rates of change . This review indicated that there were also many tec h n i c a l prospects for reducing the i n t e n s i t y of purchased (subsidized) feed grain u t i l i z a t i o n . The basic feed cost problem of the province can u s e f u l l y be considered i n terms of lagging regional technology. Accordingly, the p o s i t i v e implications of the p o l i c y change for the ac c e l e r a t i o n and focusing of t e c h n i c a l change are seen as highly s i g n i f i c a n t . 6.2 Conclusions The proposed p o l i c y change of r e s t r u c t i n g FFA has been analyzed and found to be a means to increase program benefits for producers. I t would also by i t s e l f or i n asso c i a t i o n with any broader i n i t i a t i v e act to a l l e v i a t e the problems r e s u l t i n g from the reduction of feed f r e i g h t e q u a l i z a t i o n i n Nova Scotia. Immediate - 151 -b e n e f i t s would a r i s e from the improved cost-effectiveness i n f i n a n c i a l l y a s s i s t i n g producers. In the longer term a d d i t i o n a l b e n e f i t s would r e s u l t from expected adjustment and development e f f e c t s . If the government has intentions to terminate the program i n the future or to reduce the l e v e l of assistance again, the re s t r u c t u r i n g would be a low cost means to reduce the further negative e f f e c t s of such changes on producers and others in the province. The indicated p r i c e e f f i c i e n c i e s alone are s u f f i c i e n t to make the change i n the FFA program desirable i n terms of economic c r i t e r i a . Such p r i c e e f f i c i e n c y benefits were found to increase at an increasing rate the higher the subsidy l e v e l . Consequently, i f the government elected to increase the assistance to feeders the re s t r u c t u r i n g would be even more advantageous. The l a r g e s t benefits are expected to a r i s e from the ac c e l e r a t i o n and d i r e c t i o n given to t e c h n i c a l change. These benefits would also be more s i g n i f i c a n t as they would over-time fundamentally a l t e r the feed cost circumstance of the province by reducing the i n t e n s i t y of imported feed grain u t i l i z a t i o n . While changing the imput subsidy would be neither a necessary nor s u f f i c i e n t condition for the accelerated t e c h n i c a l change which could restore the industry's competitive p o s i t i o n , i t appears to be a necessary condition for any pu b l i c i n i t i a t i v e to be cost e f f e c t i v e i n achieving t h i s end. Any program package to address the province's feed cost problems which does not include modifying the current FFA Program and i t s e f f e c t s cannot maximize r e s u l t s (at any given l e v e l of p u b l i c investment) nor achieve targets at minimum costs. An important consideration i n t h i s assessment i s the wide ranging nature - 152 -of the t e c h n i c a l change which would be feed cost reducing. I t can be expected that public and private planning and resource deployment, i n the presence of d i s t o r t e d p r i c e s , w i l l be l e s s well allocated i n so l v i n g the economic problem of high feed costs i n the province. 6.3 Recommendations for Further Study A d e f i c i e n c y of the FFA Program which impacts upon any future research are i t s unclear p o l i c y o b j e c t i v e s . A statement of the intent of the feed f r e i g h t e q u a l i z a t i o n p o l i c y at t h i s time would l i k e l y be highly suggestive of useful research topics. This study concerned only the consideration of the proposed p o l i c y change and i t s e f f e c t s on producers' welfare and on p u b l i c costs. One l i m i t i n g aspect of the benefit/cost approach taken was i t s non-optimizing nature. With respect to the fundamental feed cost problem of the a g r i c u l t u r a l industry i n Nova Scotia there are important p o l i c y v a r i a b l e s not considered here. A number of national p o l i c i e s increase feed costs i n the region. Also, the major determinants of the industry's rates of technical progress achievable over the next decade or so w i l l not a r i s e from the incremental economic inducements considered here. Nevertheless, the r e s u l t s of t h i s study would be u s e f u l should p o l i c y makers decide to implement a concerted e f f o r t and comprehensive program with the objective of restoring the competitive p o s i t i o n of the industry. While the study did not ignore the implications for technical change (and a range of e f f e c t s were entered into the benefit-cost accounting) the treatment may have been l e s s then was warranted by t h i s dynamic aspect. The p o l i c y option under consideration would be - 153 -most l i k e l y to be adopted either i n the context of a f e d e r a l -p r o v i n c i a l a g r i c u l t u r a l development agreement or in the event of a complete phaseout and termination of feed f r e i g h t e q u a l i z a t i o n . Consequently, the pr i c e incentives created for adjustment and development would probably be the c e n t r a l consideration for p o l i c y makers. The interactions which the new p r i c e environment might have with other p u b l i c means to reduce high r e l a t i v e feed cost v i a t e c h n i c a l change and to develop a g r i c u l t u r e generally would be useful to i n v e s t i g a t e . 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There had been s i x s i m i l a r short-term f r e i g h t assistance programs i n the previous 25 years and the 1941 Order-in-Council incorporated an expiry date (July 1, 1942). In 1966 Sauve, the Minister responsible for the program stated that the p o l i c y was continued after the war because import r e s t r i c t i o n s d i d not permit feeders to buy feed grains most advantageously and because of concerns with "protecting investments made necessary by wartime needs". 1 While f r e i g h t assistance was implemented i n responce to wartime conditions such a p o l i c y had been advocated i n the Maritime Provinces beginning i n the 1930's. The 1941 d e c i s i o n was perceived and/or subsequently characterized ( p a r t i c u l a r l y by the regional cooperative movement) as the adoption of such a general p o l i c y . 2 Contemporary farm publications however presented the 1941 program purely i n terms of the war e f f o r t and e s p e c i a l l y as related to the 1 Canada, House of Commons Debates, October 6, 1966, p. 8421. 2 Such a perspective i s presented i n : "Feed and Freight Assistance", Prepared for the Maritime Federation of A g r i c u l t u r e , Moncton, New Brunswick, 1966. A s i m i l a r popular account i s given i n : Walsh, F. W. "Feed Freight Assistance" contained i n We Fought for the L i t t l e Guy, Co-op A t l a n t i c , Moncton, New Brunswick, November, 1978. pp.126-141. - 170 -f u l f i l l m e n t of the t h i r d wartime United Kingdom bacon c o n t r a c t 3 . Nevertheless the subsidy eventually and with the support of national farm o r g a n i z a t i o n s 4 evolved into a permanent p o l i c y . The wartime rates of assistance paid p r a c t i c a l l y a l l of the f r e i g h t costs of moving feed grains from the p r a i r i e s to Eastern Canada and to B r i t i s h Columbia. After the war increases i n f r e i g h t rates were followed by (eventual) adjustments i n assistance rates. This process was i r r e g u l a r however and on at l e a s t one occasion i n 1955 the fe d e r a l government appears to have b r i e f l y adopted a p o l i c y of freezing the subsidy rates inrespective of any future r a i l rate increases 5 . Feed Freight Assistance by the 1960's was a major national a g r i c u l t u r a l p o l i c y and farm issue. C r i t i c i s m of the program was common p a r t i c u l a r y i n Western Canada. The p o l i t i c a l agenda of those farm groups supporting FFA at that time included having the program made statutory ( l i k e the Crowsnest Pass Agreement) and the establishment of an "eastern f e d e r a l feed grain agency". 5 Such an See for example the; "Prince Edward Island A g r i c u l t u r a l i s t " , V o l . 56 - Whole No. 2958-3010, Summerside, 1941. 4 Kerr, T. C , "An Economic Analysis of the Feed Freight Assistance P o l i c y " , A g r i c u l t u r a l Economics Research Council of Canada, September, 1966, p. 14. 5 I b i d . , p. 9. 6 I b i d . , pp. 15-16. - 171 -agency was sought to counter the monopoly power of the Canadian Wheat Board which had been p r i c i n g grain so as to capture part of the subsidy b e n e f i t 7 . In Nova Scotia there was increasing concern about the long term e f f e c t s that the p o l i c y was having on a g r i c u l t u r a l development. 8 In 1966 the Livestock Feed Assistance Act was passed by Parliament. This established the Livestock Feed Board of Canada with one of i t s primary objectives "the f a i r equalization of feed grain p r i c e s " east of present day Thunder Bay and i n B r i t i s h Columbia 9. While there was no i n d i c a t i o n at that time that f r e i g h t equalization was not a permanent p o l i c y , Maritime Members of Parliament from both sides of the House argued during the debate on the b i l l that the new agency should be orientated towards adjustment and development 1 0. Kerr had made si m i l a r recommendations with respect to such an agency a f t e r a major study of the program and i t s e f f e c t s 1 1 . While no changes were made i n the l e g i s l a t i o n eventually the minister responsible (Sauve) gave repeated assurances i n Parliament that t h i s would be the or i e n t a t i o n of the new b o a r d 1 2 . The measures and undertakings discussed i n the House of Commons however were never subsequently acted upon. 7 I b i d . , pp. 44-55. 8 I b i d . , p. 24. 9 Canada, "Livestock Feed Assistance Act", R. S., c. L-9, p. 3. 1 0 Canada, "House of Commons Debates", October 7, 1966, pp. 8463-8483 and October 11, 1966, pp. 8515-8550. 1 1 Kerr (1966) pp. 139-141. 1 2 Canada, "Debates", (1966) pp. 8484-8498. - 172 -A s i g n i f i c a n t change was made i n the program i n 1967. This involved the announcement that for the purpose of the Act that Ontario corn would be considered a "feed grain". Consequently f r e i g h t subsidies to e s t a b l i s h "farm p r i c e e qualization" were paid on eastward shipments! 3 of Ontario corn to the Maritime Provinces. Between 1968 and 1973 assistance rates were not adjusted for f r e i g h t rate increase. These however were minor and the subsidy continued to pay a high proportion of transport costs. The rapid development of corn production i n Ontario during t h i s time was one element which was a l t e r i n g support for the p o l i c y ! * . rp^e Federal Task Force on A g r i c u l t u r e ! 5 reporting i n 1969 recommended that the program be eliminated with compensation paid to the provinces a f f e c t e d . In 1974 the fede r a l government announced the "New Feed Grain P o l i c y " . The objectives of which were l i s t e d as: "1 to provide a f a i r and equitable base p r i c e for feed grains across Canada; 2 to provide r e l i e f for the producer against depressed feed grain prices 3 to encourage the growth of li v e s t o c k and feed grains (production) across Canada according to natural factors and the natural p o t e n t i a l of the various regions of Canada" 1 6. 1 3 Canada, "House of Commons Debates", October 123, 1967, p. 3065. 1 4 The 1967 p o l i c y change appears to have been made p a r t l y to appease Ontario corn growers. 1 5 Canada, "Report of the Federal Task Force on Ag r i c u l t u r e " , Ottawa, December, 1969, pp. 76-78. 1 6 Canada, "New Feed Grain P o l i c y " , Press Release, May 22, 1974, p. 1. - 173 -Subsequently i n 1976 f r e i g h t assistance on feed grain shipments to southern Ontario and western Quebec was eliminated with f i v e years of equivalent funding committed towards the development of l o c a l grain production and handling systems i n those areas. I t was also announced at that time that feed f r e i g h t assistance to the A t l a n t i c Provinces and Eastern Quebec would be continued u n t i l "a high degree of s e l f - s u f f i c i e n c y i n grain"!- 7 was achieved. The 1976 announcement was widely interpreted as securing the competitive p o s i t i o n of Maritime l i v e s t o c k producers with respect to feed g r a i n 1 8 . This perception contributed to substantial expansion of the regional hog industry i n the l a t e 1970's and early 1980's. Such expansion was encouraged by f e d e r a l - p r o v i n c i a l a g r i c u l t u r a l development agreements which were also premised on the maintenance of feed grain "price equalization" with Central Canada. Real energy p r i c e increases and rapid i n f l a t i o n during the l a t e 1970's resulted i n s u b s t a n t i a l increases i n f r e i g h t r a t e s 1 9 . This led to a sharp reduction i n the r e a l value of the subsidies and i n the degree of "price e q u a l i z a t i o n " with other regions. By the 1980's there was widespread industry concern about the industry's feed cost s i t u a t i o n . 1 7 Canada, "Modifications to the Feed Grain P o l i c y " , Press Release, May 31, 1976, pp. 1-2. 1 8 For example see, Tyrchniewicz, E. W. "Transportation Problems i n Canadian Agriculture with Special Reference to Grain," Proceedings of the Canadian A g r i c u l t u r a l Economics Society, 1976, pp. 29-30. 1 9 See table 1, p. 4. - 174 -In 1982, i n response to growing concerns, the Nova Scotia Federation of Agriculture requested that feed f r e i g h t assistance be restructured from an input to an output based payment system so as to increase r e a l i z e d benefits to feeders and to accelerate adjustment and development 2 0. This option had been previously explored by Robinson 2 1. I t was also requested by the o r g a i n i z t i o n that a number of r e s t r i c t i o n s related to the importation of feed\ ingredients, on the use of foreign shipping and on the regional development and importation of grain production technologies be modified. Later the Maritime Farmers' Council requested a r e s t r u c t u r i n g of feed f r e i g h t assistance i n the region as a whole and a r e s t o r a t i o n of the 1976 l e v e l of a s s i s t a n c e / e q u a l i z a t i o n 2 2 . After a number of meetings and a cursory analysis of the proposal the federal minister informed the Council that: "the Livestock Feed Board of Canada were not able to accept the proposal as i t was presented. This does not mean that they, nor I, disagree with the o b j e c t i v e s . At my request, the Department and the Livestock Feed Board of Canada are looking into a l t e r n a t i v e s which can achieve these underlying objectives i n a s a t i s f a c t o r y manner"23.. ^ Nova Scotia Federation of A g r i c u l t u r e , "The Domestic Feed Grain P o l i c y and Nova Scotia A g r i c u l t u r e " . Submission to the Technical Consultations on the Domestic Feed Grain P o l i c y , H a l i f a x , August 25, 1982. 2 1 Robinson, D. E., "Restructuring Feed Freight Assistance", Discussion Paper, Nova Scotia Departrment of Agriculture and Marketing, Halifax, May 1982. 2 2 Maritime Farmers Council, "Maritime A g r i c u l t u r e and Grain Transportation." Submission to the House of Commons Transport Committee, August, 1983. 2 3 Correspondence to Mr. Hank deBoer, Chairman Maritime Farmers' Council Feed Grain Committee, March 16, 1984. - 175 -Concerns with long terra development and p a r t i c u l a r l y with grain crop development had characterized Maritime responses to the FFA p o l i c y dilemma i n the ea r l y 1980's. As the economic p o s i t i o n of the regional hog industry deteriorated further however t h i s became le s s of a f a c t o r . Among others, the Maritime Council of Premiers have made appeals for increased f r e i g h t subsidies i n recent years. - 176 -APPENDIX B A Note on the Determination of Product Payment Rates and the Mechanics of Transforming the Subsidy The determination of product (output) payments used for t h i s a n a l y s i s w i l l correspond with that presented i n the Maritime Farmers Council Working Paper "The Arithmetic of Restructuring Feed Freight Assistance"^. Per unit product payments are calculated on the basis of the average amount of FFA grain u t i l i z e d across i n d i v i d u a l commodity sub-sectors. In estimating these averages a d i s t i n c t i o n was made between FFA corn and other grains since the subsidy rates d i f f e r . The payment rates are accordingly equal to the estimated FFA subsidy expenditures for each commodity sector ( i . e . , dairy, hogs, turkeys, etc) divided by t o t a l production of that product i n the base year. An advantage of t h i s approach compared with payments based on the average input of a l l grain i s that i t reduces the " d i l u t i o n e f f e c t " when the assistance i s re a l l o c a t e d to output 2. The degree to which "home grown" grain i s u t i l i z e d or to which grain and li v e s t o c k production i s complimentary or competitive varys by livestock and 1 Robinson, D. E. "The Arithmetic of Restructuring Feed Freight Assistance", Maritime Farmers Council Working Paper, November, 1982. 2 Groenewegen (1984) undertook his analysis e n t i r e l y on payments based upon the average grain input including subsidized and non-subsidized grains. He also applied such a system of subsidy payments uniformly across the e n t i r e Maritime industry. Since there are s i g n i f i c a n t d i f f e r e n c e s between the three provinces i n the proportions of FFA and non-subsidized grains u t i l i z e d the transfer of benefits from current program r e c i p i e n t s to others who experience w i n d f a l l gains was found to be s u b s t a n t i a l . - 177 -p o u l t r y sector. The extent to which grain substitutes can be u t i l i z e d a lso varys by type of animal. Transfers a r i s i n g from such causes can be avoided. Those egg producers, for example who would r e a l i z e a lower subsidy benefit under the suggested payment basis used i n t h i s analysis would do so not because of the non-subsidized grain produced and u t i l i z e d on d a i r y farms but because th e i r feed conversions are below the o v e r a l l egg sector average feed/output r a t i o . Furthermore the degree of " d i l u t i o n " remaining within each sectors would correspond d i r e c t l y with the demonstrated a b i l i t y of farms i n those sectors to reduce the u t i l i z a t i o n of subsidized g r a i n . (Whether by achieving higher feed p r o d u c t i v i t y , by producing t h e i r own grains or by s u b s t i t u t i n g higher q u a l i t y forages etc.) The MFC Working Paper presented a d e t a i l e d set of feed accounts by commodity sectors for 1980. This was derived from commodity cost of production surveys and models and from information contained i n the 1981 Census of A g r i c u l t u r e i n which a l l farms reported t h e i r feed expenditures, l i v e s t o c k populations and grain acreage 3. When si m i l a r 1986 Census of Agriculture information i s a v a i l a b l e these accounts could be r e a d i l y updated. 3 S t a t i s t i c s Canada, 1981 Census of Canada, Agri c u l t u r e , Nova  Scotia Cat. No. 96-904, October 1982. - 178 -The r e a l l e v e l of the aggregate subsidy and of subsidy rates for t h i s analysis are assumed constant throughout the 15 year period. Given the low l e v e l of the current subsidy a phase-down schedule was not incorporated. If such a p o l i c y change were implemented of course adjustments might be made at i n t e r v a l s to r e f l e c t changing imported grain input/output r a t i o s . A lump sum settlement could conceivably be sectorized such that an annual 15 year stream of compensation-adjustment payments would be d i s t r i b u t e d with the product rates varying with production l e v e l s . Such a lump sum settlement i f equal to the r e a l value of 1984-85 FFA subsidy expenditures for Nova Scotia over f i f t e e n years and discounted at 6 % would equal $27.8 m i l l i o n . Except i n the case of hogs the assumption of fixed product rates could be expected to c l o s e l y approximate actual rates. Livestock and poultry production l e v e l s are not expected to change s i g n i f i c a n t l y . An i n s t i t u t i o n a l feature of the Nova Scotia industry which would f a c i l i t a t e the transformation of the subsidy to an output basis i s the high proportion of l i v e s t o c k and poultry which i s marketed through marketing boards or commissions. Such commodities include f l u i d milk, i n d u s t r i a l milk, cream, chicken, turkeys, eggs, hogs and wool. The only exception i s the c a t t l e sector where numerous s i m i l a r d e f i c i e n c y payments have been administered by the A g r i c u l t u r a l S t a b i l i z a t i o n Board i n the past. The incremental cost of administering the subsidy d i f f e r e n t l y are estimated i n section 3.5.1. - 179 -APPENDIX C Monthly Average Corn Prices, Gulf Ports, Chicago, Chatham and Truro With Price Spreads 1978-85 ($Can/tonne) Gulf Ports Chicago Chatham Truro Price Spreads No. 2 No. 2 No. 2 No. 2 Truro- Gulf Ports Chicago-Yellow Yellow C.E. C.E. Gulf Ports Chicago Chatham 1978 J F M A M J J A S 0 N D 106 112 115 127 126 119 109 105 106 114 117 116 96 96 103 113 113 111 101 97 98 103 105 105 84 85 96 104 111 110 103 104 101 99 107 109 99 100 111 119 126 125 118 119 116 114 122 124 -7 -12 -4 -8 0 +6 +9 +14 +10 0 +5 +8 +10 +16 +12 +14 +13 +8 +8 +8 +8 +11 +12 +11 +12 +11 +7 +9 +2 +1 -2 -7 -3 +4 -2 -4 1979 J F M A M J J A S O N D 125 128 128 128 130 141 153 139 140 140 138 135 107 111 112 114 121 131 137 130 128 126 120 124 109 111 112 119 125 134 142 141 148 129 120 124 126 128 129 136 142 151 159 158 165 146 137 141 +1 0 +1 +8 +12 +10 +6 +19 +25 +6 -1 +6 +18 +17 +16 +14 +9 +10 +16 +9 +12 +14 +18 +11 -2 0 0 -5 -4 -3 -5 -11 -20 -3 0 0 1980 J F M A M J J A S O N D 123 132 129 128 130 131 151 166 164 164 174 176 116 121 120 122 121 122 140 153 158 158 160 167 120 121 115 119 127 134 150 161 155 149 157 161 141 142 136 140 148 155 171 182 176 170 178 182 +18 +10 +7 +12 +18 +24 +20 +16 +12 +6 +4 +6 +7 +11 +9 +6 +9 +9 +11 +13 +6 +6 +14 +9 -4 0 +5 +3 -6 -12 -10 -8 +3 +9 +3 +6 - 180 -continued Monthly Average Corn Prices, Gulf Ports, Chicago, Chatham and Truro With Price Spreads 1978-85 ($Can/tonne) Gulf Ports Chicago Chatham Truro Price Spreads No. 2 No. 2 No. 2 No. 2 Truro- Gulf Ports Chicago-Yellow Yellow C.E. C.E. Gulf Ports Chicago Chatham 1981 J F M A M J J A S 0 N D 177 172 169 173 169 163 171 153 140 135 133 130 167 165 163 166 164 161 167 146 130 123 121 118 166 166 166 168 165 164 165 157 147 125 118 117 191 191 191 193 190 189 190 182 172 150 143 142 +14 +19 +22 +20 +21 +26 +19 +29 +32 +15 +10 +12 +10 +7 +6 +7 +5 +2 +4 +7 +10 +12 +12 +12 +1 -1 -3 -2 -1 -3 +2 -11 -17 -2 +3 +1 1982 J F M A M J J A S 0 N D 139 140 143 146 148 150 138 129 124 114 126 132 124 127 129 129 133 138 128 115 106 100 116 118 117 112 111 119 122 129 134 125 121 99 102 108 147 142 141 149 152 159 164 155 151 129 132 138 +8 +2 -2 +3 +4 +9 +26 +26 +27 +15 +6 +6 +15 +13 +14 +17 +15 +12 +10 +14 +18 +14 +10 +14 +7 +15 +18 +10 +11 +9 -6 -10 -15 +1 +14 +10 1983 J F M A M J J A S O N D 135 145 154 164 166 167 174 192 186 184 185 181 123 133 144 151 151 159 161 174 170 168 171 166 113 120 127 142 150 161 162 172 176 164 161 155 146 153 160 175 183 194 195 205 209 197 194 188 +11 +8 +14 +6 +17 +27 +21 +13 +23 +13 +9 +7 +12 +12 +10 +13 +15 +8 +13 +18 +16 +16 +14 +15 +10 +13 +17 +9 +1 -2 -1 +2 -6 +4 +10 +11 - 181 -continued Monthly Average Corn Prices, Gulf Ports, Chicago, Chatham and Truro With Price Spreads 1978-85 ($Can/tonne) Gulf Ports Chicago Chatham Truro Price Spreads No. 2 No. 2 No. 2 No. 2 Truro- Gulf Ports Chicago-Yellow Yellow CB. C.E. Gulf Ports Chicago Chatham 1984 J 177 162 156 191 +14 +15 +6 F 171 162 158 193 +22 +9 +4 M 187 176 166 201 +14 +11 +10 A 189 182 174 209 +20 +7 +8 M 189 184 181 216 +27 +5 +3 J 192 186 187 222 +30 +6 -1 J 189 180 182 217 +28 +9 -2 A 181 166 187 222 +41 +15 -21 S 171 153 185 218 +47 +18 -32 0 160 146 136 169 +9 +14 +10 N 154 145 136 169 +15 +9 +9 D 151 141 138 167 +16 +10 +3 1985 J 158 145 140 174 +16 +13 +5 F 162 149 137 171 +9 +13 +12 M 166 155 144 178 +12 +11 +11 A 164 156 152 186 +22 +8 +4 M 160 154 152 186 +26 +6 +2 J 159 152 152 186 +27 +7 0 J 155 147 146 180 +25 +8 +1 Source: Derived from, United States Department of A g r i c u l t u r e , Economic Research Service. Feed S i t u a t i o n and Outlook Report. Various E d i t i o n s Washington, D.C: Government P r i n t i n g O f f i c e . S t a t i s t i c s Canada: Cereals and Oilseeds Review. Cat. No. 22-007 Various E d i t i o n s , Ottawa: S t a t i s t i c s Canada. - 182 -APPENDIX D Total FFA and Millfeeds Shipments and the Price of FFA Grains and Soyameal by Month, Nova Scotia 1978-84 FFA Shipment Price of FFA Grains 3 and Soyameal Total Millfeeds Wheat Oats Barley Corn Millfeeds Soyameal tonne $/tonne 1978 J 10,336 189 103 99 94 99 98 278 F 26,115 1,453 106 98 94 100 104 269 M 33,475 2,059 110 98 94 111 104 303 A 30 - 116 104 97 119 110 314 M 15,415 545 117 104 96 126 110 311 J 11,262 675 117 96 94 125 112 301 J 16,614 362 116 89 91 118 112 307 A 22,965 859 118 90 88 119 105 303 S 15,352 1,253 119 92 87 116 102 306 0 9,951 514 126 99 89 114 102 325 N 22,944 1,267 129 105 96 122 103 328 D 14,034 469 119 107 93 124 91 337 1979 J 13,818 1,302 113 108 94 126 108 335 F 17,606 1,060 116 108 97 128 122 344 M 29,892 1,700 127 102 101 129 124 351 A 2,799 166 131 105 106 136 123 340 M 20,008 777 138 114 123 142 120 338 J 15,449 1,212 152 127 127 151 130 363 J 20,623 785 158 135 122 159 138 361 A 11,615 973 153 135 123 158 128 344 S 17,072 657 157 136 130 165 128 341 0 17,172 1,065 160 134 136 146 128 329 N 16,167 1,147 156 133 141 137 129 340 D 13,272 767 152 134 136 141 131 336 1980 J 14,853 610 158 135 139 141 133 332 F 30,201 1,725 154 131 134 142 133 322 M 37,772 2,882 150 127 134 136 137 312 A - - 148 125 134 140 137 309 M 11,828 1,154 140 127 137 148 137 315 J 16,359 775 156 133 142 155 140 316 J 22,711 769 173 148 158 171 133 351 A 20,430 1,200 184 160 167 181 143 361 S 12,029 329 191 164 171 176 141 395 0 19,379 2,158 190 162 167 170 148 423 N 13,462 971 202 172 173 178 155 437 D 19,503 2,389 200 177 181 182 166 399 - 183 -continued T o t a l FFA and M i l l f e e d s Shipments and the P r i c e of FFA Grains and Soyameal by Month, Nova Scotia 1978-84 FFA Shipment Pr i c e of FFA G r a i n s 3 and Soyameal T o t a l M i l l f e e d s Wheat Oats Barley Corn M i l l f e e d s Soyameal tonne $/tonne 1981 J 14,728 266 195 180 179 191 177 399 F 17,200 1,534 195 175 178 191 180 385 M 35,440 1,365 192 170 174 191 161 379 A 517 5 194 169 174 193 161 392 M 24,097 591 199 165 176 190 163 396 J 16,633 700 197 162 174 189 159 377 J 14,325 456 196 158 178 190 163 381 A 14,492 337 184 146 166 181 145 380 S 16,914 782 176 146 159 172 131 349 0 21,021 1,738 167 148 147 150 140 343 N 16,524 1,133 162 155 142 143 148 337 D 23,180 2,082 160 163 140 142 154 348 1982 J 12,155 805 167 142 152 147 162 363 F 20,473 879 167 141 151 142 168 362 M 43,580 1,939 164 138 148 131 153 356 A 365 - 172 145 154 149 158 369 M 11,955 571 174 147 159 152 158 374 J 16,448 687 179 154 162 159 160 363 J 18,468 591 176 151 158 163 164 361 A 17,074 1,154 159 134 140 155 146 343 S 11,796 1,013 153 129 131 151 127 319 0 15,055 823 144 120 129 129 126 314 N 20,556 1,450 154 129 137 132 133 335 D 14,152 318 158 132 139 138 145 341 1983 J 22,178 980 164 136 139 145 141 344 F 15,609 822 169 141 143 152 140 345 M 32,668 1,244 169 145 141 159 142 344 A - - 183 139 145 174 144 356 M 14,950 327 184 139 142 182 146 354 J 16,718 414 190 137 140 193 141 351 J 19,865 1,464 197 136 138 194 146 366 A 14,226 525 207 144 154 204 150 399 S 21,062 1,104 207 169 170 208 158 433 0 15,827 1,119 210 177 176 196 158 420 N 19,817 635 208 171 173 193 161 418 D 16,391 1,326 Source: Derived from information obtained from the A t l a n t i c Provinces Transportation Commission and from the Annual Report (various editions) of the Livestock Feed Board of Canada. Lower of Thunder Bay spot or formula p r i c e s for western grain. - 184 -Appendix E. Survey of Feed Cost Reducing Technical Change Prospects and Economic Influences There i s s u b s t a n t i a l empirical evidence that the theory of induced t e c h n i c a l change i s relevant i n understanding aspects of economic development. Important considerations a f f e c t i n g the p o l i c y implications of t h i s theory for feed cost problems in Nova Scotia are the prospects and conditions for accelerated feed cost reducing t e c h n i c a l change i n the province. The c e n t r a l question for t h i s a n alysis i s the degree to which regional a g r i c u l t u r a l technology i s responsive over periods of time to l o c a l p r i c e r a t i o s . Related to t h i s question are the industry's prospects for technical advances which would a l l e v i a t e t h i s comparative disadvantage. One l i n e of inqui r y regarding the behavioural question concerns whether there i s evidence that the rates and d i r e c t i o n s of past technical change i n the province have been influenced by economic variables such as p r i c e s and expenditure shares. The t e c h n i c a l gains which w i l l or can be made over the next f i f t e e n years or so would remain highly speculative even a f t e r s u b s t a n t i a l i n v e s t i g a t i o n . Unknown advances in the basic sciences, gl o b a l technological changes, and the l e v e l of public t e c h n i c a l resources i n the reg i o n l w i l l a l l e f f e c t such progress. The goal of t h i s i n v e s t i g a t i o n i s more l i m i t e d . I t i s to assess whether the autonomous stimulant of a higher (undistorted) feed input p r i c e 1 The l e v e l of p u b l i c t e c h n i c a l resources may, of course, be p a r t l y determined by economic v a r i a b l e s . - 185 -environment i s l i k e l y to r e s u l t i n incremental p r o d u c t i v i t y gains of s i g n i f i c a n c e r e l a t i v e to the economic problems of the industry. In making t h i s assessment consideration i s given to s i x areas of regional a g r i c u l t u r a l technology. . These are feedstuffs and n u t r i t i o n , g r a i n production, land resource use, hog feeding, poultry feeding, and forage production and u t i l i z a t i o n and dairy feeding. The p r i n c i p l e questions addressed i n each case are whether accelerated t e c h n i c a l change can reduce the province's comparative disadvantage related to feed costs and whether the l o c a l feed input p r i c e environment i s l i k e l y to a f f e c t such progress. E . l Feed S t u f f s and N u t r i t i o n Research i n the Maritime region has examined a wide range of feed grain and soyabean meal substitute p o s s i b i l i t i e s including apple pomace 2, oat g r o a t s 3 , naked o a t s 4 , c u l l potatoes 5, potato 2 Proudfoot, F.C. "The U t i l i z a t i o n of Dried Apple Pomace i n Poultry Grower Diets" A g r i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1971. 3 Hulan, H.W. F.C. Proudfoot, and C.G. Zarkadus. " N u t r i t i v e Value and Quality of Oat Groats for B r o i l e r Chickens," Canadian  Journal of Animal Science 61, 1981. pp. 1013-1021. 4 Hulan G.W., F.G. Proudfoot. "The N u t r i t i v e Value of L o c a l l y Grown Naked Oats (Avena Nuda) For SCWL Laying Hens To 308 Days," Agriculture Canada, K e n t v i l l e Research Station Annual Report, 1984. 5 Nicholson, J.W.G. and T.M. Maclntyre. "Potato - Hay Silage for Steers," Ag r i c u l t u r e Canada, Nappan Experimental Farm Research Summary, 1976. Nicholson, J.W.G., J.A. Wright, R.E.. McQueen, R.S. Bush, and P.L. Burgess. "Use of C u l l Potatoes i n Beef Growing - F i n i s h i n g Systems," Prepared for CSAS - Truro N.S. July 11 -13, 1983. - 186 -processing wastes 6, a l f a l f a meal 7, poultry manure 8 (pasturized organic p r o t e i n ) , domestic garbage 9, cheese whey 1 0, f i s h s i l a g e 1 1 , extended p a s t u r e s 1 2 , squid and crab m e a l 1 3 , ground h a y 1 4 , t a r t a r y 6 Nicholson, J.W.G. "Potato Steamed Peel Waste for Pigs," A g r i c u l t u r e Canada, Fredericton Research Station Annual Report, 1982. Hulan, H.W. and F.G. Proudfoot. "The N u t r i t i v e Value of Potato Waste Meal for B r o i l e r Chicken," Agriculture Canada, K e n t v i l l e Research Station Annual Report, 1979. 7 Nicholson, J.W.G., T.M. Maclntyre, T.A. Van Lunen. "Use of Dehydrated A l f a l f a i n Place of Grain for Ewes", Agri c u l t u r e Canada, Nappan Experimental Farm Research Summary, 1979. 8 Nova Scotia Dept. of Agr i c u l t u r e and Marketing, Annual Research Report, 1975. 9 Proudfoot, F.G. "The E f f e c t s of Feeding Glass P a r t i c l e s of Di f f e r e n t Sizes to B r o i l e r Chickens," Canadian Journal of  Animal Science 56, 1977. 1 0 Singh, R.K., and A.E. Ghaly. " F e a s i b i l i t y of Cheese Whey Processing For Production of Food and Feed Supplements," Paper No. 85-504, Annual Meeting Canadian Society of A g r i c u l t u r a l Engineering, 1985. 1 1 Winter, K.A. and A.H. Javed. "Fish Silage as a Protein Source for E a r l y Weaned Calves," Canadian Journal of Animal Science 60, 1980 pp. 787-789. Winter, K.A. and L.A.W. Feltham. "Fish Silage: The Protein Solution," Agriculture Canada, Research Branch Contribution, 1983 Van Lunen, T.A. "Evaluation of F i s h Silage As a Feed Source for Swine," Agr i c u l t u r e Canada, Nappan Experimental Farm Research Summary, 1984. 1 2 Kunelius, H.T. "Assessment of Fodder Kale, Fodder Rape and Stubble Turnip For Late Season Grazing," Agriculture Canada Charlottetown Research Station Research Summary , 198.4. Winter K.A. "Pastures For Dairy-Beef Steers," A g r i c u l t u r e Canada, Charlottetown Research Station Research Summary, 1984. Calder, F.W., and J.E. L a n g i l l e . "Performance of Beef Steers on Intensive and Extensive Grazing of Annual Rye Grass Compared With Extensive Grazing of Permanent Pasture," Agriculture Canada, Nappan Experimental Farm Research Summary, 1983. 1 3 Hulan, H.W. and F.G. Proudfoot. " N u t r i t i o n a l Value of Squid Meal as a Source of Dietary Protein for the Chicken B r o i l e r , " A g r i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1977. Laflamme, L.F. "Adaption of Beef C a t t l e to Crab Meal In Their Diet," Agriculture Canada, Nappan Experimental Farm Research Summary, 1984. Larmond, E. H.W. Hulan and F.G. Proudfoot. "Cooking C h a r a c t e r i s t i c s and Eating Quality of B r o i l e r Chicken Fed Squid Meal," Poultry Science 59, 1980, pp. 2564-2566. 1 4 Maclntyre, T.M. and J.W.G. Nicholson. "Ground Hay vs. Grain i n the Diet of Ewes," Agri c u l t u r e Canada, Nappan Experimental Farm Research Summary, 1977. - 187 -buckwheat^ 5, and "Universal Feed Stock" ( U F S ) l 6 . The high p r i c e of soyabean meal i n t h i s region has led to research on developing canola and f i s h meal usagesl7, faba beanslS, whole seed canola, l b Nicholson, J.W.G., R.E. McQueen, E.A. Grant, and P.C. Burgess. "The Feeding Value of Tartary Buckwheat for Ruminants," Canadian Journal of Animal Science 56, 1976, pp. 903-808. 16 UFS i s a p r i v a t e l y developed feed source produced from the fermentation of f i s h by-products, c u l l potatoes and other ingredients. Hog feeding t r i a l s are scheduled for this product at the Nappan Experimental Farm in the spring of 1986. 17 Hulan, H.W., F.G. Proudfoot, and K.B. McRae. "The N u t r i t i o n a l Value of Tower and Candle Rapeseed Meals for Turkey B r o i l e r s Housed Under D i f f e r e n t Lighting Conditions," Poultry Science 59, 1980, pp. 100-109. Hulan, H.W. F.G. Proudfoot. "The N u t r i t i o n a l Value of Rapeseed Meal for Layer Genotypes Housed i n Pens," Poultry Science 59, 1980, pp. 585-593. Hulan, H.W.; Proudfoot, F.G. "Replacement of Soyabean Meal i n Chicken B r o i l e r Diets by Rapeseed Meal and Fish Meal Complementary Sources of Dietary Protein," Canadian Journal of  Animal Science 61, 1981, pp. 999-1004. Hulan, H.W. A.H. Corner, D.M. Nash, and F.G. Proudfoot. "Growth Heat Weight, Cardiac L i p i d and Pathology of Chickens Fed Rapeseed and Other Vegetable O i l s , " Poultry Science 61, 1981, pp. 1670-1671. Hulan, H.W. and F.G. Proudfoot. "The N u t r i t i o n a l Value of Rapeseed Meal for Caged Layers," Canadian Journal of Animal  Science 60, 1980, pp. 139-147. Winter, K.A. "Use of Fishmeal and a Growth Promotant For Hol s t e i n Steers," A g r i c u l t u r e Canada, Charlottetown Research Station Annual Report, 1984. Anderson, D.M., and T.A. Van Lunen. "Evaluation of Canola Meal i n Corn Based Diets For S t a r t e r , Grower, and F i n i s h e r , " Agriculture Canada, Nappan Experimental Farm Research Summary, 1984. Hulan, H.W. and F.G. Proudfoot. "The N u t r i t i o n a l Value of Rapeseed Meal for B r o i l e r Breeders," Agriculture Canada, K e n t v i l l e Research Station Annual Report, 1979. 18 Cox, A.C. "Faba Beans for Laying Hen Rations," Ag r i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1974. - 188 -and f u l l f a t soyabeans! 9 a s w e i i as a st r e s s on other means of reducing protein requirements.20 Because of the pr i c e differences between wheat screenings and corn, (related p a r t l y to aspects of the FFA p o l i c y and i t s administration), there has been research Gervason, P., M. Tugwell, and M. Conley. "P o t e n t i a l for Production and Feeding of Soyabeans and Canola i n Nova S c o t i a , " AFDA Project Report 1985-1 Published under authority of Ag r i c u l t u r e Canada, 1985. Hulan, H.W. and F.G. Proudfoot. "The N u t r i t i v e Value of L o c a l l y Grown F u l l - F a t Soyabeans for Layer Genotypes," Agr i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1983. Hulan, H.W. and F.G. Proudfoot. "Protein Level i n Turkey B r o i l e r Growing and F i n i s h i n g Feeds," Poultry Digest 40, 1981, p. 326. Hulan, H.W. and F.G. Proudfoot. "The E f f e c t of D i f f e r e n t Dietary Protein Levels i n a Three-Stage Diet System on General Performance of Chickens Reared to Roaster Weight," Poultry  Science 60, 1981, pp. 172-178. Hulan, H.W. and F.G. Proudfoot. "Bio-Economic E f f e c t s of Feeding Turkey B r o i l e r s Grower-Finisher Diet Combinations D i f f e r i n g i n Protein Level," Poultry Science 60, 1981, pp. 358-364. Hulan, H.W. and F.G. Proudfoot. " E f f e c t of Feeding D i f f e r e n t Levels of Dietary Protein i n Grower Diets and Switching from Starter-Grower-Finisher at D i f f e r e n t Ages on the Performance of Turkey B r o i l e r s Slaughtered at 84 to 98 Days of Age," Poultry  Science 60, 1981, pp. 603-610. Hulan, H.W. AND F.G. Proudfoot. "New Low Protein Dietary Regimens for Rearing B r o i l e r Chicken to Roaster Weight i n a Three-Stage Diet System," A g r i c u l t u r e Canada, K e n t v i l l e Research Station, Annual Report, 1979. Hulan, H.W. and F.G. Proudfoot. "A Comparison of the N u t r i t i v e Value of Diets Formulated with (Conventional) and Without a Minimum Protein Constraint for SCWL Laying Hens," Agr i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1983. - 189 -undertaken on replacing corn with screenings i n poultry rations.21 Other corn s u b s t i t u t i o n p o s s i b i l i t i e s have also been studied.22 With respect to the agenda for regional research on feed s t u f f s and n u t r i t i o n Hulan and Proudfoot have reported, "Since the cost of feed ingredients i s continuing to escalate and since there are l i m i t a t i o n s as to the type of ingredients s u i t a b l e for poultry feed formulations, there i s a continual search for economical yet n u t r i t i o n a l l y sound feed ingredient for l i v e s t o c k and poultry feeding.23" Saunders and Cox have s i m i l a r l y commented, "A great deal of i n t e r e s t developed i n a l t e r n a t i v e sources of protein for poultry rations during the past year. This increasing i n t e r e s t was pr e c i p i t a t e d by unprecedented increases i n poultry feed (as well as other prices) due p r i m a r i l y to the increased cost of t r a d i t i o n a l protein sources. Cox explained the s e l e c t i o n of one research project by s t a t i n g , "With today's increase i n feed p r i c e s the economics of faba bean Z L Hulan, H.W. and F.G. Proudfoot. "The N u t r i t i v e Value of Wheat Screenings for SCWL Laying Hens," A g r i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1983. 22 Hulan, H.W. and F.G. Proudfoot. "The N u t r i t i v e Value of Ground Rye as a Feed Ingredient f o r SCWL Laying Hens," Agr i c u l t u r e Canada, K e n t v i l l e Research Stat i o n Annual Report, 1983. Proudfoot, F.G. "The U t i l i z a t i o n of Ground Rye i n B r o i l e r F i n i s h e r Diets," A g r i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1976. Cox, A.C. "Wheat Evaluation for B r o i l e r Rations," A g r i c u l t u r e Canada, K e n t v i l l e Research Stat i o n Annual Report, 1974. Cox, A.C. " U t i l i t y Wheat Evaluation i n B r o i l e r Rations," A g r i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1974. 2 3 Hulan, H.W. and F.G. Proudfoot (1983). 24 Saunders, R.F., and A.C. Cox. "Sources of Protein for B r o i l e r Rations," A g r i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1974. - 190 -r a t i o n s for laying hens was investigated on a commercial farm.25" j t should be noted that the removal of feed grain p r i c e d i s t o r t i o n s would only a f f e c t innovation with respect to protein ingredients to the degree that the o v e r a l l l e v e l of feed costs had an influence. The LFBC i s however, studying the extension of f r e i g h t subsidies on pr o t e i n ingredients. Such a development could adversely a f f e c t p r i v a t e sector innovation and adoption of alternate protein sources26 and other protein saving technologies. Current widespread farm l e v e l innovations and experimentation with f u l l f a t soyabeans, whole canola seed, and faba beans could also be negatively affected,27 a s could attempts of dairy producers to harvest higher protein forages e t c . Conclusion. The regional research agenda on feed s t u f f s and n u t r i t i o n has been oriented towards s p e c i a l regional problems and opportunities. These economic s i t u a t i o n s are characterized by Cox, A.C. "Faba Beans for Laying Hen Rations," A g r i c u l t u r e Canada, K e n t v i l l e Research Sta t i o n Annual Report, 1974. Hulan and Proudfoot's comments and t h e i r own long term research programs directed c l o s e l y to industry economics and problems indic a t e that such subsidies might also a f f e c t the focus of pu b l i c research. The r e l a t i o n s h i p between p r i c e and farm l e v e l innovation with respect to protein feed inputs has been noted i n a regional farm p u b l i c a t i o n as follows, "Because the o i l meals tend to be more expensive here due to the transportation costs, many farmers are looking at ways of growing t h e i r own pro t e i n supplement. Some that have been t r i e d but have not found widespread acceptance are fababeans, peas and sunflowers. Currently i n t e r e s t centres on soybeans and canola." Animal Production Pointers. "Whole Soybeans and Canola Seed For C a t t l e Feed," Farm Focus 12, No. 5, J u l y 25, 1984. - 191 -unusual p r i c e r a t i o s between feeds and ingredients. Researchers have e x p l i c i t l y stated that p r i c e s i t u a t i o n s have influenced t h e i r s e l e c t i o n of research topics with respect to n u t r i t i o n a l and feed studies. Such findings suggest that feed ingredient p r i c e d i s t o r t i o n s have di s o r i e n t a t e d the t e c h n i c a l progress of the region to some degree. An example of t h i s i s the attempt to increase the u t i l i z a t i o n of screenings i n place of high energy corn. Since the unusual regional corn/screenings p r i c e r a t i o i s p a r t l y the r e s u l t of the feed f r e i g h t equalization p o l i c y and i t s administration t h i s i s not n e c e s s a r i l y one of the many research projects which could over time lessen the region's fundamental disadvantage with respect to feed grain p r i c e s . E.2 Grain Production Technologies Prior to the mid-1970's Maritime grain production technologies lagged noticably behind continental technology f r o n t i e r s . Nova Scotia and the other Maritime provinces accounted for a d e c l i n i n g share of North American feed grain production during the e n t i r e post-war period. There was l i t t l e grain production technology a v a i l a b l e or investigated during t h i s time that was s p e c i f i c to the region. Despite unique Maritime s o i l and c l i m a t i c conditions the use of grain v a r i e t i e s developed for the Canadian P r a i r i e s was widespread. In the subsequent period, corresponding with high i n t e r n a t i o n a l grain prices and reduced regional feed f r e i g h t e q u a l i z a t i o n , the technology of gr a i n production i n Nova Scotia advanced r a p i d l y . S i g n i f i c a n t l y the t e c h n i c a l d i r e c t i o n s have also been p a r t i c u l a r l y orientated for the region. I t i s furthermore evident that p r o v i n c i a l farmers are playing an important role i n the - 192 -development of these new technologies and th e i r incorporation into commercial farming systems. Many consider the province to be a leader i n the development and use of modified intensive c e r e a l management systems2** i n North America. These high n i t r o g e n 2 9 systems include the use of f u n g i c i d e s 3 0 (bayleton, t i l t , bravo), growth r e g u l a t o r s 3 1 (ethephon, l y c o c e l , cerone), the s p l i t a p p l i c a t i o n of f e r t i l i z e r s , the use of t r a m l i n e s 3 2 for these ap p l i c a t i o n s , and the management of protein l e v e l s i n the g r a i n . While these developments 2 8 MacLeod, J.A., H.W. Johnson, J.B. Sanderson, and H.G. Nass. "Intensive Management of Winter Wheat", Canadex 112.21, 1981. Jones, R.W. "Response of Six Selected C u l t i v a r s to Graduated Management Input i n a C u l t i v a r Evaluation Format," Agr i c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1983. Gourley, CO., R.W. Delbridge, and J.E. M i l l i g a n . " Y i e l d Response of Wheat and Rye to Optimal App l i c a t i o n of F e r t i l i z e r , Fungicide and a Plant Growth Regulator," Agriculture Canada, K e n t v i l l e Research Station Annual Report, 1977. N.S. Winter Grain Marketing Board. "Cereal Management System Comparison, A Three-Year Technology Acceleration Project Under the Canada/Nova Scotia Agri-Food Development Agreement," 1983. 2 9 MacLeod, J.A., H.W. Johnson, and H.G. Nass. "Use of Supplementary N and Fungicide on Opal Wheat," Ag r i c u l t u r e Canada, Charlottetown Research Station Annual Report, 1983. 3 0 Suzuki, M., and H.W. Johnson. " E f f e c t s of pp-333, A b s c i s i c Acid, DPX-3778, SN-49537 and T i l t on Lennox Winter Wheat," Agric u l t u r e Canada, Charlottetown Research Station Annual Report, 1983. Martin, R.A. "Potential for F o l i a r Applied Fungicides i n Cereal Production," Ag r i c u l t u r e Canada, Charlottetown Research Station Annual Report, 1983. 3 1 Johnson, H.W., J.A. MacLeod. "Application of Cerone to Winter Wheat Increases Y i e l d and Reduced Lodging Severity," A g r i c u l t u r e Canada, Charlottetown Research Station Annual Report, 1983. Jones, R.W., M. Teal, and E. McDow. "Effects of Growth Regulators and Fungicides on Performance of Lennox and Monopol Winter Wheat," Agri c u l t u r e Canada, K e n t v i l l e Research Station Annual Report, 1983. 3 2 Johnson, H.W. "Do Tramlines Reduce Cereal Y i e l d s ? " Agriculture Canada, Charlottetown Research Station Annual Report, 1983. - 193 -have been the most noteworthy, research, adaption, and farm l e v e l t r i a l and innovation i s also occurring with regard to high moisture corn, protein crops, high f l o t a t i o n e a r l y seeding, etc. The a p p l i c a b i l i t y of european management techniques 3 3 i s of s p e c i a l s i g n i f i c a n c e as i t addresses regional problems related to weather v u l n e r a b i l i t y . These techniques have been u t i l i z e d more for the production of m i l l i n g wheat to date than for feed grains. This focus on m i l l i n g wheat i s of course e n t i r e l y based on r e l a t i v e p r i c e s . Farmers have been active i n t h i s process of technical change playing key and continuing r o l e s . The f i r s t importation of a european grain v a r i e t y , opal wheat, 3 4 was undertaken p r i v a t e l y and i l l e g a l l y . A s p e c i a l exemption from the Canada Seed Act was eventually granted. More recently, a wider range of european v a r i e t i e s obtained as a r e s u l t of p r i v a t e i n i t i a t i v e s from european seed houses have been tested with a s p e c i a l research permit. The popular and now standard winter wheat v a r i e t y , lennox, 3 5 as well as J J MacLeod, L.B., H.W. Johnson, J.H. Lovering, H.G. Nass, D.L. Bates, and J.E. P e i l . "Report on a Cereal Research Mission to the U.K., The Netherlands and West Germany," Ag r i c u l t u r e Canada, Charlottetown Research Station Annual Report, 1 9 7 7 . 3 4 S e e n T h e opal A f f a i r , " Country Guide, February, 1 9 6 9 , pp. 6 7 -6 9 . 3 5 Nass, H.G. "Lennox Winter Wheat," Canadian Journal Plant  Science 5 6 , 1 9 7 6 , pp. 4 0 1 - 4 0 2 . - 194 -monopol and vulka were obtained from these endeavours. There are now i n d i c a t i o n s that Canadian seed companies are interested i n commercial opportunities for marketing p r i v a t e l y licensed european v a r i e t i e s . While there are some p r o v i n c i a l s i m i l a r i t i e s with european gr a i n production areas, p h y s i c a l and economic conditions require s u b s t a n t i a l modifications i n the technologies being imported. This involves farm l e v e l experimentation with imported technology.36 The "high technology" being used i n Nova Scotia for grain production i s currently narrowly based with regard to types of grains, and farming areas. The t e c h n i c a l p o s s i b i l i t i e s e x i s t , however, for a wide range of applied grain production innovations including the development of complete cropping systems. At a more rudimentary l e v e l , low l e v e l s of cropping s k i l l s s t i l l characterize a s u b s t a n t i a l segment of the p r o v i n c i a l d a i r y sector (and other parts of the industry). This makes the wider a p p l i c a t i o n of e x i s t i n g technology a consideration, i . e . the greater d i f f u s i o n of e x i s t i n g t e c h n i c a l knowledge can be an important factor i n reducing feed grain production costs. Economic d i s t o r t i o n s can be removed for the small cash crop sector with compensating payments on commercial marketings, but these incentives would not apply to the industry b r o a d l y . 3 7 • i b In the case of the most s i g n i f i c a n t farm l e v e l technology development, s p e c i a l p u b l i c assistance i s being given v i a the Technology Acceleration Program of the agreement on a g r i c u l t u r a l development between Ag r i c u l t u r e Canada and the Province. 3 7 Development of cash crop grain production also does not address the feed cost s i t u a t i o n of the industry. - 195 -In estimating the benefits from increased extension and the expected grower p a r t i c i p a t i o n with respect to the same types of a g r i c u l t u r a l technology i n B r i t a i n , Menz and Webster 3 8 focused on economic v a r i a b l e s . Annual reports of the S o i l s and Crops Branch of the Nova Scotia Department of A g r i c u l t u r e and Marketing have s i m i l a r l y noted experiences regarding the l e v e l of i n t e r e s t i n new types of technology at the farm l e v e l . There i s a rough c o r r e l a t i o n 3 9 between these observations and commodity p r i c e l e v e l s . The economic incentives which would r e s u l t from changes i n the FFA Program could therefore be expected to contribute to the t e c h n i c a l progress of grain production i n the province. Progress i n developing regional grain technology w i l l be p a r t l y a function of future grain p r i c e s . I n s t i t u t i o n a l innovation could be part of the progress i n reducing p r o v i n c i a l feed grain production costs. F o b e s 4 0 and 3 8 Menz, K.M., and J.P.G. Webster. "The Value of a Fungicide Advisory Programe for Cereals, " Journal of A g r i c u l t u r a l  Economics 32, 1981, pp. 21-29. 3 9 In 1981 for example, the a s s i s t a n t d i r e c t o r reported "with the ever increasing cost of purchased protein for l i v e s t o c k feed, more and more Nova Scotia farmers are expressing renewed i n t e r e s t i n developing home grown crops to supply t h i s important ingredient". S o i l s and Crop Services Branch, "Annual Report, S o i l s and Crop Services," Nova Scotia Department of A g r i c u l t u r e , 1981, p. 43. 4 0 Fobes, W. "Agro Service Rings as a Tool for Reducing Costs on Family Farms," Canadian Journal of A g r i c u l t u r a l Economics 1982, pp. 153-174. Fobes, W. "Agro Service Rings as F a c i l i t a t o r s of Inter-farm Resource Use and Rural Development with Emphasis on the Mixed Farming Areas of Canada," paper no. 83-102 submitted to CSAE at the 1983 Annual AIC Conference. - 196 -Robinson 4^ have suggested i n s t i t u t i o n a l arrangements which could p o t e n t i a l l y reduce machinery costs. Another such change involves the p r o t e i n content of grain. Techniques have been adapted on Nova Sco t i a farms to manage the protein content of grains. To date these have been used by the more advanced cash crop growers mainly to ensure meeting minimum standards for m i l l i n g wheat. The feed industry o f f e r s no p r i c e premiums for higher protein l e v e l s although there are discounts for grain below what they consider standard for a l t e r n a t e western grains. Problems involve the grading system, feed industry handling of variable p r o t e i n content grain, and lack of trade experience with high p r o t e i n grain i n feed formulations, etc. The l a t e n t crop technology however e x i s t s . What i s needed i s p r i m a r i l y a commercial system and applied n u t r i t i o n a l research. A d d i t i o n a l protein can be produced at r e l a t i v e l y low costs and the economics of grain production i n the province would be improved with t h i s development. There are no North American experiences i n t h i s area. High r e l a t i v e protein costs make such technical and i n s t i t u t i o n a l changes e s p e c i a l l y valuable i n Nova Sco t i a . One area where increased t e c h n i c a l s o p h i s t i c a t i o n could lessen a p r o v i n c i a l constraint on feed grain production involves the s p e c i a l case of rye. Rye has not h i s t o r i c a l l y been a major crop i n Nova Sc o t i a or i n the other Maritime provinces. I t i s , however, Robinson, D.E. "A Low Cost Public Measure to Reduce Machinery Costs on Nova Scotia Farms," Nova Scotia Department of A g r i c u l t u r e and Marketing, H a l i f a x , Nova Scotia, 1982. - 197 -considered by agronomists as one of the best-adapted cereals grown i n the r e g i o n . 4 2 Ry e crops are not usually harmed by winter k i l l , disease, nor hindered by the regional grain production problems associated with wet springs and seeding, and wet f a l l s and harvest. I t s e a r l y harvest increases the use of otherwise i d l e and expensive equipment and t h i s crop does better than most other grain crops on i n f e r t i l e and poorly drained a c i d s o i l s . I t can also reduce s o i l erosion problems i n some farming s i t u a t i o n s . The introduction of higher y i e l d i n g rye v a r i e t i e s combined with successful premium priced sales of rye to a l o c a l d i s t i l l e r y r e s u l t e d i n increased p r o v i n c i a l rye production i n the l a t e 1970's. This increased production was p r i m a r i l y for cash s a l e . With the termination of these purchases by the d i s t i l l e r y the Nova Scotia Grain Marketing Board has sold t h i s crop to the feed industry and d i r e c t l y to li v e s t o c k producers. Prejudices however among feeders against t h i s product (and rel a t e d to i t s association with ergot and the response of livestock to high rye content rations) have forced p r i c e s below barley equivalent l e v e l s . N u t r i t i o n i s t s consider that much of the unpopularity and d i s c r i m i n a t i o n against rye i s unfounded. 4 3 L a n g i l l e J.E., and J.A. MacLeod. "Growing F a l l Rye for Grain i n the A t l a n t i c Provinces," A g r i c u l t u r e Canada Publication 1578, 1976. Nicholson, J.W.G. "Where Does Rye F i t as a Feed," paper presented to Feed Grain Workshop, Amherst, N.S. A p r i l 15, 1983. - 198 -This s i t u a t i o n would not change with FFA restructuring except that the higher rye prices would r e s u l t i n greater production and therefore increased f a m i l i a r i t y with the product. In the case of rye grown for home feeding a $12 - $20/tonne d i s i n c e n t i v e on t h i s progress would be removed. This could be expected to a i d i n the d i s s i p a t i o n of unwarrented views toward t h i s product. Table E . l Rye Production, Acreage , and Commercial Marketings 1976,1979--84 Total Production Commercial Marketings Acreage Tonnes Tonnes $/Tonne 1984 4,500 5,700 - -1983 4,000 4,300 1,668 N.A. 1982 4,000 4,600 2,521 137 1981 5,300 5,700 3,381 156 1980 N.A. N.A. 1,815 206 1979 N.A. N.A. 1,349 ... 196 1976 1,206 N.A. — — - 199 -Conclusion. Maritime grain production technologies between 1941 and the early 1970's (a period i n which feed grain p r i c e s were "equalized" with Thunder Bay) lagged not i c a b l y behind continental technology f r o n t i e r s . The Maritine provinces accounted for a d e c l i n i n g share of North American grain production throughout t h i s period. The use of grain v a r i e t i e s developed for the P r a i r i e s became common despite Maritime s o i l and c l i m a t i c conditions. In the subsequent decade the adoption and adaption of new more r e g i o n a l l y s p e c i f i c technologies has been pronounced. This technology development coincided with decreasing p r i c e d i s t o r t i o n s from f r e i g h t e q u a l i z a t i o n and with higher i n t e r n a t i o n a l grain p r i c e . Commercial grain growers played an active r o l e i n t h i s progress. The c a s u a l i t y between p r i c e and t h i s t e c h n i c a l change, of course, can not be established. However, those p r i n c i p a l l y involved have often stated p u b l i c l y that t h e i r a c t i v i t i e s would not have been undertaken with the f r e i g h t e q u a l i z a t i o n p o l i c y as i t existed i n the past nor i s current development i n t h e i r view at the l e v e l which would be achieved with higher market determined prices i . e . , i f the FFA Program did not continue to suppress economic opportunities i n t h i s regard. The l e v e l of support for research has been i d e n t i f i e d by many as a major constraint to Maritime grain development. This i s , however, also the case for the major g r a i n growing regions of Canada where the i n t e r n a t i o n a l competitive p o s i t i o n of grain growers may have d e t e r i o r a t e d . 4 4 The required research and technology resources Canadian grain y i e l d s have declined r e l a t i v e to major competition i n the l a s t 15-20 years. - 2 0 0 -for accelerated development i n Nova S c o t i a , consequently, can be considered to have very high opportunity costs. The uniqueness of Maritime growing conditions further impacts adversely upon the economics of technology development i n the region. Research and embodied technology from other areas i s not as transferable as i t otherwise would be and v i s a versa. Even with s u b s t a n t i a l increases i n funding the technology resources of the region w i l l remain small r e l a t i v e to those of much larger and more homogenous a g r i c u l t u r a l regions, i . e . , the P r a i r i e s , Southern Ontario, the U.S. Mid-West, the Great Pla i n s region etc. Given such circumstances the induced innovation hypothesis appears highly relevant to p o l i c y considerations i n Nova Sc o t i a . Theory and past experiences with grain technology development suggests that the removal of FFA p r i c e d i s t o r t i o n s i s a necessary cond i t i o n to achieve maximum t e c h n i c a l change at any given l e v e l of p u b l i c investment. Conversely any p u b l i c target for crop development w i l l not be achieved at l e a s t cost i n the presence of the current program and i t s e f f e c t s . E.3 Land Resource Technologies Agr i c u l t u r e i n Nova Scotia has developed a land intensive commodity s t r u c t u r e . 4 5 The industry has a large component of nonland based production such as poultry and eggs, greenhouse products, mink, and land intensive h o r t i c u l t u r e . Dairying, the l a r g e s t farm sector, u t i l i z e s l e s s land per unit of output than dairy production i n other parts of Canada and correspondingly u t i l i z e s 4 5 Robinson, D.E. "Economic Opportunities for Land Based Expansion" paper no. 83-315 CSSS/CSAE J o i n t Symposium, AIC 1983 Conference. - 201 -more purchased feed inputs. This i s also the case for hog production. The share of farm production which accrues as a return to land ownership has been the lowest of any province i n Canada, excluding Newfoundland. (See table E.2), While the industry's past growth and current structure has t h i s o r i e n t a t i o n there i s a large supply of land s u i t a b l e for a g r i c u l t u r e i n the province. Nova Scotia has the lowest r a t i o of a g r i c u l t u r a l land u t i l i z a t i o n to cropping c a p a b i l i t y (defined as CLI Class 1 to 3 a g r i c u l t u r a l land) i n Canada.46 A bio-physical evaluation of Canadian land resources for grain production (Nowland, Dumanski, and S t e w a r t 4 7 ) , estimated that Nova Scotia has 2.4 m i l l i o n acres "moderately s u i t a b l e " or better for the production of spring wheat. (3.2% of the t o t a l s i m i l a r l y c l a s s i f i e d land across Canada.) This acreage i s several times the t o t a l area presently used for a g r i c u l t u r e i n the province. Nowland et . a l . also estimated that there were 2.9 m i l l i o n acres of land i n Nova Scotia "moderately s u i t a b l e " or b e t t e r , for b a r l e y 4 8 production (2.5% of a l l such land i n Canada) . These figures are s u r p r i s i n g l y favourable i n regard to the grain p o t e n t i a l or a g r i c u l t u r a l land This i s a general feature of the region. S o i l s c i e n t i s t s say that Prince Edward Island may have the lowest u t i l i z a t i o n of i t s natural c l a s s 2 land i n as favourable a climate of any place i n the world. I t i s the only province i n Canada farming an area of land l e s s than i t s endowment of c l a s s 2 land. Nowland, J.L., J . Dumanski, and R. S. Stewart. "Natural Resource Base," i n Part I. Production Base and Production  P o t e n t i a l of the Eastern Grains Industry (prepared for the Eastern Grains Conference, Montreal, October 28-29, 1982) Research Branch, A g r i c u l t u r e Canada. The estimates for spring wheat and barley are not a d d i t i v e . - 202 -supply of the province. They represent s u b s t a n t i a l proportions of the land i n Canada which could grow these crops but i s n ' t now i n farm production. Also, spring wheat and barley are not two of the most l i k e l y feed grain crops for p r o v i n c i a l expansion. The divergence of b i o - p h y s i c a l evaluations of the province's a g r i c u l t u r a l land resources with the record of land u t i l i z a t i o n can l a r g e l y be explained i n terms of the economic l i m i t a t i o n s of s p e c i a l b i o - p h y s i c a l c h a r a c t e r i s t i c s of the regional land resource. I t i s a l s o suggested by some 4 9 that a low l e v e l of technological inputs with regard to s p e c i f i c land problems has been an element of the comparatively low u t i l i z a t i o n of land i n the r e g i o n . 5 0 I t i s p o s s i b l e that the economics of crop production could be s i g n i f i c a n t l y improved with the development of land use technologies s p e c i f i c to Correspondence with Mr. John Nowland, Special Advisor Natural Resources, Agriculture Canada and conversations with Mr. Tony Schori, formerly Land Use Advisor, NSDAM. The 1978-79 Inventory of Canadian A g r i c u l t u r a l Research (ICAR) reported that there were 0.36 p r o f e s s i o n a l person years engaged i n land research i n the Maritimes compared with 172.09 across Canada. This share (0.2%) was s u b s t a n t i a l l y below the region's share of farm production and p a r t i c u l a r l y below i t s share of land with a g r i c u l t u r a l c a p a b i l i t i e s . The great divergence here, i . e . between the region's national share of farm production or land used by a g r i c u l t u r e , compared to p h y s i c a l measurements of land with a g r i c u l t u r a l c a p a b i l i t i e s , also r e f l e c t s the r e l a t i v e magnitude of land related problems and c o n s t r a i n t s . In the only subsequent e d i t i o n of ICAR (1980) the number of person years involved i n land research increased to 4.69 out of a national t o t a l of 153.41. The region has, r e l a t i v e to i t s farm production, a disproportionately large share of national a g r i c u l t u r a l research but the low investment i n such an area as regional land use problems can of course be highly s i g n i f i c a n t to development. - 203 -Table E.2 Estimated Returns to A g r i c u l t u r a l Land and Ratio of A g r i c u l t u r a l Land D t i l i z a t i o n to Cropping Capability (CLI Class 1-3) by Province 1981 to o Province Avg. Land Returns $/acre a Improved Land D t i l i z a t i o n '000 ac Total Eat. Returns to Land $000 Value of A g r i c u l t u r a l Products Sold Est. Land Returns as a % of Sales Ratio Improved Land to CLI class I-III PEI 16 501 8,074 140,370 5.8 0.50 NS 11 440 4,803 198,608 2.4 0.15 NB 7 474 3,543 154,011 2.3 0.15 OUE. 15 5,829 88,421 2,031,902 4.4 1.07 ONT. 36 11,162 398,611 4,691,669 8.5 0.62 MAN. 13 13,595 176,128 1,444,577 12.2 1.07 SASK. 10 48,619 508,287 3,078,108 16.5 1.22 ALTA. 10 30,937 308,582 3,264,822 9.5 1.17 B.C. 11 2,337 25,395 799,654 3.2 1.00 CAN. 13 113,921 1,425,752 15,832,069 9.0 1.01 Source: Derived from S t a t i s t i c s Canada, Census of Agriculture 1981 and Environment Canada. S o i l C a p a b i l i t y C l a s s i f i c a t i o n for  Agrlculture. Canada Land Inventory Report, No. 4. Ottawa, 1972. a This is based on total rent reported paid by farm operations and t o t a l land rented. Over one third of improved a g r i c u l t u r a l land in Canada Is rented and a s i m i l a r l y large proportion is rented in each province i n d i v i d u a l l y so these estimates are based on a broad market. Building rentals and quality differences between owned and rented land may Introduce biases. Maritime conditions. Nowland51 has speculated that the t e c h n i c a l s o l u t i o n to such regional land use problems as posed by s o i l fragipans would make i t economically possible for the region to grow a high proportion of feed grain requirements. While farm groups have been highly vocal i n demanding more resources for the development, s e l e c t i o n and t e s t i n g of grain v a r i e t i e s and materials s u i t a b l e for the region and for the development of t o t a l grain production systems, basic land research has not received as much industry a t t e n t i o n . The p r i v a t e sector response to land problems has been l a r g e l y i n terms of demands for p u b l i c assistance for c a p i t a l investments i n land upgrading. With regard to the fundamental problems of the land resource, these appear to require very expensive amounts of research and technology development. I t i s not l i k e l y that p r i v a t e innovation and investment w i l l e f f e c t these s u b s t a n t i a l l y . Individual farmers have, however, been active i n developing land moleing techniques. Conclusion. One area for important t e c h n i c a l advances, s p e c i f i c to the production conditions of the province, involves lower cost techniques to deal with s p e c i a l land use problems. The interactions between high r a i n f a l l and dense fragipans are an example. Regional Nowland, J.L. "The Land Base for Cereals and Production Potentials Maritime Provinces." Presentation to Maritime Feed Grain Workshop, Amherst, N.S. A p r i l 14, 1983. - 205 -feed g r a i n production costs could be lowered with such progress. The removal of feed grain p r i c e d i s t o r t i o n s could be expected to increase the farm demand for new cropping technologies. Increased basic research i s probably required before p r i v a t e sector innovation could y i e l d s i g n i f i c a n t benefits i n t h i s area. E . 4 Hog Feeding Technologies Although hogs are nonruminant animals there i s considerable v a r i a t i o n i n t e r n a t i o n a l l y i n hog feeding technologies. This r e f l e c t s l o c a l resource s c a r c i t i e s . The extreme s i t u a t i o n s are represented by grain exporting North America and by China. Grain i s seldom fed to pigs i n China, the la r g e s t pork producing country i n the world. The d i f f e r e n t types of hogs raised i n these two parts of the world c l o s e l y correspond with t h e i r economic environments. Chinese pigs are c h a r a c t e r i s t i c a l l y pot b e l l i e d and have large digestive t r a c t s . North American hogs would not be'as productive i f fed the same d i e t s . The feed s u b s t i t u t i o n p o s s i b i l i t i e s for pork production i n Canada and China with and without t e c h n i c a l change could be depicted by unique isoquants on a common innovation p o s s i b i l i t i e s curve such as conceptualized by Ahmad. 5 2 B r i e f consideration w i l l be given here to the te c h n i c a l prospects for some a l t e r n a t i v e feeds and systems. Nova Scotia accounts for less than 0.5% of the swine research i n Canada and the U.S. and i t would be d i f f i c u l t f o r the l o c a l industry to move i n a r a d i c a l l y d i f f e r e n t t e c h n i c a l d i r e c t i o n compared with the rest of the continent. While feed p r i c e s are higher i n A t l a n t i c Canada than i n any other hog 5 2 See pp. 120-121. - 206 -producing region i n North America i t i s s i g n i f i c a n t that european hog feeding (with even higher feed prices) i s not s u b s t a n t i a l l y d i f f e r e n t despite Europe's immense t e c h n i c a l resources. Consequently, the major attention w i l l be given to the gains which are possible from the wider a p p l i c a t i o n of e x i s t i n g t e c h n i c a l knowledge l a r g e l y common to a l l of North America. Evidence r e l a t e d to the influence of feed input p r i c e l e v e l s on the processes of t e c h n i c a l change i s also considered. A l l hog producing regions have attempted to improve or maintain the competitive p o s i t i o n of t h e i r industries through public research, education, and extension. An active public research and t e c h n i c a l r o l e i s normally expected j u s t to maintain a region's r e l a t i v e p o s i t i o n i n terms of p r o d u c t i v i t y and e f f i c i e n c y . Unique t e c h n i c a l advances with long l a s t i n g pay-offs are s t i l l p o s s i b l e . For example, for over 15 years the Nova Scotia hog industry has marketed the highest indexing hogs i n Canada. The premium p r i c e s received for these high " q u a l i t y " (high lean meat to fat) hogs has been an important factor i n producer returns. This l o c a l technology has been highly s i g n i f i c a n t i n o f f s e t t i n g the advantages of producers i n more n a t u r a l l y favoured hog production areas.53 5 3 There i s a disagreement among l o c a l feed industry n u t r i t i o n i s t s and extension workers and producers on the basis of the high indexing carcasses i n the province. The former at t r i b u t e d t h i s success l a r g e l y to the low energy content of l o c a l feeds (this would r e l a t e to the r e l a t i v e l y high corn/barley-oats p r i c e r a t i o of the region) and the l a t e r to the genetic stock of the p r o v i n c i a l swine herd and i t s development over time. The e f f e c t of the energy l e v e l of the d i e t on "carcass q u a l i t y " also appears to be subject of debate i n the animal science l i t e r a t u r e . While there i s some evidence that decreasing the d i e t a r y energy l e v e l of the feed increases the lean meat content of hog carcasses (and reports completely to the contrary) i t seems doubtful that the low energy feeds of the province could be the p r i n c i p l e reason for these p r o v i n c i a l performance l e v e l s . - 207 -Despite some r e l a t i v e l y high performance i n d i c a t o r s , the Nova Sco t i a hog industry has below average feed conversion rates. This i s p a r t l y the r e s u l t of the FFA rate structure favouring lower energy feeds. The Livestock Feed Board of Canada reports that Maritime feed consumption per hog i s 4.2% higher than i n O n t a r i o 5 4 although Nova Sco t i a conversion's are possibly above those of the region as a whole. Decreasing the industry average feed input by 100 lbs per market hog has become an operational target of the swine extension s t a f f of the NSDAM. Many i n d i v i d u a l producers are already achieving t h i s l e v e l of conversion i n t h e i r operations. The 1983 Nova Scotia Swine Farm Business Summary55 reported that on sample farms "feed fed per hog raised varied as much as 173 kg (381 l b s . ) " Standard deviations were not reported. The sample was not random and may have included better than average producers. Van A r s d a l l and N e l s o n 5 6 have reported that the standard d e v i a t i o n of feed input per unit of output for U.S. producers i n 1980 was 175 l b s . per l i t t e r i n feeder p i g production, 17 l b s . per hundredweight of gain i n fa r r o w - t o - f i n i s h operations and 21 l b s . per hundredweight of gain i n feeder p i g f i n i s h i n g . Reports of considerable v a r i a t i o n of feed/output r a t i o s between farms are s i g n i f i c a n t given the standard nature of most hog production operations i n the province. While the s t a t i c p r i c e 5 4 Livestock Feed Board of Canada, "Annual Report 1982-83", Montreal, p. 3. 5 5 Farm Management D i v i s i o n , "Nova Scotia Swine Business Summary 1983", Nova Scotia Department of Agri c u l t u r e and Marketing, Truro, N. S., 1983. 5 6 Van A r s d a l l , R.N., and K.E. Nelson. U.S. Hog Industry. USDA, A g r i c u l t u r a l Economics Report No. 511, 1984, p. 27. - 208 -e f f i c i e n c y adjustments to v a r i a t i o n s i n the feed/hog p r i c e r a t i o are of a minor nature, for many farms there are large gains possible from t e c h n i c a l e f f i c i e n c i e s . This s i t u a t i o n i s depicted i n figu r e E . l . Two farms with differences i n t e c h n i c a l e f f i c i e n c y are operating on isoquants Ij_ and I 2 The i n i t i a l p r i c e s for feed and other inputs r e s u l t s i n optimal input combinations along the A ray and they operate at C and F r e s p e c t i v e l y . With higher feed prices such that points along the B ray are optimal they w i l l change to D and F. In the p a r t i c u l a r case of hog production the p r i c e e f f i c e n c y gains are frequently s m a l l . 5 7 The t e c h n i c a l e f f i c i e n c y gains which are po s s i b l e , are much larger for many and perhaps most farms. Feed Inputs Figure E . l Technical E f f i c i e n c y and Price E f f i c i e n c y 5 7 See pp. 80-88. - 209 -Whether or not advancements i n t e c h n i c a l e f f i c i e n c y would be influenced by input p r i c e s i s an important issue. Peed costs are g e n e r a l l y equivalent to over 60% of revenue i n hog production. Returning to figure E . l the higher feed cost s i t u a t i o n can be represented by the isocost l i n e PP and, as such, i t involves a change i n a major cost f a c t o r , and hence i n the t o t a l economic p o s i t i o n of the enterprise. Such a s i t u a t i o n would pose higher opportunity costs for not making the more s i g n i f i c a n t t r a n s i t i o n from point C to point P. There i s some evidence that the l e v e l of feed p r i c e s has influenced the rate at which t e c h n i c a l knowledge has been applied to commercial hog feeding i n Nova S c o t i a . This includes an i n d i c a t i o n of the magnitude of the e f f e c t which can be used to assess the p o s s i b l e gains r e s u l t i n g from p o l i c y changes. Between 1966 and 1979 the Economics Branch of A g r i c u l t u r e Canada c o l l e c t e d data annually from seven feeder hog operations i n Nova S c o t i a . 5 8 Over t h i s period the feed to carcass weight r a t i o decreased. (See table E.3) Real feed costs ($/tonne) and hog returns ($/cwt) can "explain" 46% of the v a r i a t i o n i n the year to year change i n the feed input per unit of pork output achieved over t h i s period. (See table E.4) The parameter estimate for the feed cost v a r i a b l e was s i g n i f i c a n t at the 8 percent l e v e l and the parameter estimate for hog returns at the 2 percent l e v e l with one-t a i l t - t e s t s . See: Gunn, T.C. "Economics of Hog Feeding Enterprises i n Nova Sco t i a , " Canadian Farm Economics 12, 1977, pp. 1-7. - 2 1 0 -Table E.3 Cost of Feed, Hog Returns and Feed to Carcass Weight Ratio, Seven Hog Feeder Operations, N.S. 1966-79 Cost of Feed a $tonne Farm Returnsb Received $/cwt Feed Consumption Per Hog Equivalent Raised Dressed Weight Per Hog Equivalent Raised Feed to Carcass Weight Ratio 1966 93.05 36.20 656.0 155.0 4.23 1967 96.14 31.15 633.0 154.0 4.11 1968 90.85 30.50 588.0 152.5 3.85 1969 86.66 36.23 605.0 161.4 3.74 1970 92.39 32.62 615.0 162.0 3.79 1971 93.93 26.29 599.0 163.0 3.67 1972 93.93 37.49 593,0 159.0 3.72 1973 153.47 55.19 605.0 160.0 3.78 1974 178.83 53.63 557.0 161.0 3.46 1975 180.59 70.06 600.9 158.4 3.79 1976 179.71 66.59 593.0 157.6 3.76 1977 183.02 61.74 553.0 158.2 3.50 1978 183.61 72.45 611.8 168.0 3.64 1979 209.31 66.73 587.8 164.9 3.57 Source: Nova Scotia Hog Feeder Enterprise Study Economics Branch, Agriculture Canada, Truro. a Average cost a l l rations including delivery costs. D Market returns plus s t a b i l i z a t i o n payments and bonuses. In the presence of the apparent inward movement of isoquants (and e s p e c i a l l y the i n t r a c t a b l e nature of t h i s s h i f t ) the e f f e c t may be considered as mainly t e c h n i c a l change as opposed to input s u b s t i t u t i o n , i . e . movement to new farm production functions not to new points on the same production functions. Comparisons against other regions such as Ontario where feed costs are lower, wages higher, and the opportunity cost of management higher, but feed consumption per hog reportedly 4.2% l e s s , support the b e l i e f that these changes represent l a r g e l y factor augmenting p r o d u c t i v i t y i n c r e a s e s . 5 9 A trend v a r i a b l e used i n equation 1.2 suggested that the rate of feed conversion increases was slowing but the variable was not s t a t i s t i c a l l y s i g n i f i c a n t . A component of the year to year change i n feed conversions did r e l a t e to adjustments which d i d not involve technical change. The p r i n c i p l e adjustment would r e l a t e to hog shipping weights. Given diminishing feed conversions for mature animals a lower feed/hog p r i c e r a t i o makes heavier shipping weights optimal and vice versa. There are however, very narrow l i m i t s for such adjustments. Changes i n slaughter weights were a minor factor i n the v a r i a t i o n i n feed conversions (see table E.3). When the change i n dressed weights was used to explain annual d i f f e r e n c e s i n feed conversion gains the v a r i a b l e was not s i g n i f i c a n t and had the wrong sign. (see equation 1.3, table E.4). The s l i g h t upward trend i n t h i s period of dressed weights was related to changes i n grade regulations and was a modifying factor i n feed conversion gains i n l a t e r years. 5 9 Hours of labour per hog rai s e d also decreased sharply. - 212 -Table E . 4 OLS Regressions of Year to Year Change i n Feed Consumption Per Hog to Carcass Weight, Seven Farms, Nova Scotia 1966-79 Constant Real Cost of Feed $/tonne a Real Return to Hogs S/cwt D Trend Carcass Wt. Change R SQ. 1.1 C o e f f i c i e n t -0.241 -0.008 0.029 0.460 (t-ratio) (-1.290) (-2.000) (2.900) df=10 1.2 C o e f f i c i e n t -0.248 -0.008 0.028 0.007 0.481 (t-ratio) (-1.298) (-2.000) (2.800) (0.636) df=9 1.3 C o e f f i c i e n t -0.210 -0.009 0.031 -0.008 0.476 (t-ratio) (-0.650) (-2.120) (2.860) (-0.700) df=9 Survey farms t o t a l average cost per tonne of purchased feeds including creep feeds, s t a r t e r , grower and f i n i s h e r /(GNEIPI). Total returns $/cwt for survey farms includes market returns as well as def i c i e n c y payments and bonuses / (GNEIPI). L i t e r a l i n t e r p r e t a t i o n of equation 1.2 i s useful i n respect of the magnitude of the implied e f f e c t s and t h e i r p l a u s i b i l i t y . The $11.20/tonne and $2.40/cwt p r i c e changes^ which would r e s u l t from the p o l i c y change being evaluated, would presumably induce a 0.0067 kg per kg increase i n the annual improvement i n feed to carcass conversion rates. Such an autonomous e f f e c t would improve feeding margins i n the f i r s t year by $0.14/hog and by $2.13/hog6l in year f i f t e e n . I f i t were assumed that the induced e f f e c t would diminish l i n e a r l y over time and i n proportion to the reductions i n feed costs r e l a t i v e to the i n i t i a l p o l i c y induced feed cost increase, then the year f i f t e e n improvement would be $1.68/hog. Taken as pure p r o d u c t i v i t y gains these figures are both economically s i g n i f i c a n t and t e c h n i c a l l y p l a u s i b l e . Such an improvement i n the industry's competitive p o s i t i o n would be a p o s i t i v e and worthwhile step. On the other hand the implied gain i s not inconceivable. A l l else being equal p r o v i n c i a l conversions would s t i l l be i n f e r i o r to those i n Ontario at the end of the 15 year period, i . e . the t o t a l implied 15 year induced gain would be l e s s than the present difference i n Maritime and Ontario conversion rates. 6 0 In the 1971 d o l l a r used i n the regression the pri c e changes are $3.70/tonne and $0.79/cwt. 6 1 Calculated on the basis of an i n i t i a l input of 0.365 tonne of feed per 77 kg of dressed pork and with a feed p r i c e of $275/tonne. - 214 -In c a l c u l a t i n g the net e f f e c t of the p r i c e changes the negative influence of higher hog returns, (resulting from the d i r e c t payment of assistance) has been included. I t i s possible that with a w e l l understood f i x e d term payment program, i n l i e u of the f r e i g h t subsidy, that the moderating e f f e c t of higher hog returns would be negated. For producers wishing to remain i n the industry in the medium term the onus a r i s i n g from p o l i c y would be f i r m l y placed on management. The implementation of a $10/tonne increase i n f r e i g h t subsidies could be expected to reduce the rate of feed conversion gains by 0.021 kg per kg per annum. The t e c h n i c a l changes considered above involve an accelerated movement of farms towards "state of the technology" p r a c t i c e s . Technological changes from the a p p l i c a t i o n of new s c i e n t i f i c p r i n c i p l e s have not been considered. One area of i n t e r e s t for new technological advances of i n t e r e s t involves the s u b s t i t u t i o n of g r a i n , soyameal, and other protein supplements by other feed s t u f f s . Some l o c a l hog feeding research projects were noted i n section E . l . Consistent with the theory of induced t e c h n i c a l change, much of the recent research on a l t e r n a t i v e feed s t u f f s for hogs has been c a r r i e d out i n locations where grain p r i c e s are r e l a t i v e l y high and during high grain p r i c e periods. The researchers reporting these i n v e s t i g a t i o n s have also referred to changing economic conditions as the basis for undertaking such p r o j e c t s . 6 2 Recent l i t e r a t u r e has 6 2 Livingstone et. a l . (1977), Whittmore and Taylor (1975). - 215 -included studies on using swedes (brassica napus) as a replacement for barley,63 potato feeding,64 a n ( j potato processing65 techniques for pigs, and the use of cabbage (brassica oleracea),66 other b r a s s i c a crops,67 and grass s i l a g e i n the d i e t of pigs. The 6 3 Livingstone, R.M., A.S. Jones, and I. Mennie. "Sweden (Brassica Napus) For Growing Pigs: Chemical Composition and use as a Replacement For Barley i n the Diet." Animal Feed Science  Technology, 2, 1977 pp. 31-40. 64 whittemore, C.T. "The Potato (Solanum Tuberosum) as a Source of Nutrients for Pigs, Calves and Fowl - A Review." Animal  Feed Science Technology, 2, 1977 pp. 171-190. Wittemore, C.T., A. Scott, and L.W. Moffat. "The I n h i b i t i o n of Nitrogen Digestion i n Diets for Growing Pigs Containing Various Sources of Raw Potato." Potato Research, 18, 1975 pp. 322-325. Whittemore, C.T. A.G. Taylor, I.W. Moffat, and A. Scott. "A N u t r i t i v e Value of Raw Potato for Pigs," Journal A g r i c u l t u r e  Food Agriculture 1975, pp. 255-260. 65 Livingstone, R.M., T. Atkinson, B. Baird. and R.M.J. C r o f t s . "The E f f e c t of Processing Potatoes on the Apparent Digestion by Pigs of Organic Matter and Nitrogen Measured Over a l l and at the Terminal Ileum," Proceedings of Nutr. Soc. 1977, pp. 36-58A. Livingstone, R.M., B.A. Baird, T. Atkinson, and R.M.J. Cr o f t s . "The E f f e c t of D i f f e r e n t Patterns of Thermal Processing of Potatoes on Their D i g e s t i b i l i t y by Growing Pigs," Animal Feed Science Technology 4, 1979, pp. 295-306. Livingstone. R.M., B.A. Baird, T. Atkinson, and R.M.J. C r o f t s . "The E f f e c t of Either Raw or B o i l e d Potato Juice on the D i g e s t i b i l i t y of a Diet Based on Barley i n Pigs," Proc. Nutr.  Soc. 1979, pp. 38-50A. 66 Livingstone R.M. B.A. Baird, and T. Atkinson 1980 "Cabbage (Brassica Oleracea) i n the Diet of Growing - F i n i s h i n g Pigs," Animal Feed Technology, 5, 1980 pp. 69-75. 67 Livingstone, R.M. and A.S. Jones. "The P o t e n t i a l for Brassicas as Feed for Pigs and Ruminants," Rowett Research I n s t i t u t e 1977. Greenhagh, J.F.D., I.H. McNaughton, and R.D. Thow. "Brassica Fodder Crops," Eds. Proc. U.K. Conf., SADC/SPBS, Feb. 1977, pp. 102-105. - 216 -experiences of t e c h n i c a l l y advanced high grain-soya priced Europe suggests that major changes i n these respects are not of s u b s t a n t i a l relevance for North American producers at t h i s time. However, more te c h n i c a l information on the processing of potatoes and on the feeding of grass and f i s h s i l a g e to pigs could be minor factors i n improving the v i a b i l i t y of hog production on p a r t i c u l a r farms i n Nova S c o t i a . Conclusion. S i g n i f i c a n t improvement i n the competitive p o s i t i o n of the hog sector i n Nova Scotia i s p o s s i b l e from the accelerated a p p l i c a t i o n of feeding technologies. Theory and some empirical evidence suggests that greater p r o d u c t i v i t y gains would be induced i n the higher feed grain p r i c e environment which would r e s u l t from the proposed p o l i c y change compared with what would otherwise be the case. The transformation of the FFA Program therefore could be expected to p o s i t i v e l y influence the l e v e l of economic v i a b i l i t y achievable by t h i s sector i n the medium and long runs. E .5 Poultry Feeding Technology Research has been undertaken i n Nova Scotia on the u t i l i z a t i o n of several alternate poultry feed ingredients and on other means to lower p r o t e i n requirements. Such technologies are of p a r t i c u l a r relevance to the regional cost p o s i t i o n and werediscussed i n section E . l . Nevertheless, modern i n d u s t r i a l i z e d poultry and egg production technology i s advancing r a p i d l y and l a r g e l y independant of l o c a l p r i c e r a t i o s . As was the case for hogs the benefits from any incremental p r i c e inducements, for t e c h n i c a l change, are more l i k e l y - 217 -to a r i s e i n t h i s commodity sector from the accelerated adoption of e x i s t i n g technologies and methods. The prospects for such gains w i l l be considered here and not the development of l o c a t i o n s p e c i f i c p o ultry technology. In poultry (meat) production Nova Scotia feed conversion c o e f f i c i e n t s may be above the national average. A survey commissioned by the Canadian Chicken Marketing Agency reported that 1982 feed conversion rates for b r o i l e r chicken on a p r o v i n c i a l industry l e v e l ranged from 2.032 i n B r i t i s h Columbia to 2.235 i n Saskatchewan with a weighted national average of 2.169. The reported Nova Scotia rate was 2.150. 6 8 A s i m i l a r survey for 1979 reported a weighted national average of 2.176, while the Nova Scotia rate was 2.160 (table E.5). This s i t u a t i o n ( i . e . the difference i n advancement of the production function of poultry feeding i n Nova Scotia compared with other feeding sectors i n the province and e s p e c i a l l y compared with the egg sector discussed below) i s consistent with the expectations derived from the induced innovation hypothesis i n that poultry feed p r i c e s i n Nova Scotia have the l a r g e s t ($/tonne or percentage) d i f f e r e n t i a l s compared with prices i n other regions of any type of feed (See table E.6). This has also been the s i t u a t i o n for an extended p e r i o d . 6 9 68 p o r Nova Scotia and the other smaller provinces the survey included a l l producers. In the case of the larger provinces large samples were taken. Standard deviations were not reported. 6 9 Report of the J o i n t NSFA/NSDAM Feed Committee, December, 1981. H a l i f a x , Nova Scotia Department of A g r i c u l t u r e and Marketing. - 218 -Table E.5 Reported Provincial Average Peed Conversion for Broiler Chicken, 1979 and 1982 Province 1979 1982 B.C. 2.166 2.032 Sask. 2.307 2.235 Man. 2.176 2.075 Ont. 2.126 2.110 Que. 2.222 2.209 N.B. 2.297 2.218 N.S. 2.160 2.150 N f l d . 2.191 2.198 Eight Provinces (Wt. Ave.) 2.176 2.169 Source: Canadian Chicken Marketing Agency (Touche Ross and Partners Reports). In 1983 the Livestock Feed Board of Canada reported that b r o i l e r feeds were $50-60/tonne higher than those i n Ontario. The higher corn/soyabean meal composition of high energy b r o i l e r feeds i s part of the basis for such large p r i c e d i f f e r e n c e s . No f r e i g h t subsidies are paid on protein supplement ingredients and the rate on corn i s lower than on (lower energy) western grains. A further factor i s the higher manufacturing margins i n the p r o v i n c i a l feed industry for poultry feeds compared with other regions or other feeds. Graham, Beames, and Shelford70 estimated that the gross manufacturing margin for poultry feeds i n A t l a n t i c Canada from August 1974 to Ju l y 1977 averaged $16/tonne above those i n any other region. 70 Graham J.D., R.M. Beames, and J.A. Shelford. "Ingredient Costs and Formula Feed P r i c i n g i n Canada, " Canadian Journal of  A g r i c u l t u r a l Economics 30, 1982, pp. 209-222. - 219 -While poultry feed conversions i n Nova Scotia are possibly better than the national average, they are not the best i n Canada. S i g n i f i c a n t further improvements are t e c h n i c a l l y p o s s i b l e . An improvement i n p r o v i n c i a l feed conversion rates to the Ontario's l e v e l ( i f achieved s o l e l y due to factor productivity) would increase net returns (producer rents) by $265,000 annually. On the same bas i s , achieving the reported B r i t i s h Columbia average (1982) would y i e l d benefits of $818,000. Some Nova Scotia producers now achieve these l e v e l s of performance. The proposition that the economic environment may influence the rate and d i r e c t i o n of t e c h n i c a l changes on farms producing b r o i l e r s i s supported by r e s u l t s of a research project c a r r i e d out by Funk and Tarte.71 i n i n v e s t i g a t i n g the farmer decision process i n purchasing b r o i l e r feeds they reported that on the basis of c r i t e r i a such as returns, feed conversion f a c t o r s , and feed cost that growers recognize "a problem" and move "to the second stage of the decision process, the search for information." This involved "a s e r i e s of e f f o r t s to obtain s p e c i f i c information concerning feed brands and dealers, feed p r i c e s and conversions and other related information." These a c t i v i t i e s required a commitment of time, e f f o r t , and expense. The d e s c r i p t i o n of the process which they give i s s i m i l a r to the behavioural model of cost reduction developed by Radner 7 2 i n which 71 Funk T.F., and F.C. Tarte. "The Farmer Decision Process i n Purchasing B r o i l e r Feeds," American Journal of A g r i c u l t u r a l  Economics 60, 1978, pp. 678-682. 7 2 Radner, R. "A Behavioral Model of Cost Reduction," The B e l l  Journal of Economics 6, 1975, pp. 196-215. - 220 -the manager's behavior i s to a l l o c a t e cost reduction e f f o r t s towards the input with the greatest p o t e n t i a l for cost reduction. The f a c t that reported Ontario feed conversions are superior to Nova Scotia's, while feed p r i c e s are s u b s t a n t i a l l y cheaper i n that province, supports the b e l i e f that the lower Nova Scotia feed p r o d u c t i v i t y l e v e l r e f l e c t s mainly a di f f e r e n c e i n t o t a l factor p r o d u c t i v i t y and not p a r t i a l p r o d u c t i v i t y differences r e s u l t i n g from input s u b s t i t u t i o n . In contrast to the r e l a t i v e l y high feed conversion rates achieved i n p r o v i n c i a l poultry (meat) production, national cost of Table E.6 B r o i l e r & Layer Feed Pr i c e s Differences, Nova Scotia and Ontario 1977-83 Starter B r o i l e r Feeds F i n i s h e r Laying Mash $/tonne % $/tonne % $/tonne % 1977 32.30 15.4 33.25 17.5 8.00 4.: 1978 37.00 17.5 40.00 20.6 8.50 4. 1979 33.50 13.7 37.85 16.8 8.75 4.: 1980 39.25 15.3 52.00 22.2 12.75 5. 1981 40.80 14.4 46.50 17.9 12.60 5.: 1982 41.45 14.5 53.40 18.7 16.90 7. 1983 50.00 19.0 60.20 20.7 14.65 6. Source: Derived from r e t a i l feed p r i c e s published i n the Annual Reports of the Livestock Feed Board of Canada, various e d i t i o n s 1977-84. - 221 -production surveys have reported below average conversions for egg producers i n Nova Scotia. The most recent such survey indicated that the Nova Scotia egg sector had the lowest feed p r o d u c t i v i t y of any province. The actual data from these surveys at the p r o v i n c i a l l e v e l i s c o n f i d e n t i a l . 7 3 Also i n contrast with the s i t u a t i o n i n the poultry (meat) sector laying feeds i n Nova Scotia have comparatively small p r i c e differences compared with these same feeds i n the re s t of Canada (See table E.6). These long standing p r i c e s i t u a t i o n s may have been a factor i n the sharply d i f f e r e n t performance l e v e l s of the Nova Scotia egg and poultry producers measured against t h e i r respective counterparts i n the r e s t of the country. The proportion of brown egg layers i n the p r o v i n c i a l f l o c k and possibly the age of the egg sectors' c a p i t a l stock (buildings and equipment) are also factors i n the lower p r o v i n c i a l feeding e f f i c i e n c i e s i n the case of egg production. The o v e r a l l Canadian feed to egg conversion rate was reported by the most recent cost of production survey as 4.02 l b per dozen e g g s . 7 4 While t h i s i s superior to the Nova Scotia rate i t i s below the feed e f f i c i e n c y l e v e l achieved by the U.S. industry. In 1984 the U.S. average feed input per dozen eggs was approximately 3.94 l b 7 5 7 3 This information was obtained from communication with Nova Scotia Egg Marketing Board and Canadian Egg Marketing Agency o f f i c a l s . 7 4 I b i d . 7 5 Derived from USDA, Feed Outlook and S i t u a t i o n Yearbook, ERS, December 1985 and USDA Livestock and Poultry Outlook and  Sit u a t i o n Report, ERS, May, 1985. - 2 2 2 -despite problems with avian influenza that year. While the average p r o v i n c i a l feed conversion i s not known i t i s possible that the d i f f e r e n c e between i t and the U.S. l e v e l of performance has a larger e f f e c t on r e l a t i v e feed costs i n Nova Scotia at present than does the FFA Program. This would d e f i n i t e l y be true for some i n d i v i d u a l operations. If the change i n the FFA method of payment resulted i n small induced feeding e f f i c i e n c i e s the economic benefits could p o t e n t i a l l y be large r e l a t i v e to the incremental p u b l i c costs associated with such a p o l i c y change. They could be of s i g n i f i c a n c e for the competitive p o s i t i o n of t h i s sector. With egg transportation costs of 5-7<-/doz76 (and a l l else being equal) egg producers i n an importing region are competitive with feed prices $26-38/tonne higher, i f feed conversions (in both regions) are 4.10/lb/dozen. If both regions achieve 3.90 lb/dozen conversions the producers i n the high cost regions are competitive with feed p r i c e s $29-40/tonne above those of the competing region. Conclusion. There i s some evidence that the feeding e f f i c i e n c i e s achieved over the next f i f t e e n years i n poultry and egg production would be higher with the p o l i c y change than would otherwise be the 7 6 Derived from $1200-1500 for a carload l o t of 1500 boxes of 15 dozen and representative of shipments from Pennsylvania or Ontario to Nova Sc o t i a . - 223 -case. Combined with a broader t e c h n i c a l i n i t i a t i v e i t i s conceivable that the competitive p o s i t i o n of the p r o v i n c i a l industry could be s i g n i f i c a n t l y improved i n t h i s period. E.6 Forage and Dairy Feeding Technologies Dairy farming technologies are more s p e c i f i c to l o c a t i o n than i s the case for hogs and poultry production. The technology used i n forage production and u t i l i z a t i o n i s also characterized to an extent by l o c a l s o i l and c l i m a t i c conditions and by the economic environment. Opportunities for lowering p r o v i n c i a l feed costs are presented by both l a t e n t forage technologies of p a r t i c u l a r relevance to Maritime feed costs and growing conditions and by the accelerated adoption of e x i s t i n g and future advances i n general dairy feeding technology. This review w i l l assess the prospect for such t e c h n i c a l change. Technical change i n forage production and u t i l i z a t i o n appears to o f f e r s u b s t a n t i a l scope for reducing the i n t e n s i t y of feed grain use by the d a i r y sector i n Nova S c o t i a . Compared with dairy farms i n other provinces and i n other countries grain feeding i s r e l a t i v e l y high i n Nova Sc o t i a . The generally low q u a l i t y of p r o v i n c i a l forages i s the major cause of t h i s s i t u a t i o n . Forage q u a l i t y i s important i n g r a i n s u b s t i t u t i o n because of nutrient concentration and i t s e f f e c t s on feed intake. Higher q u a l i t y forage i s consumed i n greater amounts by cows per day and t h i s i s often of greater importance i n lessening concentrate requirements than the e f f e c t of greater d i g e s t i b i l i t y per u n i t of forage consumed per se. - 224 -Lawson77, i n s p e c i f i c reference to the Maritime region, has stated that, "A long t r a d i t i o n of poor-quality forage with low intake and u t i l i z a t i o n has made the dairy farmers heavily dependent on purchased concentrates and gra i n " , and fur t h e r , "The n u t r i t i o n i s t s working with DHAS believe that the average dairy cow obtains about 65% of i t s d i g e s t i b l e nutrient requirements from forage crops. Attempts to increase t h i s to 70% have been hampered by the i n a b i l i t y of the average farmer to improve h i s forage q u a l i t y i n terms of d i g e s t i b l e energy. N u t r i t i o n i s t s have detected considerable improvement i n the best samples from farmers over the years, but they s t i l l believe that the q u a l i t y of the average forage sample has not improved g r e a t l y . " I t has been estimated by Young78 that an increase of one per centage point i n the protein content of Ontario hays would represent about 64,510 tonne of actual p r o t e i n "that could be eliminated from purchased feed invoices." S i m i l a r i l y he adds an increase of one per centage point represents "a s i z a b l e amount of TDN or energy." Based upon forage q u a l i t y - g r a i n requirement r e l a t i o n s h i p s reported by 7 7 Lawson, N.C. "Forage Crops i n Quebec and the A t l a n t i c Provinces" i n Proceedings of the National Forage Symposium 1981 Agr i c u l t u r e Canada, 1983, pp. 15-23. 7 8 Young W.S. "Forage i n Ontario," i n Proceedings of the National  Forage Symposium, , 1981, A g r i c u l t u r e Canada, 1983, pp. 24-27. - 225 -Stone, Spalding, M e r r i l l , and Reed 7 9 c a l c u l a t e d for a cow producing 12,000 lbs of 3.5% b.f. milk, feed grain demand on Nova Scotia d a i r y farmers would f a l l by more than 17,500 tonnes i f forage q u a l i t y were increased from " f a i r " to "average" l e v e l s . (See table E.7) Table E.7 Amounts of Grain Required for a 10 Month Lactation According to Forage Quality 3 Production Level (3 . High Quality 5%Milk) Forage 5 Average Quality Forage 0 Fair Quality Forage d - lb -18,000 5400 6450 7800 15,000 3900 4800 6000 12,000 2500 3300 4400 Source: Stone, et. a l . a Calculated for 90 days of lead feeding + 215 days for t y p i c a l l a c t a t i o n curves at each l e v e l of production. D h corn s i l a g e + % hay cut by June 15. c h corn s i l a g e + h hay cut by June 15-30. d h corn s i l g e + h hay cut after July 1. 7 9 Stone J.B., R.lW. Spalding, W.G. M e r r i l l and J.T. Reid. "A Dairy C a t t l e Feeding Program For High Production," i n Proceedings 1964 Corn e l l N u t r i t i o n Conference, pp. 82-88. - 226 -Forage production and u t i l i z a t i o n technology i n Canada was considered at the National Forage Symposium i n 1981. 8 0 I t was the opinion of many p a r t i c i p a n t s including LeRoux81, Young 8 2, w i n c h 8 3 , and S a i d a k 8 4 , that s u b s t a n t i a l and comparatively large p r o d u c t i v i t y gains could be made i f e x i s t i n g technology were applied more extensively. They also stated that current research and technology development i n Canada was i n s u f f i c i e n t considering the p o t e n t i a l of l a t e n t technologies i n t h i s area. This opinion i s also shared by 8 0 See: Proceedings of the National Forage Symposium 1981, A g r i c u l t u r e Canada, Cat No. A22-103/1983E. 81 " y i e l d s of forage could be doubled and q u a l i t y dramatically increased i f a l l e x i s t i n g technology were applied on c u r r e n t l y used areas. At present however, we i n Canada are not reaching our forage p o t e n t i a l forages c e r t a i n l y can play a much larger r o l e i n our a g r i c u l t u r a l industry than they do at present." Ibi d , p. 11. 8 2 "Although considerable advances can be made using technology already a v a i l a b l e , the introduction and use of new technology could place perennial forage crops more strongly i n competition as an energy source. The genetic p o t e n t i a l , production recipe, and harvest-preservation systems are a l l implicated and should be examined for p o t e n t i a l improvements." I b i d , p. 24.. 8 3 "Although the technology for increased y i e l d s and q u a l i t y from forage crops i s a v a i l a b l e i t generally i s not used. The p o t e n t i a l of forage has not been f u l l y r e a l i z e d I f forage crops are indeed low-cost feeds and i f the p o t e n t i a l for y i e l d and q u a l i t y has not been obtained i t would appear that perennial forage crops could play a very s i g n i f i c a n t r o l e i n the crop and l i v e s t o c k systems of the future." I b i d , p. 57. 8 4 "A highly v i s i b l e c h a r a c t e r i s t i c of forage producers i s t h e i r reluctance to use the technology now a v a i l a b l e for forage production. Some forage production experts consider that production could be doubled and q u a l i t y s i g n i f i c a n t l y improved through the increased use of f e r t i l i z e r and by harvesting at the optimum stage of growth." I b i d , p. 109. - 227 -the Canadian A g r i c u l t u r a l Research C o u n c i l . 8 5 I t was noted by Winch that research on forage i n the Maritimes was p a r t i c u l a r l y low e s p e c i a l l y given i t s production value r e l a t i v e to t o t a l a g r i c u l t u r e i n the region. C l e a r l y the accelerated adoption of e x i s t i n g t e c h n i c a l knowledge with respect to both forage production and u t i l i z a t i o n and advances i n technologies s p e c i f i c to the Maritime region could fundamentally lessen Nova Scotia's comparative disadvantage with respect to feed grain. In respect to the wider use i n feeding of e x i s t i n g knowledge Nicholson has for example s a i d , " U t i l i z a t i o n of the low-quality feed requires considerable s k i l l by c a t t l e feeders i n knowing what feed to give the various classes of stock for optimum r e s u l t s and i n devising adequate suppplementation. Improper use of low-quality roughage can be the l i m i t i n g factor i n milk production or can require expensive grain supplements or b o t h . " 8 6 8 5 In 1981 the Council stated, "Research on forage crops i s not strong enough i n Canada compared to what we are doing for other commodities. More research on e s t a b l i s h i n g forage crops on d i f f i c u l t and often poorly drained land, s o i l f e r t i l i t y requirements, rejuvenation of stands, plant breeding, plant physiology, disease and i n s e c t c o n t r o l and measuring productive capacity i n terms of beef are l i n e s of endeavour to pursue now because i t takes a long time to gather data and understand what to recommend when we're dealing with problems of such complexity and v a r i a b i l i t y . " Canadian A g r i c u l t u r a l Research Council, "Recommendations for Research and Development i n A g r i c u l t u r e and Food i n Canada, Report to Canadian A g r i c u l t u r a l Service Coordinating Committee by Canadian A g r i c u l t u r a l Research Council," 1981, pp. 11-12. 8 6 Nicholson, J.W.G. "Forage U t i l i z a t i o n i n Eastern Canada," i n Proceedings of the National Forage Symposium 1981, Agriculture Canada, Cat. No. A22-103/1983E, pp. 19-23. - 228 -Basic s c i e n t i f i c advances are forseen which would allow greater e x p l o i t a t i o n of the feeding value of forage. Winch has stated i n t h i s regard, "Further reductions i n the use of grain i n rations may be possible and appear to be re l a t e d to the higher intake of low-moisture high q u a l i t y forage which could set the d i r e c t i o n for future research into the greater use of forage i n rations Attention should be given to the q u a l i t y components, t h e i r l e v e l s i n the crops and the r e l a t i o n s h i p between forages and grain or other crops i n l i v e s t o c k p r o d u c t i o n . " 8 7 The t e c h n i c a l p o s s i b i l i t i e s and l i m i t a t i o n s with respect to the greater use of forages i n place of grain i n dairy production are s t i l l not well defined. In a review of what dair y science knows about maximizing the use of forage, Wangsness and Muller have commented, "Currently we do not know the p o t e n t i a l s for feeding high producing cows adequately on high forage d i e t s . " 8 8 i n t h i s regard they reported that forage q u a l i t y i s of "foremost concern." and that s u b s t a n t i a l reductions i n grain inputs are t e c h n i c a l l y and economically f e a s i b l e , " I f higher q u a l i t y forages and higher energy density feeds are used and i f the other factors., discussed can be a l t e r e d , g rain feeding could decrease by 400 to 500 kg (in U.S.) per cow per year. Therefore, the forage to concentrate r a t i o would be more toward a 65:35 or even 70:30 instead of the current 60:40 for the e n t i r e l a c t a t i o n . A c o r r e c t d i s t r i b u t i o n of forages, grain and protein supplement over the e n t i r e l a c t a t i o n i s e s s e n t i a l i n maximizing use of f o r a g e s . " 8 8 8 7 Winch, J.E., "Forage the National P i c t u r e . " i n Proceedings of  the National Forage Symposium, 1981, A g r i c u l t u r e Canada, Cat. No. A22-103/1983E, pp. 57-65. 8 8 Wangsness P.J. and L.D. Muller. "Maximum Forage for Dairy Cows," Journal of Dairy Science, 64, 1981, pp. 1-13. - 229 -Consistent with the induced technical change hypothesis higher grain and oilmeal prices in the last decade led to an increase in the investigation of forage feeding technologies in dairy production. 8 9 Among others, Holter, et. a l . and DePeters and Kesler, have explained their selection of research topics in terms of increased grain and protein input costs. Whether or not regional researchers, extension workers, and dairy producers would innovate and incorporate to a faster and greater extent this new sci e n t i f i c knowledge in a higher grain price environment is central to this consideration of FFA changes and technical change in the Nova Scotia dairy sector. Conference participants at the Forage Symposium frequently questioned the technology transfer system in Canadian agriculture in the face of the wide gap they perceived in existing farm and technical efficiencies. It was not noted that in parts of the 8 9 DePeters E.J. and E.M. Keslen. "Partial Replacement of Concentrates by High Quality Hay for Cows in Early Lactation," Journal of Dairy Science 63, 1980, pp. 936-944. Holter J.B. W.E. Hylton, CB. Smith, and W.E. Urban. "Reducing Concentrate Feeding for Lactating Dairy Cows," 1982 Journal of  Dairy Science 65, 1982, pp. 37-51. Donker, J.D. and F.A MacClure. "Response of Milking Cows to Amounts of Concentrate in Rations," Journal of Dairy Science 65, 1982, pp. 1189-1204. Turnbull G.W., D.W. Claypool, and E.G. Dudley. "Performance of Lactating Cows Fed Alfalfa Hays Graded by Relative Feed Value System," Journal of Dairy Science 65, 1983, pp. 1205-1211. Davenport, D.G., A.H. Rakes, B.T. McDaniel, and A.C Linnerus. "Group-Fed Concentrate-Silage Blend Versus Individually-Fed Concentrates and Group-Fed Silage for Lactating Cows," Journal  of Dairy Science 66, 1983, pp. 2116-2123. - 230 -country competitive imported feeds are subsidized. This may have had an influence i n dampening te c h n i c a l advances i n such areas inc l u d i n g the Maritime region. The general national s i t u a t i o n , with respect to slow progress, i s s t i l l of s i g n i f i c a n c e . I t was Winch's opinion that, "Whether or not forage crops w i l l achieve th e i r p o t e n t i a l and become a major contributor to low-energy, low-grain farming systems w i l l depend on the following: Changing the a t t i t u d e of farmers, administrators, and p o l i t i c i a n s ; developing a strategy... and increasing personnel and research. ... This strategy should consider the d i v e r s i t y of needs across Canada. . . . and should be directed towards a substantial reduction or a more e f f i c i e n t use of grain i n forage-livestock r a t i o n s . " 9 0 There i s s u b s t a n t i a l empirical evidence that a g r i c u l t u r a l p r i c e d i s t o r t i o n s a f f e c t both the adoption of research and technology and the underlying research agenda i t s e l f , i . e . the "attitudes" of farmers, administrators, and p o l i t i c i a n s . In recent years progress has been made on the better dairy farms i n Nova Scotia. The decreases, since 1980, i n kg of meal per kg of milk produced as shown i n f i g u r e E.2 are l a r g e l y a t t r i b u t e d to achieved increases i n forage q u a l i t y . Other factors such as the increased use of forage analysis would have also contributed to t e c h n i c a l e f f i c i e n c y gains. The recent experience, with regard to the number of forage samples submitted to the p r o v i n c i a l chemistry lab , provides some evidence that farm l e v e l t e c h n i c a l change i s 9 0 Winch (1983) p. 65. - 231 -responsive to input p r i c e s . The use of t h i s services/technology increased s u b s t a n t i a l l y (+30%) i n 1981. The 1980-81 period was characterized by high r e a l feed p r i c e s (See table E.8). Table E.8 Forage Samples Submitted to the Provincial Chemistry Lab and Dairy Feed Prices 1977-84 No. of Samples Index of Real Submitted Dairy Feed Prices 3 (1971=100) 1984 2920 97.4 1983 2650 95.4 1982 2515 97.6 1981 2504 112.7 1980 1931 110.1 1979 1928 105.6 1978 1953 96.5 1977 2115 105.2 Source: S t a t i s t i c s Canada Industry S e l l i n g P r i c e Indexes, Cat. No. 62-011, Ottawa: S t a t i s t i c s Canada and Nova Scotia Department of Agr i c u l t u r e & Marketing, S o i l s and Crops Branch Annual Report Various E d i t i o n s . a peed Industry S e l l i n g P r i c e Index for Complete Dairy Feeds/Gross National Expenditures I m p l i c i t P r i c e Index. - 232 -A s u b s t a n t i a l v a r i a t i o n i n the q u a l i t y of forage and of feeding management on dairy farms i n Nova Scotia i s s t i l l found. The percentage of net energy derived from meal on Dairy Herd Analysis Service (NSDAM) herds ranged from 8% to 68% i n 1984 and averaged 42%. Feed costs per l i t r e of milk ranged form 8.6$ to 30.IOC and averaged 16.8*. 9 1 Improvements in regional forage technologies are not l i m i t e d to the dairy sector. They would also improve the v i a b i l i t y of beef and sheep production. Grass s i l a g e may also be an economic a l t e r n a t i v e feed for sow pigs i n some farming s i t u a t i o n s . 70 71 72 73 74 75 75 77 78 79 80 81 82 83 84 Year Figure E.2 - Annual Milk Production Per Cow and Concentrate Feeding Per Unit of Milk Production, DHAS Annual Averages, 1970-84. 9-1- Livestock Services Branch, "Dairy Herd Analysis Service Annual Report," Nova Scotia Department of Agr i c u l t u r e and Marketing, 1984. - 233 -Conclusion. The prospects for achieving a s i g n i f i c a n t reduction i n the i n t e n s i t y of imported feed grain u t i l i z a t i o n from broadly defined t e c h n i c a l change i n forage production and u t i l i z a t i o n and i n the accelerated adoption of d a i r y feeding technologies appears s i g n i f i c a n t . The rate and d i r e c t i o n of these changes can be expected to be influenced by the method of payment used by the FFA Program. The adverse e f f e c t s of the reduction i n feed equalization on the industry (and of any possible future termination of FFA) could be expected to be reduced overtime by the p o l i c y change. E.7 Summary The d i r e c t i o n of animal n u t r i t i o n and feed s t u f f s research i n Nova Scotia and the Maritime region has been orientated l a r g e l y towards l o c a l problems and opportunities characterized by unusual p r i c e r a t i o s . Researchers have e x p l i c i t l y stated that r e l a t i v e p r i c e s have influenced t h e i r s e l e c t i o n of research p r o j e c t s . The incorporation of such research i n t o commercial production systems by innovators can be expected to be determined l a r g e l y by t h e i r assessments of the expected costs, including r i s k s , against the expected returns. The s c a r c i t y of grain technology s p e c i f i c to regional growing conditions has adversly effected grain development i n Nova Scotia. Recently, farmers have introduced and adapted new foreign technologies and have encouraged increased p u b l i c research on such technologies. High grain p r i c e s r e s u l t i n g from reduced feed f r e i g h t e q u a l i z a t i o n and strong i n t e r n a t i o n a l markets appear to have induced t h i s a c t i v i t y . (Individual farmers have stated t h i s e x p l i c i t l y ) . This strongly suggests that the future technical - 2 3 4 -p r o g r e s s i n g r a i n p r o d u c t i o n i n N o v a S c o t i a w i l l b e p a r t l y a f u n c t i o n o f g r a i n p r i c e s . T h e d e v e l o p m e n t o f g r a i n t e c h n o l o g y i n t h e r e g i o n f a c e s m a n y d i f f i c u l t i e s i n c l u d i n g t h e u n i q u e n e s s o f g r o w i n g c o n d i t i o n s , t h e h i g h o p p o r t u n i t y c o s t s f o r t h e g r a i n r e s e a r c h r e s o u r c e s n e e d e d , a n d l o w e x p e c t e d i n t e r n a t i o n a l g r a i n p r i c e s . T h e r e i s s u b s t a n t i a l e v i d e n c e t h a t t h e r e m o v a l o f p r i c e d i s t o r t i o n s i s a n e c e s s a r y c o n d i t i o n t o a c h i e v e m a x i m u m t e c h n i c a l p r o g r e s s a t a n y g i v e n l e v e l o f p u b l i c i n v e s t m e n t a n d t h a t c o n v e r s e l y s u c h c h a n g e s a r e a n e c e s s a r y c o n d i t i o n f o r t h e a c h i e v e m e n t o f a n y p u b l i c d e v e l o p m e n t t a r g e t s a t l e a s t c o s t . I n t h e v i e w o f some s o i l s c i e n t i s t s t h e d e v e l o p m e n t o f new l a n d u s e t e c h n o l o g i e s s p e c i f i c t o t h e r e g i o n ' s l a n d r e s o u r c e w o u l d m a k e i t e c o n o m i c a l f o r f a r m e r s t o p r o d u c e " a h i g h d e g r e e o f f e e d g r a i n r e q u i r e m e n t s . " 9 2 U n t i l a m a j o r p u b l i c r e s e a r c h p r o g r a m h a s b e e n u n d e r t a k e n t h e s c o p e f o r p r i v a t e i n n o v a t i o n a p p e a r s l i m i t e d i n t h i s a r e a . T h e a c c e l e r a t e d a d o p t i o n o f e x i s t i n g f e e d i n g t e c h n o l o g i e s f o r h o g s , p o u l t r y , a n d d a i r y c a t t l e w o u l d i m m e d i a t e l y r e d u c e t h e i n t e n s i t y o f i m p o r t e d g r a i n u t i l i z a t i o n a n d f e e d c o s t s . T h e p r o d u c t i o n a n d u t i l i z a t i o n o f f o r a g e f e e d s i s i n c l u d e d h e r e . T h e r e i s s o m e e v i d e n c e t h a t f e e d p r i c e s h a v e i n f l u e n e d t h e r a t e o f a d o p t i o n o f s u c h t e c h n o l o g i e s i n t h e p a s t . T h e a c h i e v e m e n t o f h i g h c o m p a r a t i v e l e v e l s o f f e e d i n g e f f i c i e n c y , w o u l d i m p r o v e t h e c o m p e t i t i v e p o s i t i o n o f p r o v i n c i a l f e e d e r s . 9 2 N o w l a n d ( 1 9 8 4 ) . - 235 -

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