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Growth of agricultural capital and the farm income problem (Canada 1935-1965) Hladik, Maurice James 1969

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GROWTH OF AGRICULTURAL CAPITAL AND THE FARM INCOME PROBLEM (CANADA 1935-1965) by MAURICE JAMES HLADIK B.Sc, University of Alberta, 1966 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN AGRICULTURE in the Division of Agricultural Economics We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA APRIL, 1969 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make i t freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of Agricultural Economics The University of British Columbia, Vancouver 8, Canada Apri l , 1969 ABSTRACT Average Canadian farm incomes tend to be consistently lower than non-farm incomes. Many reasons, including aggregate overproduction are advanced as possible explanations of the above problem. This thesis attempts to determine whether overproduction has been one of the causes of the farm income problem. The bulk of information used in this study was time series data as prepared by the Dominion Bureau of Statistics for the years 1935 to 1965. A model was constructed to test two related hypotheses regarding the presence of excess capital formation and its effect on income and overproduction. The basic findings of the study were that capital formation was not greater than required to produce an aggregate supply of agricultural products equal to aggregate demand. The growth in aggregate supply and aggregate demand were found to be very similar for the period 1935 to 1965, thus indicating that the farm income problem was not aggravated during this era by overproduction. In subsequent analysis, a broader view of the problem was undertaken. To begin, it was established that per capita farm incomes have been growing at a rate similar to that of non-farm incomes. In addition the so called "cost-price squeeze" was not found when the entire 1935 to 1965 period was observed but rather was only found in subperiods. Factor share analysis was used to show that agricultural capital offered returns a> least equal to the oppor-tunity costs of capital. TABLE; OF CONTENTS CHAPTER PAGE I. INTRODUCTION 1 The Concept of Economic Growth 1 Statement of the Problem 3 Statement of Hypotheses 4 Scope of the Analysis 5 Objectives of the Study 6 Outline of the Model 6 Applications of the Model 9 Limitations of the Model 10 II. THE CONCEPT OF CAPITAL AND ITS MEASUREMENT 13 Definition of Capital 13 Conceptual Difficulties in the Measurement of Capital 14 Use of Index Numbers to Measure Capital 17 The Capital-Output Ratio 21 . I I I . CAPITAL, OUTPUT AND DEMAND IN CANADIAN AGRICULTURE 24 Capital 24 Durable Agricultural Capital Value in Current Dollar Terms 24 Durable and Non-durable Capital Valued in Constant Dollar Terms 27 Output 35 Demand 38 CHAPTER PAGE IV. TESTING OF HYPOTHESES 45 First Hypothesis 45 Second Hypothesis 54 Discussion 6 l V. THE F,iRM INCOME PROBLEM 63 The Farm Income Problem 63 The Cost-Price Squeeze 69 Discussion 80 VI. FORCES BEHIND AGRICULTURAL CAPITAL AND OUTPUT GROWTH 81 Returns to Labour and Capital According to Factor Shares 82 Substitution of Capital For Labour 91 Disaggregation of Farm Output 92 VII. SUMMARY AND CONCLUSIONS 99 Agricultural Policy Considerations 100 Possibilities for Further Research 100 APPENDIX A - TABLES 102 APPENDIX B - MODEL OF THE AGRICULTURAL ECONOMY 113 BIBLIOGRAPHY 119 LIST OF TABLES TABLE PAGE I o Value of Durable Capital in Canadian Agriculture (1935-1965) (In Current Dollar Terms) ....... 25 I I o Livestock and Poultry Numbers in Canada (1935-65) 103 I I I o Constant Dollar Value of Durable and Non-durable Capital in Canadian Agriculture (1935-1965) 29,30 I V o Constant Dollar Value of Livestock, Canada (1935"""19^ 5 ) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0 0 0 10/+ V. Constant Dollar Estimation of Farm Real Estate, CcLTlcliClcL (1935""*19^ 5 ) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 105 5 106 VI. Constant Dollar Estimation of Farm Machinery, CcLRclCicL (1935*1965 ) © 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 106 V I I o Constant Dollar Estimation of Non-durable Capital, CcHiciclcLy (l935"~19^ -*5) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 110^111 VIII. Value of Output in Canadian Agriculture (1935-1965)... 36 IX. Constant Dollar Estimation of Total Demand for Canadian Agricultural Production (1935-1965) 41 X. Comparison of Actual and Required Capital Without Allowances Made for Inventory Change, Canada (l935"*" 196 5 ) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0 0 XI. Constant Dollar Estimation of Farm Level Inventory CfrcLri££€ S y Ct3.rid.Cit3, (1935""1939) o o o o o o o o o o e o o o o o o o o o o o o o 112 XII. Comparisons of Actual and Required Capital With Allowances Made for Inventory Change, Canada (1935—1965) ft.©.o«.«o«©»ooo.o...©.........ooo 51 TABLE XIII. PAGE XIV. XV. XVI, XVII. XVIII. XIX. XX. Comparison of Actual and Required Capital After Allowances Made for Inventory Accumulation, Canada (1935—1965) o o o . . o o « o « o o « . o o . . . « « o . . . . . « © . . i Comparison of Supply and Production with no Allowances Made for Inventory Change or Accumulation, Canada (1935-1965) , Comparison of Supply and Demand With Allowances for Inventory Changes and Accumulation, Canada ) © o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o i Ratios of Farm to Non-farm Incomes Per Capita Employed, Canada (1935-1965) ...... „ , Rate of Return on Canadian Agricultural Capital > 9 e o o 0 0 ( X933*™1965 ) 0 O O O 0 O O O O O O O O O O O O O O O O O O O 0 O O O 0 o e o o o e o o o i Yield on Government of Canada Direct and Guaranteed Sccxiritiss (1935~ 1965) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 - 0 0 0 0 0 0 0 0 0 0 0 Classification of Commercial Farms With Respect to Total Output, Canada, I960 and 1965 ° ° Classification of Commercial Farms with Respect to Total Capital Value, Canada, 1965 O O 0 o o o -53 57 O O O O O 0 0 0 O O 0 O 0 O 0 O O 59 65,66 85 88 94 96 LIST OF FIGURES FIGURE, PAGE 1. Hypothetical Structure of Demand Curve for Aggregate Canadian Agricultural Products Under the Influence of International Competition . . . . . 0 . . . 0 . . . . . O . . . . 0 11 2. Rate of Depreciation of Buildings Via the Declining Bt3.lc3.riC© M€ t ilOCi < j « « o o 0 < ) 0 O O < > o o « « « o o o o 0 O o o o « 0 o o « 0 0 0 6 « 31 3. Existing Capital and Capital Requirements in Canadian Agriculture, 1935-1965 • ° . 55 4. Comparison of Estimated Supply and Demand of Agricultural Products, 1935-1965 ........ 60 5. Ratio of Agricultural/Non-agricultural Per Capita XnCOTIlCS ^  193 5"* 19^ 5 © • o o o o o o o o o o o o o o a o o o o o ^ ^ o o o * * © © 68 6. Price Index Numbers (1935-39 = 100) - 1935-1965 .... 71 7. Price Index Numbers (1949 = 100) - 1950-1965 - 73 8. Price Index Numbers (1935-39 = 100) - 1950-1965 ..... 74 9. Schematic Representation of the Relation of Agricultural Investment to the Farm Income Problem o o t f o o o o o o o o o o o o o o o o o o o o e o o o o o o o o e o o c o o e o ' o - o 115 CHAPTER I INTRODUCTION The agricultural industry in Canada has undergone important change in the period 1935-'65» Both the stock of capital and total output have increased substantially. In addition, there has been a dramatic decline in the farm labour force. Average farm incomes have increased, but not to the degree the writer would consider satisfactory to offer an adequate return to all inputs employed. This consideration leads to the following question. Has capital growth and the consequent growth in output been excessive and so the cause of a retarded growth in per capita incomes in spite of a decline in the numbers of people employed in agriculture? The present study is concerned with the many-implications of the growth pattern described in the above question. I. THE CONCEPT OF ECONOMIC GROWTH The term "growth'1 describes a wide range of phenomena. In a most general sense it means, an increase over time. Economic growth involves an expansion of the economy, either in part or in entirety, possibly involving increased resource use or an expansion brought about by technological improvement. The end result may take the form of increased human satisfaction. The increase in gratification may pertain to the same level of satisfaction for a larger population, an increase in the per capita satisfaction for the same population, or to both. The measuring rods of economic growth include increases in productive inputs (land, labour and capital), increases in output and increases in income. Measures may involve totals or per capita averages. These measures are interrelated and tend to grow together, (2) but not necessarily at the same rate. Economic growth, according to Domar is bounded by both demand and capacity. Demand, the force which directs growth, is based on personal consumption, investment and government expenditures. Capacity, on the other hand, is dependent on the size and quality of the labour force, accumulated capital and technological progress?~ In essence, economic growth is directed by demand but limited by capacity. In a single sector of the economy, such as agriculture, growth is limited by demand as it is the criterion on which the decision to direct resources is based. Thus a sector9s growth pattern depends on how its output is received by the economy as a whole. Each sector is growing in an atmosphere of competition with all others while demand plays the role of director of inputs. In this manner agricultural growth is limited by demand. This study involves growth in primary agriculture within the entire economy of Canada. In a sense, this is a treatment of a two sector growth model (i.e. primary agriculture versus the rest of the economy). However, the methods, purpose and setting of this study are very different from two sector growth models such as presented by Ranis and 2 Fei . In their analysis, a theoretical growth pattern is traced from ^Evsey D. Domar, "A Theoretical Analysis of Economic Growth,"' Essays, in the Theory of Economic Growth, (New York: Oxford University Press, 1957) p.19 o ^Gustav Ranis and J.C.H.Fei, "A Theory of Economic Development", The American Economic Review, Volume. LI, Number 4, pp.533-565, September 196l; f "Innovation, Capital Accumulation, and Economic Development," The American Economic Review, Volume LIII, Number 3, PP-283-313, June 1963 (3) an underdeveloped economy with a labour surplus agricultural base as one sector and an insignificant industrial sector as the other, through •a ,(take off period" to a situation where growth in the entire economy 3 is "more or less automatic" . This study, on the other hand, is empiric?.! in nature and does not trace a changing pattern of growth. It observes growth as i t actually existed in Canadian agriculture and thus is predictive only under the assumption that the economic environment is relatively stable and thus the future is an extension of the present. Perhaps the greatest difference arises in the settings of the two analysis» Canada is a highly developed country and has possessed the characteristic of automatic growth since at.least 1935. Automatic growth, the end result of the Ranis and Fei approach, is a precondition to this analysis. In essence, this study is an attempt to investigate growth in Canadian agriculture after ntake off". In this study observations are irade of the peculiar position of agriculture in a developed economy (Canada) with an attempt to explain the existing growth pattern. II. STATEMENT OF THE PROBLEM There is a general, well founded, consensus among farmers, farm leaders, government officials, agricultural economists and the general public that a farm income problem exists. Specifically, average income per person employed in primary agriculture maintains a level well below that of non-farm per capita incomes^. Overproduction, coupled with the ^Gustav Ranis and J.C.H.Fei , "A Theory of op^ c i t . , p.534 ^S.N.Kulshreshtha, '"Measuring the Relative Income of Farm Labour, 1941-'61" Canadian Journal of Agricultural Economics. Volume XV, Number 1, pp.28-43, 1967 The farm income problem wi l l be dealt with in detail in Chapter V. (4) generally inelastic demand for agricultural products is considered to be 5 a basic cause of this Inequality . As capital (Including land) is a main factor of production, or overproduction as the case may be, the fol-lowing hypotheses were tested. III. STATEMENT OF HYPOTHESES I. Capital formation in Canadian agriculture occurs at a faster rate than is consistent, under changing technology, with the growth in demand for agricultural products as determined by growth of domestic population, increases in per capita real income, and changes in net exports of agricultural products. II. The observed capital expansion and the corresponding increase in output, coupled with the existing general inelas-ticity of demand for Canadian agricultural products is one of the principal causes of the relatively low level of incomes in agriculture. These hypotheses are concerned with an increase in overproduction over time . Thus from the given position of supply and demand in the base period (1935 - '39), the first hypothesis will be rejected i f the aggregate supply of agricultural output is not growing more rapidly than the aggregate demand for Canadian agricultural products. 5P.J. Thair, "The Problem of Economic Adjustments Within Agriculture", The Economic Growth of Canadian Agriculture, Eighth Annual Workshop Report, Canadian Agricultural Economics Society, (University of Alberta, Edmonton, June 10-14, 1963)pp. 53-63. 6This does not imply that overproduction existed in the base period. An increase in overproduction is merely the case where supply is growing faster than demand. (5) The second hypothesis will be rejected if overproduction in relation to the base period cannot be demonstrated. In addition, rejection will occur even if overproduction does exist but not to the extent sufficient under the prevailing elasticity of demand to be considered a principle cause of the farm income problem. These two hypotheses do not deal with the possibility that over-production was existent in the base period and is thus a chronic condition of the agricultural sector. However the hypotheses do deal with the era of rapid capital expansion since "world War II and involve an investigation of any aggravation of the farm income problem through overproduction during this period. IV. SCOPE OF THE ANALYSIS Growth of aggregate Canadian agriculture from 1935 to 1965 was observed. Specifically, time series included capital, output, aggregate demand, net income per person employed in agriculture, and the farm labour force. The period 1935 to 1965 was chosen for the following reasons: (l) It included all phases of a business cycle plus an inter-national crisis over which growth could be observed. (2) Dominion Bureau of Statistics data were available.? The aggregate nature of the analysis was to provide observations characteristic of the entire sector. Regional growth, although important, is thus beyond the scope of this study. ^Unfortunately the Handbook of Agricultural Statistics, Part II, Farm Incomes 1926-65 from which many of the important series were drawn prevented the analysis from including any of the post 1965 period. (6) V. OBJECTIVES OF THE STUDY The study was undertaken in order to investigate the interrelations between capital formation, growth of output and growth of demand. It was hoped that the effects, i f any, of capital growth on the growth of total and per-capita farm income might be determined. This objective involved an examination of certain aspects of the relationship between agriculture and the Canadian economy as a whole in an attempt to determine some of the forces behind the observed growth pattern. Comparisons were made of the opportunity costs of labour and capital in agriculture with respect to the entire economy. In this study an attempt was made to examine the cause and effects of the many aspects of growth in agriculture with the purpose of attempting to identify and explain the existing level of farm income. The analysis may be useful in the context of discussions of Canadian agricultural policy. VI. OUTLINE OF THE MODEL The following model has been developed to test the hypotheses. To begin, the expected growth in demand for Canadian agricultural products defined as a function of changes in population, real per-capita income and net exports, was determined. The relative change in domestic demand under the assumption of constant tastes and preferences can be estimated using equation (l). (1) ADDt/DDt_i =(4Nt/NT_!J + [<fy( Jt/^t-l)] Where: DD=estimated domestic demand for agricultural products. N=total Canadian population • y=income elasticity of demand for food Y=real income per capita t=time subscript representing the present Total estimated domestic demand was derived using the identity in (2). ( 7 ) (2) DDt = DD^ _]_ (lYdDDt/DDt.! )) DD^  is now measured in constant dollar terms based on simple first difference equation analysis from a^ base demand given in dollars. Equation (3) expands to total estimated demand for Canadian agricultural products including net exports. (3) Dt = DDt +X,. - Mt Where: D=total estimated demand for Canadian agricultural products in constant dollar terms X=total agricultural exports in constant dollar terms M=total agricultural imports in constant dollar terms Capital required to meet the estimated demand is related through the capital-output ratio as observed in equation (4). (4) RKt = Dt ( K/0 ) t Where: RK=required stock of capital to meet estimated demand K/0=Capital/output ratio in agriculture base in constant dollar terms. The capital-output ratio represents productivity of a given stock of capital. Trends over time in the ratio are indicative of changes in technology and resource mix. Annual variations are the result of environmental conditions such as weather and the influence of insects and disease. For the purpose of this study both capital and output are measured in constant dollar terms to remove the variations which would arise from changes in price. The comparison between actual capital (AK) and required capital (RK) to meet the estimated demand is the interesting part of the analysis. If a major divergence is observed over time, then capital accumulation has not taken place at the pace dictated by growth of estimated demand and thus a trend to either overproduction or underproduction has been (8) demonstrated. This will bring the analysis to the point where the first hypothesis can be accepted or rejected. The second hypothesis is closely linked with the first. Thus the final portion of this model uses the available information on capital and output to test the second hypothesis. De.viations of output from-estimated demand is derived in the following relationship: (5) o{ = ( AK - RK ) t (0/K)t N Where: O?=deviation of output from estimated demand AK =actual capital stock If the additional output each year is equal to increased demand, one can expect, ceteris paribus, the aggregate price of agricultural products to remain the same over time. However any deviation from the above equality will result in a change in price as given in the following equation: * P - ( 0[/Dt)/( .Pt/pt-l> or; <6> ( pt/*t-l) = ( °t/Dt) (1/-:..P) Where: ( P ^ / ^ ) = the relative change in price of aggregate a agricultural products (0t/Dt) = the relative change in quantity of the deviation in production from estimated total demand -^ p = the price elasticity of demand Comparison can be made now between revenue (defined as R=PQ) if o output equals estimated demand (0t=0) and revenue if they are not equal o (O^yo). The following equations are used: (7) ERt - ERt_x ( l - H y b ^ ) Where: ER = revenue if actual output equals estimated demand (price remains constant but quantity changes) (9) (8) ARt = ARt-1 ( (1+ Dt-K)[/Dt_1+Ot.1 ))'(( 4 P t/ Pt- X ) + 1) Where: AR = revenue i f a deviation exists between actual output and estimated demand Now, in order to determine the effect on income, the difference between equations (7) and (8) is found: (9) CIt = ERt - ARt Where: CI = change in total agricultural income if aggregate output is not equal to estimated aggregate demand Acceptance or rejection of the second hypothesis concerning the relative level of farm incomes, rests on the above deviation. In particular, i f CI is negative over time the hypothesis will be rejected as not explaining the farm income problem. Alternatively, i f CI is positive the degree to which the hypothesis explains the farm income problem will be determined. In general terms, this would involve the comparison of CI with the amount of aggregate income necessary to elimi-nate any discrepancies between farm and non farm incomes. Thus if CI only accounts for a small fraction of the income discrepancy, then the hypothesis will also be rejected as not explaining the farm income problem. It should be noted that the above analysis will be conducted using constant dollar terms (real values) only. Also, the model is initiated with a given level of demand and capital in the base period. VII. APPLICATIONS OF THE MODEL The model can be applied directly to policy decisions to determine the influence on aggregate Canadian agricultural incomes under various levels of capital accumulation. One could predict the outcome on farm incomes of an injection of funds through government sponsored agricultural (10) loans. Predictions would not be limited to capital injections alone. In addition, one could measure the effects of a situation where internally-generated funds are withheld from normal investment. For example, the government may provide an incentive to divert funds normally invested in agriculture to other ventures not associated with the production of food and fiber. Thus with given elasticity, productivity and market potential based on past observations, the effect on aggregate farm incomes of a thwarted agricultural capital expansion could be assessed. VIII. LIMITATIONS OF THE. MODEL The basic weakness of the model is the range of applicability of certain independent variables which are based on observations of reality* A problem would arise if the model was used to predict the consequences of a very large movement of capital either into or out of Canadian agriculture. Specifically, the capital-output ratios and the elasticities involved may not apply i f this major shift within the industry were to occur. The capital-output ratio could be expected to change in the face of a large reallocation of resources within agriculture because the pro-duction function would change. If a sizable injection of capital into agriculture were to take place, one would expect on a priori grounds that the above ratio would decline in magnitude, indicating a reduction in the productivity of a unit of capital. Unfortunately, the model allows no more than this a priori speculation on the sensativity of the capital-output ratio as a consequence of a major movement of agricultural capital. (11) A related problem concerning elasticity arises because the concept '•elasticity' is based on marginal changes only. Therefore the estimate of demand elasticity becomes less reliable as one moves from the price and quantity conditions on which the estimate was based. A second problem associated v.dth elasticity of demand arises when considering the importance of international markets on Canada's agricultural industry. Conceptually i t is very probable that, in the aggregate, an inelastic demand exists over a narrow range of production. The following figure is.used to demonstrate the above statement. HYPOTHETICAL STRUCTURE OF DFMAND CURVE FOR AGGREGATE CANADIAN AGRICULTURAL PRODUCTS UNDER THE INFLUENCE OF INTERNATIONAL COMPETITION (12) Assume aggregate production in reality is in the general vicinity of A as depicted by the intersection of the first supply curve (S-jS ) with the demand curve (D-^ D^ )© At this point the demand would be inelastic. However, if capital were withdrawn from agriculture and the supply curve shifted to the left (^2^2^ P ri- c e s would have risen beyond the point E where the agricultural products of other countries could overcome trans-portation and tariff barriers and enter the Canadian market. When this occurs, any change in the quantity of domestic production will influence price to an extent much less noticeably than at A. Thus the demand is more elastic at this point (fc^)" At the other end of the spectrum, an expansion of capital and consequently production would shift the supply curve beyond F (S^S^) where the elasticity of demand would again be greater than at A. The opposite effect to a contraction of supply has now occurred as prices have been driven down to international levels as Canada is exporting from nearly all sectors of her agricultural economy. In the region of£^ any change in domestic production would only influence price in as much as it would affect the international markets. The resulting approximated demand curve over all levels of production would take on the dog-leg shape of DEFD. In general, an estimated elas-ticity of demand is relevant only in a narrow range for both mathematical and economic reasons. (13) CHAPTER II THE CONCEPT OF CAPITAL AND ITS MEASUREMENT The presence of capital is evident. Less evident, however, is the nature or meaning of capital. Measurement, other than in physical inventory fomi poses many more problems. These problems are compounded when, as is the case of this study, capital must be measured over time. I. DEFINITION OF CAPITAL The term "capital'1 is characterized by many definitions, with the central theme of each describing it as a tool of production. Most commonly, this -tool takes on the form of physical plant, equipment, construction and machinery, all of which have been previously produced through the efforts of man. Besides the above mentioned tangible items, capital is sometimes defined to include improvements in the human element in the form of education or skills.''" However for the purposes of this study consideration has been made only of the physical aspect of capital. Investment, the act leading to capital accumulation refers to production or acquisition. The fact that capital is used in production differentiates it from economic wealth; for the latter involves owner-ship of an asset which may or may not be productive. Capital, by definition, must be produced through the efforts of man (therefore excluding free goods such as radiation of the sun), saved from immediate consumption and used as a productive input over time. This general xT.W.Schultz, "Investment in Human Capital", The American Economic  Review, Volume LI, Number 1, pp. 1-16, March 1961 (14) definition is shared by Kindleberger s Baumol , and Spitze . c In economic theory, capital can play two roles „ (l) It can be income-generating with its existence leading to the employment of factors of production having a consequent remuneration. (2) According to the Austrian theory of capital, it is capacity-creating in the sense that it is either an adjunct to or replacement for labour. This second approach to the role of capital has been the basis of the growth models of Harrod and Domar. The above definition and discussion treats capital as a homogeneous input without form. This approach is sufficient for some theoretical discussions. However, if capital is to be dealt with empirically, as in this study, the problem of a disaggregative measurement arises. II. CONCEPTUAL DIFFICULTIES IN THE MEASUREMENT OF CAPITAL Before entering the theoretical aspect of the measurement of capital, an indication of some of the difficulties is in order. , CP.Kindleberger, Economic Development (second edition; New York; McGraw-Hill Book Company, 1965) pp.84-87 ^William J. Baumol, Economic Theory and Operations Analysis, (second edition; Englewood Cliffs, New Jersey; Prentice-Hall Inc. 1965) pp. 408-409 • Spitze, '"'Determinates in Capital Formation", Capital and Credit  Needs in a Changing Agriculture. E.L.Baum, H.G. Diesslin, and E.D.Heady, editors (Ames, Iowa; The Iowa State University Press, 1957) pp.19-22 ^William C. Hood and Anthony Scott, Output. Labour, and Capital in the  Canadian Economy. Royal Commission on Canada's Economic Prospects. (Hull; Queen's Printer, February 1957) pp.246-247 (15) Joan Robinson states: •'The evaluation of a stock of capital goods is the most perplexing point in the whole of the analysis which we have undertaken.-' 7 Solow, along a lighter vein wrote: ,sThe Capital time series is one that will drive a purist mad.,v Thus it appears that although capital can be measured, the result will not be completely satisfactory. The following discussion covers many of the problems encountered in the measurement of capital. g According to Robinson there are four ways to measure capital. These include: (l) a physical inventory of capital goods, (2) measurement in terms of physical productive capacity, (3) measurement in terms of the amount of labour required to produce the capital, (4) measurement in terms of money. The physical inventory technique is unsatisfactory for most analysis. Its use is limited to comparisons of a specific resource over time or from one economy to another. Even this is subject to question. For example, a cow in India is not the same unit of capital as a cow in Canada. However, according to the physical inventory method they are considered as equivalent. Another weakness of the physical inventory procedure is its inability to recognize the age-composition of capital. ^Joan Robinson, The Accumulation of Capital, (New York; St. Martins Press, 1965) p.117 ^Robert M. Solow, "Technical Change and the Aggregate Production Function", The Review of Economics and Statistics, Volume XXXIX, 1957 p.314 °Robinson, op. cit. pp.117-123 (16) Thus two machines identical in all respects except their vintage are classified as equal units of capital. True, a weighting factor could be applied to account for the above two weaknesses, but such a procedure is beyond the scope of the physical inventory technique. However, in subsequent methods for evaluating capital the weighting method has in fact been applied. The productive capacity technique is not based on an age differential and is subject to the same weakness as above. However, the measurement of the productive capacity would eliminate the problem exemplified in the comparison of cows in India and Canada. Capital is thus measured by some inverse relation to the labour required to maintain some given level of output. A relatively small labour requirement implies the existence of a proportionately large amount of capital. Capital measured in labour time invc?.ves the use of commodities as the common denominator. Thus, if a stock of capital is valued at X units of existing commodities and the wage per unit labour is Y/X, measured in these same commodities, the stock of capital would be valued at Y units of labour. This method is applicable in comparisons both between economies and for a single economy over time. If the profit level of an economy is low at one point in time (returns to capital are low while wages are high) capital will have a relatively low value in terms of labour time. Thus an economy with high capital intensity, low profits, and high wages has a lower value placed on a unit of capital, in spite of equal man hours required in its production, than an economy which has a labour surplus and a capital deficiency. This means of capital measurement fulfills the (17) expectations of marginal productivity analysis in determining the income to resources and thus their capitalized value. Unfortunately the method suffers in practice for it becomes difficult-.if not impossible to measure in terms of commodities which are themselves non-homogeneous in nature. In measuring capital in terms of money the above difficulty is overcome, although new ones are added. The money value of capital might be measured in three separate, but related ways. They are (l) value with respect to selling price (actually a reflection of anticipated profits) (2) discounted present value of anticipated future profits, and (3) the cost incurred in the development of the capital accumulated to present value at appropriate interest rates minus any profit the capital has already yielded. Evaluating capital in money terms by method (l) or (2) unfortunately leads to a circular definition. Capital is valued according to its profit potential which in turn is a function of price. Furthermore, price is a function of productivity. Thus the marginal value product of capital is indeterminate since its quantity valued in money terms depends on productivity. In essence, the consequence of this circular description is that although a money value can be placed on capital, it is not possible to explain the process by which the money value was established. III. USE OF INDEX NUMBERS TO MEASURE CAPITAL For the purposes of groxrth analysis the measurement of capital becomes even less satisfying when time is introduced. The value of capital over time is subject to a changing price level which indicates an (is) increase in money value in the absence of a corresponding increase in productivity or physical quantity. To overcome this difficulty, the use of quantity index numbers has been adopted. Specifically, Laspeyres quantity index (^ iPo/^ oP,-,)» where p and q are price and quantity respectively, has been used. Quantity, measured in physical terms, is the only variable component of this ratio. Conceptually, the formula measures the ratio of a current stock of capital valued at some base price to a base stock of capital similarly priced. This procedure was used for livestock and land^, both of which are measured in physical terms. To arrive at constant dollar value of buildings, machinery and durable inputs, the given current value for each (IPiq^) was divided by an appropriate Laspeyres price indexes ^ . P ^ P ^ P Q ^ Q ) as published by Dominion Bureau of Statistics'1'0. Upon casual observation these two techniques appear to be incon-sistent with the valuation of a single aggregate stock of capital. However it should be noted that the constant value of capital and not the index number is the end product sought in this analysis. L^and is traditionally treated as a separate input (i.e. the Classical triad of land, labour and capital) because the consideration that it was a free good. However, the only free characteristic of land is its spatial dimension. It requires the efforts of man to discover, settle and develop. Thus for the purposes of this analysis land was considered as simply a part of aggregate capital. ^Canada, Dominion Bureau of Statistics, Price Index Numbers of  Commodities and Services Used by Farmers. (Ottawa: Queen's Printer and Controller of Stationery, various years) (19) The Laspeyres quantity index was used to determine present value of land and livestock is represented in the following equation: (DgiiPo = £qiPo&q 0p 0) 0 &q0p0) This identity is trivial as the dependent variable (;..q]_p0) is equal to itself. However, this equality can be compared to the following mathe-matical representation to derive the constant dollar value of buildings, machinery and durable inputs. or: (2) l a ^ = fo^P^) • (ZJ>0%) Thus the two methods are equivalent if %0.-i1Poi^<loPo (Laspeyres quantity index) is equal to^ p^ q-]_/^ p-]_q0 which is the Paache quantity index; weighted by given-year prices instead of a base year price. Both the Laspeyres and Paache index are designed to measure the quantity of a variable over time in terms of changing values of a unit of money. According to Mudgett^ these approaches, in theory,-lead to the same answer. However, in practice, the two methods are subject to bias which may vary in degree and direction. The problem of index number bias has been subject to considerable 12 discussion in the literature . In essence, Laspeyres price and quantity 11Bruce D. Mudgett, Index Numbers. (New York: John Wily and Sons, 195l)p.31 "I Q Irving Fisher, The Making of Index Numbers, (third edition; Boston: Houghton Miffen Company, 1927), pp.58 and 238; Hendrik S. Lok, irAn Enquiry into the Relationships Between Changes in Over-all Productivity and Real Net Return Per Farm", Michigan State Ph.D. thesis, (Ann Arbor, Michigan: University Microfilms Inc., 1961), pp.31-32 (20) . indexes are thought to overestimate change over time while Paasche's index are thought to underestimate change. Bias is thought to be due to the tendency of buyers to shift purchases away from those items that exhibit the most dramatic price increases and toward less expensive items. In an aggregate price index using base period quantities, as is the case with Laspeyres price index GLp-]q04s:p0q0)} any shift in quantities purchased as a result of a change in p-^  goes unrecorded. The items with a relatively high price are weighted by larger quantities than are purchased in reality while items with low prices are weighted less than sufficient to measure actual purchases. The combined influence on the numerator of the index formula is to bias it upward. An analogous argument with regard to the Paasche price index formula (£p^ qi/j» P^ -^ ) indicates that the denominator is unrealistically large due to the inflex-ibility of p D with respect to changes in q^. If q^ becomes relatively large then p in reality would be expected to decline while if q-^  became scarce price would rise. From this it follows that the sum of the denominator (<Lp0qi) is larger than one would like; for large quantities (with p Q unrealistically high) will outweigh small quantities (with p lower than real price.) The argument follows for Laspeyres quantity index which is theorec-tically an overestimation and Paasche's which is a corresponding under-estimation of the values of quantities (i.e. capital) as they exist in reality. The denominator of the Paasche price index CLp0qi) which was previously judged to overestimate reality is now the numerator of the Laspeyres quantity index. An identical switch occurs between Laspeyres (21) price and Paasche's quantity indexes with (Lp^ q^ ) which theoretically overestimates, now serving as the denominator in the Paasche index. In summary, it has been theorized that both (£.p-jq0) and fe.q-]P0) overestimate reality due to substitution effects. Each has a place in. the numerator of the respective Laspeyres indexes and thus both indexes are subject to an upward bias. Paasche indexes, on the,other hand, have these sums in the denominators of the respective index formulas and consequently both have a downward bias. 13 However, this theory is not universally accepted nor are empirical comparisons any more conclusive. Fisher"^ found Laspeyres and Paasche indexes (when calculated simultaneously) to portray no bias when compared over time. Neither index was constantly above nor consistently below the other. On this evidence is rested the assumption that Laspeyres and Paasche indexes can be used interchangeably. IV. THE CAPITAL-OUTPUT RATIO The capital-output ratio is a relatively simple concept. Its value and accuracy is' completely dependent on each of its parts being measured satisfactorily. The problem of capital measurement was considered in the preceding discussion and consequently will not be dealt with further. As output can usually be placed into somewhat homogeneous categories and can be assigned a value established in the market place its measurement is generally less problematic than the measurement of capital. loc. cit. •^Fisher, loc.cit. (22) As previously stated, production necessitates the presence of capital. This statement alone is sterile for it gives no hint of capital produc-tivity from which the understanding of the factors that determine capital volumn and rate of growth are gained. The capital-output ratio has been used to determine the above relationship for growth analysis. The Harrod-Dcnar growth models are well known examples of the use of this ratio. In one application, the capital-output ratio is the constant which determines the level of savings required to maintain equilibrium when the labour force is growing both in numbers and in productivity. This is the so called "natural rate of growth". With respect to the "warranted rate of growth", the capital-output ratio determines the growth rate of output when the saving function differs from that described as leading to the natural rate of growth.''"'' The capital-output ratio used in this study follows a somewhat different line of reasoning. The question under examination is: Under a given level of demand, what amount of capital is required for the production of the corresponding supply? Thus for an appropriate level of production to occur, the amount of capital must be the product of the capital-output ratio and the appropriate level of .production. In essence, the capital-output ratio is a simple measurement of productivity. The ratio used in this study is an aggregative produc-tivity measurement calculated on an annual basis for Canadian agriculture. "'"''Paul A. Samuelson and Anthony Scott, Economics, (Toronto: McGraw-Hill, 1966) pp.795-798 (23) Due to the introduction of time both the numerator and denominator of the ratio were estimated in constant dollar terms in an attempt to eliminate any noise which may arise through uncoordinated price fluctuations. It should be noted that the capital-output ratios referred to thus far are averages and not marginal or incremental ratios. The use of marginal ratios undoubtedly would be a much more refined method especially with respect to decisions involving investment opportunities. However, for the purposes of this study the method involving average capital-output wi l l be adopted for two reasons: (l) marginal values are unknown,' (2) the model deals with total capital only with investment decisions given or assumed. Thus, i f incremental capital additions result in a correspondingly larger or smaller output than the existing average, this wi l l be reflected in a changing average over time. For example, the level of capital required to meet estimated demand is given by: (3) RKt =.D (K/0) \ which is equation (4) in Chapter I. This relationship is identical to the following equation in which the incremental ratio has been developed, (4) RKt = D t (K t _ x + A V O W +A.0t) From this equation i t is obvious that the average annual ratio is sensitive to incremental changes. Thus far, discussion has centered around the theoretical aspects of capital which included definition, measurement and productivity. The next chapter wi l l apply this theory to evaluating the aggregate stock of agricultural capital in Canada at a constant base price. In addition, demand as well as output wi l l be estimated to provide the model with the necessary data to test the hypotheses. (24) CHAPTER III CAPITAL, OUTPUT AMD DEMAND IN CANADIAN AGRICULTURE In Chapter I a model was presented to test the stated hypotheses. The model was based on an aggregation of capital, output and demand. In the present chapter an attempt is made to provide empirical estimates of these three basic ingredients of the model, all valued in constant dollar terms with a base of 1935-1939=100. I. CAPITAL A. DURABLE, AGRICULTURAL CAPITAL VALUE IN CURRENT DOLLAR TERMS Durable agricultural capital refers to physical inputs which have a productive value lasting for more than one year or season. Components are livestock and poultry1, land and buildings, as well as implements and machinery. In Table I, page 25, it is indicated that the current values of durable capital in Canadian agriculture has expanded nearly fourfold over the period from 1935 to 1965. However this expansion is not a true indication of capital formation. The influences of inflation, increased productivity of existing resources, as well as price cycles for agricul-tural products, as a group distort both the magnitude of capital and periods of capital growth as observed in Table I. 1 Livestock and poultry have been included as durable because of the existence of breeding stock and horses. Ideally all animals which have an existence at the farm level of less than one year should have been excluded from the durable category. However the data failed to make this distinction and thus all forms of livestock and poultry are classified together. (25) TABLE I VALUE OF DURABLE CAPITAL Bl CANADIAN AGRICULTURE (1935-1965) (IN CURRENT DOLLAR TERMS) (1) (2) (3) (4) (5) i : ;Year \ Livestock i 1 and: Land and Implements & Total ! \ \ Poultry ! Buildings Machinery 1 ; ($000) (a)(b)i ($000)(a)(b) ($000)(a)(b) ($000)(a)(b) ! ' 1 !l935 ! 540,507 1 13,449,255 533,546 4,523,308 ! :1936 I 573,632 13,292,258 - 524,429 4,396,319 | 11937 i 603,672 13,253,346 526,876 4,383,894 \ •1938 ; 587,077 13,083,056 543,781 4,213,914 [1939 : 644,485 :3,106,885 547,393 4,298,763 il940 '• 682,522 |2,963,226 568,349 4,214,097 ; 11941 621,304 13,029,846 596,046 4,247,196 :1942 ; 751,393 ;3,283,024 660,492 4,649,909 J 11943 i 1,097,966 3,454,480 ' 722,277 5,274,723 11944 : 1,081,967 j3,649,477 758,083 5,489,527 ;,1945 i 1,042,302 • 3,711,473 826,632 5,580,407 ;1946 i 1,075,330 ; 3,897,005 905,491 5,877,826 11947 I 1,148,856 4,214,119 1,026,573 6,389,548 Il948 ; 1,244,981 • 4,665,126 1,194,947 7,105,054 i J1949 ! 1,370,792 ! 4,716,823 1,415,546 7,503,161 11950 ! 1,467,580 : 5,022,642 1,681,075 8,171,297 11951 ; 2,006,491 i 5,512,590 1,931,880 9,450,890 11952 ! 1,790,874 ; 5,668,467 2,076,787 9,536,128 11953 ! 1,556,503 • 6,295,977 2,257,636 10,110,116 :i954 1,424,076 : 6,183,050 2,352,548 9,959,674 11955 I 1,462,727 ; 6,567,066 2,283,627 10,313,420 il956 j 1,422,719 ; 6,852,657 2,263,286 '10,583,662 1957 j 1,512,472 ; 6,958,491 2,371,409 10,842,372 J1958 ; 1,860,461 < 7,440,775 2,441,191 11,742,427 S1959 ! 1,956,443 1 7,842,190 2,509,654 12,308,287 i I960 1,878,010 : 8,226,925 2,575,025 12,679,960 il96l I 1,990,234 ' 8,603,397 2,565,538 ! 13,159,169 11962 ! 2,053,779 I 8,974,027 2,656,211 13,684,017 '1963 ! 2,119,933 : 9,639,254 2,781,770 -14,540,957 |1964 j 2,166,287 10,675,560 • 2,948,169 15,790,016 11965 2,102,238 12,039,289 3,140,171 '17,281,698 Sources: (a) 1935-1940 M.C.Urquhart and A.H.Buckley (editors) Historical  Statistics of Canada. (Toronto: The MacMillan Company of Canada Ltd., 1965) p.23. (b) 1941-1965 Canada, Dominion Bureau of Statistics Quarterly Bulletin of Agricultural Statistics, April - June 1966, pp. 103-107. (26) To expand further, the influence of inflation is obvious. Any increase in the current value of a resource related to increase in values or prices throughout the economy in no way contributes to any change in the physical supply of agricultural products. Consequently the influence of inflation must be removed to facilitate testing of the hypotheses regarding actual capital formation. Secondly, price changes due to changes in productivity of capital must be taken into consideration. Injections of technology into Canadian agriculture over the period under study have no doubt played an important role in the level of total production. These injections have resulted in a change of the capitalized value of existing resources, in a manner that in turn depends on the existing market conditions for agricultural output. 2 Such changes should not be defined as investment. Any change in produc-tivity will be accounted for in a changing capital-output ratio over time so that double accounting would result if such changes were also imputed to an increase in capital. The final influence to which the capital data in Table I is subject is the price cycle. The capital stock of certain items may appear to expand and contract while in reality the physical stock does not exhibit similar oscillations. Livestock and to a lesser extent land are subject to dollar value changes as reflected directly from market conditions. ^ Investment here refers to farm level only and does not pertain to costs of research in either the public or private non primary agricultural sectors. In addition, any investment to implement technological change in the use of existing capital will be accounted for as capital formation. (27) For example, the current value of livestock and poultry increased by approximately a third from 1950 to 1951, then fell back to nearly the original level by 1953 as illustrated in Column (2), Table I. In comparison the physical change in livestock populations which can be represented in Table II of the appendix is negligable. Thus product price cycles which have a corresponding capitalized price cycle in existing capital resources result in a distortion of the measures of capital formation. To account for the above three influences on capital measurement over time, all agricultural items will be converted from current to constant dollar terms. The methods and the logic involved will be dealt v/ith in the following sections. B. DURABLE AND NON-DURABLE CAPITAL VALUED IN CONSTANT DOLLAR TERMS The real growth of capital can be approximated using index numbers as outlined in Chapter II. For the purposes of the analysis, the deri-vation of each item has been described. In addition, an attempt has been made to explain unusual growth patterns. Livestock and Poultry Items included are milk cows, cattle and calves, • horses^ , hogs, sheep and all varieties of poultry. Table II of the appendix reports population figures for each of these types of livestock. To arrive at the aggregate value of all livestock as shown in Table III, pages 29 and 30, milk cows were valued at $39 per head, beef cattle and JFor the purposes of this study horses were classified with machinery. If retained with livestock, their decline offset increases in the other forms of livestock. As machinery was substituted for horses as a power source the decline in horse numbers is offset by some of the increase in machinery and implements. (28) calves $26, horses $69, hogs $12, sheep $6, with poultry at $.73. Thess figures are the average value per head for the 1935-1939 period based on existing market prices^. Thus the constant dollar measure of value of livestock capital rests on the assumption that the ratios of values per head remain constant oyer time. Land and Buildings Land and buildings, although generally classified together, have been separated both to facilitate analysis and to observe capital growth in a less aggregative form. The measurement of this form of capital at 1935-1939 prices proved to be rather involved due to the nature of the data. To determine the value of buildings in deflated termc-the following formula was used-^ . (1) DBVt = K + (Ct + (Rt-Dt) (l/¥t)) . (l/EMIt) Where: DBV = deflated building value K = a constant= $118PSc 106=1939 value of buildings C = total agricultural construction R = repairs to farm buildings D = depreciation of farm buildings W = percentage of owner-operated farms EMI = index cf building material costs M^.C .Urquhart and K.A.H. Buckley (editors), Historical Statistics of Canada, (Toronto: The MacMillan Company of Canada Ltd., 1965) p,367 Livestock numbers were simply divided into total values to develop the above value per head, ^This formula x^ as applied in Table V of the appendix. Sources of the various series are footnoted there as well. (29) TABLE; I I I CONSTANT DOLLAR VALUE OF DURABLE AND NON-DURABLE CHPITAL I N CANADIAN AGRICULTURE! (1935-1965) (1935-1939 = 100) i l l (2) 131 (4) 15.1 ; V a l u e o f l i v e -Y e a r ! s t o c k minus V a l u e o f b u i l d i n g s V a l u e o f l a n d j V a l u e o f | |machiner y p l u s i T o t a l durao.l c a p i t a l h o r s e s (b) ( c ) i ho r s e s (d) (e) ($000,000)(a) ($000,000) _ i .s, «. . .. ($000,000); ($000,000) ($000,000) 0.935 ' 388 1164 2855 ! 735 5142 1936 390 1148 28?9 744 5161 1937 391 1141 2902 770 5204 1938 372 1133 2926 791 5222 1939 380 1126 2949 £20 5275 D.940 401 1122 2973 362 5358 J19/...1 405 1122 3037 909 5473 1942 427' 1120 3049 940 5536 0-943 450 1110 3063 943 5567 0-944 464 1108 3078 973 5623 J1945 441 1112 3092 1011 5656 0-946 418 1125 3107 1074 5723 DL947 419 1139 3121 1193 5872 1948 390 1151 3136 1334 6011 J1949 384 1174 3150 1490 6198 1950 367 1195 3165 1655 6382 1951 371 1213 3192 1811 6587 J1952 400 1233 3213 1969 6815 0-953 401 1254 3233 2159 7048 1954 422 1272 3253 2214 7161 11955 438 1290 3274 2292 7294 1956 447 1314 3292 2396 7449 1957 456 1334' 3311 2510 7611 1958 466 1352 3322 2584 7724 1959 474 1372 3333 2680 7859 I960 459 1390 3345 2779 7973 1961 480 1425 3370 2860 8135 1962 473 1464 3399 2965 8301 1963 492 1502 3428 ' 3093 " 8515 1964 502 1537 3452 3242 8733 1965 ! 500 1570 3485 3410 8964 ( C o n t i n u e d ) S o u r c e s : ( a ) T a b l e I V , . Column ( 4 ) , A p p e n d i x (b) T a b l e V, Column ( 1 2 ) , A p p e n d i x ( c ) T a b l e V, Column ( 1 3 ) , A p p e n d i x (d) T a b l e VI,-Column (8), A p p e n d i x '(e) Sum o f Columns (2),(3) , (4) and ( 5 ) . (30) TABLE n i (Continued) (1935-1939 - 100) (7) (8) (9) (10) (11) (12) (13) Value of : Machinery:Feed ; Miscellaneou sj Total j Non-'Total Total Fertilizer; Expenses !Expenses i Expenses : Capital | Capital ($000)(f) minus " ($000)(h)| ($000)(i) ! Durable :($000,000)lndex \ repairs ; ( $ o o o ) ( g ) i 1 i 1 I Capital | ($000)(j) \ (k)1935-39 ! 100 7205 j 55887 \ 41513 i 29487 ! 134093 \ 5276 ! 97.5 7036 1 58404 j 46331 i 29867 i L42438 ; 5303 ; 98.0 10017 i 61937 | 47225 j 32547 | 151726 1 5356 I 103.8 10832 j 67501 ! 54533 i 34166 161032 : 5389 ! 99.6 11119 ! 76222 i 68352 • 37064 i 192757 1 5468 ; 101.1 11829 j 81628 1 62955 \ 37861 j 194273 ! 5552 ! 102.6 11334 ; 85712 ! 70799 ! 48369 ! 2162U : 5689 1 105.2 13979 I 84819 • 95542 i 55677 > 250017 I 5786 I 106.9 16374 | 86525 1135940 i 58601 i 309440 ; 5876 ; 108.6 17386 ! 91003 i130470 ! 64585 ; 303444 ' 5926 j 109.5 20157 i 94940 1135762 ! 67831 ? 318590 ! 5975 ! 112.1 21919 i 102857 1159359 ! 71242 355377 ; 6078 1 112.3 ,23482 ! 109139 !188132 \ 74763 ; 395516 6268 | 115.9 23960 ! 121539 1137531 \ 69073 j 352103 '• 6363 I 117.6 26759 !137943 \126974 j 65919 : 357595 ! 6556 1 121.3 27390 i 142263 1118595 1 66593 ! 354841 i 6737 I 124.5 28446 ! 136243 1120149 ! 83043 i 367881 :• 6955 I 128.6 27126 1142616 |117401 i 80053 ! 367196 : 7182 ! 132.8 30830 1149864 1111399 i 83203 ! 375296 • 7423 : 137.2 29614 1 152284 !126829 ! 86731 j 395458 7556 ! 139.7 '28352 1161352 !123330 ! 95014 ; 308C.V8 7602 ! 140.5 29230 i168470 i147656 i100981 j 446337 '= 7895 i 145.9 29867 1170557 j136072 1 96324 i 432820 : 8044 ! 148.7 32228 i172941 1166366 1100008 i 471543 : 8196 ; 151.5 35472 ! 175641 !165520 ! 109446 i 486059 8345 ; 154.2 35966 i178539 !161763 ;110310 ; 486578 8460 i 156.4 :41330 i175992 i156558 i116504 i 490384 8625 I 159.4 44943 1184054 1157026 ;116069 ; 502082 1 8803 j 162.7 ;5044o j187959 i169278 i122992 1 530675 i 9046 167.2 !60259 i190713 1178206 i132505 I 561683 ; 9295 i 171.8 165101 ' 195014 :190965 .129399 ! 580479 : 9544 ! 176.4 Sources: (4) Appendix ( 7 ) \ A Table VII Column Table Vii Column  t Appendix (h) Table VII Column (10), Appendix (i) Table VII Column (13), Appendix (j) Sum of Columns ( 7 ) ( 8 ) (9) and (10) (k) Sum of Columns (6) and (11) (3D The K value which is the 1934 value of existing buildings was derived from the dollar amount of farm building depreciation calculated at (4$)^ o The method used by the Dominion Bureau of Statistics for depreciating buildings was adopted for this study. The depreciation is based on the replacement cost of the balance of buildings remaining at the end of each year. This involved the declining balance method which is shown in Figure 2, Age of Building in Years FIGURE 2 RATE OF DEPRECIATION OF BUILDINGS VIA THE DECLINING BALANCE METHOD (As adopted by the Dominion Bureau of Statistics) "Canada, Dominion Bureau of Statistics, Handbook of Agricultural  Statistics. Part II Farm Income — 1926-1965 (Ottawa: Queen's Printer and Controller of Stationery, June 1967) pp.24 and 79. This roundabout method was chosen due to the absence of a suitable series for the value of farm buildings disaggregated from land. The value of buildings was estimated by DBS from "'official annual statistic^ of the value of farm land'1. These estimates may be subject to error as the procedure involved a breakdown of the value of real estate into land and buildings which no doubt was somewhat arbitrary. (32) It should be noted that both repair and depreciation series were reported for owner-operated farms only, while for rented farms these two factors were simply aggregated in the rental payments. However, for the purposes of this study it was necessary to investigate all capital in agriculture, regardless of tenure. Therefore repair and depreciation charges were estimated for the rented farms and added to the published series. It was assumed that the ratio of rented to owner-operated farms was the same as the ratio of both repair and depreciation charges under these two forms of ownership. Repairs, it was assumed, make a long term contribution to production and thus were included as durable capital. Land valuation is based on constant prices per developed and unde-veloped acre. The average value of all Canadian farm land including buildings for the period 1935-1939 has been estimated at $24 per acre?. From an Alberta study** of the period 1935-1964 it was found that the value of an improved acre of land averaged 1,59 times as much as an acre 9 of all land • Assuming the same relationship holds for the Canadian aggregate, the average value of improved land is $38 for the base period. This leaves unimproved land the residual of $9 per acre-^. It should ?Canada, Dominion Bureau of Statistics, Quarterly Bulletin of Agricultural Statistics. (Ottawa: Queen's Printer and Controller of Stationery, January-March, 1955) p.21 °Elmer Allen, "Results of Multiple Regressions on Land Values Around Edmonton"' (unpublished undergraduate essay, The University of Alberta, Edmonton, Alberta, date unknown) 9lt was found that the per .acre value of aggregate land averaged $37.60 while improved land alone averaged $59.60 per acre, 1 0Total acres,for the period of 1935-1939 include 87,5 x Itfi improved and 79.0 x 10° unimproved with a total value of $39% x 10°. Thus 87.5($38)+79.0(Y) = $3996 leaving Y=$9 which is the estimated value per acre of unimproved land. (33) be noted that these values included the 1934 stock of buildings and thus the K value ($1181 x 10^) must be subtracted each year in developing an estimate of the value of land over time at a base price. In observing Table V of the appendix, it is of interest to note that total acres have increased only slightly while improved acreage has increased considerably at the expense of the unimproved. It could be argued that the additional improved land is inferior and not comparable in productivity to the original stock of land under cultivation, some of which may even have been lost to agriculture through urban sprawl. However, in this study, the average quality of both improved and unimproved land was assumed to remain constant over time. Machinery and Equipment Measurement of additions to the stock of machinery and equipment in constant dollar terms involved the use of the Paasche quantity index as described in the previous chapter. The base value of machinery of 1934 was calculated using the depreciation rate and amount of depreciation in the same manner as the base building value was derived. To this original stock of capital was added a cumulative total of current investment plus repairs, minus depreciation charges divided by the machinery cost index. In addition, the value of horses was added for reasons out-lined previously. In reference to the Dominion Bureau of Statistics' estimate of machinery capital in 1934» this stock was based on the bench-mark value established by the Census of Agriculture for 1931. No doubt the above method was subject to a certain degree of error, but no improved alternative was known. (34) It is interesting to note in Table III that machinery capital has exhibited much growth. Most spectacular are the last decade and a half of the study during which the machinery stock doubled to rival the land base in magnitude of values. This occurrence can probably be traced to factor substitution of machine capital for labour. Non-durable Capital Non-durable capital includes fertilizer, machinery expenses net of repairs, prepared feeds and miscellaneous items; all of which are listed separately in Table VII. Because their measurement in deflated terms involved the same procedure in each case they will not be described individually. Specifically, the current dollar value of each of these inputs was divided by an appropriate price index, as can be observed in Table VII of the appendix. All components of. non-durable capital have exhibited considerable growth. In the case of fertilizer the increase is twenty-fold. Machinery expenses which have expanded nearly four-fold are a reflection of the similar growth in durable machinery capital. Feed purchased through commercial channels has increased by a multiple of eleven. This can be attributed to increased specialization of the feeder cattle, hog, dairy and broiler operations with a trend away from the general mixed farm where field crops were marketed through livestock in small vertically integrated operations. In addition, more attention is now given to balanced rations necessitating the purchase of prepared feeds. The miscellaneous category includes expenditures for pesticides, nursery stock, irrigation, containers, seed, twine, electricity, telephone, artificial insemination, veterinarian, and fencing. The four-fold expansion of the miscellaneous category of (35) non-durable capital i s not easily explained because of the multiplicity of its composition. However, there are certain items such as pesticides, artificial insemination and possibly electricity and telephone which were either unknown or- not available to the majority of farm operators in the mid 1930»s and early 1940's. A complete format of the inputs and outputs involved in the measure-• ment of both durable and non-durable capital can be observed in Tables IV and VII of the appendix. II. OUTPUT At this point the data for the numerator of the capital-output ratio has been gathered. Now to complete the ratio, the output of Canadian agriculture in constant dollar terms for the period 1935-1965 must be estimated. Again inflation and price cycles distort the growth of pro-duction"'"''" in current dollar terms as observed in Table VIII, Column (2) page 36, Fortunately an index of the physical level of production for the years under study had been prepared by the Dominion Bureau of Statistics, This index, which was developed using Laspeyres quantity formula can be observed in Column (3) of Table VIII 1 2. -^Production estimates in current dollar terms are defined as total . sales of agricultural products plus inventory change plus income in kind minus farm dwelling rental value. This rather cumbersome definition resulted from the manner in which the data were formulated. 12 The use of this formula implies the assumption that the ratio of prices of all agricultural products remain constant over time. (36) TABLE VIII VALUE- OF OUTPUT IN CANADIAN AGRICULTURE (1935-1965) m (2) (3) (4) , Year > Production in Index of Production i ; current dollars : physical agricultural 1935-39 prices i : ($000) (a) production (b) ! ($000.000)(c) m • §38443 95o2 j 707.8 657156 85.1 632.7 :1937 742114 83.7 622.3 11938 798582 107.4 798.5 11939 880965 128.7 956.9 11940 ; 924955 130.1 967.2 11941 955048 108.7 j 808.2 J1942 1587529 164.2 ] 1220.8 J1943 1449666 113.7 845.4 11944 ' 1851798 140.4 1 1043.9 J1945 : 1601362 110.9 824-5 >1946 1887580 125.6 933.8 11947 2074400 116.0 862.5 11948 • 2591157 125.1 930.1 S1949 2603031 122.3 909.3 ;1950 : 2449064 137.8 1024.5 |195l 3272814 154.7 1150.2 |1952 3297129 166.2 1235.7 > 1953 2977074 157.9 1174-0 11954 2396533 119.7 890.0 U955 2613682 150.4 1118.2 ;1956 2888483 169.5 1260.2 11957 2558569 133.9 955.5 H 9 5 8 • 2868472 145.3 1080*3 J1959 2840959 144.6 1075.1 ;I960 . 2811803 154.4 1148.0 i1961 ; 2757300 126.5 940.5 ;1962 ; 3427028 172.2 1280.3 11963 ! 3628053 189.0 1405.2 i1964 : 3530569 176.1 1309.3 i1965 5 4002312 189.0 1405.2 Sources: (a) Canada, Dominion Bureau of Statistics, Handbook of Agricultural  Statistics. Part II, Farm Income - 1926-1965, (Ottawa: Queen's Printer and Controller of Stationery, June 1967) pp.48-67. Current production is defined as total sales plus income in kind plus inventory change minus farm rental value. (Sources continued on next page) (37) Sources: (of Table VIII continued) (b) , . , Index of Farm Production (Ottawa: Queen's Printer and Controller of Stationery, various years)• See the 1962 issue for conversion of the 1949=100 lease to 1935-1939=100 for the years 1962-1965. (c) Production in constant dollar terms is based on the average of 1935-1939 current dollars of column (2), multiplied by the index number in column (3). (38) To arrive at the constant dollar level of production, this index was multiplied by the average current dollar level of production of the base period. This method again involved the indirect use of the Paasche quantity index formula as described in Chapter II. In Column (4) of. Table VIII, the constant dollar levels of production for the years 1935 to 1965 can be observed. It is interesting to note that production has approximately doubled over the thirty year period. Another important feature of this production data is the variation. For example, 1942 had a level of production approximately 50$ higher than either the previous or the ensuing year. No doubt these oscillations are the consequence of variations in environmental conditions, specifically weather and are not due to propor-tional changes in inputs and technology in agriculture. III. DEMAND The third aspect of growth in Canadian agriculture to be measured is demand. For the purposes of this study it includes the expansion of both domestic and foreign markets, which when combined constitute total demand. Growth in domestic demand is assumed to be a function of changes in population and real net income per capita, both of which are quantifiable. However, as foreign demand is dependent on such variables as trade restriction and variable levels of aggregate production throughout the world, the long term growth in the international market is very difficult to develop into a meaningful function. Furthermore domestic demand is a more or less defined market which can be supplied either through domestic production or to a lesser extent by imports of agricultural products. Thus under constant prices the growth of the quantity demanded domestically (39) can be estimated i f tastes and preferences regarding the consumption of agricultural products in general are assumed not to change except under 13 conditions of changing real per capita incomes . However the international market is not so easily defined and consequently cannot be expected to exhibit a predictable growth pattern under the same assumptions as for growth of domestic demand. As the export demand is indeterminate under constant prices it has been considered as an exogeneous independent variable. Thus the annual historic exports for the period under study were added to estimated domestic demand to develop early estimates of the total demand for Canadian agricultural products. In summary, a problem of overproduction will arise if domestic demand plus export possibilities at a given base price level are growing at a slower rate than output. However, the problem of a chronic level of overproduction with continual inadequate returns to inputs has not been identified in the above statement. These additional aspects of the farm income problem has been dealt with in subsequent discussions in Chapters V and VI. •^ No doubt tastes and preferences of the general population change with respect to what constitutes the average diet. However, unless substi-tutions accompany a change in per capita incomes the food budget will probably remain the same. Thus under the assumption implied in footnote 12 regarding constant price ratios over time the quantity of agricultural production remains unchanged as long as the average food budget remains unchanged. An unchanged food budget then reflects the absence of shifts in tastes and preferences for food. It should also be noted that although there is some consumption of agricultural production in the non-food form, the consumption pattern for al l production is based on food alone, since industrial consumption is much less important and difficult to predict. No doubt even the pattern of non-food consumption is closely related to growth in popu-lation and real per capita incomes. (40) From the ideas involved in the foregoing discussion, the model identifying growth in quantity demanded without change in the real price level presented in Chapter I can now be developed starting with equation ( 2 ) , (2) ADD^DD^ = ( ^ - 1 ) +(£- - A W l ) This equation represents the relative change in domestic demand as a function of changes in population and real per capita net income. Relevant data is presented in Table IX, pages 41 and 42. An income elasticity of demand for aggregate agricultural products of 0.25"^ was assumed in preparing Column (3). The year to year change in demand (Column 4) was found to range from a negative level (-3.8$) in one instance to over U%> In most cases the growth in domestic demand ranged from two to four percent (23 out of the 30 years). G.E. Brand ow, Interrelations Among Demands for Farm Products and  Implication for Control of Market Supply, (Interregional Publications for State Experimental Stations), (Bulletin 680 University Park, Pennsylvannia: The Pennsylvannia State University, College of Agriculture, Agricultural Experimental Station, August 196l) p.17; and David L. MacFarlane and John D. Black, The Development of Canadian  Agriculture to 1970 (Montreal: McDonald College, McGill University, 1958) p. 8 Brandow's estimate for aggregate income elasticity at the retail level was empirically estimated to be .25667 and applied to the United States consumer. MacFarlane and Black suggested that the elasticity measurement at the Canadian farm level ranged between 0.20 and 0.25. Thus for the purposes of study the elasticity of demand at the Canadian farm level was somewhat arbitrarily chosen at .25. It should be noted that this income elasticity does not refer to an increase in the quantity of food consumed measured in calories or units of protein. Both in the general context of this study and specifically with this elasticity estimate food quantities are weighted according to value. Thus if average per capita incomes increase, a shift in demand can be expected toward foods having a higher price per unit food value. For example, the consumption of a pound of beef would represent an increase in the demand for food over wheat of approximately the same nutritional value, (41) TABLE IX CONSTANT DOLLAR ESTIMATION OF TOTAL DEMAND FOR CANADIAN AGRICULTURAL PRODUCTION (1935-1965) (1935-1939=100) Ii) (21 121 (4) i l l 121 lYear • Relative j Relative \ Total iTotal ; change in ! change in j relative 'domestic ; population demand by j change in:demand '.AN • changes inl domestic ! DDt ;Net I exports jTotal :demand !(5)+(6) N (a) xncome (b) : demand ! (3)+(3) lADDt • DDt-1 : ($000,000):($000,000)!($000,000): ! (c): (d); ; 1935 .0097 ; .0085 I .0182 1 577.7 85.5 ! 663.2 1936 .0097 -.0478 ; -.0381 ! 555.7 257.4 \ 813.1 D-937 .0087 .0213 :; .0300 ' 572.4 149.7 j 722.1 0.938 ; .0097 -.0017 ! .0080 577.0 131.2 708.2 11939 • .0103 ; .0140 : .0423 601.4 175.2 ; 776.6 b.940 : .0101 : .0222 : .0323 620.8 187.7 ; 808.5 1941 i .0111 • .0215 ; .0326 ! 641.0 219.6 860.6 L^942 j 1943 : .0128 ; .0293 I .0421 668.0 222.4 : 890.4 .0121 '; .0083 : .0204 681.6 282.8 i 870.4 p-944 : .0128 • .0185 : .0313 702.9 405.1 j 1108.0 a945 ; .0105 .0047 ! .0152 : 713.6 399.3 : 1112.9 11946 : .0182 .0052 .0234 ! 730.3 232.9 963.2 1947 ! .0210 -.0096 .0114 738.6 198.1 ; 936.7 11948 ': .0216 ;-.0028 , .0188 i 752.5 194.3 946.8 1949 i .0207 ;-.O028 .0179 766.0 195.3 961.3 11950 = .0197 .0051 ; .0247 784.9 ' 164.3 948.2 J1951 .0217 .0095 i .0312 i 809.4 185.6 •; 995.0 1952 .0321 ; .0056 ; .0377 : 839.9 277.7 1117.6 |1953 .0196 .0084 .0280 863.4 269.6 1133.0 1954 : .0298 -.0074 ; .0224 882.7 ; 150.7 1032.4 ,1955 ; .0269 .0110 ! .0379 ! 916.2 146.1 ' 1062.3 1956 .0244 ; .0158 ; .0402 ; 953.0 202.1 : 1155.1 :i957 I .0329 • .0024 . .0353 j 986.6 169.5 1156.1 1958 | .0283 ; .0048 : .0331 ' 1019.3 177.5 1196.8 1959 ! .0236 ; .0028 : .0264 1044.4 183.1 ; 1227.5 I960 - .0222 .0056 : .0278 ' 1073.4 138.6 • 1212.0 1961 . .0206 : .0052 .0258 | 1101.1 ; 117.3 1218.4 1962 .0182 : .0046 ; .0228 5 1126.2 ^ 103.9 1230.1 1963 ! .0176 .0044 : .0220 1141.0 172.5 i 1313.5 1964 .0180 .0045 : .0225 1166.7 326.6 i 1493.3 1965 ! .0175 .0044 : .0219 : 1192.3 278.2 ! 1470.5 (Sources on next page) (42) Sources: (of Table IX) (a) Canada, Dominion Bureau of Statistics, Canadian Statistical  Review, (Ottawa: Queen's Printer and Controller of Stationery, various issues) Total population figures were used to calculate relative change in population due to the influence of Newfoundland entering the Dominion; the average of 1948 and 1950 relative changes was assumed to exist for 1949. (b) , , National Accounts. Incomes and Expenditures (Ottawa: Queen's Printer and Controller of Stationery, various issues) Personal income in current terms was deflated by the consumer price index to arrive at relative changes in real income per capita. (c) Calculated on the basis of equation (3), page (d) 1935-1960 M.C. Urquhart and A.H. Buckley (editors), Historical  Statistics of Canada (Toronto: The MacMillan Company of Canada Ltd., 1965) pp.17^ -180. (e) 1961-1965 Canada, Dominion Bureau of Statistics, Canada Year Book (Ottawa: Queen's Printer and Controller of Stationery, various years). Using the current series of net exports and equation (5) page 43 the series was calculated in constant terms. (43) In the following simple first difference equation the relative changes in demand are used to estimate demand for the new time period. (3) DDt = (DDt-1) (l+A.DDt/DDt_1) The levels of demand during the years 1935 to 1939 were calculated from 15 the real value of output by subtracting net exports and adjusting for inventory change for each of the five years. The mean of these five observed levels of demand was assumed to be the level of domestic demand for 1937, the median year of the period. All demands over the period which can be observed in Column (5) of Table IX are based on the benchmark year of 1937. Total demand for Canadian agricultural products in real terms is formulated as: (4) Dt = DDt + ( Xt-Mt) The level of real net exports must be added to the previously established domestic demand. Annual estimates of net exports in constant terms (as observed in Column ( 6 ) , Table IX) are generated using the following formula. (5) R(X-M)t = ( .85 C(X-M)t) • (RTPt/CTPt) Where: R(X-M) = real farm value of net exports C(X-M) = current value of net exports of agricultural products including value added factor OTP = current value of total production RTP = real value of total production .85 = a constant to adjust values at export position to corresponding values at the farm gate. 15Net export estimates used were adjusted to account for estimates of value added as described in footnote 16. l6The total value of agricultural exports does not all accrue to farmers. There is a value added which must be taken into account to arrive at the value of the quantity demanded for export at the farm level. The adjustment constai of 85$ was estimated on the basis of the handling and storage costs of grain which constitutes the bulk of exports. This adjustment was also applied to imports as their price also constituted value added. It should also be noted that the published series of export values excluded all transportation charge: (44) The above method to bring net exports to constant dollar terms has been based on the assumption that the ratios of current to constant dollar values are equal for both total production and net exports in any .given year. This assumption is the same as that used in Laspeyres quantity index. Total demand has been estimated and is presented in Column (7), Table IX. Of importance is the fairly steady growth pattern which has resulted in an approximate doubling of total demand over the thirty years involved in this study. In conclusion, the analysis has now progressed to the point where the hypothesis can be tested. Therefore in Chapter IV, the observed growth patterns of capital formation, supply and demand are combined to facilitate the examination of the farm income problem. (45) CHAPTER IV TESTING OF HYPOTHESES In the analysis of the last chapter, levels of capital, output and demand were all estimated at 1935-1939 prices over the period from 1935 to 1965. The pattern exhibited by these three aspects of growth provide the basis on which the two hypotheses presented in Chapter I can be tested. I. FIRST HYPOTHESIS The first hypothesis as presented in Chapter I is: Capital formation in Canadian agriculture occurs at a faster rate than is consistent under changing technology, with the growth in demand for agricul-tural products as determined by growth in domestic population, increases in per capita real income, and changes in the net exports of agricultural products. The relationship between the growth of capital, output and demand has been investigated following a Harrod-Domar type of approach involving the use of a capital-output ratio as illustrated in Table X, page 46. Equation (4) of Chapter I, (RKt = D t(K/0) t) has been used to establish the capital requirements to meet the estimated level of demand at constant prices over time. The capital-output (presented in Column (2) ) , measured from constant dollar terms, is the measure of the productivity of a given stock of capital during one year under the exogenous influences (46) TABLE X COMPARISON OF ACTUAL AND REQUIRED CAPITAL WITHOUT ALLOWANCES MADE FOR INVENTORY CHANGE, CAMADA (1935-1965) (1935-1939=100) 121 (4) i l l (6) JYear |K/O Ratio ! (a) ;Total ;Estimated ^Estimated I Capital !Demand I Requirements |($000,000)1(2) x (3) !Existing j Capital ; ($000,000); ( c j ; Deviation of actual from required capital (5) - (4) i (b)j ($000,000) j ; ($000,000) ; i 9 3 5 i 7.5 : 663 . 2 ; 4974 1 5276 11 •i +302 1936 \ 8.4 1 813.1 6830 ; 5303 1 -1527 1937 i 8.6 ! 722.1 6210 i 5356 -854 1938 ! 6.7 i 708.2 j 4745 ; 5389 +644 1939! 5.7 : 776.6 ! 4427 ! 5468 ! +1041 1940 ! 5.7 I 808.5 i 4608 ; 5552 ! +944 19411 7.0 i 860.6 j 6024 5689 -335 ; i 9 4 2 | 4.7 1 890.4 4185 1 5786 +1601 1943 ! 7.0 i 870.4 i 6093 ! 5876 i -217 1944; 5.7 ; 1108.0 ': 6316 ; 5926 i -390 1945 ! 7.2 i 1112.9 ! 8013 ! 5975 i -2038 1946' 6.5 j 963.2 j 6261 i 6)78 -183 1947 \ 7.3 ! 936.7 ! 6838 6268 ; -570 1948! 6.8 1 946.8 ; 6438 ! 6363 -75 1949 i 7.2 i .96i;3 6921 ; 6556 1 -365 1950! 6.6 ' .948.2 ; 6258 ! 6737 i +479 1951 i 6.0 ; 995.0 5970 i 6955 i +985 ,1952 j 5.8 \ 1117.6 6482 : 7182 : +700 1953 j 6.3 ; 1133.0 • 7138 7423 1 +285 1954! 8.5 \ 1032.4 ! 8775 ! 7556 -1219 1955! 6.8 ; 1062.3 7224 7602 +378 1956; 6.3 i 1155.1 7277 7895 +618 1957 i 8.4 ! 1156.1 9711 ; 8044 ! -1667 19581 7.6 : 1196.8 9096 ' 8196 i -900 1959! 7.8 \ 1227.5 ; 9575 : 8343 ' -1232 I960; 7.4 i 1212.0 8969 846O -509 1961: 9.1 ; 1218.4 ! 11087 8625 i -2462 1962 j 6.9 ! 1230.1 ; 8488 ! 8803 ; +315 1963! 6.4 i 1313.5 i 8406 ; 9046 j +640 ;1964 5 7.1 •: 1493.3 10602 ; 9295 I -1307 1965 ; 6.8 : 1470.5 9999 9544 ! -455 Sources: (a) Column (5) of this table £ Column 4, Table V I I I , page 36 (b) Column (7) , Table I X , page 41 (c) Column (12), Table I I I . , page 30 (47) of weather, pests, diseases and general environmental conditions''". Technological change and changes in labour productivity also influence the ratio, but as mentioned previously these influences tend to be stable in the short run and do not promote oscillating levels of output. Thus in any given year, i f a l l output determining conditions were known in advance the amount of capital required to meet the estimated demand (Column (3), Table X) for that specific year would be determined by the above formula (RK^ = D^(K/0)^) using the established capital-output ratio. The analysis implies perfect information respecting a l l variable factors affecting production as well as perfect mobility of capital both into and out of the agricultural sector- Although perfect information and mobility cannot possibly exist in reality, they have been assumed to provide the criterion to which the actual capital formation can be compared. In the real world the short run equality of supply, demand and required capital would only arise by coincidence given unstable environ-mental conditionso However, i f required capital formation is consistently above or below actual capital formation, the conclusion can be drawn that capital formation in the long run is not in accord with long run equi-librium conditions. Specifically, indications would be that capital growth over time was at a different rate than dictated by the growth in demand during the same period. Disequilibrium would then have existed either in the base period, in subsequent years, or both. l i t is very interesting to note that the capital-output ratio has not demonstrated any major change over the period of the study. In relation to actual changes in productivity i t should be remembered that, production has approximately doubled while the agricultural labour force has been reduced to one-half its original size. (See Column (2) , Table XVIII, page 88) This indicates that a unit of capital today combines with one quarter the labour necessary in 1935 to produce the same amount of output. (48) A comparison has been made between actual and required capital formation under the assumptions of perfect information and perfect mobi-l i t y . In observing both the actual capital available (Column (5)) and the capital required (Column (4)) to meet estimated demand over the entire 31 year period of the study, there has been, on the aggregate, a slight net d e f i c i t in the growth of capital as can be seen in Columns (6) and (7). Within the period, i t can be observed that prior to World War II capital requirements were approximately matched by existing capital stock. However this observation was to be expected since 1935-1939 was the base period used in the calculations. During the War and its aftermath there appeared to be a deficit in capital with the notable exception of 1942 when an extremely large crop (presumably due to weather) v/as recorded. From 1950 to 1953 a surplus of capital appeared. However, from 1954 to 1965 the estimated capital requirements appeared to be mostly in excess of the existing stock. The capital d e f i c i t in these later years is part-i a l l y explained by adverse weather conditions on the Prairies in 1954, 1957 and 1961. Also, 1964 and 1965 had abnormally large wheat sales and therefore expanding aggregate demand and capital requirements. Over the 31 year period, a mean deficit of existing capital from estimated capital required was 238 million dollars v/ith a standard devia-tion of 964 million dollars. The average def i c i t is 3.1 percent of the existing capital stock. The above approach of equating off farm supply with estimated demand each year did not involve consideration of the farm level inventory changes. An estimation of the inventory change on farms in constant terms has been presented in Table XI of the Appendix. Assumptions similar to those used (49) in export evaluation in constant dollar terms were involved in the calculations. In essence, the composition of .inventories was assumed to be similar to that of aggregate production. When inventory change is considered, capital requirements are expected to differ from those observed previously. The anticipated differences are twofold: (1) Expected capital requirements would be reduced due to inventory accumulation in high output years which exhibit low capital-output ratios reflecting favorable environmental conditions; while in adverse years with high capital output ratios, inventories could be depleted. The net result of inventory fluctuations would be to reduce long run capital requirements. Excess production would take place in years which are characterized by high output per unit capital while in years with unfavorable returns to capital, inventories could be drawn upon to supplement output productivity without a temporary expansion of capital with low productivity. Thus a reduced amount of capital would be required in the long run without reducing the annual available supply. The reduction in capital requirements would be reflected in a reduced mean capital d e f i c i t of actual capital from estimated capital requirements. (2) A second anticipated observation would be a reduction in the standard deviation of the differences between the estimated capital requirements ana the actual capital stock due to the smoothing effect of inventories on the available supply. Of these two expected observations, only the second was observed. The influence of inventory changes on capital requirements has been cal-culated and is presented in Table XII, page 51. In column (2) the constant value of inventory change appears. The product of the capital-output ratio as observed in Table X and annual inventory change as rep-(50) orted in Column (3) Table XII represents the influence on capital of changes in inventory. This influence is added to the capital requirements cal-culated previously in Table X to arrive at new levels of estimated capital requirements. The mean deficit of the resulting deviations bet-ween estimated capital requirements and the actual capital stock as est-ablished in Column (5) is 298 million dollars, an unexpected increase over the original mean deficit of 238 million dollars. It occurred because est-imated capital requirements included the 31-year increase in the level of inventories as demand. The.revised capital requirements (Column (5) Table XII) are sufficient to meet both estimated demand and inventory accumulation. The standard deviation of the difference between actual capital stock and estimated capital requirements was reduced to 599 million dollars from the previous level of. 964 million dollars as anticipated. There are two possible explanations for inventory build-up over time. (1) There is the obvious consideration that increased stocks of unsold agri-cultural output are a consequence of overproduction. (2) Alternatively, as the agricultural industry expanded, there was a corresponding increase in inventories in the form of feed, seed, livestock and other retained farm products which may be classified as inputs. Thus agriculture may require a minimum inventory level proportional to the expanded size of the industry. An estimation of the necessary capital requirements under the as-sumption that the accumulated portion of inventories were superfluous and not an addition to estimated demand for agricultural products is presented in Table XIII, page 53. The adjustment of output to remove (51) TABLE XII COMPARISONS OF ACTUAL AND REQUIRED CAPITAL WITH ALLOWANCES MADE FOR INVENTORY CHANGE, CANADA (1935-1965) (1935-1939=100) (1) (2) (3) (4) (5) Inventory- Influences on Capital Deviation of JYear change capital required after actual from ($000,000)(a) ($000,000)(b) inventory change required capital ($000.000)(c) ($000.000)(d) 1935 +4.2 +32 5006 +270 1936 - 4 1 . 1 -345 6485 -1182 1937 - 9 . 3 -80 6130 -774 ;1938 +36.7 +246 4991 +398 1939 +58.4 +333 4760 +708 1940 +81.2 +463 5071 +481 1941 +44.5 -312 5712 -23 1942 +251.5 +1182 5367 +419 1943 -68.5 -480 5613 +263 1944 - 7 2 . 0 -410 5906 +20 1945 - 1 2 2 . 9 -885 7128 -1153 1946 +6.5 +42 6303 -225 1947 - 2 0 . 7 -151 6687 -419 1948 - 4 . 7 - 3 2 6406 -43 1949 -34.6 : -249 6672 -116 1950 +55.3 +365 6623 1 +114 1951 +115.0 +690 6660 +295 ;1952 +106.3 +617 7099 +83 1953 +29.4 : +185 7323 ; +100 1954 -28.5 -242 8533 | -977 1955 +87.2 +593 7817 -215 1956 +84.4 +532 7809 +86 1957 -45.8 . -385 9326 1 -1282 1958 -17 .3 : -131 8965 i -769 1959 : - 2 3 . 7 -185 9390 ; -1047 I960 +27.6 +204 9173 ! -713 1961 -92.2 -839 10248 i -1623 1962 i +70.4 ; +486 8974 ! -171 11963 ' +112.4 : +719 9125 ; -79 H964 - 3 5 . 4 • -251 10351 -1056 1965 +22.5 ' +153 10152 i -608 Sources: (a) Column (6), Table XI, Appendix (b) Column (2) of t h i s table x'Column ( 2 ) , Table X, page 46 (c) Column (3) + Column (4) Table X (d) Column (4) - Column (5) Table X (52) 1 inventory build-up was proportional to the current level of production . This adjustment of ouput can be observed in Column (2). The product of the yearly capital-output ratio of Table X, page 46, and the output adjustment is presented in Column (3) Table XIII. The resulting capital adjustment is subtracted from the capital requirement estimations of Table XII, page 51, to form a new estimated capital requirements series (Column (4), Table XIII). Thus inventory change was retained but long term accumulation of inventories was deleted. Presented in Column (5) are deviations of the existing capital stock from the new estimated capital stock from the new estimated capital requirements. The resulting mean defi-cit is decreased to $ 188 million, indicating that the capital requirements to meet long run estimated demand with inventory change, but not accumulation, have been reduced from the levels estimated without these two conditions. Thus capital requirements based on growth in estimated demand are an average of 2.5 percent higher than the existing stock of capital. The standard deviation of the differences between the two capital measurements remained at a relatively low 575 million dollars reflecting the influence of inventory changes on short Inventory accumulation was assumed to occur at the same rate as the expansion of the industry. As capital, output and demand al l approximately doubled over the 31 year period, inventory accumulation can be expected to occur at the rate of y+y/31 x to a cash level of $ 488 in 1965 where: y = initial amount of accumulation x = year (0 - 31) To find the i n i t i a l y the function is integrated 31 2 ^y + y/31 x dx = (31y+31 y/62) - (0) = 488 46.5y = 488 y = 10.4 Thus the level of accumulation is y = 10.4 +• (10.4/31)x. (53) TABLE XIII COMPARISON OF ACTUAL AND REQUIRED CAPITAL AFTER ALLOWANCES MADE FOR INVENTORY ACCUMULATION, CANADA (1935-1965) 1935-: L939=100 (1) (2) (3) (4) (5) i Adjustment ;• Adjustment ; Capital requirements. Deviation of j (Year ;to output j to capital . after adjustments ; actual from j j ($000,000)(aJ ($000,000)(b); ($000,000)(c) i required capital i j ! ($000,000)(d) 1 1935 ! 10o7 80.3 4926 +350 1936 i 11.1 93.2 6392 -1089 1937 11.4 98.0 6032 : -676 1938? 11.7 i 78.4 4913 i +476 1939: 12.1 ! 69.0 4691 +777 :' 11940 s 12.4 ; 70.7 5000 +552 11941 j 12.7 88.9 5623 +66 ; 1942 13.1 i 61.6 5305 +481 1943 1 13.4 93.8 5519 +357 1944! 13.7 78.1 5828 +98 1945 ; 14.1 101.5 '• 7026 -1051 ;i946i 14.4 93.6 6209 -131 1947 ; 14.7 107.3 6580 -312 !l948! 15.1 102.7 6303 +60 1949! 15.4 i 110.9 6561 -5 1950 ; 15.7 103.6 6519 +218 19511 16.1 96.6 6563 +392 1952: 16.4 95.1 ; 7004 +178 11953 . 16.7 105.2 7218 +205 1954; 17.1 j 145-4 8388 -832 1955 : 17.4 118.3 7699 -97 1956; 17.7 111.5 7697 +198 i '1957' 18.1 152.0 9174 -1130 : 1958 18.4 139.8 8825 -629 ! 1959 < 18.7 145.9 9244 -901 ! I960; 19.1 141.3 9032 "572 1961! 19.4 i 176.5 ' 10071 -1446 1962! 19.7 135.9 8838 -35 1963 '• / 20.1 128.6 : 8996 +50 : 1964, 20.4 144.8 10206 -911 1965: 20.8 141.4 10011 ! -467 ' Sources: (a) From Y = 10.4+(10.4/3l)-, from p a g e 52 (b) Table X, page 46 (c) Table XII, 51 (d) Column (5), Table X - Column (4) of this table (54) run c a p i t a l requirements. This l a t e r and most refined estimate was sub-jected to Student's t - t e s t , t = JL====. with the r e s u l t i n g t = 1.35, i n d i c a t i n g T / N ^ 1 that the mean of actual c a p i t a l stocks was not i n excess of the mean estimated c a p i t a l requirements at the 5% s i g n i f i c a n c e l e v e l . In as much as the preceding t-tes t s supported the hypothesis on an average c a p i t a l basis, the tests did not account for the fact that the rate of change of the former series may be i n excess of the l a t t e r . To test that t h i s s i t u a t i o n did not e x i s t the following two simple l i n e a r regressions were run for both e x i s t i n g c a p i t a l (Y^) and actual c a p i t a l (Y2). The regressions were Y x = 4,654.05 + 145.95t and Y 2 = 4,414.29 + 172.48t re s p e c t i v e l y . When the b values were subjected to a t - t e s t x/here b1 - b 3 ' t / ^ p w ^ i j + i/$-4j a n d w h e r e the t value was 0.8201 with 58 d.f.; thus supporting the hypothesis, at the 5% s i g n i f i c a n c e l e v e l that actual c a p i t a l stocks were not growing at a rate f a s t e r than the rate of expansion of c a p i t a l requirements. Thus on the basis of the above tests the f i r s t hypothesis has been rejected, i n d i c a t i n g that actual c a p i t a l formation has not taken place at a rate more rapid than dictated by changes in demand. I I . SECOND HYPOTHESIS With estimates for both e x i s t i n g c a p i t a l l e v e l s and required c a p i t a l l e v e l s established, the t e s t i n g of the second hypothesis follows. To repeat the second hypothesis as presented i n Chapter I i s : 11 »35 «37 '39 »41 '43 '45 '47 '49 »5i «53 R55 *1F57 *59 ^ ^63 "*6! FIGURE 3 YEAR . EXISTING CAPITAL AND CAPITAL REQUIREMENTS IN CANADIAN AGRICULTURE, 1935-1965 (BASED ON 1935-1939 FRICES=IOO) (56) The observed capital expansion and the corresponding increase in output coupled with the existing general inelasticity of demand for Canadian agricultural products is one of the principal causes of the rela-tively low level of incomes in agriculture. In testing this hypothesis* equations (5) to (9) inclusive as presented in Chapter I were involved. Equation (5), page 8 (0^ = (AK-RK) °(0/K) ) t t in essence measures the difference between actual aggregate supply of and estimated aggregate demand for agricultural products at constant prices. It should be noted that Equation (5) is presented only to demonstrate the relationship as described above. In reality, both actual supply and demand have been estimated previously within the framework of the model to determine the capital-output ratio and the required level of capital. Thus the difference (0^ .) can be calculated directly as reported in Tables IX (Column (7)) and VIII (Column (4)) on pages 41 and 36 respectively. Supply is assumed to be the annual total production without adjustments made for inventory change and accumulation, as represented in Table XIV, page 57. The deviations of supply from estimated demand (Column (2)) are recorded in Column (4) while the cumulative total of these deviations has been presented in Column (5). The inclusion of this last column is to portray the magnitude of any long term trends in either accumulation of inventories or a failure to meet estimated demand. Generally it appears that there has been no long run trend to either overproduction or under-production when no allowance has been made for inventory change. From the analysis it appears that estimated demand was in excess of actual supply (57) TABLE, XIV COMPARISON OF SUPPLY AND PRODUCTION WITH NO ALLOWANCES MADE FOR INVENTORY CHANGE OR ACCUMULATION, CANADA (1935-1965) (1935-1939=100) (1) (2) (3) (4) (5) •Estimated ; Total : Deviation of :Cumulative sum .Year 'total demand production ! production from' of deviations i ($000,000) (a): ($000,000) (b)l demand (3)-(2) ;($000,000) Kftooo.ooo) J1935 | 663.2 707.8 +44.6 +44.6 11936 ! 813.1 632.1 : -181.0 -136.4 1937 ! 722.1 622.3 i -99.8 -236.2 1938 708.2 798.5 : +90.3 ! -145.9 11939 i 776.6 956.9 : +180.3 +34.4 1940 ; 808.5 967.2 ; +158.7 ' +193.1 1941 ! 860.6 808.2 < -52.4 +140.7 1942 i 890.4 1220.8 +330.4 +471.1 11943 870.4 845.4 -25.0 +446.1 1944 ! 1108.0 1043.9 ; +35.9 +482.0 1945 ; 1112.9 824.5 i -288.4 +193.6 1946 ! 963.2 933.8 -29.4 +164.2 11947 i 936.7 862.5 -74.2 +90.0 1948 1 946.8 930.1 -16.7 +73.3 11949 : 961.3 909.3 -52.0 +22.3 1950 ' 948.2 1024.5 +76.3 +97.6 1951 1 995.0 1150.2 ; +55.2 +152.8 1952 •: 1117.6 1235.7 : +118.1 +270.9 1953 ; 1133.0 1174.0 +41.0 +311.9 |1954 I 1032.4 890.0 • -142.4 +169.5 1955 ! 1062.3 1118.2 : +55.9 +225.4 1956 : 1155.1 1260.2 +105-1 +330.5 1957 ; 1156.1 955-5 -200.6 +129.9 1958 • 1196.8 1080.3 ' -116.5 : +13.4 1959 1 1227.5 1075.1 ; -152.4 -139.0 I960 : 1212.0 1148.0 -64.0 -203.0 1961 i 1218.4 940.5 1 -277.9 -480.9 11962 1 1230.1 1280.3 +50.2 -430.7 1963 : 1313.5 1405.2 : =91.7 -339.0 J1964 i 1493.3 1309.3 i +184.0 -523.0 1965 1470.5 1405.2 i -65.3 -588.3 Sources: (a) Column (7), Table IX, page 41 (b) Column (4), Table VIII, page 36 (58) (production) in fourteen of the thirty-one years. In total, the sum of deviations is -588.3 million dollars (the last figure in Column (5)). Thus estimated demand was greater than actual supply by a mean of nineteen million dollars with a standard deviation of 138.2 million dollars. In relative terms the average annual supply should have been 1.8 per cent greater to be equal to estimated demand over the period under study. Thus when annual output is a proxy for supply, indications are that supply has not been growing faster than the estimated demand. In reality the growth rates were nearly equal. An identical analysis to the one used to develop Table XIV has been applied in Table XV, page 59, where supply now is the actual quantity of agricultural products released into the market place each year (i.e. inventory change and accumulation have been accounted for). The average supply deficit has now increased to -32.5 million dollars, due to the removal of inventory accumulation, while the standard deviation was reduced to 79.4 million dollars due to the smoothing effects of inventory changes. Thus the corresponding increase in output as a consequence of capital expansion is not in excess of estimated demand throughout the. period from 1935 to 1965. Actual output was observed to fall short of estimated demand by an average of 3«1 per cent. In Figure 4, page 60, the growth patterns of estimated supply and demand have been plotted to facilitate the observation of the two closely related growth patterns. Supply, as plotted, is the annual amount of agricultural products released into the market after inventory adjustments have been made. The annual observations are drawn from Columns (2) and (3) of Table XV. (59) TABLE XV COMPARISON OF SUPPLY AND DEMAND WITH ALLOWANCES MADE FOR INVENTORY CHANGES AND ACCUMULATION, CANADA (1935-1965) (1935-1939=100) (1) (2) (3) (4) (5) |Estimated total Total Deviation of . Cumulative lYear i demand ; supply supply from 1 sum of deviations ' j ($000,000)(a) ; :' i '^00,000)(b)i demand (2)-(3) ($000,000) f ($000,000) ! 11935 i 663.2 i 703.6 +40.4 +40.4 1936 813.1 j 673.2 -139.9 I -99.5 1937 722.1 631.6 -90.5 i -190.0 1938 708.2 I 761.8 +53.6 I -136.4 1939 776.6 898.5 +121.8 ! -14.6 1940 808.5 i 886.0 +77.5 i +62.9 1941 860.6 1 852.7 -7.7 ! +55.2 1942 ; 890.4 ! 969.3 +78.9 +134.1 1943 870.4 i 913.9 +43.5 +177.6 1944 i 1109.0 ; 971.9 -136.1 I +41.5 1945 1112.9 947.4 -165.5 +124.0 1946 963.2 940.3 -22.9 : -146.9 !l947 936.7 983.2 +46.5 i -100.4 J1948 946.8 • 934.8 -12.0 i -112.4 1949 961.3 | 943.9 -17.4 ! -129.8 1950 : 948.2 j 969.2 +22.0 -107.8 1951 995.0 ! 1035.2 +40.2 -67.6 1952 i 1117.6 '> 1129.4 +11.8 ! -55.2 .1953 1 1133.0 j 1144.6 +10.8 ; -45.0 1954 1032.4 ' 918.5 -114.3 -159.3 1955 i 1062.3 ' 1031.0 -31.3 j -190.6 11956 \ 1155.1 | 1175.8 +20.7 -169.9 11957 ! 1156.1 1 1001.3 -54.8 -224.7 1958 : 1196.8 j 1097.6 -99.2 ! -323.9 .1959 1 1227.5 ! 1098.8 -128.7 i -452.6 !l960 1212.0 1120.4 -91.6 -544.2 il96l 1218.4 ! 1032.7 -186.3 -730.5 S1962 \ 1230.1 ; 1209.9 -20.2 -750.7 11963 ! 1313.5 S 1292.8 -21.7 -772.4 11964 ! 1493.3 | 1344.7 -148.6 ; -921.0 1965 ! 1470.5 ! 1382.7 -87.8 -1008.8 Sources: (a) Column (7), Table IX, page 41 (b) Column (3), Table XIV, page 57 + Column (2), Table XIII, page 53 (60) AGGREGATE SUPPLY AND DEMAND ($ 00,000,000) , o O -O » O (—' K G £ (61) III. DISCUSSION Agricultural capital and the corresponding supply have been observed to grow at approximately the rate determined by estimated demand. On a priori grounds one would expect the effect of capital growth on the farm income problem defined in terms of total revenue to be nearly neutral. The economic position of farmers has probably been neither weakened nor improved as a consequence of the aggregate price they receive. The foregoing a priori speculation has been borne out in the appli-cation of the model. To begin, equation (6) of Chapter I ( (^t-l/'^t^ = (Ot/Dt)(l/—p)) obviously results in an average positive change in price as O.J. (deviation of actual from expected output) is negative over the long run. In equation (8) (A\=^t_1(l+Dt+o[/Dt_1+0^1))(APt/Pt„1) + l the actual revenue (ARt) will be larger (with an increase in relative prices) than expected revenue (ER.) as estimated in equation (7) (ER =ER (1+ D /D )) where z t t-1 t' t-1 prices are held constant with no allowances made for change in price. In conclusion, equation (9) (CIt = ER -ARt) will be positive under the assumption of inelastic demand and the estimated demand growth which is slightly in excess of the observed growth in supply. In essence the existing amount of capital growth and the resulting expansion in output has not been in excess of demand requirements over the thirty-one years under study. Consequently the second hypothesis has been rejected. The model could, of course, be used to determine the additional income which supposedly accrued to farmers as a result of estimated demand reportedly being in excess of supply by an average of 3*2 per cent. However, in the author's opinion this would be no more than an academic (62) exercise with questionable results. It is needless to pretend that the established difference of 3«2 per cent is an exact representation of reality when the methods used to measure aggregate series over time were admittedly subject to error. The real importance of this estimated deviation rests in the fact that supply has been apparently less than demand instead the extreme opposite situation which of course would have led to the non-rejection of the second hypothesis. If the observed growth in output does not explain the farm income problem, the question s t i l l exists as to what does cause the problem. Before this can be investigated a thorough look at the nature of the problem is in order. In addition many questions have been raised which warrant investigation. For example, why and how does capital accumulation take place at the same time that a farm income problem exists? The above and related questions have been dealt with in detail in the following two chapters. (63) CHAPTER V THE FARM INCOME PROBLEM A farm income problem exists. The preceding analysis of the historical agricultural growth pattern while not explaining the problem raised further questions. If indeed, supply and demand are approximately equated (with aggregate supply increasing slightly less than aggregate demand) over time one would expect that conditions of general equilibrium would more or less apply with respect to prices. Specifically, have the aggregate prices received by farmers risen in relation to price increases throughout the entire economy? On a priori grounds one would expect prices to have exhibited a slight relative increase. However, the much flaunted cost-price squeeze would appear to indicate that conditions of general equilibrium have not existed with reference to the position of agricultural prices in the Canadian economy. The purpose of this chapter is to investigate the nature of the farm income problem with respect to relative prices received by farmers for their aggregate output as compared to general price levels within the entire economy. In addition, the magnitude and trend of the farm income problem has been investigated as a prelude to the above analysis. I. THE FARM INCOME PROBLEM The farm income problem has previously been defined in Chapter I as a situation in which the average income per person employed in primary agriculture maintains a level well below that of the per-capita incomes of those engaged in non-farm employment. The magnitude and trend of this discrepancy has been measured in the following analysis. (64) In Table XVI, pages 65 and 66, data has been presented and the ratios of per capita incomes of the farm and non-farm sectors have been calculated. The agricultural labour force as presented in Column (2) includes both hired and owner-operated labour. It is of interest to note that numbers have decreased by approximately a half from 655,000 in 1935 to 298,000 in 1965. Total net farm income is the sum of agricultural hired labour income (Column (3)) plus total farm net income (Column (4)) including perquisites. The income per person employed in agriculture is presented in Column (6). It is interesting to note the per capita income growth from a few hundred dollars in the late 1930*s to well over two thousand dollars in the early 1960»s. The remainder of Table XVI is devoted to a similar analysis to determine the per capita income of people employed in non-agricultural enterprises. In Column (8) a doubling of the non-agricultural labour force from 3,104,000 in 1935 to 6,468,000 in 1965 can be observed. Military pay, total net agricultural income as well as inventory adjustments (Column (10)) are subtracted from Net National Income at Factor Cost1 (Column (9) to arrive at an estimate of the income of the non-agricultural civilian sector (Column (ll)). The income per person employed in the non-agricultural labour force (Column (12)) and the income per capita employed in Net National Income at Factor Cost is a DBS term which is NNP minus indirect business taxes. In essence it is the full factor earnings of al l productive activity. (65) TABLE XVI RATIOS OF FARM TO NON-FARM INCOMES PER CAPITA EMPLOYED, CANADA (1935-1965) (ALL CURRENT DOLLARS) Ml 111 (3) (U) (5) (6J j Agricultural Agricultural- Total farm. Total ; Income per j Year jlabour hired labour! net income! agricultural5 person employed j j force : income ! I net income ! in agriculture j J ! (c)(d) | (e)(f) 1(3) + (4) ! (5) - (2) | j i($000)(a)(b)i (feGiC.uoO) j ($000.000) ($000.000) (!) j 1935 1298 ! 67 ! 238 i 305 230 1936 1319 > 71 ! 245 ! 316 240 1937 1339 76 j 307 383 ! 287 1938 1359 77 ! 364 441 '• 325 1939 1379 1 78 ! 431 ! 509 369 1940 1344 ' 83 ! 466 | 549 408 1941 1224 1 86 i 479 i 565 462 1942 1139 : 95 ! 1016 i 1111 976 1943 1118 ! 103 j 779 I 882 789 1944 1136 ! 107 ! 1129 \ 1236 1087 1945 1144 109 ! 852 \ 961 840 1946 1271 i 120 i 1053 i 1173 923 1947 1172 ! 130 ! 1104 ! 1234 1053 1948 1186 1 131 i 1525 1 1656 1396 1949 1114 1 1 3 4 i 1383 1517 1361 1950 1066 ' 144 ! 1249 1 1393 1307 1951 991 158 ! 1931 I 2089 2108 1952 927 172 j 1880 i 2052 2214 1953 898 1 171 ! 1560 \ 1831 2039 1954 893 159 l 980 ! 1139 1276 1955 873 i 161 i 1174 ! 1335 1530 1956 819 i 172 j 1316 1 1488 1817 1957 772 172 1 994 i 1166 1510 1958 739 ! 178 l 1263 j 1441 1950 1959 724 182 j 1098 i 1280 1768 I960 675 i 192 j 1191 1 1383 2049 1961 726 | 195 ; 935 ! 1130 1557 1962 681 201 1492 I 1693 2486 1963 664 209 ! 1502 i 1711 2576 1964 •667 1 215 i 1313 I 1528 2291 1965 655 ! 220 ' 1660 l 1880 2871 Sources: (Continued) (a) 1935-1960 M.C. Urquhart & A.H. Buckley, Historical Statistics of Canada. The MacMillan Company of Canada Ltd. Toronto 1965 p.6l. (b) 1961-1965 Canada, Dominion Bureau of Statistics, The Labour Force (Ottawa, Queen's Printer and Controller of Stationery, various years) (c) 1939-1959 Urquhart, op. cit. p.97 (66) TABLE XVI (Continued) (ALL CURRENT DOLLARS) (7) (8) (9) (10) (11) (12) Non- ;Net national Adjustments Total Income per Ratio: i agricultural i ncome at factor non-farm person Farm/ j labour j C O S t net income' employed non-farm j force 1 (g)(h) (g)(h)(i) (8)-(9) other than (6)-(ll) ! ($000) (a Kb)! ($000,000) ($000,000) ($000,000) agr. 1 3104 | 3099 314 2785 899 .26 3147 ! 3367 325 3042 967 .25 3187 j 3887 393 3494 1096 .26 ! 3229 i 4001 450 3551 1100 .30 ; 3270 i 4236 541 3695 1130 .33 3263 I 5063 742 4321 1324 .31 3242 : 6305 951 5354 1651 .28 3430 | 8098 1752 6346 1850 .53 3449 1 8802 1192 7610 2206 .36 1 3412 1 9583 2303 7280 2134 .51 3376 ! 9665 2078 7587 2247 .37 3591 i 9551 1513 8038 2239 .41 j • 3782 ! 10361 1317 9044 2391 .44 ' 3849 j 12003 1738 10265 2667 .52 • 3978 i 12905 1632 11373 2859 .48 4032 ! 14161 1530 12631 3132 .42 i 4245 1 16588 2290 14298 3368 .63 i ; 4417 ! 18654 2322 16332 3698 .60 I 4488 1 19294 2140 17154 3822 .53 i • 4593 ! 19032 1506 17526 3816 .33 i j 4712 1 20737 1729 19008 4034 .38 ! i 4919 ! 23166 1912 21254 4321 .42 5198 I 24011 1642 22369 4303 .35 1 5381 ; 25011 1932 23079 4289 .45 ! 5462 i 26482 1776 24706 4523 .39 ! 5716 j 27433 1892 25541 4468 .46 1 5816 j 28250 1680 26570 4568 .34 j 5909 ! 30653 1279 29374 4971 .50 ! 5994 1 32869 2309 30560 5098 .51 j 6234 ! 35437 2101 33336 5347 .43 1 !< 6468 1 38819 2567 i 36252 5605 .51 ! Sources: (Continued) (d) 1960-1965 Canada, Dominion Bureau of Statistics, National Accounts, Income and Expenditures (Ottawa: Queen's Printer and Controller of Stationery, 1966)p.30 (e) 1935-1959 Urquhart, op.cit. p.356 (f) 1960-1965 Canada, Dominion Bureau of Statistics, Handbook of Agricultural Statistics, Part II. Farm Income 1926-1965 (Ottawa: Queen's Printer and Controller of Stationery, June 1967) p.28. (g) 1935-1959 Urquhart, op.cit. p.134 (h) 1960-1965 Canada, Dominion Bureau of Statistics, National Accounts and Expenditures (Ottawa: Queen's Printer and Controller of Stationery, 1966) p.19. (i) Adjustments are the sum of military pay, total agricultural net income and inventory adjustments. (67) agriculture (Column (6)) are used to form the desired ratio as presented in Column (13) . Of interest is the fact that agricultural incomes are consistently well below those of the non-agricultural sector. Figure 5, page 68, is used to illustrate the relative position of agricultural income over time. Indications are that agriculture was in an improved position at t,he end of the period under study. In the 1935-1939 period, per capita farm income was 27.4 per cent of non-farm income while in 1961-1965 it had increased to 45.8 per cent. From early in World War II, until after the Korean conflict (1942-1953) the ratio of incomes was 48.3 per cent with 1951 reaching a peak of 63 per cent. This period of relative prosperity was a consequence of international events of the time and could not be expected to remain after hostilities subsided and the international market returned to a more normal position. 3 The previous analysis appears to be contrary to Kulshreshtha's work • on this subject. From his analysis he draws the conclusion that farm incomes "have been rising at a slower rate than the non-farm incomes"^. T^he measures of incomes per person employed in each of the two sectors include returns to both capital and labour. No doubt the ownership of capital does not fa l l neatly into the two sectors as many individuals have investments in both. Ideally, disposable income comparisons would have been the most realistic measure. However disposable income comparisons over the period were unavailable so the above method was adopted. In spite of this possible shortcoming, the relative position of the two incomes were established. In addition, the uniform accounting method used over the thirty-one years insured that an observed trend was drawn from consistent observations. S^.N. Kulshreshtha, ''Measuring the Relative Income of Farm Labour, 1941-1961'', Canadian Journal of Agricultural Economics. Volume XV, Number 1, PP. 32-33, 1967 4Ibid. p.37 .7 • *35 « 3 7 \y) V41 4^5 »47 '49 *51 ~*~53 »55 5^7 *59 FIGURE 5 RATIO OF AGRICULTURAL/MON AGRICULTURAL PER CAPITA INCOMES, (1935-1965) »6l »63 '65 YEAR (69) In his choice of five sub periods, the first four were averages of five years while the last was only the single observation of 196lo Primarily, due to crop failure on the Prairies in 1961, this year had one of the 5 lowest per capita incomes since 1950 . The conclusion that farm incomes are falling in relation to non-farm incomes over time is questionable i f 1961 is used as a representative observation of the most recent farm income situation., To further illustrate this point the farm to non-farm income ratios as presented in Column (13), Table XVI, could be grouped into the same five subperiods as used by Kulshreshtha with identical apparent conclusions. The ratio would peak in the 1951-1955 period, fall off somewhat in 1956-1960 and fall s t i l l further in 196l. When annual obser-vations are presented as in Figure 5, it becomes readily apparent that much information is lost by the aggregation into arbitrary and non-uniform groupings. The general conclusions which can be drawn from this section are two-fold, (l) On a per labourer income basis alone farmers are consistently much worse off than their non-farming counterparts. (2) The relative position of farmer incomes does not appear to be depreciating over time. In fact by the early 1960's there were indications that the income situation in primary agriculture may have improved. II. THE COST-PRICE SQUEEZE There is a general consensus that the prices farmers receive for their products are increasing at a slower rate than has been observed for the-5See Column (6), Table XVI (70) products they purchase. This phenomenon is commonly known as the cost-price squeezed The presence of such a price relationship is incongrous with the analysis in which supply and demand grow at approximately equal rates. Unless there has been a change in tastes and preferences on the part of consumers vit^ ~-rp^ct to agricultural products, the simultaneous presence of a cost-price squeeze, which in essence is a decline in the relative price of food and fiber, and approximate equality in the growth rates of supply and demand is doubtful. To begin, various price and cost indexes have been plotted in Figure 6, page 71. These indexes include the aggregate farm production price index, the general wholesale price index, the price index of commodities and services used by farmers as well as the farm family living cost index. The reasons behind the choice of the three indexes in addition to the one representing prices of farm production are as follows. As a representation of the price level of the economy as a whole the general wholesale price index was selected. Both the index reflecting prices of commodities and services used by farmers and the farm family living cost index were chosen as an indication of the relative prices which are faced by farmers in the roles of both producer and consumer. All of the four indexes had a base of 1935-1939=100 and were plotted over the period of 1935 to 1965. .M. Drummond, "The Problem of Economic Development of Canadian Agriculture", The Economic Growth of Canadian Agriculture. Eighth Annual Workshop Report, Canadian Agricultural Economics Society (June 10-14, 1963) University of Alberta, Edmonton, pp.37-38 340 j 320 • <3? ^37 »39 H I *43 * 4 S * t s T » 4 9 ^51" »53 »55 *57 »59 *5X *53 ~n&5 FIGURE 6 PRICE INDEX LUMBERS (1935-39-100) - 1935-1965 Source: Canada, Dominica Bureau >f S ta t i s t i c s , Prices and Price Indexes, Various Tears (72) Aggregate farm production in the period commencing in 1939 to approx-imately 1954 exhibits a large divergence from the other trends. The rapid price increases up to 1951 followed by an equally dramatic decline ending in 1954 are historically coincident with World War II followed by the Korean War. The decline in prices from 1951 to 1954 reflect a cessation in hostilities and a return to what could be considered a more natural .state of international markets. For the decade starting in 1955 the relative position of agricultural prices f e l l into a trend similar to that of the other three indexes. In essence, there appears to be a lack of evidence supporting a cost-price squeeze i f the base period of 1935-1939 = 100 is used. However i f the base period of 1949 is adopted as is frequently the case a cost-price squeeze becomes very evident. In Figure 7, page 73» the four indexes using this later base price have been plotted. After 1951 the relative position of agricultural prices f e l l and remained in an unfavorable position for the duration of the period under study. Under the above described situation, the period from 1950 to 1965 reflect agricultural prices failing to increase at the same rate as the other relative price i n d i c c t o r s . In order to demonstrate the importance attached to the choice of base period, comparison should be made between Figure 7 and Figure 8, page 74. This later figure includes indexes with a 1935-1939 base equal to 100 but covers the same span of years (1950 to 1965) as in Figure 7. The apparent difference is remarkable as completely different conclusions can be drawn from each of the two figures. In essence the 1935-1939 base price does not strongly support the hypothesis of a cost-price squeeze while with the 1949 base the phenomenon &• Aggregate Farm Production Price Index General Wholesale Price Index © - Commodities and Services Used by Farmers Price Index. F a r m Family Liv ing Cost Index. *54 '56 »58 FIGURE 7 PRICE INDEX NUMBERS (1949=100) 1950-1965 Source: Canada, Dominion.Bureau of S ta t i s t i c s , Prices and Price Indexes, Various Tears. r ,1 Aggregate Farm Production Price Index x—General Wholesale Price Index QrQ Commodities and Services Used by Farmers Price Index • •«— Farm Family Living Cost Index FIGURE 8 PRICE INDEX NUMBERS (1935-39-100)~1950-1965 Source: Canada, Dominion Bureau of Statistics Prices and Price Indexes, Various Tears (75) is evident. The question arises as to which of the two analysis is most appropriate in representing reality. Although there is no evidence to support the existence of equilibrium in the period of 1935-1939; the choice of 1949 as a base year is very questionable. In Figure 6, the year 1949 as well as the years preceding and following i t can be seen to exhibit very favorable relative prices for agricultural products. As previously indicated this situation was at least partly due to strong exogenous forces as a consequence of international conflict so therefore market conditions could not be considered as normal. Thus the acceptance of any year or groups of years during this era cannot reflect equilibrium conditions. Consequently, the presence of a cost-price squeeze based on 1949 = 100 cannot be accepted as valid. Although the analysis using a 1935-1939 base of 100 does not eliminate the possible existence of a cost-price squeeze which could become evident i f a longer period, such as the entire twentieth century was observed with respect to relative prices. However the earlier base period is superior in the fact that it provides a longer subset of years over which to observe price relations. The more recent base year (1949) leads to a myopic observation which follows with the conclusion that a cost-price squeeze exists while the relevance of the existing price relationships in the base year is disregarded. Therefore the longer the period under observation, the more credence can be attributed to the conclusions. In summary, there appears to be no long term trend over the period of 1935 to 1965 for agricultural prices to increase at a rate slower than that of price increase in the general economy. Therefore the relative position (76) of agricultural prices is as expected in a situation in which supply and demand are expanding at approximately the same rates. Empirically there is some evidence which can be drawn from the previous analysis to support the view that the cost-price squeeze is relatively insignificant and not of the major proportions portrayed in Figure 7. Under the assumption that the rate of long run increases of a l l prices was approxi-mately the same, one would expect the real per capita income in agriculture to have increased by the product of the ratios of final output to original output and original farm labour force to final farm labour force. In essence, farm income per capita should increase in proportion to the relative increase in production times the relative decline in the farm labour forceo If a l l prices (both agriculture and non-agriculture) increase at the same rate there is a consistent inflationary trend and thus real income (which has this trend removed) should be devoid of price influences. This means that a relative increase in aggregate production will result in the same proportionate increase in total income to the agricultural sector. The ratio of output in 1961-1965 relative to 1935-1939 in constant n dollar terms was 1.7 . The inverse ratio of the agricultural labour forces 8 for the two periods proved to be 1.97 . From this i t is expected that the real income per person employed in agriculture would have increased by a factor equal to 3.37 over the period. In actuality the real income per Q capita level expanded by a multiple of 3-78 . This provides further evidence 7 Table XIV, Column (2) 8 Table XVI, Column (2) 9 Table XVI, Column (6) { The annual incomes were adjusted by the consumer price index of base 1949=100 to arrive at incomes in constant dollar terms. (77) that the aggregate prices farmers receive for their products are increasing slightly faster than prices in the economy as a whole. This last relation-ship is actually the inverse of the conventional cost-price squeeze as i t applies to primary agriculture. Thus the above analysis does not contribute any evidence which would support the presence of a cost-price squeeze in the period from 1 9 3 5 to lit>5. To this point there has been no mention of technological advances and their influence on the cost-price squeeze. Under competition, an input is paid its marginal value product or at least some proportion of the value of the incremental output consequent upon its use. Changes in technology which influence prices of inputs and thus costs of production do not necess-arily either enhance or diminish the cost-price squeeze. Technological progress may result in a unit input which is qualitatively improved increasing in price in relation to the capitalized savings in the total cost of output. The input is in reality an expanded unit of capital which increases the productivity of other capital. If a technological improve-ment resulted in a smaller capital requirement to produce the same output, but a l l the existing capital were non-mobile one would observe conse-quences similar to those characterizing a co3t-price squeeze. In essence, the improved input was purchased at an additional cost but resulted in neither an increase in output nor a reduction in resources employed. Conceptually, i f technological change improves a tractor's working capacity the additional price charged to the agricultural industry over the price of an earlier model could be equal to the capitalized value of the labour saved before a cost-price squeeze would be demonstrated. However in (78) the case of an i n d i v i d u a l farmer the s i t u a t i o n could be completely d i f f e r e n t . I f he attempts to replace h i s o l d t r a c t o r he may be f o r c e d t o purchase a new model which contains labour saving devices. However h i s land resources may be l i m i t e d to the extent t h a t he now has a surplus of labour. He now farms h i s land i n only a f r a c t i o n of the time but does not increase output. In r e a l i t y , he and h i s t r a c t o r are underemployed. However to him i t appears t h a t he has bought the same u n i t of c a p i t a l as before (he produces no more w i t h i t ) but i s f o r c e d to pay a higher p r i c e . The t e c h n o l o g i c a l change i s of no f i n a n c i a l consequence t o him and t h e r e f o r e claims w i t h c e r t a i n j u s t i f i c a t i o n t h a t he i s v i c t i m of a c o s t - p r i c e squeeze. A g r i c u l t u r e d i d not experience such cost i n f l a t i o n from 1935 to 1965. The p r i c e index of commodities and s e r v i c e s used by farmers account f o r t e c h n o l o g i c a l improvements and adjustments are made to the index accord-i n g l y . Of much gr e a t e r s i g n i f i c a n c e i s the f a c t t h a t the i n d u s t r y as a whole a d j u s t s to take advantage of t e c h n o l o g i c a l change r a t h e r than face the same c o s t - p r i c e squeeze an i n d i v i d u a l farmer might f e e l . In r e a l i t y the i n d i v i d u a l would be i n a constant s t a t e of t r a n s i t i o n as a consequence of t e c h n o l o g i c a l progress. Returning to the example of. the t r a c t o r , the competitive f o r c e s d i c t a t e t h a t the farmer must purchase more land t o u t i l i z e the expanded u n i t of c a p i t a l i n v e s t e d i n h i s new machine. I f he does not make t h i s move someone e l s e , i n a p o s i t i o n not u n l i k e h i s , w i l l attempt t o purchase h i s land i n an e f f o r t t o take advantage of technology which he has acquired. Thus i f t e c h n o l o g i c a l improvements r e q u i r e l a r g e r farming u n i t s f o r (79) their efficient implementation an apparent cost-price squeeze will exist for small operations. This situation would be especially true to smaller or marginal farming units for at least two reasons. Firstly, large units are more flexible in expanding or contracting an input. For example, a farm employing several men can reduce its labour input i f new capital in the form of labour saving technological improvements is adopted. However a single owner-operator does not possess this freedom. A second disadvan-tage of the smaller units is the probable inability to expand due either to lack of funds, managerial ability, or both. Thus for the industry as a whole technological change has generally not contributed to a cost-price squeeze. However for individuals on smaller or marginal units forced to purchase technologically improved inputs (because the earlier versions of these inputs are now obsolete and off the market) and cannot take advantage of them, the cost-price squeeze may be very real. Relatively small producers make up a majority of a l l farmers so that i t might appear that the industry as a whole suffers the same fate. The above is a classic example of what logicians would refer to as the fallacy of composition. In essence the problem as faced by the majority in the agricultural sector is actually part of a transition period in which competitive forces drive the small production units to either withdraw from agriculture or expand the farming unit. The latter alternative (expansion) is available to an individual farmer only with the former alternative (withdrawal) available to his neighbor. Thus farm consolidation takes place. (80) III. DISCUSSION The original hypotheses, i f accepted, would have explained the farm income problem, at least in part, as the consequence of a growth pattern in the agricultural sector which has been inconsistent with market growth. This chapter contains observations which support the findings regarding the near equal expansion of the supply of and demand for Canadian agricultural products of Chapter IV. To begin, the relative position of agricultural incomes with respect to non-agricultural incomes, although unfavorable, in reference to farmers did not become more aggravated over the period under study. Although this in itself is not supporting evidence, a cost-price squeeze was not found for the industry as a whole when the entire period from 1935 to 1965 was observed. However in a subsequent discussion the possibility was raised that due to technological improvements many marginal and possibly small farms face what could be called an apparent cost-price squeeze. A situation such as this may not affect the industry very much when observed in the aggregate since a large proportion of agricultural output originates from a minority of relatively large units. In the following chapter an attempt has been made to determine the climate for capital growth in Canadian agriculture in recent years. Included in the analysis has been a breakdown of the source of agricultural output with respect to size of farming unit based on both value of capital and value of output. From this aspect of .the analysis more can be deter-mined with respect to the possible existence of an apparent cost-price squeeze. (81) CHAPTER VI FORCES BEHIND AGRICULTURAL CAPITAL AND OUTPUT GROWTH Up to this point the analysis has been primarily concerned with growth in the agricultural sector of such indicators as capital, output, as well as both per capita and aggregate income. Conclusions were that a farm income problem existed which was not aggravated by excess production. However the question arises as to what incentives exist to expand capital when average total returns per person involved in agriculture, both as a labourer and capital holder, are at a relatively low level. It is obvious that the Incentive to reduce labour involved in agriculture has existed at least since World War II, as farm employment has been halved during this period1. However, less obvious has been the reason why the average per capita incomes s t i l l lag well behind that of the non-agricultural sector. The fundamental questions are twofold. First, are returns to both labour and capital below opportunity costs? Second, is the agricultural industry organized in such a manner that the majority of output originates from only a small proportion of the total agricultural units, where returns to all inputs are at levels greater than or equal to opportunity costs? The above questions are important as the answers will determine the form of government policy necessary to alleviate the problem. For example, i f labour were found to be redundant while returns to capital were at least equal to the going rate of return on other forms of investment, any policy which would discourage capital expansion and thus output in an attempt to Table XV, page 59, Column (2) (82) increase prices would lead to a misallocation of resources. Likewise policy decisions should be very different depending on whether a l l farms or only the smaller units are receiving inadequate returns to-'resources„ If a large proportion of agricultural output could be produced under conditions which would yield adequate returns to a l l resources employed, then the farm income problem would be identified as existing within the industry and not be a characteristic of the entire sector. The difference between these two conclusions, although subtle, is important in as much as the methods required to remedy the problem are quite different. If the whole sector is affected, then any government assistance should cover a l l primary agriculture. On the other hand, i f units of certain sizes are more productive than others then the obvious policy would be of a less general nature. The purpose of this chapter has been to determine the factor shares of labour and capital in Canadian primary agriculture. In addition, the amount of production originating from agricultural units of different sizes has been determined in an effort to gain further insight into the farm income problem. I. RETURNS TO LABOUR AND CAPITAL ACCORDING TO FACTOR SHARES Capital in Canadian agriculture has been growing in spite of relatively low per capita farm incomes. While insufficient incomes reflect low returns to aggregate inputs this does not necessarily mean that each input shares a similar fate. An investigation of the returns to each input based on factor shares has been used to show the returns to both labour and capital. Thus i f capital proved capable of a return greater than or equal to in opportunity cost, then the growth of capital can be justified. (83) Returns to labour and c a p i t a l were estimated using the observations of 2 f a c t o r shares developed by Lerohl and MacEachern . Before determining these estimations, a b r i e f d e s c r i p t i o n of the method used by Lerohl et a l , i s i n order. The authors describe t h e i r method as follows: "Two basic methods are employed i n t h i s study to determine f a c t o r shares within a g r i c u l t u r e . In one method, a l t e r n a t i v e opportunity returns are a l l o c a t e d to a l l resources employed except labour, which receives the r e s i d u a l . In the second method, a l t e r n a t i v e opportunity rates of return are c a l c u l a t e d f o r a l l inputs employed including labour, and farm r e a l estate i s the r e s i d u a l . The two methods are commonly c a l l e d the "asset" and "labour" bases, r e s p e c t i v e l y , f o r a l l o c a t i n g income among functional categories".3 Of these two methods, the factor shares derived through the "labour" basis was adopted. The reason for t h i s i s twofold. F i r s t , the authors c a l c u l a t e d the opportunity cost of c a p i t a l from a r e a l estate c a p i t a l s e r i e s which unfortunately was not well defined. Thus as the current c a p i t a l s e r i e s published by Dominion Bureau of S t a t i s t i c s was adopted i n t h i s t h e s i s , i t does not n e c e s s a r i l y follow that the returns to c a p i t a l as derived by Lerohl et a l . p e r t a i n to the same c a p i t a l s e r i e s . Consequently the opportunity costs based on in t e r e s t charges would be as d i f f e r e n t as the two respective c a p i t a l s e r i e s . Secondly, i t was observed that the factor share of labour was consid-erably higher when based on opportunity costs of h i r e d farm labour than when labour receives the r e s i d u a l . In r e a l i t y , at l e a s t part of the a g r i -c u l t u r a l labour i s receiving money wages (opportunity c o s t s ) , so therefore M.L. Lerohl and G.A. MacEachern, "Factor Shares i n A g r i c u l t u r e : The Canada-U.S. Experience", Canadian Journal of A g r i c u l t u r a l Economics, Volume XV, Number 3, 1967, pp. 1-20. 3 Ibid, pp. 7. (84) it is fallacious to attribute returns to capital which does not leave a residual for labour large enough to equal the wages of hired farm labour. In addition, to assign capital returns based on opportunity costs would result in an inconclusive circular exercise. In essence all one would be doing would be to arbitrarily grant capital a fair return on investment and then conclude that these returns were of a magnitude which would explain capital growth. It should be noted that the accounting method applied in the analysis of Lerohl et al to determine per capita farm labour income was different from that used in this thesis. Interest on indebtedness and farm rental payments, as well as wages to farm labour, have been included in the returns of all resources committed to agriculture. The reasons underlying this approach are that the incentive for investment and employment pertain to all individuals who wish to contribute their resources in hope of individual gain and not merely to the farm owner-operators. In essence it does not matter who collects the returns; but it does matter if these returns are adequate to cover opportunity costs. It should be noted that the above distinction is important only when determining the incentive to commit specific resources to agriculture and not in discussion of the magnitude of the farm income problem. The returns to capital, if labour is granted its opportunity costs and capital is granted the residual, are to be seen in Table XVII, pages 85 and 86. The computed labour share (Column (2)) exhibit a steady decline from 66 per cent in 1935 to a level of 32.7 per cent in 1965. It is interesting to note that this trend is identical to that of the farm labour force in that both have approximately halved in the period under study. The total (85) TABLE X V I I RATE OF RETURN ON CANADIAN AGRICULTURAL CAPITAL (1935-1965) (1) (2) (3) (4) (5) (6) (7) (8) C^omputed- Share to Residual Total ; Total '; Returns to %return; Tear '.Labour labour &•capital gross capital ; capital to ! [share capital share income (durable) ! (4) x (6);capital j (a) (b) (3)-(2) (c) i (d)(e) i (7 ) x l : ! i % % t ($000,000): ($000,000); ($000,000) 1 ! (3-935 1 66.0 • 69 . 8 3.8 702 : 4,523 ! 27 .6 ' ,11936 i 63.8 70.4 6.6 720 ! 4,390 i 48 l . l i |1937 I 61.6 71.0 ' 9.4 805 1 4,384 j 76 1.7 1 1938; 59.4 71.6 12.0 859 4,214 1 103 2.4 1939! 58.8 72.2 13.4 944 i 4,299 j 126 2.9 ! J1940! 58.3 72.8 14.5 994 1 4,214 ! 144 3.4 ! 11941 i 57.8 73.5 15.7 1,044 ; 4,247 j 164 3.9 J1942! 57.3 74.2 16.9 1,706 ! 4,650 ! 288 6,2 ; 1943 i 56.8 74.9 18.1 1,550 ; 5,275 ; 281 5.3 1944 j 57.1 74.0 16.9 1,942 i 5,490 i 328 6.0 ; 1945 I 57-4 73.1' 15.7 1,681 ; 5,580 J 264 4.7 1946! 57.7 72.2 14.5 1,982 ! 5,878 i 287 4.9 1947! 58.0 71.3 13.5 2,170 ! 6,390 , 293 4.6 119481 58.3 70.2 11.9 2,704 i 7,105 ! 322 4.5 1949! 56.0 69.8 13.8 2,615 : 7,503 i 361 4.8 1950: 53.5 69.4 15.9 2,565 ! 8,171 ! 408 5.0 •1951! 51.1 69.0 17.9 : 3,398 j 9,451 i 608 6.4 J1952 \ 48.3 68.6 20.3 3,443 , 9,536 i 699 7.3 p-953' 1954! 46.5 68.2 . 21.7 3,115 i 10,110 I 676 6.7 44.9 67.1 22.2 2,538 9,960 | 563 5.7 {19551 43-3 66.0 22.7 : 2,797 . 10,313 i 635 6.2 119561 41.7 64.9 23.2 2,055 i 10,584 1 477 4.5 11957 j 40.1 63.7 23.6 2,730 : 10,842 644 5.9 119581 38.5 62.5 24.0 ' 3,113 I 11,742 1 747 6.4 ' [1959 j 37.5 62.3 24.8 3,059 1 12,308 • 759 6.2 1960i 36.7 61.8 25.1 3,230 12,670 ; 811 6.4 1961 j 35.9 61.5 25.6 3,008 13,159 i 770 5.9 11962 j 35.1 61.2 26.1 3,720 13,684 i 971 7.1 J1963: 34.3 60.9 ' 26.6 • 3,879 • 14,541 ' 1,032 7.1 ' 1964! 33-5 60.6 ' 27.1 3,799 15,790 : 1,030 6.5 1 9 6 ? ! 32.7 60.3 27.6 4,301 . 17,282 1.187 6.9 (Sources on next page) (86) Sources: (of Table XVI) (a) M.L. Lerohl and G.A. MacEachern, Factor Shares in Agriculture: The Canada - U.S. Experience, Canadian Journal of Agricultural  Economics. Volumn XV, number 1, 1967, p«8, column 10. (b) Ibid column 3 (c) Canada, Dominion Bureau of Statistics, Handbook of Agricultural  Statistics. Part II, Farm Income 1926-1965. June 1967, p.28. (d) M.C. Urquhart and K.A.H, Buckley (editors) Historical Statistics of  Canada. The MacMillan Company of Canada Ltd. Toronto 19^ 5, p.353, series L18 (1935-1940). (e) Canada, Dominion Bureau of Statistics, Quarterly Bulletin of  Agricultural Statistics. April-June 1966, pp. 103-107 (1941-1965). (87) share to labour and durable capital maintained a relatively constant level of near 70 per cent until the early 1950*s, when a decline began which continued at least until 1965 when their combined share was 60.3 per cent. This decline is probably, at least partially, attributable to the increased use of such non-durable capital items such as fertilizer, and general machinery expenses. The residual which is granted durable capital (Column (4)) can be seen to steadily increase from 3-8 per cent to 27.6 per cent over the 31 years of study. In current dollar terms, calculated from total gross income (Column (5)), the returns to capital have increased by a multiple of 40 from 1935 to 1965. Thus the returns calculated as a per centage of total durable capital (Column (6)) exhibited an increase in the first fifteen years to a reasonably stable level thereafter. Of importance now is the comparison of these returns to other investment opportunities in the Canadian economy during the same period. In Table XVIII, page 88, the returns to two, five, ten, and fifteen year Government of Canada direct and guaranteed securities for the period I936 - I965 are recorded. The four different terms represent short, medium, and relatively long term cash holdings, similar in duration to the spectrum of capital investments made by farmers. If the yields on these bonds and securities are an indication of the opportunity costs of capital in agri-culture, it appears that the incentive to expand agricultural assets existed in al l but the first four or five years of the study. In fact, frequently the returns to capital in agriculture was near double that of yields paid on Government securities. No doubt the returns on bonds and securities do not reflect the same (88) TABLE XVIII YIELD ON GOVERNMENT OF CANADA DIRECT A ND GUARANTEED SECURITIES (1935-1965) (1) (2) (3) (4) (5) Year 2 Years (a)(b) , 5 Years (a)(b) | 10 Years (a)(b) 15 years (a)(b) 1935 1936 1.22 1.63 | 2.48 2.94 1937 1.68 2.34 ! 3.04 3.21 1938 1.15 1.79 I 2.64 3.03 1939 1.72 2.40 1 3.27 3.50 1940 1.34 2.12 1 2.83 3.11 1941 1.46 2.17 ! 2.99 3.06 1942 1.48 2.22 i 3.00 3.06 1943 1.55 2.24 i 2.76 3.00 1944 1.44 2.08 2.67 2.99 1945 1.38 1.77 ! 2.48 2.83 1946 1.40 1.70 ! 2.31 2.60 1947 1.42 1.76 { 2.24 2.56 1948 1.58 2.27 •i 2.71 2.93 1949 1.65 2.17 1 2.63 2.75 1950 2.17 2.55 j 2.97 2.99 1951 2.26 2.82 3.41 3.50 1952 3.07 3.52 ! 3.67 3.62 1953 3.20 3.61 ! 3.64 3.61 1954 1.87 2.57 j 2.90 3.05 1955 3.34 3.45 I 3.42 3.41 1956 4.48 4.51 j 4.08 3.97 1957 3.88 3.92 3.71 3.75 1958 4« 62 4.52 4.48 4.78 1959 5.24 5.81 j 5.25 5.32 I960 4.14 4.86 i 4.84 5.36 1961 3.58 4.15 1 4.74 4.93 |1962 4.11 4.42 ! 4.86 5.07 1963 4.29 4.75 i 5.11 5.15 1964 4.35 4.83 ! 5.02 4.96 !l965 5.30 4.93 5.52 5-53 Sources: (a) M.C. Urquhart and K.A.H. Buckley (editors) Historical Statistics of Canada. The MacMillan Company of Canada Ltd. Toronto 1965 p.274. This series included the years 1936 - 1959 inclusive. The yields were weekly averages for the month of December each year. (b) Canada, Bank of Canada, Statistical Summary Supplement 1963 and 1965. This source was used to complete the series from i960 to 1965. A mid-month reading for December was used for the recorded yields. (89) element of risk characteristic of agricultural investment. Information on yields to Canadian stocks 4 which do reflect some degree of risk have, on the average, returns not unlike those of agriculture. Consequently the oppor-tunity costs of funds with stocks as the criterion do not appear to be in excess of investment returns in agriculture. Any mention of agricultural income in the form of capital gains are absent thus far for reasons that in the aggregate capital gains are not a true form of income for the industry as a whole. In the case of agriculture an individual makes a capital gain only to the detriment of the purchaser of his property. In essence only individuals can receive capital gains and not an industry as a whole, for in the aggregate what is one person's gain is another's loss. It is also of interest to note that in the case of agriculture possible investment in anticipation of capital gains is gener-ally not capital expanding in the physical sense. As land is the only form of agricultural capital on which capital gains can accrue and is by nature fixed in quantity, l i t t l e capital expansion for the industry can be attributed to the motive of making capital gains. However as farming is generally not a speculative venture from the point of view of capital gains i t is safe to assume that an average farmer makes a decision to invest primarily with the thought of reaping the rewards of increased production. Consequently he will be satisfied with returns no greater than he would receive i f his funds were channeled into some other production venture. (90) Of at least equal importance to opportunity costs of funds which reflect internal financing are the interest charges which farmers must pay on borrowed funds. As an estimated 15 per cent of the stock of agricultural capital is non-equity in nature and supplied through credit"', the incentive to expand agricultural capital has no doubt been greatly affected by interest rates. From an investigation of the various sources of farm credit^, it appears that funds have been made available to farmers at interest rates which compared favorably with the average return on existing agricultural capital. In 1965 the average interest rate farmers were paying on long term (ten years) loans was 5.1 per cent. Federal and Provincial government agencies provided 2/3 of these funds at an average rate of 5.4 per cent and 3«5 per cent respectively. Approximately 50 per cent of all intermediate terms credit outstanding was provided by Farm Improvement Loans under Section 88 of the Bank Act at a rate of 5.0 per cent. The average charge on all intermediate funds borrowed by farmers was 7.3 per cent, thus indi-cating the advantages of the government assisted loans. Government plays a relatively minor role in short term credit of less than eighteen months. However the average interest on loans of short duration was 6.4 per cent with the main source being the chartered banks 5 W.J.Anderson, Fundamentals of Sound Credit. Agricultural Economics Research Council of Canada, June 21, n.d. 6 R.S. Rust, Farm Credit Legislation in Canada. Economics Branch, Canada Department of Agriculture, Ottawa, Publication number 1360, revised 1967 , "The Growth of Agricultural Credit in Canada", Canadian Farm Economics, volume 2, number 2, June 1967, Table I, p.17 (91) Thus the climate for the growth of agricultural capital appears to have existed for nearly all the years under study with the exception of the period prior to 1940. Alternative investment opportunities which were available to farmers did not appear superior with respect to the average rate of return on agricultural capital. In addition, funds were available at attractive rates to facilitate capital expansion. Thus the expansion of Canadian Agricultural capital is justified on the grounds that returns were at least equal to opportunity costs. II. SUBSTITUTION OF CAPITAL FOR LABOUR If, as is indicated in the previous analysis, capital received returns which approximated opportunity costs; the farm income problem can then be at least partially attributable to the low returns to labour. The above situation is not surprising when one considers the opposing directions of off farm migration''' and of capital expansion. However the question remains as to why off farm migration had not been even more rapid. It is very interesting to note that the ratio of farm to non-farm incomes maintains a relatively constant level , especially in recent years when off farm migration was large. Thus in response to the above point on why the movement off farms was not faster; one possible answer could be that in o the aggregate farmers exhibit satisfying behavior in that as long as average farm incomes are approximately one-half of the non-farm incomes there is little incentive to move out of agriculture. As non-farm ? Table XVI, Column (2), pages 65 8 Table XVI, Column (12), page 66 ^ William J. Baumol, Economic^ Theory,.and_ (second edition, Englewood Cliffs, New Jersey; Prentice-Hall Inc. 1965) p.30S (92) incomes increase, the incentive to leave farming exists in the aggregate only until enough have migrated to leave the remainder at the satisfying level. The above, of course, describes a continuous process. Although the . above agrument is inconclusive it does merit a position as a logical expla-nation to the apparent misallocation of human resources. Thus in spite of the fact that i t has been profitable in the past to substitute capital for labour from the point of view of the entire industry, an individual farmer's decision to stay or not to stay in agriculture is based on how much he can improve his position by leaving. III. DISAGGREGATION OF FARM OUTPUT Thus far no attempt has been made to distinguish the difference in scale of farming units. If a small proportion of all farms produce a major fraction of total output, own a major portion of all capital, and are organized in such a manner as to receive returns to all resources well above the average, then the farm income problem would be identified to exist within agriculture and not be a characteristic of the industry as a whole. The inference is that if agriculture were so structured as to include a large proportion of relatively unprofitable units but was able to provide adequate returns to a minority of large producers, the problem would rest not in the agricultural markets (i.e. overproduction) but in the structure of the industry. Thus any move to alter the price structure would lead to misallocation of resources due to unnatural incentives to expand production. In addition, possible corrective measures to change the market structure will benefit the industry on a per unit basis, thus help-ing large producers proportionally more than the small producers. (93) In essence the results would be to increase average returns in agriculture, but not necessarily benefit the small farmer to any great extent. The two criteria which have been chosen to measure the size of an agricultural firm are the amount of capital used by an operation and the quantity of output; both measured in dollar terms. Cross-sectional observation of these types can be gleaned from Canadian Census data. Unfortunately the methods of recording vary between census years and conse-quently the data is not uniform. Never-the-less certain observations are compared over time. In the measurement of farm size according to output, one serious weak-ness in the method becomes obvious. Due to the unstable nature of produc-tion deriving from environmental conditions output observations include units which have had exceptional yields for only one year; while i f they were observed over a longer period, their performance would have been much less outstanding. An analogous situation exists for farms observed with abnormally low returns. However, i t can be assumed that the net effect- of these two opposing biases will be one of at least partially compensating errors. Unfortunately, as the data leaves a l l individual farms uniden-tified there is no way to determine the consistency of achieving high or low output among farms. In spite of this weakness, the observations over time will no doubt contain many farms which achieve fairly stable levels of output. For example, barring extreme environmental conditions few small farms become large producers while the opposite situation exists for larger units. In Table XIX, page 94, i t can be observed that on farms with output valued at $ 1 0 ,C O O and over constitute 14.1 per cent of a l l labour and 31«4 TABLE XIX CLASSIFICATION OF COMMERCIAL FARMS VITH RESPECT TO TOTAL OUTPUT, CANADA, I960 and 1965 (a) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Census j observation' time Output ranges Number per farm of ($) ;farms ;Per cent Capital |of total farms '•• ($000,000) Fer cent;Labour of total; capital i(000 wee Fer cent of total ks) labour Output Fer cent of total output 25,000 1 9507 ' 2.8 1,165 10.0 i 1,544 13.8 ; 470 : 20.7 15,000 ; 23948 6.8 2,220 19.1 ! 2,460 22.1 740 32.5 I960 1 10,000 ^ OQ ! 49871 i 14.1 3,613 31.0 J 3,506 : 31.4 1,051 46.2 ; 5,000 |140290 i 39.7 7,042 60.6 ' 5,353 52.5 1,676 | 73.7 ! ALL FARMS 1353293 I 100.0 11,626 100.0 : 11,149 100.0 2,275 i 100.0 1 35,000 -»<=o \ 10123 i 3.7 1,806 11.3 ; - - 762 : i 24.3 i t 25,000 *o«> i 19416 i 7.1 2,905 18.1 : - - 1,032 I 32.9 ; ; 1965 j 15,000 "o j 52241 ; 19.1 j 6,222 38.8 - ; - ; 1,613 i 51.5 1 i 10,000 ->°° \ 96057 ! 35.1 9,263 57.8 : - 1 - > 2,144 1 68.4 i ALL FARMS :273964 | 100.0 16,025 100.0 - i - 3,135 i 100.0 Source: (a) Canada, Dominion Bureau of Statistics, Census of Canada. Agriculture. (Ottawa: Queen's Printer and Controller of Stationery) 1961 and 1966. (95) per cent of total capital to produce 4605 per cent of total agricultural output. In 1965 a similar rate of high productivity existed as farms with output of $15,000 and over accounted for 51-5 per cent of the output while requiring 38»8 per cent of all agricultural capital. Unfortunately the required farm labour data was absent in the most recent census. Of additional interest is the degree of farm consolidation and expan-sion which is reflected in these data. The total number of farms, of course, was observed to decrease. However both the proportion and absolute number of farms increased in the category having output of $15,000 and over. The general conclusions which can be drawn from the classification of commercial farms with respect to total output are twofold. First, there is the obvious fact that a small proportion of total farms produce a relatively large share of total output in any given year. Secondly, this group of large producers exhibit productivity far superior to the agricultural average. Although no conclusions can be drawn, as would be the case if these large producers were a consistent bloc in reference to performance; it is apparent that in any one year farmers in this group are either receiving their usual high returns for the resources committed or are receiving windfall gains. In either case, the large producers have an incentive to invest in agriculture. A small proportion of total farms are responsible for producing a large share of total output as can be seen in Table XX, page 96. However the most interesting observation can be gained through the comparison of the percentage of total capital in each range (Column (5)) with the proportion of total output falling into each similar group (Column (7)). Farms with a capital value of $149,000 and over required 18.4 per cent of the total TABLE XX CLASSIFICATION OF COMMERCIAL FARMS r-ITH RESPECT TO TOTAL CAPITAL VALUE, CANADA, 1965 (a) (1) (2) (3) (4) (5) (6) (7) •Range of capital ; Number of ; Per cent ! Capital ! Per cent ! Output ; Per cent of | lvalue per farm ' farms ; of total : ! of total i total output ! I (CO | ($000,000) ! Capital ! ($000,0C ) :149,000 fao 12,179 4.4 2,947 18.4 581 18.5 99,950 ^ e o 35,011 12.8 5,678 35.4 1,050 33.5 49,950 : 125,041 45.8 j 11,895 74.4 2,112 67.0 All commercial farms 273,964 100.0 16,043 100.0 3,135 100.0 Source: (a) Canada, Dominion Bureau of Statistics, 1966 Census of Canada. Agriculture (Ottawa; Queen's Printer and Controller of Stationery) * Commercial farms include all farms with gross sales of $250.00 or more per year. (97) capital to produce a near identical 18.5 per cent of total output; thus indicating that larger scale operations make no more efficient use of capital than the industry average. Of the medium sized farms (capital valued between $49,950 and 149,000) there appears to be a relatively ineffi-cient use of capital, as this group required 56.0 per cent of total capital to produce a proportionally small 49.5 per cent of output. Surprisingly then, the small commercial farms with capital value of less than $49,950 require only 25.6 per cent of capital to produce 33.0 per cent of total output. This apparent efficient use of capital can probably be attributed to the high labour intensity of small scale operations. It is also interesting to speculate on reasons why the middle sized group exhibited the lowest return on capital. Conditions may not be unlike those described in the discussions of the possibility that unused techno-logical improvements to capital may appear as a cost-price squeeze to the user1*"*. It may be that small farmers do not have the ability or incentive to purchase substantial amounts of technologically advanced capital and thus do not enter into the possible position of their somewhat larger counter-parts. Farms ranging in capital value from $49,950 to $99,950 may be in the unfortunate position of being too large to rely on labour intensive practices but too small to take full advantage of the labour saving devices available to them. Consequently this situation manifests itself in a relatively high capital-output ratio for the median scale of farmers. Larger operations, on the other hand, appear to be in a position where the advantages of scale exist. Thus it can be concluded that large scale Page 77 (98) farming operations are at least as productive as the industry average with respect to the use of capital and indeed more productive than farms with only average capital holdings. (99) CHAPTER VII SUMMARY AMD CONCLUSIONS The farm income problem has been discussed and investigated. The following findings were forth coming. 1. In constant dollar terms, durable and non-durable capital expanded by approximately 75 per cent from the period 1935-1939 to 1965. 2. Demand expanded by approximately 100 per cent during the same period. 3. Supply exhibited a nearly identical expansion to the expansion in demand during this period. 4. The farm-income problem defined as the relative income discrepancy between farm and non farm income earners did not grow worse during the period. In fact, there were slight signs of improvement in recent years. 5. The so-called cost-price squeeze did not exist to any great extent when the entire 1935-1965 period was observed at once using 1935-1939 as the base. 6. Agricultural capital appeared to yield returns at least equal to opportunity and borrowing costs. The general conclusion which can be reached from this group of observations is that capital expansion during the period of 1935-1965 has not led to an aggravation of the farm income problem. (100) I. AGRICULTURAL POLICY IMPLICATIONS It would appear from the above conclusion and previous discussions that, in general, agricultural policy should not discourage capital expan-sion and should encourage off farm migration. The present lending policy appears to have been successful in the sense that farmers have been able to expand total capital resources in agriculture but not to the extent that returns on investment have fallen below opportunity costs either through overproduction or overcapitalization. From the aggregative point of view, there appears little reason for major policy changes with respect to quantity and costs of funds made available to farmers. However on the dis-aggregative level the possibilities of change may be very different. A selective rather than aggregate loan policy could be designed to assist certain products, geographical areas or individuals. Any discussion on the aspects of the selective approach, although very important, are beyond the scope of the findings of this thesis. However from the evidence presented in this study it would appear that any loan policy, no matter what its scope, should not curtail the total amount of capital resources entering agriculture. II. POSSIBILITIES FOR FURTHER RESEARCH With the advent of central collection of farm records for electronic assessment, an excellent opportunity has arisen for a much less aggregative approach to the evaluation of the effects of capital expansion on farm incomes. A suitable time series could be established for individual farms, geographical areas or specific products. Using a model similar to the one developed in this study, the effects of capital expansion on, for example, (101) hog production in Canada could be determined and compared to some other type of enterprise. Such a program would be of assistance in the formu-lation of agricultural loan policy which would specify the allocation of resources in an efficient manner. A second area of research which appears to be deficient in Canada is a study of the elasticities of demand for agricultural products both in the aggregate and at the individual commodity level. In addition, up-to-date estimates of demand elasticities of Canadian agricultural products, which are actually priced in the international market, should be developed. For example, it is very important to Canadian agricultural policy whether domestic beef actually has an inelastic demand. Good elasticity measure-ments are desirable for further studies involving methods similar to those used in this paper. (102) APPENDIX A TABLES (103) TABLE II LIVESTOCK AND POULTRY NUMBERS IN CANADA (1935-1965) (1) (2) (3) (4) (5) (6) (7) i I Milk Cattle and Horses ! Hogs ; Sheep ! Poultry ; (Year J cows calves 1 t (000) (a) (000) (a) (000) (a) (000) (a) ; (000) (a)* (000) (b); 11935 \ 3841 5132 2911 i 3651 j 3224 j 56769 ! 1936 ' 3805 5024 2878 4136 3159 ! 59298 j 1937 I 3844 2845 4016 i 3071 ! 57510 ! 11938 ! 3730 4761 2770 ! 3527 1 3047 j 57237 ! :1939 1 3681 4693 2761 ! 4364 ! 2911 i 62405 ! 1940 i 3650 4730 2780 6002 ! 2887 ; 64143 ; 1941 j 3626 4891 2789 i 6081 : 2840 1 63526 i 11942 { 3614 5098 2759 6808 ! 2972 ! 73130 " 11943 ! 3623 5499 2667 ! . 7413 1 3107 j 79247 ; 11944 i 3668 5876 2568 6790 ; 3213 i 91644 : ,1945 ; 3631 6001 2374 ! 4964 1 3032 i 89505 • 1946 j 3485 5689 2136 : 4277 j 2792 j 90285 i 1947 ! 3411 5674 1937 4957 ! 2465 i 88264 i 1948 ; 3357 5627 1789 3946 j 2050 { 72580 ' 11949 | 3237 5404 1642 4452 i 1773 1 72659 1 !l950 ! 3119 5224 1496 1 4372 1579 1 64886 : 11951 ! 2973 53 90 1304 i 4914 I 1461 1 64541 ; '1952 j 3006 6147 1179 5428 1534 ; 65782 1 11953 I 3084 6722 1055 3970 1592 i 66451 : 11954 i 3120 7050 917 4440 1636 ! 73923 ; 1955 I 3151 7452 832 : 4800 ! 1634 1 73000 j 1956 ; 3160 7851 782 4731 1620 ! 73161 ; (1957 : 3098 8167 722 4758 1628 ; 77168 i {1958 i 3028 7962 661 5931 1630 i 82624 ! J1959 i 11960 ! 2955 8103 598 6519 ! 1608 1 81785 ! 2965 8372 552 5070 j 1607 • 75649 ! 11961 ! 2987 8947 511 5331 1548 i 79132 i J1962 j 2956 9120 477 4973 i 1433 • 72229 i 11963 i 2915 i 9391 444 5210 1340 •! 73788 I 11964 ! 2906 9911 424 5620 ; 1287 : 75830 ! 11965 ! 2885 i 10116 398 5136 1169 •i 75729 ! Sources: (a) 1935-1960 M.C. Urquhart and A . H . Buckley (editors), Historical  Statistics of Canada. (Toronto: The MacMillan Company of Canada Ltd., 1965) p.367. 1961-1965 Canada, Dominion Bureau of Statistics, Livestock and Animal Products Statistics, (Ottawa: Queen's Printer and Controller of Stationery, various years). (b) 1935-1965 , Canada Year Book (Ottawa: Queen's Printer and Controller of Stationery, various years.) (104) TABLE IV CONSTANT DOLLAR VALUE OF LIVESTOCK, CANADA (1935-1965) (1935-1939=100) (1) (2) .(3) (4) 1 i ! Value of ; Value of ; Value of | Year a l l l i v e s t o c k j horses ! l i v e s t o c k ; t i exc luding horses | i ($000,000, f=) •' ($000,000) (b) j ($000,000) S 1935 589 ; 201 ! 388 j 1936 i 589 199 1 390 I 1937 ; 587 196 ! 391 1 1938 563 191 i 372 ! 1939 .: 571 191 380 i 1940 j 593 192 401 1 1941 ! 597 192 j 405 i 1942 : 617 190 427 i 1943 •: 634 ! 184 1 450 ! 1944 : 641 ! 177 ! 464 ; 1945 : 605 164 ! 441 I 1946 565 147 418 i 1947 : 553 ; 134 ! 419 j 1948 1 513 123 i 390 i 1949 \ 497 113 ' 384 i 1950 i 470 \ 103 367 •: 1951 ' 461 90 i 371 i 1952 i 481 81 1 400 ! 1953 ; 474 ! 73 i 401 ! 1954 ' 485 63 ; 422 i 1955 i 495 57 438 ! 1956 ' 501 54 ] 447 I 1957 ; 506 i 50 ) 456 i 1958 •. 512 : 46 ; 466 : 1959 I 515 41 474 i 1960 : 497 38 459 1 1961 • 515 I 35 480 ; 1962 i 506 33 473 i 1963 | 513 31 ! 492 j 1964 ; 531 ; 29 ! 502 ! 1965 , 527 27 500 Sources: (a) The value of a l l l i v e s t o c k was der ived by m u l t i p l y i n g t h e i r populat ions of Table I I of the Appendix'by t h e i r appropriate values ( i . e . mi lk cows $39, beef c a t t l e and calves $26, horses $69, hogs $12, sheep $6 and p o u l t r y $ 7 3 ) . (b) Horses were excluded from general l i v e s t o c k and inc luded as machinery f o r purposes p r e v i o u s l y o u t l i n e d . (105) TABLE V CONSTANT DOLLAR ESTIMATION OF FARM REAL ESTATE, CANADA (1935-1965) (1935-1939=100) (1) (2) (3) (4) (5) (6) (7) Acres of Value of j Acres of Value of Total Cost of Year i improved improved j unimproved!unimproved value of construction land land i land 'land real estate (current prices) (a) (t; S (a) (b) (3) + (5) ($000,000) (c) (000.000) ($000,000)' (000.000) 1($000,000) ($000,000) [1935 87.5 3325 i 79.0 711 4036 9 1936 88.0 3344 i 79.5 716 4060 10 1937 88.5 3363 j 80.0 720 4083 14 1938 89.0 3382 80.5 725 4107 14 1939 89.5 3401 1 81.0 729 4130 15 1940 90.0 3420 ; 81.5 734 4154 18 1941 91.6 3481 j 81.9 737 4218 21 1942 92.0 3496 I 81.5 734 4230 17 il943 92.5 3515 I 81.0 729 4244 11 1944 93.0 3534 ] 80.5 725 4259 19 1945 93.5 3553 1 80.0 720 4273 24 1946 94.0 3572 ! 79.5 716 4288 36 1947 94.5 3591 1 79.0 711 4302 42 j 1948 95.0 3610 ! 78.5 707 4317 53 i 1949! 95.5 3629 I 78.0 702 4331 68 1950 96.0 3648 I 77.5 698 4346 68 j 1951 96.8 3678 i 77.2 695 4373 63 '1952 97.7 3705 i 76.5 689 4394 75 1953 98.2 3732 1 75.8 682 4414 77 1954 98.9 3758 ! 75.1 676 4434 70 1955 99.6 3785 i 74.4 670 4455 79 ! 1956 100.3 3811 ! 73.6 662 4473 89 j 1957 101.0 3838 i 72.7 654 4492 94 i 1958 101.5 3857 ! 71.8 646 4503 92 1959 102.0 3876 ! 70.9 638 4514 99 i I960 102.5 3895 70.0 631 • 4526 97 ! 1961 : 103.4 3929 ! 69.1 622 4551 153 1962 104.3 3963 1 68.5 617 4580 168 j 1963i 105.2 3998 1 67.9 611 4609 169 i 196A ! 106.1 4092 i 67.3 606 4638 177 1 1965 ; 107.0 4066 » 66.7 600 • 4666 185 1 (Continued on next page) Sources (cn page 107) (106) TABLE 7T (Continued) (8) (9) (10) (11) (12) (13) ^Building Net : C O S t O f ,Net •Value of t Value of j depreciation construction! building const rue tion!buildings\land minus repairs (8) - (9) jmaterials !(1935-39 j(1935-39 (1935-39 j j(current (current • index prices) ! prices) prices) ! ; prices) (d) prices) (e) i (f) (g) i :($000,000) ($000,000) S (1935-39=100) ($000,000) |($ooqpoo)!($000,000) i 2 4 -15 1 87.1 I ! -17.2 i 1163.8 2855 ! 25 -15 ; 97.3 , -15.4 ! 1148.4 2879 24 -10 ! 108.7 -9.3 ' 1141.1 2902 ; 22 -8 I 98.7 —8.1 : 1133.0 2926 ! 23 -8 108.1 -7.4 I 1125.6 2949 ! 22 -4 i 116.0 1 -3.4 * 1122.2 2973 21 0 128.1 0 ! 1122.2 3037 1 21 -4 : 148.5 i -2.7 ; 1119.5 3049 ! 2 4 -13 i 155.0 -8.4 ! 1111.1 3063 ! 2 4 -5 ! 173.0 ; -2.9 ! 1108.2 3078 ! 31 7 : 174.8 ;. 4.0 j 1112.2 3092 14 22 ! 175.2 12.6 1 1124 .8 3107 j 16 26 186.7 1 13.9 i 1138.7 3121 15 28 1 2 2 4 . 8 12.5 ' 1151.2 3136 | i 14 54 I 237.1 22.8 ! 1174.0 3150 ! ! 15 53 i 255.0 20.8 i 1194.8 3165 j i 9 54 i 296.1 18.2 !> 1213.0 3192 ; 14 6 1 I 303.3 20.1 1 1233.1 3213 ! i 11 67 1 307 ."8 ; 21.8 • 1254.9 3233 i i 1 7 53 ! 307.0 17.3 ! 1272.2 3 2 5 3 I i 23 56 308.8 ! 18.1 ! 1290.3 3 2 7 4 ! 14 75 316.6 23.7 ! 1314.0 3 2 9 2 I 31 63 i 3 2 2 . 9 19.5 } 1335.5 3311 ! ; 34 58 1 3 2 1 . 6 18.0 ! 1351.5 3322 j 33 66 1 325.6 ; 2 0 . 3 I 1371.8 3333 ! ! 36 6 1 i 327.7 :. 18.6 1 1390.4 3345 j i a 112 ; 324.3 i 34.5 I 1424.9 3 3 7 0 i j 40 128 ; 326 . 3 39.2 ; 1464.I 3399 42 127 ; 334.2 ' 38.0 i 1502.1 3428 i 1 52 125 ! 357.8 i 34.9 ! 1537.0 3 4 5 2 ! 1 6 2 123 : 371.4 33 . 1 ,, ! 1570.1 3485 i Sources: (On next page) (107) Sources: (of Table y ) (a) 1935-1965 Canada, Dominion Bureau of Statistics, Census of Canada, (Ottawa: Queen's Printer and Controller of Stationery, various census years). (b) The 1935-39 values of improved and unimproved land were estimated to be $38 and $9 respectively. (c) 1935-1965 Canada, Dominion Bureau of Statistics, Canada Year Book. (Ottawa: Queen's Printer and Controller of Stationery, various years). Construction costs for agriculture were estimated by disaggregating the combined costs of fishing and agriculture according to the share of GNP contributed by each. (d) 1935-1965 Canada, Dominion Bureau of Statistics, Handbook of Agricultural Statistics. Part II. Farm Income  1926-1965 (Ottawa: Queen's Printer and Controller of Stationery, June 1967) pp. 79-94. Note that the published data has been adjusted to include a l l farms, both rented and owner operated. (e) 1935-1965 , , Price Index Numbers of Commodities and Services Used by Farmers (Ottawa: Queen's Printer and Controller of Stationery, various issues) (f) The value of building estimates are the 1934 b u i l d i n g " valuation of $1181 x 10 6 plus the net constructi estimates of Column (11), (g) The value of land estimates are the t o t a l r e a l estate estimates of Colum (6) minus the 1934 building valuation of $1181 x 10 6, (108) TABLE VI CONSTANT DOLLAR ESTIMATION OF FARM MACHINERY, CANADA (1935-1965) 1935-1939=100 (1) (2) (3) (4) (5) (6) (7) (8) j'Machinery j Machinery-;Net Farm Net Value of Value of Year ipurchases1depre- machinery: machinery machinery machinery machinery current ciation increase cost increases 1935-39 plus ! prices minus : 2 ) - ( 3 ) index 1935-39 prices horses (a) repairs current 1935-39 prices ($000000) 1935-39 (fooopoo) current prices =100 ($ooopoo) prices prices(b)j($000000) (c) ($ooopoo) ($000000) 1935 33 32 1 95.5 1.0 534.0 735.0 1936 43 32 11 97.8 11.2 545.2 744.2 1937 59 31 28 97.2 28.8 574.0 770.0 1938 58 31 27 104.1 25.9 599.9 790.9 1939 60 30 :30 103.6 29.0 628.9 819.9 ; 1940 75 32 43 105.8 40.6 669.5 861.5 1 1941 86 34 52 109.1 47.7 717.2 909.2 1 1942 69 .32 37 114.4 32.3 749.5 939.5 j 1943 46 35 11 117.1 9.4 758.9 942.9 j 1944 77 33 44 118.2 37.2 796.1 973.1 1945 95 36 59 115.1 51.3 847.4 1011.4 1946 136 41 95 118.8 80.0 927.4 1074.4 1947 213 47 166 126.3 131.4 1058.8 1192.8 1948 270 56 214 141.6 151.1 1209.9 1132.9 1949 339 75 264 158.3 166.8 1376.7 1489.7 1950 375 85 290 165.1 175.7 1552.4 1655.4 ; 1951 410 95 315 186.8 168.6 1721.0 1811.0 1952 430 104 326 195.4 166.8 1887.8 1968.8 1953 511 123 388 196.0 198.0 2095.8 2158.8 1954 279 150 129 197.0 65.5 2151.3 2214.3 1955 308 142 166 198.8 83.5 2234.8 2291.8 1956 356 131 225 209.4 107.4 2342.4 2396.4 ! 1957 392 138 264 223.8 118.0 2460.2 2510.2 1958 331 147 184 236.7 77.7 2537.9 2583.9 1959 391 141 250 248.4 100.8 2638.7 2679.7 I960 403 143 260 254.2 102.3 2741.0 2779.0 , 1961 371 150 220 261.4 84.2 2825.2 2860.2 1962 435 159 286 268.8 106.4 2931.6 2964.6 1963 508 152 356 273.6 130.1 3061.7 3092.7 ! 1964 583 160 423 . 279.6 151.3 3213.0 3242.0 1965 660 177 284.9 169.5 3382.5 3409.5 • Sources on next page (109) Sources: (of Table VI) (a) Canada, Dominion Bureau of Statistics, Canada Year Book, (Ottawa: Queen's Printer and Controller of Stationery, various years). Machinery purchases for agriculture were estimated by disaggregating the combined costs of fishing and agriculture according to the share of GNT contributed by each. (b) , , Handbook of Agricultural Statistics. Part II. Farm Income 1926-1965, (Ottawa: Queen's Printer and Controller of Stationery, June 1967) pp. 79-94. (c) , , Price Index Numbers, P.f Commodities and Services Used by Farmers (Ottawa: Queen's Printer and Controller of Stationery, various issues). (no) TABLE Vn CONSTANT DOLLAR ESTIMATION OF NON-DURABLE CAPITAL, CANADA ( 1 9 3 5 - 1 9 6 5 ) ( 1 9 3 5 - 1 9 3 9 = 1 0 0 ) (1) (2) (3) (4) (5) (6) (7) Value of Fertilizer Value of Machinery Gasoline, * Machinery Tear fertilizer! price fertilizer j expenses oil & grease)expenses current index 1935-39 1excluding price index 1935-39 prices prices repairs 1935-39=100 prices 100 current prices ($000) (a) (b) ($000) ($000) (a) (b) ($000) 1935 6989 97.0 7205 58737 105.1 55887 1936 7695 98.2 7836 59397 101.7 58404 1937 10157 101.4 10017 61751 99.9 61937 1938 11189 103.3 10832 65746 97.4 67501 1939 11141 100.2 11119 73326 96.2 76222 1940 12574 106.3 11829 79669 . 97.6 81628 1941 12921 114.0 11334 ;89998 105.0 85712 1942 17041 121.9 13979 97033 114.0 84819 1943 18486 112.9 • 16374 99244 114.7 86525 ' 1 9 4 4 19629 112.9 ! 17386 104381 114.7 91003 1 9 4 5 22757 112.9 20157 108422 114.2 94940 1 9 4 6 24966 113.9 21919 119725 116.4 102857 J1947 1948 1 1 9 4 9 28296 120.5 ; 23482 132276 121.2 109139 31508 131.5 i 23960 166387 136.9 121539 37811 141.3 ! 26759 192154 139.3 137943 tL950 40264 147.0 i 27390 206423 145.1 142263 1951 45400 159.6 j 28446 200413 147.1 136243 1952 49179 181.3 1 27126 213781 149.9 142616 |1953 56141 182.1 i 30830 2253 95 150.4 149864 1954 54135 182.8 i 29614 232996 153.0 152284 1 1 9 5 5 51373 181.2 | 28352 244771 151.7 161352 ' 1 9 5 6 52847 180.8 ! 29230 256916 152.5 168470 , 1 9 5 7 54776 183.4 ! 29867 264363 155.0 170557 J 1 9 5 8 59558 184.8 ! 32228 269961 156.1 172941 1 1 9 5 9 66723 188.1 i 35472 273824 155.9 175641 I960 70061 194.8 | 35966 276736 155.0 178539 1961 80429 194.6 S 41330 275427 156.5 175992 1962 87099 193.8 i 44943 290438 157.8 184054 J1963 101699 201.6 ; 50446 296035 157.5 187959 1 9 6 4 ! 122808 203.8 1 60259 304950 159.9 190713 1 9 6 5 j 138600 212.9 • 65101 311437 159.7 195014 , Sources: (Continued) (a) Canada, Dominion Bureau of Statistics, Handbook of Agricultural  Statistics. Part II. Farm Income 1926-1965. (Ottawa: Queen's Printer and Controller of Stationery, June 1967) pp.79-94. (b) Source (b) on next page. (Ill) TABLE VLT(continued) (8) (9) (10) (11) (12) (13) Feed expenses 1 Feed price Feed expenses Total Hardware Total current index 1935-39 miscellaneous price miscellaneous prices ;1935-39 = prices current index 1935-39 i 100 prices 1935-39= prices ($000) (a) ! (b) ($000) ($000) (a) (b) 100 ($000) I 38815 j 93.5 41513 28425 96.4 29487 45219 ! 97^ 46331 28881 96.7 29867 S 60297 i 127.6 47225 32872 101.0 32547 S 54969 1 100.8 54533 35635 104.3 34166 | 55023 | 80.5 68352 37657 101.6 37064 ! 57163 ! 90.8 62955 41306 109.1 37861 ! '67484 95.6 70799 54899 113.5 48369 108249 113.3 95542 66812 120.0 55677 163128 120.0 135940 70732 120.7 58601 163218 125.1 130470 77825 120.5 64585 173232 127.6 135762 81194 119.7 67831 204458 128.3 159359 86060 120.8 71242 263009 139.8 188132 96968 129.7 74763 280564 204.0 137531 105406 152.6 69073 266011 209.5 126974 108634 I 6 4 . 8 65919 267195 225.3 118595 112009 168.2 66593 274180 228.2 120149 155109 187.5 83043 273896 233.3 117401 163388 204.1 80053 240288 215.7 111399 168652 202.7 83203 260379 205.3 126829 174936 201.7 86731 264789 214.7 123330 190218 200.2 95014 304763 206.4 147656 211959 209.9 100981 278267 204.5 136072 215863 224.1 96324 320197 192.5 166366 231418 231.4 • 100008 j 335510 202.7 165520 255666 233.6 109446 ! 329996 204.0 161763 264081 239.4 110310 | 330181 210.9 156558 281940 242.0 116504 [ 364614 232.2 157026 286918 247.2 116069 i 392725 232.0 169278 306372 249.1 122992 ! 402924 226.1 178206 337093 254.4 132505 i 434063 227.3 190965 344332 266.1 129399 Source: (b) Canada, Dominion Bureau of Statistics, Price Index Numbers of Commodities and Services Used by Farmers. (Ottawa: Queen's Printer and Controller of Stationery, various years). (112) TABLE XI CONSTANT DOLLAR ESTIMATION OF FARM LEVEL INVENTORY CHANGES, CANADA (1935-1939) (1) (2) (3) (4) (5) (6) Inventory Total Inventory Output Inventory jSear change production change as a 1935-39 change current prices current prices % of output!prices (c)!1935-39 prices (3)-(2)xl00 1(4) x (5) ($000) (a) (*rvy>) / b ) ($000.000)L($000,000) ;1935 + -3726 638443 + .6 707.8 + 4.2 1936 - 42522 657156 - 6.5 632.7 - 41.1 1937 - 10820 742114 - 1.5 622.3 - 9.3 ;1938 + 35047 798582 + 4.6 798.5 + 36.7 J1939 + 53598 880965 + 6.1 956.9 + 58.4 11940 + 77653 824955 + 8.4 967.2 + 81.2 J1941 - 52589 955048 - 5.1 808.2 - 44.5 ;1942 +327253 1587529 +20.6 1220.8 +251.5 J1943 -116780 1449666 - 8.1 845 0 4 - 68.5 ;1944 -128383 1851798 - 6 .9 1043-9 - 72.0 il945 -239291 1601362 -14.9 824.5 -122.9 11946 + 13502 1887580 + .7 933.8 + 6.5 il947 - 50777 2074400 - 2.4 862.5 - 20.7 ;1948 - 12618 259H57 - .5 930.1 - 4.7 1949 - 98073 2603031 - 3.8 909.3 - 34.6 ;1950 +131842 2449064 + 5.4 1024.5 + 55.3 il951 +327165 3272814 +10.0 1150.2 +115.0 :1952 +282165 3297129 + 8.6 1235.7 +106,3 1953 + 74559 2977074 + 2.5 1174.0 + 29.4 1954 - 77151 2396533 - 3.2 890.0 - 28.5 !1955 +202834 2613682 + 7.8 1118.2 + 87.2 1956 +194967 2888483 + 6.7 1260.2 +.'84.4 1957 -118143 2558569 - 4.6 995.5 - 45.8 1958 - 46924 2868472 - 1.6 1080.3 - 17.3 1959 - 63583 2840959 - 2.2 1075.1 - 23.7 I960 + 67825 2811803 + 2.4 1148.0 + 27.6 1961 -271140 2757300 - 9.8 940.5 - 92.2 1962 +187498 3427028 + 5.5 1280.3 + 70.4 1963 +289942 3628053 + 8.0 1405.2 +112.4 1964 - 94587 3530569 - 2.7 1309.3 - 35.4 1965 + 64496 4002312 + 1.6 1405.2 + 52.5 Sources: (a) Canada, Dominion Bureau of Statistics, Handbook of Agricultural Statistics. Part II T Farmjjicaae 1926^ -1965".(Ottawa: Queen's Printer and Controller of Stationery, June 19&7) pp.40-46. (b) Ibid - pp. 28, 48-67. Current production is defined as total sales plus income in kind, plus inventory change minus farm dwelling rental value. (c) Column 4 S Table VIII, page 36 (113) APPENDIX B MODEL OF THE AGRICULTURAL ECONOMY (114) The purpose of this appendix is to provide a simplified theoretical model which would simultaneously include many of the aspects of the farm income problem discussed in the main body of the thesis. The nature of this discussion will not be designed to reach any conclusions, but rather to provide a theoretical framework of agricultural investment and how i t relates to the farm income problem. However, i t is hoped that the theory presented is adaptable to an empirical approach which could be used in policy decision making. The model under discussion has been presented in schematic form in Figure 9, page 115. As the model is presented using five quadrants, each will be described on an individual basis before their interrelation will be demonstrated using a simplified example. In quadrant I, an estimate of the level of income required by the entire agricultural sector for maintenance purposes (M) has been estimated. Maintenance includes the minimum expenditure possible for adequate provisions of such essentials as shelter, clothing, food, medical care, education and transportation for a l l of Canadian agriculture. Any income above such a level is considered available for investment. Conceptually the 45° line representing total income and the parallel line to the left at distance M bound the constant maintenance amount for a l l levels of revenue. The distance between the horizontal line furthest left and the vertical axis is the amount of revenue available for invest-ment purposes. Quadrant II represents the total revenue function. In this simpli-fied version the demand is perfectly inelastic. nil iv Additional Capital FIGURE 9 SCHEMATIC REPRESENTATION OF THE RELATION OF AGRICULTURAL INVESTMENT TO THE FARM INCOME PROBLEM (116) Portrayed in quadrant III is the marginal productivity of agricul-tural capital. In this simple approach, the average productivity of capital as developed in the capital/output ratio has been adopted. Quadrant IV contains the investment function arbitrarily presented as a straight line function. The 45° represents the maximum level of investment possible if all non-maintenance revenue was allocated to the expansion of agricultural capital. In quadrant V, the farm income per capita is measured. The line starting in the origin and rising to the right represents the per capita income at all levels of revenue. The slope of this line is directly_ dependent on the farm population as the slope is equal to the number of people living on farms. If the farm population were to decline, this line would fall to the right thus indicating a higher per capita income from a given amount of revenue. The vertical line represents the level of incomes which would be considered necessary to eliminate the farm income problem. Under the simplified conditions established in the diagram the following interactions of the model have been described to portray the dynamic mechanisms of the model. Starting with quantity A which yields revenue B, total farm income can be divided into two parts; BC repre-senting supernumerary income from which investment funds can be drawn, and CD which is equal to M - the amount required for maintenance. According to the investment function, EF out of the total available funds (BC) were invested. This increase in agricultural capital expanded output by CA which in turn reduced revenue by BH. At this point the (117) cyclical nature of the model has been established. It is now obvious that under conditions of constant demand and investment functions, as well as a stable farm population, the equilibrium level of revenue will be X where there is no supernumerary income available for investment. The per capita incomes would be established at Y. Any change in Y would only take place if one or more of the possible variables would change. Thus far the model has been unrealistically simple for purposes of illustration. However, in the real world the relationships portrayed in each of the five quadrants are subject to fluctuations. To begin in quadrant I, the total maintenance level of income changed for two reasons. First, farm population does not remain stable over time. Secondly, under changing conditions there is no reason to expect the maintenance needs of a person to remain constant over time. For example, even in constant dollar terms medical expenses have been expanding over time. This is at least partially due to the expanded services available. The revenue function of quadrant II, besides being of an unrealistic slope, certainly could be expected to move outward over time as demand expands through increased per capita incomes in the general economy, as well as an increase in the total population. The productivity of additions to total capital of quadrant III are of course over-simplified and do not account for changes in productivity as a consequence of technological improvements. There is no reason to assume that the agricultural investment function is linear as presented in quadrant IV. However, the function can be expected to remain in the area bounded by the maximum investment line. (118) According to historical trends the farm population has been declining. Therefore the line representing the per capita incomes in quadrant V can be expected to move to the left over time. Thus the total concept of the model could be used through an econo-metric approach to measure expected per capita farm incomes based on historical trends of demand, investment productivity, as well as changes in the Canadian farm population. If the incomes did not reach the pre-described desired level and policy considerations were that corrective measures should be taken, then the influence of possible governmental approaches to the problem could be measured. For example, if farmers could be persuaded to invest less, the influence on net incomes could then be determined. The policy considerations would not be limited to altering one variable at a time but rather could include the simultaneous influence on any group or all of the variables. Perhaps the model would be even more meaningful i f the approach was limited to a single agricultural commodity. If, for example, the average incomes of wheat farmers were to reach the desired levelj what rate of off farm migration, level of investment, and quantity of wheat demanded (altered through government aid programs and stock-piling) would be necessary? The basic model, as presented in this appendix hopefully should provide a possible method to answer the above question. (119) BIBLIOGRAPHY Allen, Elmer, "Results of Multiple Regressions on Land Values Around Edmonton11, (Unpublished undergraduate essay, The University of Alberta, Edmonton, Alberta, circa 1964) Anderson, D.S., ?:The Apparent Decline in Capital-Output Ratios," Quarterly Journal of Economicsf#4 vol. 75, Nov. 1961, pp.615-634 Anderson, W.H.L., "Tr-'ckj'ing Down. The Relationship Between Economic Growth and the Extent of Poverty Among American Families", Quarterly Journal of Economics, vol. 78, Nov. 1964, pp.511-524. Anderson, W.J., Fundamentals of Sound Credit. 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