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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 A p r i 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 opportunity costs of capital.  TABLE; OF CONTENTS CHAPTER I.  II.  PAGE 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  THE CONCEPT OF CAPITAL AND ITS MEASUREMENT Definition of Capital  13 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 Capital  24 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 IV.  PAGE TESTING OF HYPOTHESES  45  First Hypothesis  45  Second Hypothesis  54  Discussion V.  VI.  THE F,iRM INCOME PROBLEM  6l 63  The Farm Income Problem  63  The Cost-Price Squeeze  69  Discussion  80  FORCES BEHIND AGRICULTURAL CAPITAL AND OUTPUT GROWTH  81  Returns to Labour and Capital According to Factor Shares  VII.  82  Substitution of Capital For Labour  91  Disaggregation of Farm Output  92  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 Io  PAGE Value of Durable Capital in Canadian Agriculture (1935-1965) (In Current Dollar Terms)  IIo IIIo  .......  Livestock and Poultry Numbers in Canada (1935-65)  (1935""*19^5 )  (1935*1965 )  IX.  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 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  (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  Value of Output in Canadian Agriculture (1935-1965)...  106  110^111  36  Constant Dollar Estimation of Total Demand for Canadian Agricultural Production (1935-1965)  X.  105 5 106  Constant Dollar Estimation of Non-durable Capital, CcHiciclcLy  VIII.  10/+  Constant Dollar Estimation of Farm Machinery, CcLRclCicL  VIIo  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  Constant Dollar Estimation of Farm Real Estate, CcLTlcliClcL  VI.  29,30  Constant Dollar Value of Livestock, Canada (1935"""19^5 )  V.  103  Constant Dollar Value of Durable and Non-durable Capital in Canadian Agriculture (1935-1965)  IVo  25  41  Comparison of Actual and Required Capital Without Allowances Made for Inventory Change, Canada (l935"*" 196 5 )  XI.  0  0 0 0 0 0 0 0 0 0 9 0 0 0 0 0  Constant Dollar Estimation of Farm Level Inventory CfrcLri££€ S y  XII.  0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0  Ct3.rid.Cit3,  (1935""1939)  ooooooooooeooooooooooooo  112  Comparisons of Actual and Required Capital With Allowances Made for Inventory Change, Canada (1935—1965)  ft.©.o«.«o«©»ooo.o...©.........ooo  51  PAGE  TABLE XIII.  Comparison of Actual and Required Capital After Allowances Made for Inventory Accumulation, Canada (1935—1965)  XIV.  o o o . . o o « o « o o « . o o . . . « « o . . . . . « © . . i  53  Comparison of Supply and Production with no Allowances Made for Inventory Change or Accumulation, Canada (1935-1965)  XV.  ,  57  Comparison of Supply and Demand With Allowances for Inventory Changes and Accumulation, Canada )  XVI,  © 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) ...... „  XVII.  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 Oo 0 e o o o e o o o i  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  85  88  Classification of Commercial Farms With Respect to Total Output, Canada, I960 and 1965 ° °  XX.  65,66  Yield on Government of Canada Direct and Guaranteed Sccxiritiss (1935~ 1965)  XIX.  ,  > 9 e o o 0 0  Rate of Return on Canadian Agricultural Capital ( X933*™1965 )  XVIII.  59  O O 0 o o o -  94  Classification of Commercial Farms with Respect to Total Capital Value, Canada, 1965  O O O O O 0 0 0 O O 0 O 0 O 0 O O  96  LIST OF FIGURES FIGURE, 1.  PAGE Hypothetical Structure of Demand Curve for Aggregate Canadian Agricultural Products Under the Influence of International Competition  2.  Rate of Depreciation of Buildings Via the Declining Bt3.lc3.riC©  3.  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 «  .  55  Comparison of Estimated Supply and Demand of Agricultural Products, 1935-1965 ........  5.  31  Existing Capital and Capital Requirements in Canadian Agriculture, 1935-1965 • °  4.  11  . . . . . 0 . . . 0 . . . . . O . . . . 0  60  Ratio of Agricultural/Non-agricultural Per Capita XnCOTIlCS ^  193 5"* 19^5  68  © • o o o o o o o o o o o o o o a o o o o o ^ ^ o o o * * © ©  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 a l l 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 manyimplications of the growth pattern described in the above question. I. THE CONCEPT OF ECONOMIC GROWTH The term "growth' describes a wide range of phenomena. In a 1  most general sense i t 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 i t is the criterion on which the decision to direct resources is based.  Thus a sector s growth pattern depends on 9  how its output is received by the economy as a whole. Each sector is growing in an atmosphere of competition with a l l 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; "Innovation, Capital Accumulation, and Economic Development," The American Economic Review, Volume LIII, Number 3, PP-283-313, June 1963 f  (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 take off". n  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 w i l l be dealt with i n 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 f o l 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 inelast i c i t y 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 f i r s t 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. P.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. This 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  6  (5)  The second hypothesis will be rejected i f overproduction in relation to the base period cannot be demonstrated.  In addition, rejection will  occur even i f 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 overproduction 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 a l l phases of a business cycle plus an international 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) ADD /DD _i =(4N /N _!J t  t  t  T  +  [<fy(  J /^t-l)] t  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)  DD = DD^_]_ t  (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) D = DD +X,. - M t  t  t  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 = D  t  ( K/0 )  t  Where: RK=required stock of capital to meet estimated demand K/0= apital/output ratio in agriculture base in constant dollar terms. C  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 ) (0/K) t  N  t  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[/D )/( .P / t-l> p  t  t  or; <> 6  ( t/*t-l) p  =  ( °t/ t) (1/-:..P) D  Where: ( P ^ / ^ )  = the relative change in price of aggregate agricultural products (0 /D ) = the relative change in quantity of the deviation in production from estimated total demand -^p = the price elasticity of demand a  t  t  Comparison can be made now between revenue (defined as R=PQ) i f o  output equals estimated demand (0 =0) and revenue i f they are not equal t  o  (O^yo).  The following equations are used:  (7) ER - ER _ ( l - H y b ^ ) Where: ER = revenue i f actual output equals estimated demand (price remains constant but quantity changes) t  t  x  (9)  (8) AR = AR t  ( (1+ D -K)[/D _ +Ot. ))'(( 4 P / t P  t-1  t  t  1  1  t  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)  CI = ER - AR t  t  t  Where: CI = change in total agricultural income i f 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 eliminate any discrepancies between farm and non farm incomes.  Thus i f 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 internallygenerated 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 i f 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 production 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, i f capital were withdrawn from agriculture and the supply curve shifted to the left (^2^2^ P i r  ces  would have risen beyond the point E  where the agricultural products of other countries could overcome transportation 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. more elastic at this point (fc^)"  Thus the demand is  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 a l l sectors of her agricultural economy. In the region of£^ any change in domestic production would only influence price in as much as i t would affect the international markets. The resulting approximated demand curve over a l l levels of production would take on the dog-leg shape of DEFD. In general, an estimated elasticity 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' is characterized by many definitions, with the 1  central theme of each describing i t as a tool of production. Most commonly, this -tool takes on the form of physical plant, equipment, construction and machinery, a l l 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 i t from economic wealth; for the latter involves ownership 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  T.W.Schultz, "Investment in Human Capital", The American Economic Review, Volume LI, Number 1, pp. 1-16, March 1961 x  (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, i t is capacity-creating in the sense that i t 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, i f 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: The Capital time series is one that will drive a purist mad.  ,s  ,v  Thus i t 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 a l l 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, i f 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 i t 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, i t 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 inconsistent with the valuation of a single aggregate stock of capital. However i t should be noted that the constant value of capital and not the index number is the end product sought in this analysis.  ^Land is traditionally treated as a separate input (i.e. the Classical triad of land, labour and capital) because the consideration that i t 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 p ) 0  0  0  &q p ) 0  0  This identity is trivial as the dependent variable (;..q]_p) is equal to 0  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)  la^  =  fo^P^)  •  (ZJ> ) 0%  Thus the two methods are equivalent i f %0.-i P i^<l P 1  o  o  o  (Laspeyres  quantity index) is equal to^p^q-]_/^p-]_q which is the Paache quantity 0  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 11  "I  . In essence, Laspeyres price and quantity  Bruce D. Mudgett, Index Numbers. (New York: John Wily and Sons, 195l)p.31  Q  Irving Fisher, The Making of Index Numbers, (third edition; Boston: Houghton Miffen Company, 1927), pp.58 and 238; Hendrik S. Lok, An 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 ir  (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-]q 4s:p q ) any shift in quantities 0  0  0  }  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 i t 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 inflexibility of p with respect to changes in q^. D  If q^ becomes relatively  large then p in reality would be expected to decline while i f q-^ became scarce price would rise.  From this i t follows that the sum of the  denominator (<Lp qi) is larger than one would like; 0  for large quantities  (with p unrealistically high) will outweigh small quantities (with p Q  lower than real price.) The argument follows for Laspeyres quantity index which is theorectically an overestimation and Paasche's which is a corresponding underestimation of the values of quantities (i.e. capital) as they exist in reality.  The denominator of the Paasche price index CLp qi) which was 0  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, i t has been theorized that both (£.p-jq) andfe.q-]P )overestimate 0  0  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. c i t . •^Fisher, loc.cit.  (22)  As previously stated, production necessitates the presence of capital. This statement alone is sterile for i t gives no hint of capital productivity 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 i s : 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 productivity 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 capitaloutput w i 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 i n a  correspondingly larger or smaller output than the existing average, this w i 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 _ + A V O t  x  W  +A.0 ) t  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 w i 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 w i 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, a l l 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 poultry , land and buildings, as well as implements and 1  machinery. In Table I, page 25, i t 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 agricultural 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 a l l 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 a l l forms of livestock and poultry are classified together.  (25) TABLE I VALUE OF DURABLE CAPITAL Bl CANADIAN AGRICULTURE (1935-1965) (IN CURRENT DOLLAR TERMS) i  (1)  :  (2)  (3) i  1  (4)  (5)  ! Implements & Total ;Year \ Livestock and: Land and \ \ Poultry ! Buildings Machinery 1 ; ($000) (a)(b)i ($000)(a)(b) ($000)(a)(b) ($000)(a)(b) ! '  1  1  4,523,308 ! 533,546 !l935 ! 540,507 13,449,255 :1936 I 573,632 13,292,258 524,429 4,396,319 | 526,876 13,253,346 603,672 4,383,894 \ 11937 i •1938 ; 13,083,056 543,781 4,213,914 587,077 :3,106,885 4,298,763 [1939 : 644,485 547,393 682,522 il940 ' • • |2,963,226 4,214,097 ; 568,349 596,046 4,247,196 13,029,846 11941 621,304 :1942 660,492 4,649,909 J 3,283,024 751,393 3,454,480 5,274,723 11943 i 1,097,966 ' 722,277 5,489,527 758,083 11944 : 1,081,967 j3,649,477 826,632 5,580,407 • 3,711,473 ,1945 i 1,042,302 5,877,826 ;1946 i 1,075,330 ; 3,897,005 905,491 6,389,548 4,214,119 1,026,573 11947 I 1,148,856 • 4,665,126 Il948 ; 1,244,981 1,194,947 7,105,054 i 7,503,161 1,415,546 ! 4,716,823 J1949 ! 1,370,792 11950 ! 1,467,580 5,022,642 1,681,075 8,171,297 1,931,880 9,450,890 11951 ; 2,006,491 i 5,512,590 11952 ! 1,790,874 9,536,128 ; 5,668,467 2,076,787 2,257,636 10,110,116 • 6,295,977 11953 ! 1,556,503 1,424,076 6,183,050 2,352,548 9,959,674 :i954 10,313,420 ; 6,567,066 11955 I 1,462,727 2,283,627 2,263,286 '10,583,662 ; 6,852,657 il956 j 1,422,719 10,842,372 2,371,409 ; 6,958,491 1957 j 1,512,472 J1958 ; 1,860,461 < 7,440,775 2,441,191 11,742,427 1 7,842,190 S1959 ! 1,956,443 2,509,654 12,308,287 i I960 1,878,010 12,679,960 2,575,025 : 8,226,925 2,565,538 ! 13,159,169 ' 8,603,397 il96l I 1,990,234 2,656,211 11962 ! 2,053,779 13,684,017 I 8,974,027 2,781,770 '1963 ! 2,119,933 -14,540,957 : 9,639,254 15,790,016 10,675,560 • 2,948,169 |1964 j 2,166,287 '17,281,698 2,102,238 11965 12,039,289 3,140,171 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 i f 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 f e l l 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, a l l 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 a l l 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 a l l livestock as shown in Table III, pages 29 and 30, milk cows were valued at $39 per head, beef cattle and  For 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. J  (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 termcthe following formula was used-^. (1) DBV = K + (C + (R -D ) (l/¥ )) . (l/EMI ) t  Where: DBV K C R D W EMI  t  = = = = = = =  t  t  t  t  deflated building value a constant= $118PSc 10 =1939 value of buildings total agricultural construction repairs to farm buildings depreciation of farm buildings percentage of owner-operated farms index cf building material costs 6  ^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 V A L U E OF DURABLE AND NON-DURABLE C H P I T A L I N CANADIAN AGRICULTURE! (1935-1965) (1935-1939 = 100)  131  15.1  (4) (2) Value o f jValue o f | T o t a l durao.l ; Value o f l i v e - Value o f | m a c h i n e r y p l u s i capital land Year ! stock minus buildings h o r s e s ( d ) (e) (c) i horses (b) ($000,000) ($000,000) ( $ 0 0 0 , 0 0 0 ) ; ($000,000)(a) ($000,000) _ i .s, «. . .. 5142 ' 388 2855 735 1164 0.935 5161 390 1148 28?9 1936 744 2902 770 5204 391 1141 1937 5222 2926 372 1938 791 1133 £20 380 1126 5275 2949 1939 362 5358 401 1122 D.940 2973 1122 909 5473 3037 405 J19/...1 5536 940 1120 1942 3049 427' 1110 5567 450 3063 943 0-943 3078 1108 5623 464 973 0-944 1011 5656 3092 1112 441 J1945 5723 0-946 418 1074 3107 1125 5872 3121 1193 419 1139 DL947 6011 390 3136 1948 1334 1151 6198 1490 3150 384 1174 J1949 6382 1950 1655 367 3165 1195 1811 3192 6587 1213 371 1951 6815 400 J1952 1969 3213 1233 7048 401 2159 3233 1254 0-953 7161 422 1272 2214 3253 1954 2292 1290 7294 438 3274 11955 2396 3292 7449 1956 447 1314 7611 2510 456 1334' 3311 1957 3322 466 7724 1352 1958 2584 2680 1372 7859 474 3333 1959 1390 I960 2779 7973 3345 459 2860 3370 480 8135 1961 1425 8301 1962 2965 3399 1464 473 3428 ' 1502 8515 492 3093 " 1963 3242 502 3452 8733 1537 1964 3410 8964 500 1570 3485 1965 ! (Continued) Sources: ( 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, C o l u m n ( 1 2 ) , A p p e n d i x ( c ) T a b l e V, C o l u m n ( 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 C o l u m n s ( 2 ) , ( 3 ) , ( 4 ) a n d ( 5 ) . i l l  !  (30) TABLE n i (Continued) (1935-1939 - 100) (10) (12) (7) (13) (9) (11) (8) Value of : Machinery:Feed ; Miscellaneou sj Total 'Total Total Fertilizer; Expenses !Expenses i Expenses : Capital | Capital j Non($000)(f) minus " ($000)(h)| ($000)(i) ! Durable :($000,000)lndex \ repairs 1i I Capital (k)1935-39 \ i1 ; ($ooo)( ) | ($000)(j) ! 100 7205 \ 5276 ! 97.5 j 55887 \ 41513 i 29487 ! 134093 ; 98.0 1 58404 ; 5303 7036 j 46331 i 29867 i L42438 | 151726 10017 i 61937 | 47225 j 32547 5356 I 103.8 161032 : 5389 10832 j 67501 ! 54533 i 34166 ! 99.6 ! 76222 i 68352 • 37064 ; 101.1 i 192757 11119 1 5468 5552 ! 102.6 11829 j 81628 1 62955 \ 37861 j 194273 85712 5689 11334 ! 70799 ! 48369 ! 2162U 1 105.2 • 95542 i 55677 > 250017 I 5786 13979 I 84819 I 106.9 i 309440 ; 5876 | 86525 1135940 i 58601 16374 ; 108.6 17386 ! 91003 i130470 ! 64585 ; 303444 ' 5926 j 109.5 ? 318590 ! 5975 ! 112.1 20157 i 94940 1135762 ! 67831 ; 6078 1159359 ! 71242 21919 i 102857 355377 1 112.3 ,23482 ; 395516 6268 ! 109139 !188132 \ 74763 | 115.9 ! 121539 1137531 \ 69073 23960 j 352103 •' 6363 I 117.6 \126974 j 65919 : 357595 26759 !137943 ! 6556 1 121.3 ! 354841 i 6737 27390 i 142263 1118595 1 66593 I 124.5 28446 ! 136243 1120149 ! 83043 i 367881 :• 6955 I 128.6 |117401 i 80053 ! 367196 : 7182 ! 132.8 27126 1142616 30830 ! 375296 : 137.2 1149864 1111399 i 83203 • 7423 7556 j 395458 ! 139.7 1 152284 !126829 ! 86731 29614 '28352 !123330 ; 308C.V8 ! 140.5 ! 95014 1161352 7602 ' = 7895 29230 i168470 i147656 i100981 446337 i 145.9 29867 : 8044 1170557 j136072 1 96324 i 432820 ! 148.7 32228 8196 ; 151.5 i172941 1166366 1100008 i 471543 ; 154.2 8345 35472 ! 175641 !165520 ! 109446 i 486059 ;110310 8460 ; 486578 i178539 35966 !161763 i 156.4 i175992 :41330 i156558 i116504 i 490384 8625 I 159.4 1157026 ;116069 ; 502082 1 8803 1184054 44943 j 162.7 ;5044o 1 530675 i 9046 167.2 j187959 i169278 i122992 1178206 i132505 I 561683 ; 9295 60259 i190713 i 171.8 190965 .129399 ! 580479 : 9544 165101 ' 195014 ! 176.4 Sources: g  1  !  ;  :  j  :  !  :  Table Table (h) Table (i) Table  VII Column Vii Column VII Column VII Column  (4) Appendix ((7) 7 ) \ Appendix A (10), Appendix (13), Appendix t  (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' . 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. 1  (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 i t was necessary to investigate a l l 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 owneroperated farms was the same as the ratio of both repair and depreciation charges under these two forms of ownership. Repairs, i t 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 undeveloped acre.  The average value of a l l 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 i t was found that the value of an improved acre of land averaged 1,59 times as much as an acre 9  of a l l 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, Total 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. 10  (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, i t 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 benchmark 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; a l l 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 production"'"''" 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 . 12  -^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 a l l agricultural products remain constant over time.  (36) TABLE VIII VALUE- OF OUTPUT IN CANADIAN AGRICULTURE (1935-1965)  m  (2) , Year > Production in i ; current dollars : i : ($000) (a) §38443 657156 :1937 742114 11938 798582 11939 880965 11940 ; 924955 11941 955048 J1942 1587529 1449666 J1943 11944 ' 1851798 J1945 : 1601362 >1946 1887580 2074400 11947 11948 • 2591157 S1949 2603031 ;1950 : 2449064 3272814 |195l |1952 3297129 > 1953 2977074 2396533 11954 2613682 U955 ;1956 2888483 11957 2558569 H 9 5 8 • 2868472 J1959 2840959 ;I960 . 2811803 i1961 ; 2757300 ;1962 ; 3427028 11963 ! 3628053 i1964 : 3530569 i1965 4002312  m•  5  (3) Index of physical agricultural (b) ! production j 95o2 85.1 83.7  107.4 128.7 130.1 108.7 164.2 113.7 140.4 110.9 125.6 116.0 125.1 122.3 137.8 154.7 166.2 157.9 119.7 150.4 169.5 133.9 145.3 144.6 154.4 126.5  172.2 189.0 176.1 189.0  (4) Production 1935-39 prices ($000.000)(c) 707.8 632.7 622.3  798.5 j ]  1  956.9 967.2  808.2 1220.8 845.4 1043.9 824-5 933.8  862.5 930.1 909.3  1024.5 1150.2 1235.7  1174-0 890.0 1118.2 1260.2  955.5 1080*3 1075.1  1148.0 940.5 1280.3 1405.2  1309.3 1405.2  Sources: (a) Canada, Dominion Bureau of Statistics, Handbook of Agricultural Statistics. Part II, Farm Income - 1926-1965, (Ottawa: Queen's Printer and Controller of Stationery, June 1967) pp.48-67. Current production is defined as total sales plus income in kind plus inventory change minus farm rental value. (Sources continued on next page)  (37) Sources: (of Table VIII continued) (b)  , . , Index of Farm Production (Ottawa: Queen's Printer and Controller of Stationery, various years)• See the 1962 issue for conversion of the 1949=100 lease to 1935-1939=100 for the years 1962-1965.  (c) Production in constant dollar terms is based on the average of 1935-1939 current dollars of column (2), multiplied by the index number in column (3).  (38)  To arrive at the constant dollar level of production, this index was multiplied by the average current dollar level of production of the base period. This method again involved the indirect use of the Paasche quantity index formula as described in Chapter II.  In Column (4) of. Table VIII, the  constant dollar levels of production for the years 1935 to 1965 can be observed. It is interesting to note that production has approximately doubled over the thirty year period. Another important feature of this production data is the variation.  For example, 1942 had a level of  production approximately 50$ 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 proportional 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 i t 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 i t 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 i f 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 substitutions 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 a l 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 population 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 i f 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)  (4) 121 121 (21 ill • Relative j Relative \ Total iTotal ;Net jTotal lYear change in ! change in j relative 'domestic I exports :demand ; population demand by j change in:demand !(5)+(6) '.AN • changes inl domestic ! DDt (a) xncome N : demand : ($000,000):($000,000)!($000,000): (c) (d) ; ! (3)+(3) ! (b) lADDt • DDt-1 ;  ;  :  1935  1936 D-937 0.938 11939 • b.940 : 1941 i ^L942 j 1943 : p-944 : a945 ; 11946 : 1947 ! 11948 ': 1949 i 11950 = ;  J1951  1952 |1953 1954 : ,1955 ; 1956 :i957 I 1958 | 1959 ! I960 1961 . 1962 1963 ! 1964 1965 !  .0097 .0097 .0087 .0097 .0103 .0101 .0111 .0128 .0121 .0128 .0105 .0182 .0210 .0216 .0207 .0197 .0217 .0321 .0196 .0298 .0269 .0244 .0329 .0283 .0236 .0222 .0206 .0182 .0176 .0180 .0175  .0085 -.0478 .0213 -.0017 ;  ; .0140  : .0222 • .0215 ; .0293 '; .0083 • .0185 .0047 .0052 -.0096 ;-.0028 -.O028 .0051 .0095 ; .0056 .0084 -.0074 .0110 ; .0158 • .0024 ; .0048 ; .0028 .0056 .0052 : .0046 .0044 .0045 .0044 ;  :  I .0182  ; ; ! : : ;  -.0381 .0300 .0080 .0423 .0323 .0326 I .0421 : .0204 :  : .0313  ! .0152 .0234 .0114 , .0188 .0179 ; .0247 i .0312 ; .0377 .0280 ; .0224 .0379 .0402 . .0353 : .0331 : .0264 : .0278 .0258 ; .0228 : .0220 : .0225 .0219 !  ;  :  ! 663.2 1 577.7 85.5 ! 555.7 257.4 \ 813.1 ' 572.4 149.7 j 722.1 577.0 131.2 708.2 175.2 ; 776.6 601.4 620.8 187.7 ; 808.5 ! 641.0 219.6 860.6 668.0 : 890.4 222.4 681.6 282.8 i 870.4 j 1108.0 702.9 405.1 : 713.6 : 1112.9 399.3 963.2 232.9 ! 730.3 738.6 198.1 ; 936.7 946.8 i 752.5 194.3 766.0 961.3 195.3 948.2 784.9 ' 164.3 185.6 • 995.0 i 809.4 1117.6 : 839.9 277.7 269.6 1133.0 863.4 882.7 ; 150.7 1032.4 ! 916.2 146.1 ' 1062.3 953.0 202.1 : 1155.1 1156.1 j 986.6 169.5 1196.8 177.5 ' 1019.3 183.1 1044.4 ; 1227.5 138.6 • 1212.0 ' 1073.4 | 1101.1 ; 117.3 1218.4 1126.2 ^ 103.9 1230.1 1141.0 172.5 i 1313.5 326.6 1166.7 i 1493.3 278.2 ! 1470.5 : 1192.3 (Sources on next page) ;  ;  5  (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) DD = (DD ) (l+A.DD /DD _ ) t  t-1  t  t  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. A l l 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) D = DD + ( X -M ) t  t  t  t  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) = ( .85 C(X-M) ) • (RTP /CTP ) 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. t  t  t  t  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 a l l 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 a l l 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 a l l 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 i s : 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 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, (RK = D (K/0) ) has been used to establish t  t  t  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 C A P I T A L WITHOUT ALLOWANCES MADE FOR INVENTORY CHANGE, CAMADA (1935-1965)  (1935-1939=100)  121  (4)  (6)  ill  ;Total ;Estimated !Existing j Deviation of JYear |K/O Ratio ^Estimated I Capital Capital ; actual from I Requirements ($000,000); required capital ! (a)!Demand |($000,000)1(2) x (3) ( c j ; (5) - (4) ; ($000,000) i (b)j ($000,000) j 1 : 663 . 2 ; 4974 5276 ; i 9 3 5 i 7.5 •i +302 1936 \ 8.4 6830 ; 5303 1 813.1 -1527 ! 722.1 -854 1937 i 8.6 6210 i 5356 +644 1938 ! 6.7 5389 4745 ; i 708.2 j : 776.6 ! 4427 1939! 5.7 ! +1041 ! 5468 1940 ! 5.7 ; 5552 ! +944 I 808.5 i 4608 6024 5689 -335 19411 7.0 i 860.6 j +1601 ; i 9 4 2 | 4.7 5786 1 890.4 4185 1 5876 1943 ! 7.0 6093 ! i 870.4 i i -217 1108.0 ': 6316 ; 5926 i -390 1944; 5.7 8013 ! 1945 ! 7.2 5975 i 1112.9 ! i -2038 1946' 6.5 6)78 -183 j 963.2 j 6261 i 6268 ; -570 6838 1947 \ 7.3 ! 936.7 ! 1948! 6.8 946.8 ; 6438 ! 6363 -75 7.2 6921 ; 6556 1 -365 1949 i i .96i;3 1950! 6.6 ' .948.2 ; 6258 ! 6737 i +479 6.0 ; 995.0 1951 i 5970 i 6955 i +985 \ 1117.6 6482 : 7182 : +700 ,1952 j 5.8 6.3 ; 1133.0 • 7138 7423 1 +285 1953 j -1219 1954! 8.5 \ 1032.4 ! 8775 ! 7556 7602 +378 1062.3 1955! 6.8 7224 1956; 6.3 +618 i 1155.1 7277 7895 ! 1156.1 ! -1667 8.4 9711 ; 8044 1957 i 19581 7.6 : 1196.8 9096 ' 8196 i -900 7.8 ' -1232 1959 \ 1227.5 ; 9575 : 8343 846O I960; 7.4 -509 8969 i 1212.0 1961: 9.1 8625 ; 1218.4 ! 11087 i -2462 ! 1230.1 ; 8488 ! 8803 ; +315 1962 j 6.9 ; 9046 1963! 6.4 i 1313.5 i 8406 j +640 10602 ; 9295 ;1964 5 7.1 • 1493.3 I -1307 6.8 -455 1965 : 1470.5 9999 9544 Sources: 1  1  1  ;  1  ;  !  :  ;  (a) Column (5) of this table £ Column 4, Table (b) Column ( 7 ) , Table I X , page 41 (c) Column (12), Table I I I . , page 30  !  VIII,  page 36  (47)  of weather, pests, diseases and general environmental conditions''". Technological change and changes i n 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 i n  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 i n 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 environmental 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 equilibrium 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 i n 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 c a p i t a l formation under the assumptions of perfect information and perfect mobility.  In observing both the actual c a p i t a l available (Column (5)) and  the c a p i t a l required (Column (4)) to meet estimated demand over the entire 31 year period of the study, there has been, on the aggregate, a s l i g h t net d e f i c i t i n the growth of c a p i t a l as can be seen i n Columns (6) and (7). Within the period, i t can be observed that p r i o r to World War I I c a p i t a l requirements were approximately matched by existing c a p i t a l stock. However this observation was to be expected since 1935-1939 was the base period used i n the calculations. there appeared to be a d e f i c i t  During the War and i t s aftermath  in c a p i t a l 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 c a p i t a l appeared.  However, from 1954  to  1965 the estimated c a p i t a l requirements appeared to be mostly i n excess of the existing stock.  The c a p i t a l d e f i c i t in these l a t e r years is part-  i a l l y explained by adverse weather conditions on the P r a i r i e s i n 1954, 1957 and 1961.  Also, 1964 and 1965 had abnormally large wheat sales and  therefore expanding aggregate demand and c a p i t a l requirements. Over the 31 year period, a mean d e f i c i t of existing c a p i t a l from estimated c a p i t a l required was 238 m i l l i o n dollars v/ith a standard deviat i o n of 964 m i l l i o n d o l l a r s .  The average d e f i c i t i s 3.1 percent of the  existing c a p i t a l stock. The above approach of equating o f f 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 i n Table XI of the Appendix.  Assumptions  similar to those used  (49)  in export evaluation i n constant d o l l a r terms were involved i n the calculations.  In essence, the composition of .inventories was assumed to  be similar to that of aggregate production. When inventory change i s considered, c a p i t a l requirements are expected to d i f f e r from those observed previously. twofold:  The anticipated differences are  (1) Expected c a p i t a l requirements would be reduced due to  inventory accumulation i n high output years which exhibit low c a p i t a l output ratios r e f l e c t i n g favorable environmental conditions; while i n adverse years with high c a p i t a l output r a t i o s , inventories could be depleted.  The net result of inventory fluctuations would be to reduce  long run c a p i t a l requirements.  Excess production would take place i n  years which are characterized by high output per unit c a p i t a l while i n years with unfavorable returns to c a p i t a l , inventories could be drawn upon to supplement output productivity without a temporary expansion of c a p i t a l with low productivity.  Thus a reduced amount of c a p i t a l would  be required i n the long run without reducing the annual available supply. The reduction in c a p i t a l requirements would be reflected  i n a reduced mean  c a p i t a l d e f i c i t of actual c a p i t a l from estimated c a p i t a l requirements. (2) A second anticipated observation would be a reduction i n the standard deviation of the differences between the estimated c a p i t a l requirements ana the actual c a p i t a l 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 c a p i t a l requirements has been c a l culated and i s presented i n Table XII, page 51. constant value of inventory change appears.  In column (2) the  The product of the c a p i t a l -  output r a t i o as observed i n Table X and annual inventory change as rep-  (50) orted i n Column (3) Table XII represents in inventory.  the influence on c a p i t a l of changes  This influence is added to the c a p i t a l requirements c a l -  culated previously i n Table X to arrive at new c a p i t a l requirements.  levels of estimated  The mean d e f i c i t of the r e s u l t i n g deviations bet-  ween estimated c a p i t a l requirements and the actual c a p i t a l stock as established i n Column (5) is 298 m i l l i o n d o l l a r s , an unexpected increase over the o r i g i n a l mean d e f i c i t of 238 m i l l i o n d o l l a r s .  It occurred because est-  imated c a p i t a l requirements included the 31-year increase in the l e v e l of inventories as demand.  The.revised  c a p i t a l requirements (Column (5) Table  XII) are s u f f i c i e n t to meet both estimated demand and inventory accumulation. The  standard  deviation of the difference between actual c a p i t a l  and estimated c a p i t a l requirements was the previous  reduced to 599 m i l l i o n d o l l a r s from  l e v e l of. 964 m i l l i o n d o l l a r s as anticipated.  There are two possible explanations (1)  stock  for inventory build-up over time.  There i s the obvious consideration that increased stocks of unsold  cultural output are a consequence of overproduction. as the a g r i c u l t u r a l industry expanded, there was  agri-  (2) A l t e r n a t i v e l y ,  a corresponding increase  in inventories i n the form of feed, seed, livestock and other retained farm products which may  be c l a s s i f i e d as inputs.  Thus agriculture may  a minimum inventory level proportional to the expanded size of the  require industry.  An estimation of the necessary c a p i t a l requirements under the assumption that the accumulated portion of inventories were superfluous and not an addition to estimated demand for a g r i c u l t u r a l 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)  (2)  (1)  (5)  (4)  (3)  Deviation of Influences on Capital capital required after actual from ($000,000)(a) ($000,000)(b) inventory change required capital  InventoryJYear change  ($000.000)(c)  1935 1936 1937 ;1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 ;1952 1953 1954 1955 1956 1957 1958 1959 I960 1961 1962 i 11963 ' H964 1965 :  +4.2 -41.1 -9.3 +36.7 +58.4 +81.2 +44.5 +251.5 -68.5 -72.0 -122.9 +6.5 -20.7 -4.7 -34.6 +55.3 +115.0 +106.3 +29.4 -28.5 +87.2 +84.4 -45.8 -17.3 -23.7 +27.6 -92.2 +70.4 +112.4 -35.4 +22.5  5006 6485 6130 4991 4760 5071 5712 5367 5613 5906 7128 6303 6687 6406 6672 6623 6660 7099 7323 8533 7817 7809 9326 8965 9390 9173  +32 -345 -80 +246 +333 +463 -312 +1182 -480 -410 -885 +42 -151 -32 : -249 +365 +690 +617 : +185 -242 +593 +532 . -385 : -131 -185 +204 -839 ; +486 : +719 • -251 ' +153  10248 8974 9125 10351 10152  ($000.000)(d)  1  ; |  1 i ;  ! i ! ; i  +270 -1182 -774 +398 +708 +481 -23 +419 +263 +20 -1153 -225 -419 -43 -116 +114 +295 +83 +100 -977 -215 +86 -1282 -769 -1047 -713 -1623 -171 -79 -1056 -608  Sources: (a) Column (6), Table XI, Appendix (b) Column (2) of  this 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 a l 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 = i n i t i a l 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 (2) (5) (4) (3) (1) i Adjustment ;• Adjustment Capital requirements. Deviation of j (Year ;to output actual from j to capital . after adjustments i required capital j j($000,000)(aJ ($000,000)(b); ($000,000)(c) i ($000,000)(d) j ;  ;  !  4926 1935 ! 10o7 80.3 6392 93.2 11.1 1936 i : 98.0 6032 1937 11.4 1938? 11.7 i 78.4 4913 i 12.1 ! 69.0 1939: 4691 11940 5000 12.4 ; 70.7 5623 12.7 88.9 11941 j 1942 13.1 5305 i 61.6 93.8 1943 13.4 5519 5828 78.1 13.7 1944! '• 7026 1945 ; 14.1 101.5 ;i946i 93.6 14.4 6209 6580 14.7 1947 107.3 !l948! 15.1 6303 102.7 6561 1949! 15.4 i 110.9 1950 ; 15.7 103.6 6519 16.1 96.6 19511 6563 1952: 95.1 16.4 ; 7004 7218 105.2 11953 . 16.7 8388 1954; 17.1 j 145-4 1955 : 17.4 118.3 7699 1956; 17.7 111.5 7697 18.1 152.0 '1957' 9174 1958 139.8 18.4 8825 1959 < 18.7 145.9 9244 I960; 9032 19.1 141.3 1961! ' 10071 19.4 i 176.5 1962 8838 19.7 135.9 128.6 : 8996 1963 •' / 20.1 144.8 10206 1964, 20.4 20.8 10011 1965: 141.4 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 s  1  ;  !  !  1  +350 -1089 -676 +476 +777 +552 +66 +481 +357 +98 -1051 -131 -312 +60 -5 +218 +392 +178 +205 -832 -97 +198 -1130 -629 -901 "572 -1446 -35 +50 -911 -467  :' ;  i  : ! !  : '  (54) run  c a p i t a l requirements.  jected  T h i s l a t e r and  to Student's t - t e s t , t =  JL====.  most r e f i n e d  w i t h the  e s t i m a t e was  resulting  sub-  t = 1.35,  indicating  T/N^1  t h a t the mean o f  actual  c a p i t a l s t o c k s was  c a p i t a l requirements at the In as much as an  test  basis,  r a t e of change o f  respectively.  1  -  b  at  5%  +  exist  $-4j  i/  the  capital  a n d  0.8201 w i t h 58  significance  Thus on  the  be  hypothesis  account f o r the i n excess of  f o l l o w i n g two (Y^) Y  2  on  and  the  simple  actual  fact latter.  linear  capital  = 4,414.29 +  (Y2).  172.48t  d.f.;  w h e r e  thus s u p p o r t i n g the  l e v e l that actual  b a s i s of  indicating  a r a t e more r a p i d II.  former s e r i e s may  = 4,654.05 + 145.95t and  a r a t e f a s t e r than the  rejected,  supported the  3  t v a l u e was  at the  x  level.  When the b v a l u e s were s u b j e c t e d to a t - t e s t x/here  ' t/^pw^ij  the  the  i n excess o f the mean e s t i m a t e d  t e s t s d i d not  f o r both e x i s t i n g  r e g r e s s i o n s were Y b  the  t h a t t h i s s i t u a t i o n d i d not  r e g r e s s i o n s were run The  significance  preceding t-tests  average c a p i t a l  t h a t the To  the  5%  not  r a t e of the  that actual  than d i c t a t e d  c a p i t a l s t o c k s were not  expansion o f c a p i t a l  above t e s t s  the  growing  requirements.  f i r s t h y p o t h e s i s has  c a p i t a l f o r m a t i o n has by  hypothesis,  not  been  taken p l a c e at  changes i n demand.  SECOND HYPOTHESIS With e s t i m a t e s f o r both e x i s t i n g  levels  e s t a b l i s h e d , the  repeat the  testing  of  the  capital levels  and  required  second h y p o t h e s i s f o l l o w s .  second h y p o t h e s i s as p r e s e n t e d i n Chapter I i s :  capital To  11  »35  «37  '39  »41  '43  '45  '47  '49  »5i  «53  R  55  FIGURE 3 EXISTING CAPITAL AND CAPITAL REQUIREMENTS IN CANADIAN AGRICULTURE, 1935-1965 (BASED ON 1935-1939 FRICES=IOO)  * 57 1F  *59  ^  ^63  "*6!  YEAR .  (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 relatively 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 i t appears that there has been no long run trend to either overproduction or underproduction when no allowance has been made for inventory change. From the analysis i t 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) .Year  (2) (5) (3) (4) : Deviation of :Cumulative sum •Estimated ; Total 'total demand production ! production from' of deviations i ($000,000) (a) ($000,000) (b)l demand (3)-(2);($000,000) Kftooo.ooo) +44.6 707.8 +44.6 | 663.2 ! 813.1 632.1 : -181.0 -136.4 ! 722.1 i -99.8 -236.2 622.3 708.2 : +90.3 ! -145.9 798.5 i 776.6 +34.4 956.9 +180.3 967.2 ; 808.5 ' +193.1 ; +158.7 808.2 ! 860.6 +140.7 < -52.4 1220.8 i 890.4 +471.1 +330.4 -25.0 +446.1 870.4 845.4 ! 1108.0 +482.0 1043.9 ; +35.9 +193.6 ; 1112.9 824.5 i -288.4 ! 963.2 +164.2 933.8 -29.4 +90.0 -74.2 i 936.7 862.5 1 946.8 930.1 -16.7 +73.3 -52.0 : 961.3 +22.3 909.3 ' 948.2 +97.6 1024.5 +76.3 +152.8 995.0 1150.2 +55.2 : +118.1 •: 1117.6 +270.9 1235.7 ; 1133.0 +41.0 1174.0 +311.9 890.0 I 1032.4 +169.5 • -142.4 1118.2 ! 1062.3 : +55.9 +225.4 1260.2 1155.1 +105-1 +330.5 -200.6 ; 1156.1 +129.9 955-5 • 1196.8 ' -116.5 1080.3 : +13.4 -139.0 1075.1 1 1227.5 -152.4 : 1212.0 1148.0 -64.0 -203.0 i 1218.4 -277.9 -480.9 940.5 1 1230.1 +50.2 -430.7 1280.3 1405.2 -339.0 : 1313.5 : =91.7 -523.0 i +184.0 i 1493.3 1309.3 1405.2 -588.3 1470.5 i -65.3 :  J1935 11936 1937 1938 11939 1940 1941 1942 11943 1944 1945 1946 11947 1948 11949 1950 1951 1952 1953 |1954 1955 1956 1957 1958 1959 I960 1961 11962 1963 J1964 1965  :  1  ;  :  ;  1  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 f a l l 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) lYear f  (2) (3) |Estimated total Total i demand ; supply j ($000,000)(a) ;'^00,000)(b)i ' i i 663.2 i 703.6 673.2 813.1 j 722.1 631.6 708.2 I 761.8 776.6 898.5 886.0 808.5 i 852.7 860.6 1 ; 890.4 ! 969.3 870.4 i 913.9 971.9 i 1109.0 ; 1112.9 947.4 963.2 940.3 983.2 936.7 946.8 • 934.8 961.3 | 943.9 969.2 948.2 j 995.0 ! 1035.2 1129.4 i 1117.6 ' > 1144.6 1 1032.4 1133.0 j ' 918.5 i 1062.3 ' 1031.0 \ 1155.1 | 1175.8 ! 1156.1 1 1001.3 : 1196.8 j 1097.6 1098.8 1 1212.0 1227.5 ! 1120.4 1218.4 ! 1032.7 \ 1230.1 ; 1209.9 ! 1313.5 S 1292.8 ! 1493.3 | 1344.7 ! 1470.5 ! 1382.7 :  11935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 !l947 J1948 1949 1950 1951 1952 .1953 1954 1955 11956 11957 1958 .1959 !l960 il96l S1962 11963 11964 1965  :  (5) (4) Deviation of . Cumulative supply from 1 sum of deviations ' demand (2)-(3) ($000,000) ! ($000,000) +40.4 +40.4 -139.9 I -99.5 -90.5 i -190.0 +53.6 I -136.4 +121.8 ! -14.6 +77.5 i +62.9 ! +55.2 -7.7 +134.1 +78.9 +177.6 +43.5 -136.1 I +41.5 +124.0 -165.5 : -146.9 -22.9 +46.5 i -100.4 -12.0 i -112.4 ! -129.8 -17.4 +22.0 -107.8 +40.2 -67.6 +11.8 ! -55.2 +10.8 ; -45.0 -159.3 -114.3 -31.3 j -190.6 -169.9 +20.7 -54.8 -224.7 -99.2 ! -323.9 -128.7 i -452.6 -544.2 -91.6 -730.5 -186.3 -20.2 -750.7 -772.4 -21.7 -148.6 ; -921.0 -87.8 -1008.8  Sources: (a) Column (7), Table IX, page 41 (b) Column (3), Table XIV, page 57 + Column (2), Table XIII, page 53  (60) AGGREGATE ,o  O  -O  SUPPLY  »  AND DEMAND ($ 00,000,000) 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 application of the model. To begin, equation (6) of Chapter I ( (^t-l/'^t^  =  (Ot/D )(l/—p)) obviously results in an average positive change in price as t  O.J. (deviation of actual from expected output) is negative over the long run. In equation (8) ( \=^ _ (l+D +o[/D _ +0^ ))(AP /P „ ) + l the actual revenue A  t  1  t  t  1  1  t  t  1  (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 t t-1 t' t-1 z  prices are held constant with no allowances made for change in price. In conclusion, equation (9) (CI = ER -AR ) will be positive under the t  t  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 Cost (Column (9) to arrive 1  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 i t is the full factor earnings of a l 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! agricultural 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 1298 230 1935 i 305 ! 67 ! 238 1936 ! 316 1319 > 71 ! 245 240 76 j ! 287 1937 1339 383 307 1938 1359 77 ! 364 441 •' 325 1 78 ! 431 369 1939 ! 509 1379 408 1940 466 ' 83 ! | 549 1344 462 1 86 i 1941 1224 479 i 565 976 1942 i 1111 1139 : 95 ! 1016 1118 I 882 789 1943 779 ! 103 j \ 1236 1087 1944 1136 ! 107 ! 1129 840 852 \ 961 1945 1144 109 ! 1946 923 1271 i 1173 i 120 i 1053 1172 ! 130 ! 1104 1053 1947 ! 1234 1396 1948 1186 1 1656 1 131 i 1525 1361 1949 1517 1114 1383 1 i 1950 1066 1307 ' 144 ! 1249 1 1393 2108 158 ! 1931 1951 991 I 2089 1952 i 2052 172 j 1880 2214 927 898 \ 1831 2039 1953 1 171 ! 1560 1276 980 1954 893 159 l ! 1139 1530 1955 1174 873 i 161 i ! 1335 1956 i 172 j 1316 1817 819 1 1488 1510 772 172 1 1957 994 i 1166 1950 1958 ! 178 l 1263 739 j 1441 1768 182 j 1098 i 1280 1959 724 I960 2049 1191 1 1383 675 i 192 j 1961 726 ! 1130 1557 | 195 ; 935 2486 1962 681 201 1492 I 1693 2576 1963 664 209 ! 1502 i 1711 2291 •667 1964 1313 1 215 i I 1528 1660 l 1880 220 ' 655 2871 1965 (Continued) Sources: (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 5  1  !  3  4  (66) TABLE XVI (Continued) (ALL CURRENT DOLLARS) (12) (10) (8) (7) (9) (11) NonIncome per Ratio: i Adjustments Total ;Net national non-farm person agricultural iincome at factor Farm/ j jCOSt labour net income' employed non-farm j other than (6)-(ll) ! force (g)(h)(i) (8)-(9) 1 (g)(h) ($000,000) ($000,000) agr. 1 ( $ 0 0 0 ) (a Kb)! ($000,000) .26 2785 899 3104 | 3099 314 3042 .25 ! 3367 967 3147 325 j 3887 1096 .26 ! 3187 3494 393 450 1100 .30 3229 3551 i 4001 1130 ; 3270 .33 3695 541 i 4236 3263 742 4321 1324 .31 I: 5063 3242 .28 1651 6305 951 5354 3430 | 8098 1752 6346 1850 .53 7610 2206 .36 1192 3449 1 7280 3412 .51 1 8802 9583 2303 2134 3376 2078 .37 ! 9665 7587 2247 8038 2239 3591 1513 i! 10361 9551 .41 j • 3782 .44 2391 1317 9044 1738 2667 .52 ' 3849 10265 j 12003 • 3978 1632 .48 2859 11373 i 12905 4032 ! 14161 1530 12631 3132 .42 1 16588 2290 14298 3368 .63 i i 4245 2322 3698 .60 I 16332 ; 4417 ! 18654 4488 2140 3822 .53 i 17154 1 19294 ! 19032 1506 17526 3816 .33 i • 4593 19008 .38 ! 4034 1729 j 4712 1 ! 20737 23166 1912 4321 .42 i 4919 21254 5198 I 24011 1642 22369 4303 .35 1 5381 ; 25011 1932 4289 23079 .45 ! 5462 1776 24706 4523 .39 i 26482 ! 5716 1892 4468 .46 25541 j 27433 1680 26570 4568 .34 1 5816 j 28250 4971 .50 1279 29374 ! 30653 j 5909 30560 5098 .51 1 32869 2309 ! 5994 2101 33336 5347 .43 1 ! 35437 j 6234 i 36252 < 6468 5605 .51 ! 1 38819 2567 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. 1  !  (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 i t 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"^. ^The 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 f a 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 Ibid. p.37 4  .7 •  *35  «  3 7  \y)  V41  ^45  »47  '49  *51  ~*~53  »55  ^57  *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 due to crop failure on the Prairies in 1961,  Primarily,  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, f a l l off somewhat in 1956-1960 and f a l l s t i l l further in 196l.  When annual obser-  vations are presented as in Figure 5, i t 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 twofold,  (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 theSee Column (6),  5  Table XVI  (70)  products they purchase. price squeezed  This phenomenon is commonly known as the cost-  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  HI  *43  *4S*tsT»49  ^ 5 1 " »53  »55  *57  »59  *5X  *53 ~n&5  FIGURE 6 PRICE INDEX LUMBERS (1935-39-100) - 1935-1965 Source: Canada, Dominica Bureau >f S t a t i s t i c s , Prices and Price Indexes, Various Tears  (72) Aggregate farm production in the period commencing i n 1939 to approximately 1954 exhibits a large divergence from the other trends.  The rapid  price increases up to 1951 followed by an equally dramatic decline ending i n 1954 are historically coincident with World War II followed by the Korean War.  The decline in prices from 1951 to 1954 reflect a cessation i n  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 i s used. However i f the base period of 1949 i s adopted as i s 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 i n 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 f a i l i n g to increase at the same rate as the other relative price indicctors. 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. Family L i v i n g Cost Index. F a r m  *54  '56  »58  FIGURE 7 PRICE INDEX NUMBERS (1949=100) 1950-1965 Source: Canada, Dominion.Bureau of S t a t i s t i c s , Prices and Price Indexes, Various Tears.  r  Aggregate Farm Production Price Index x — G e n e r a l Wholesale Price Index QrQ Commodities and Services Used by Farmers Price Index • •«— Farm Family Living Cost Index ,1  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 i t 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 i s as expected in a situation i n which supply and demand are expanding at approximately the same rates. Empirically there i s some evidence which can be drawn from the previous analysis to support the view that the cost-price squeeze i s relatively insignificant and not of the major proportions portrayed i n Figure 7. Under the assumption that the rate of long run increases of a l l prices was approximately the same, one would expect the real per capita income i n agriculture to have increased by the product of the ratios of f i n a l output to original output and original farm labour force to f i n a l farm labour force. In essence, farm income per capita should increase i n proportion to the relative increase i n production times the relative decline i n the farm labour forceo  If a l l prices (both agriculture and non-agriculture) increase at  the same rate there i s 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 i n aggregate production w i l l result i n the same proportionate increase i n total income to the agricultural sector. The ratio of output i n 1961-1965 relative to 1935-1939 i n 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 i s expected that the real income per person employed i n 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) Table XVI, Column (6) The annual incomes were adjusted by the consumer price index of base 1949=100 to arrive at incomes i n constant dollar terms. 9  {  (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  1935  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 i t s marginal value product or at least some proportion of the value of the incremental output consequent upon i t s use.  Changes in technology  which influence prices of inputs and thus costs of production do not necessa r i l y either enhance or diminish the cost-price squeeze.  Technological  progress may result in a unit input which is qualitatively improved increasing i n 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 consequences 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 o f an i n d i v i d u a l f a r m e r the s i t u a t i o n c o u l d be c o m p l e t e l y  different.  I f he a t t e m p t s t o r e p l a c e 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 w h i c h c o n t a i n s l a b o u r s a v i n g d e v i c e s .  However h i s l a n d  r e s o u r c e s may He now  be l i m i t e d t o the e x t e n t t h a t he now  has a s u r p l u s o f  farms h i s l a n d i n o n l y a f r a c t i o n of the time but does not  output.  I n r e a l i t y , he and h i s t r a c t o r are underemployed.  labour.  increase  However t o  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 b e f o r e  (he  produces no more w i t h i t ) but i s f o r c e d t o pay a h i g h e r p r i c e . 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  him  The therefore  c l a i m s 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 e x p e r i e n c e The  such c o s t i n f l a t i o n from 1935  to  1965.  p r i c e i n d e x o f commodities and s e r v i c e s used by f a r m e r s account f o r  t e c h n o l o g i c a l improvements and a d j u s t m e n t s are made t o the i n d e x ingly.  accord-  Of much g r 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 t o take advantage o f t e c h n o l o g i c a l change r a t h e r t h a n f a c e the same c o s t - p r i c e squeeze an i n d i v i d u a l f a r m e r might f e e l . the i n d i v i d u a l would be i n a c o n s t a n t  In r e a l i t y  s t a t e o f 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 p r o g r e s s . Returning  t o the example of. the t r a c t o r , the c o m p e t i t i v e  forces  d i c t a t e t h a t the f a r m e r must purchase more l a n d t o u t i l i z e the expanded u n i t o f 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 n o t u n l i k e h i s , w i l l a t t e m p t t o purchase h i s l a n d i n an e f f o r t t o take advantage o f t e c h n o l o g y  w h i c h 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 f a r m i n g u n i t s f o r  (79) their efficient implementation an apparent cost-price squeeze w i l l 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 i t s labour input i f new capital in the form of labour saving technological improvements i s adopted. However a single owner-operator does not possess this freedom.  A second disadvan-  tage of the smaller units i s 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 i n which competitive forces drive the small production units to either withdraw from agriculture or expand the farming unit.  The latter  alternative (expansion) i s available to an individual farmer only with the former alternative (withdrawal) available to his neighbor. consolidation takes place.  Thus farm  (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 determined 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 period . 1  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 a l l 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 i n 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 i n 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 i n opportunity cost, then the growth of capital can be justified.  (83) Returns t o l a b o u r and c a p i t a l were estimated  u s i n g the o b s e r v a t i o n s  of  Before d e t e r m i n i n g  these  2 f a c t o r shares estimations, order.  The  developed by L e r o h l and MacEachern .  a b r i e f d e s c r i p t i o n o f the method used by L e r o h l et a l , i s i n authors  d e s c r i b e t h e i r method as f o l l o w s :  "Two b a s i c methods are employed i n t h i s study to determine f a c t o r shares w i t h i n a g r i c u l t u r e . I n one method, a l t e r n a t i v e o p p o r t u n i t y r e t u r n s are a l l o c a t e d to a l l r e s o u r c e s employed except l a b o u r , which r e c e i v e s the r e s i d u a l . In the second method, a l t e r n a t i v e o p p o r t u n i t y r a t e s o f r e t u r n are c a l c u l a t e d f o r a l l i n p u t s employed i n c l u d i n g l a b o u r , and farm r e a l e s t a t e i s the r e s i d u a l . The two methods are commonly c a l l e d the " a s s e t " and " l a b o u r " 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 b a s i s was  two methods, the f a c t o r shares  adopted.  The  reason  d e r i v e d through the  f o r t h i s i s twofold.  First,  the  "labour" authors  c a l c u l a t e d the o p p o r t u n i t y c o s t o f c a p i t a l from a r e a l e s t a t e  capital  s e r i e s which u n f o r t u n a t e l y was  current  not w e l l d e f i n e d .  Thus as the  c a p i t a l s e r i e s p u b l i s h e d by Dominion Bureau o f S t a t i s t i c s was this thesis,  i t does not n e c e s s a r i l y f o l l o w t h a t the r e t u r n s to c a p i t a l  d e r i v e d by L e r o h l 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 . the o p p o r t u n i t y c o s t s based on the two  adopted i n  respective capital  Secondly, i t was  as  Consequently  i n t e r e s t charges would be as d i f f e r e n t  as  series.  observed t h a t the f a c t o r share of l a b o u r was  e r a b l y h i g h e r when based on o p p o r t u n i t y c o s t s o f h i r e d farm l a b o u r when l a b o u r r e c e i v e s the r e s i d u a l .  In r e a l i t y ,  considthan  at l e a s t p a r t o f the  agri-  c u l t u r a l l a b o u r i s r e c e i v i n g money wages ( o p p o r t u n i t y c o s t s ) , so t h e r e f o r e  M.L. L e r o h l and G.A. MacEachern, " F a c t o r Shares i n A g r i c u l t u r e : The CanadaU.S. E x p e r i e n c e " , Canadian J o u r n a l o f A g r i c u l t u r a l Economics, Volume XV, Number 3, 1967, pp. 1-20. 3 I b i d , 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 a l l 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 a l l resources committed to agriculture. The reasons underlying this approach are that the incentive for investment and employment pertain to a l l individuals who wish to contribute their resources in hope of individual gain and not merely to the farm owner-operators. In essence i t does not matter who collects the returns;  but i t does matter i f 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, i f 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  XVII  R A T E OF RETURN ON CANADIAN A G R I C U L T U R A L C A P I T A L  (1935-1965)  (6) (8) (2) (3) (5) (4) (7) ^Computed- 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 % ($000,000): ($000,000); ($000,000) ( 7 ) : ! i % t (1)  xl  1  !  (3-935 1  ,11936 i |1937 I 1938; 1939! J1940! 11941 i J1942! 1943 i 1944 j 1945 I 1946! 1947! 119481 1949! 1950: •1951! J1952 \ p-953' 1954! {19551 119561 11957 j 119581 [1959 j 1960i 1961 j 11962 j J1963: 1964! 196?!  66.0 • 63.8 61.6 59.4 58.8 58.3 57.8 57.3 56.8 57.1 57-4 57.7 58.0 58.3 56.0 53.5 51.1 48.3 46.5 44.9 43-3 41.7 40.1 38.5 37.5 36.7 35.9 35.1 34.3 33-5 32.7  69.8  70.4 71.0 ' 71.6 72.2 72.8 73.5 74.2 74.9 74.0 73.1' 72.2 71.3 70.2 69.8 69.4 69.0 68.6 68.2 . 67.1 66.0 64.9 63.7 62.5 62.3 61.8 61.5 61.2 60.9 ' 60.6 ' 60.3  702 720 805 859 944 994 1,044 1,706 1,550 1,942 1,681 1,982 2,170 11.9 2,704 2,615 13.8 15.9 2,565 17.9 : 3,398 20.3 3,443 21.7 3,115 22.2 2,538 22.7 2,797 23.2 2,055 23.6 2,730 24.0 ' 3,113 24.8 3,059 25.1 3,230 25.6 3,008 26.1 3,720 26.6 • 3,879 27.1 3,799 27.6 4,301 3.8 6.6 9.4 12.0 13.4 14.5 15.7 16.9 18.1 16.9 15.7 14.5 13.5  :  : ! 1  i 1 ; ! ; i ; ! ! i : ! j , i  . i : I 1  •  4,523 ! 4,390 i 4,384 j 4,214 1 4,299 j 4,214 ! 4,247 j 4,650 ! 5,275 ; 5,490 i 5,580 J 5,878 i 6,390 , 7,105 ! 7,503 i 8,171 ! 9,451 i 9,536 i 10,110 I 9,960 | 10,313 i 10,584 1 10,842 11,742 1 12,308 • 12,670 ; 13,159 i 13,684 i 14,541 ' 15,790 17,282 :  .  27 48 76 103 126 144 164 288 281 328 264 287 293 322 361 408 608 699 676 563 635 477 644 747 759 811 770 971 1,032 1,030 1.187  (Sources on next page)  .6 l.l 1.7 2.4 2.9 3.4 3.9 6,2 5.3 6.0 4.7 4.9 4.6 4.5 4.8 5.0 6.4 7.3 6.7 5.7 6.2 4.5 5.9 6.4 6.2 6.4 5.9 7.1 7.1 6.5 6.9  ' i 1 ! ! ; ;  '  '  (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 agriculture, i t appears that the incentive to expand agricultural assets existed in a l 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)  Year  1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959  I960  1961 |1962 1963 1964 !l965  (2)  (3)  1.22 1.68 1.15 1.72 1.34  1.63 2.34 1.79 2.40 2.12 2.17 2.22 2.24 2.08 1.77 1.70 1.76 2.27 2.17 2.55 2.82  (4)  2 Years (a)(b) ,5 Years (a)(b) | 10 Years (a)(b)  1.46 1.48 1.55 1.44 1.38 1.40 1.42 1.58 1.65 2.17  2.26  3.07 3.20 1.87 3.34 4.48 3.88 4« 62 5.24 4.14 3.58 4.11 4.29 4.35 5.30  3.52  3.61 2.57 3.45 4.51 3.92  4.52  5.81 4.86 4.15  4.42 4.75 4.83 4.93  |  ! I  1  1 !  i i  !  !  {  •i  1 j !  ! j I  j j i 1 ! i !  2.48  3.04  2.64 3.27 2.83 2.99 3.00  2.76  2.67 2.48 2.31 2.24 2.71  2.63  2.97 3.41 3.67  3.64 2.90 3.42 4.08 3.71 4.48  5.25  4.84 4.74  4.86 5.11  5.02 5.52  (5) 15 years (a)(b) 2.94 3.21 3.03 3.50 3.11  3.06  3.06 3.00 2.99 2.83 2.60  2.56  2.93 2.75 2.99  3.50  3.62 3.61 3.05 3.41 3.97 3.75 4.78  5.32  5.36 4.93 5.07 5.15 4.96 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 which do reflect some degree of risk have, on the 4  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 i n agriculture. Any mention of agricultural income i n 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 i s one person's gain is another's loss.  It i s also of interest to note that i n the case of  agriculture possible investment in anticipation of capital gains i s genera l l y not capital expanding in the physical sense.  As land i s the only form  of agricultural capital on which capital gains can accrue and i s by nature fixed i n 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 i s generally not a speculative venture from the point of view of capital gains i t i s 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 w i l l 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^, i t 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 a l l 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 a l l intermediate funds borrowed by farmers was 7.3 per cent, thus indicating 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 a l l 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 Table XVI, Column (12), page 66 ^ William J. Baumol, Economic^Theory,.and_ (second edition, Englewood Cliffs, New Jersey; Prentice-Hall Inc. 1965) p.30S 8  (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 i t does merit a position as a logical explanation 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 a l l farms produce a major fraction of total output, own a major portion of a l l capital, and are organized in such a manner as to receive returns to a l l 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 i f 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 helping large producers proportionally more than the small producers.  (93)  In essence the results would be to increase average returns i n agriculture, but not necessarily benefit the small farmer to any great extent. The two c r i t e r i a  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 consequently the data i s not uniform.  Never-the-less certain observations are  compared over time. In the measurement of farm size according to output, one serious weakness i n 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 w i l l be one of at least partially compensating errors.  Unfortunately, as the data leaves a l l individual farms uniden-  t i f i e d there i s no way to determine the consistency of achieving high or low output among farms.  In spite of this weakness, the observations over  time w i l l no doubt contain many farms which achieve f a i r l y 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  $10,COO  and over constitute 14.1 per cent of a l l labour and 31«4  TABLE XIX CLASSIFICATION OF COMMERCIAL FARMS VITH RESPECT TO TOTAL OUTPUT, CANADA, I960 and 1965 ( ) a  (2) (8) (10) (4) (5) (6) (7) (9) (1) (3) Census j Output ranges Number ;Per cent Capital Fer cent;Labour Fer cent Output Fer cent observation' per farm of |of total of total; of total of total time ($) farms farms '•• ($000,000) capital i(000 wee ks) labour output 13.8 ; 470 : 20.7 25,000 10.0 i 1,544 1 9507 ' 2.8 1,165 6.8 2,220 15,000 ; 23948 22.1 740 19.1 ! 2,460 32.5 I960 1 10,000 ^OQ ! 49871 i 14.1 31.0 J 3,506 46.2 3,613 1,051 : 31.4 |140290 i 39.7 7,042 60.6 ' 5,353 1,676 | 73.7 5,000 52.5 ! 100.0 ALL FARMS 100.0 1 1353293 I 100.0 11,626 11,149 2,275 i 100.0 ;  ;  :  35,000 -»<=o \ 10123 i 3.7 it 25,000 *o«> i 19416 ;  1965  i  7.1  j 15,000 1  i  "o j 52241 ; 19.1 10,000 ->°° \ 96057 j ! 35.1  ALL FARMS  273964 | 100.0  :  11.3 ;  -  -  2,905  18.1  -  -  6,222  38.8  9,263  57.8 :  1,806  16,025  100.0  :  -  ;  -  1  -  -  i  -  762  :  i  I ; 1,613 i 1,032  > 2,144 3,135  1  i  24.3 32.9  ;  51.5 68.4 100.0  i  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 output.  4605  per cent of total agricultural  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 a l l 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 expansion 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 i f  these large producers were a consistent bloc in reference to performance; i t 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  11,895  74.4  2,112  67.0  16,043  100.0  3,135  100.0  49,950 All commercial farms  : 125,041  45.8  273,964  100.0  j  Source: (a) Canada, Dominion Bureau of Statistics, 1966 Census of Canada. Agriculture (Ottawa; Queen's Printer and Controller of Stationery) *  Commercial farms include a l l 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 inefficient 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 technological improvements to capital may appear as a cost-price squeeze to the user*"*. It may be that small farmers do not have the ability or incentive 1  to purchase substantial amounts of technologically advanced capital and thus do not enter into the possible position of their somewhat larger counterparts. 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 f u l l 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 i t 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 expansion 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 i t 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-todate estimates of demand elasticities of Canadian agricultural products, which are actually priced in the international market, should be developed. For example, i t is very important to Canadian agricultural policy whether domestic beef actually has an inelastic demand. Good elasticity measurements 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) (6) (2) (7) (5) (3) (4) (1) Sheep ! Poultry ; Milk Cattle and Horses ! Hogs ; i I t (Year J cows calves 1 (000) (a) (000) (a) ;(000) (a)* (000) (b); (000) (a) (000) (a) 5132 3224 j 56769 ! 11935 \ 3841 3651 j 2911 i 1936 ' 3805 4136 3159 ! 59298 j 5024 2878 4016 i 3071 ! 57510 ! 3844 2845 1937 I 2770 ! 3730 4761 3047 j 57237 11938 ! 3527 1 2761 ! i 62405 ! 2911 4364 ! :1939 1 3681 4693 1940 i 3650 2780 6002 ! 4730 64143 ; 2887 3626 6081 : 2840 1 63526 i 1941 j 4891 2789 i 11942 { 3614 5098 2972 ! 73130 " 2759 6808 ! j 79247 3107 3623 2667 ! . 7413 1 11943 ! 5499 3668 2568 6790 ; 5876 3213 i 91644 : 11944 i 6001 3032 i 89505 • 3631 2374 ! 4964 1 ,1945 ; 2136 : 2792 j 90285 i 1946 j 3485 5689 4277 j 2465 i 88264 i 4957 ! 1947 ! 3411 5674 1937 3946 j 2050 { 72580 ' 5627 1948 ; 3357 1789 1642 1773 11949 | 3237 5404 1 72659 1 4452 i 1 64886 : 4372 !l950 ! 3119 1496 1 1579 5224 53 90 1461 ; 11951 ! 2973 1304 i 4914 I 1534 ;1 64541 3006 5428 65782 '1952 j 6147 1179 6722 3970 1592 i 66451 : 3084 1055 11953 I 3120 7050 4440 1636 ! 73923 ; 917 11954 i 7452 832 : 4800 ! 1634 1 73000 j 3151 1955 I 3160 782 1620 ! 73161 ; 7851 1956 ; 4731 722 4758 1628 ; 77168 i 8167 (1957 : 3098 7962 661 1630 3028 5931 i 82624 ! {1958 i 598 1608 1 81785 ! 8103 6519 ! J1959 i 2955 11960 ! 8372 552 1607 • 75649 ! 2965 5070 j 2987 5331 11961 ! 8947 511 1548 i 79132 i 2956 1433 J1962 j 9120 477 4973 i • 72229 i 5210 1340 •! 73788 I 444 11963 i 2915 i 9391 2906 5620 ; 1287 : 75830 ! 9911 424 11964 ! 5136 1169 •i 75729 ! 11965 2885 i 10116 398 Sources: !  ;  ;  1  !  (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 i|  (2)  (1) !  Year  ;  t  |  i  S 1935  j 1936 i I 1937 1 1938 ! 1939 . ;  :  i 1 i  i  ! ; I  i j i i•: i !  1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953  j  !  : • : : : :  1  \  i' i ;  ! 1954 '  i 1955 i ! 1956 ' I i  1957 ; 1958 • . : 1959 I i1 1960 1961 • :  ; 1962 i i 1963 | j 1964 ; ! 1965 ,  Value of  ;  all  j  livestock  ($000,000, f=) •' 589 ; 589 587 563 571 593 597 617 634  !  641 605 565 553 513 497 470 461 481 474 485 495  !  501  506 512 515 497 515 506 513 531 527  ; \ !  i: I  ;  (4)  .(3)  Value o f horses  ; !  i  ($000,000) (b) j 201 ! 199 1 196 ! 191 191 192 192 190 184 177 164  147 134 123 113 103 90 81 73 63 57 54  50  46 41 38 35 33 31 29 27  i  j 1  ! !  !  i  '  i  1  i  ;  ] )  ;  ! !  Value o f livestock e x c l u d i n g horses  ($000,000) 388 390 391 372 380 401 405 427 450 464 441 418 419 390 384 367 371 400  401 422 438 447 456  466  474 459 480 473 492 502 500  Sources: (a) The v a l u e of a l l l i v e s t o c k was d e r i v e d by m u l t i p l y i n g t h e i r p o p u l a t i o n s o f T a b l e I I of the A p p e n d i x ' b y t h e i r a p p r o p r i a t e v a l u e s ( i . e . m i l k cows $ 3 9 , beef c a t t l e and c a l v e s $ 2 6 , horses $ 6 9 , hogs $ 1 2 , sheep $6 and p o u l t r y $ 7 3 ) . (b) Horses were e x c l u d e d from g e n e r a l l i v e s t o c k and i n c l u d e d 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 E S T I M A T I O N OF FARM R E A L E S T A T E , CANADA  (1935-1965)  (1935-1939=100)  (2) (6) (3) (4) (5) Value of Total Acres of Value of j Acres of value of Year i improved improved j unimproved!unimproved land land 'land real estate i land (t; (3) + (5) (a) (b) S (a) (000.000) ($000,000)' (000.000)1($000,000) ($000,000) 4036 [1935 87.5 3325 i 79.0 711 1936 88.0 4060 716 3344 i 79.5 720 4083 1937 88.5 3363 j 80.0 1938 89.0 3382 4107 80.5 725 3401 1 81.0 4130 1939 89.5 729 1940 90.0 3420 ; 81.5 4154 734 91.6 3481 4218 1941 737 1942 92.0 3496 jI 81.9 4230 734 81.5 92.5 il943 3515 I 81.0 729 4244 93.0 ] 80.5 4259 1944 725 3534 720 1945 93.5 4273 3553 1 80.0 1946 94.0 3572 ! 79.5 716 4288 4302 1947 94.5 3591 1 79.0 711 1948 95.0 3610 ! 78.5 707 4317 702 1949! 95.5 3629 4331 1950 96.0 698 3648 I 78.0 4346 96.8 3678 I 77.5 1951 4373 695 i 77.2 '1952 4394 3705 i 76.5 689 97.7 98.2 3732 1 75.8 682 4414 1953 3758 ! 75.1 676 4434 98.9 1954 99.6 670 4455 3785 i 74.4 1955 1956 100.3 3811 ! 73.6 662 4473 3838 4492 1957 101.0 654 i 72.7 1958 101.5 646 4503 3857 ! 71.8 3876 ! 70.9 638 4514 1959 102.0 I960 102.5 70.0 • 4526 3895 631 1961 : 103.4 622 4551 3929 ! 69.1 1962 104.3 4580 3963 1 68.5 617 3998 1 67.9 611 1963i 105.2 4609 196A ! 106.1 4092 606 4638 i 67.3 • 4666 1965 ; 107.0 4066 » 600 66.7 (1)  (7) Cost of construction (current prices) ($000,000) (c) 9  10 14 14 15 18 21 17 11 19 24 36 42 53 68 68 63 75 77 70 79 89 94 92 99 97 153 168 169 177 185  (Continued on next page) Sources (cn page 107)  ij  j !  j i  i  !  j 1i  1  (106) TABLE 7T (Continued) (8) ^Building depreciation minus repairs j(current ; prices) (d) : ($000,000) 24  25 24 22 23  22 21 21  24 24  31 14 16 15 14 15 9 14 11  i  !  i  i  i  17  i ! ; !  i j 1 1  23 14 31 34 33 36 a 40 42 52  62  (12) (13) (10) (11) (9) : COSt O f Net ,Net •Value of Value of j t construction! building const rue tion!buildings\land (8) - (9) !(1935-39 j(1935-39 (1935-39 jmaterials j (current • index prices) ! prices) prices) ! prices) (e) i (f) (g) i ($000,000) S (1935-39=100) ($000,000) |($ooqpoo)!($000,000) i I 1 i 1163.8 2855 ! -15 87.1 !, -15.4 -17.2 ! 1148.4 2879 -15 ; 97.3 -10 ! 108.7 -9.3 ' 1141.1 2902 ; -8 —8.1 : 1133.0 2926 ! I 98.7 -8 108.1 I 1125.6 2949 ! -7.4 i 116.0 1 -3.4 * 1122.2 2973 -4 1 0 128.1 0 ! 1122.2 3037 ; 1119.5 3049 ! : 148.5 -4 i -2.7 i 155.0 -8.4 ! 1111.1 3063 ! -13 -5 ! 173.0 ! 1108.2 3078 ! ; -2.9 7 : 174.8 ;. 4.0 3092 j 1112.2 22 ! 175.2 12.6 1124.8 3107 j 26 1 13.9 3121 186.7 i 1138.7 28 12.5 ' 1151.2 3136 | 1 224.8 54 I 237.1 22.8 ! 1174.0 3150 ! i 255.0 20.8 i 1194.8 3165 j 53 ! 18.2 > 1213.0 3192 ; 54 i 296.1 61 20.1 3213 ! I 303.3 1 1233.1 1 307 ."8 ; 21.8 • 1254.9 3233 i 67 ! ! 307.0 17.3 1272.2 53 3253 I 3274 56 308.8 ! 18.1 ! 1290.3 316.6 23.7 ! 1314.0 75 3292 I 63 i 322.9 19.5 } 1335.5 3311 ! 58 18.0 ! 1351.5 3322 j 1 321.6 ! ; 20.3 66 1 325.6 I 1371.8 3333 61 :. 18.6 1 1390.4 i 327.7 3345 j 3370 i 112 ; 324.3 i 34.5 I 1424.9 ; 1464.I 128 ; 326.3 39.2 3399 127 ; 334.2 ' 38.0 i 1502.1 3428 i 3452 ! 125 ! 357.8 i 34.9 ! 1537.0 123 3 3 . 1 ,, ! 1570.1 3485 i 371.4  Sources: (On next page)  1  :  (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 b u i l d i n g estimates are the 1934 b u i l d i n g " v a l u a t i o n of $1181 x 1 0 plus the net c o n s t r u c t i estimates of Column (11), 6  (g) The value of land estimates are the t o t a l r e a l e s t a t e estimates of Colum (6) minus the 1934 b u i l d i n g v a l u a t i o n of $1181 x 1 0 , 6  (108) TABLE VI CONSTANT DOLLAR ESTIMATION OF FARM MACHINERY, CANADA  (1935-1965)  1935-1939=100 (2) (3) (4) (5) j'Machinery j Machinery-;Net Farm machinery: machinery Year ipurchases1deprecurrent ciation increase cost minus ! prices index :2)-(3) current (a) repairs 1935-39 (fooopoo) current prices =100 prices(b)j($000000) (c) ($000000) 32 1 1935 33 95.5 1936 32 11 97.8 43 28 97.2 1937 59 31 1938 58 104.1 31 27 60 30 :30 103.6 1939 1940 32 105.8 75 43 86 52 1941 109.1 34 .32 1942 69 37 114.4 46 11 117.1 1943 35 118.2 1944 77 33 44 36 1945 95 115.1 59 1946 136 118.8 41 95 166 1947 213 126.3 47 1948 270 56 141.6 214 1949 339 264 75 158.3 1950 375 290 165.1 85 186.8 1951 410 95 315 1952 430 326 104 195.4 123 388 196.0 1953 511 150 197.0 1954 279 129 308 142 166 198.8 1955 1956 356 131 225 209.4 138 223.8 1957 392 264 1958 331 184 147 236.7 250 1959 391 141 248.4 I960 260 254.2 403 143 1961 371 150 220 261.4 1962 435 286 268.8 159 508 152 273.6 356 1963 160 . 279.6 1964 583 423 660 177 1965 284.9 (1)  Sources on next page  (8) (7) Value of Value of machinery machinery 1935-39 plus prices horses ($000000) 1935-39 ($ooopoo) prices  (6) Net machinery increases 1935-39 prices  ($ooopoo)  1.0 11.2 28.8 25.9 29.0 40.6 47.7 32.3 9.4 37.2 51.3 80.0 131.4 151.1 166.8 175.7 168.6 166.8 198.0 65.5 83.5 107.4 118.0 77.7 100.8 102.3 84.2 106.4 130.1 151.3 169.5  534.0 545.2 574.0 599.9 628.9 669.5 717.2 749.5 758.9 796.1 847.4 927.4 1058.8 1209.9 1376.7 1552.4 1721.0 1887.8 2095.8 2151.3 2234.8 2342.4 2460.2 2537.9 2638.7 2741.0 2825.2 2931.6 3061.7 3213.0 3382.5  735.0 744.2 770.0 790.9 819.9 861.5 909.2 939.5 942.9 973.1 1011.4 1074.4 1192.8 1132.9 1489.7 1655.4 1811.0 1968.8 2158.8 2214.3 2291.8 2396.4 2510.2 2583.9 2679.7 2779.0 2860.2 2964.6 3092.7 3242.0 3409.5  ; 1  1 j j  ;  !  , !  •  (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)  (c)  , , Handbook of Agricultural Statistics. Part II. Farm Income 1926-1965, (Ottawa: Queen's Printer and Controller of Stationery, June 1967) pp. 79-94. ,  , 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 )  (1935-1939=100)  (1)  (2)  (3)  (4)  1935 1936 1937 1938 1939 1940 1941 1942 1943 '1944 1945 1946  J1947 1948 11949  tL950 1951 1952 |1953 1954 11955 '1956 ,1957 J1958 11959  (5)  Value of Machinery fertilizer j expenses 1935-39 1excluding prices repairs 100 current prices ($000) (a) (b) ($000) ($000) (a) 97.0 7205 58737 6989 98.2 7836 59397 7695 10017 61751 10157 101.4 10832 65746 11189 103.3  Fertilizer Value of Tear fertilizer! price current index prices  11141  12574  12921 17041 18486 19629  22757  24966 28296 31508 37811  40264  45400 49179 56141 54135 51373 52847  54776 59558 66723  I960 70061 1961 80429 1962 87099 J1963 101699 1 9 6 4 ! 122808 1 9 6 5 j 138600  100.2 106.3 114.0 121.9 112.9 112.9 112.9 113.9 120.5 131.5 141.3 147.0 159.6 181.3 182.1 182.8 181.2 180.8 183.4 184.8 188.1 194.8 194.6 193.8 201.6 203.8 212.9  ; i ! i  11119 11829 11334 13979 16374 17386 20157 21919 23482 23960 26759 27390  1 i i | ! ! ! i  27126 30830 29614 28352 29230 29867 32228 35472  • !  j 28446  |  35966  S 41330  i  ;  44943  50446 60259 • 65101 1  Sources:  73326  79669  ;89998 97033 99244 104381 108422 119725 132276 166387 192154 206423 200413 213781 2253 95  232996  244771 256916 264363 269961 273824  276736  275427 290438 296035 304950 311437  (6) (7) Gasoline, Machinery * oil & grease)expenses price index 1935-39 1935-39=100 prices (b) 105.1 101.7 99.9 97.4 96.2 . 97.6 105.0 114.0 114.7 114.7 114.2 116.4 121.2 136.9 139.3 145.1 147.1 149.9 150.4 153.0 151.7 152.5 155.0 156.1 155.9 155.0 156.5 157.8 157.5 159.9 159.7  ($000) 55887 58404 61937 67501 76222 81628 85712 84819 86525 91003 94940 102857 109139 121539 137943 142263 136243 142616 149864 152284 161352 168470 170557 172941 175641 178539 175992 184054 187959 190713 195014 ,  (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) (10) (9) Feed expenses 1 Feed price Feed expenses current index 1935-39 prices ;1935-39 = prices i 100 ($000) (a) ! (b) ($000) 38815 j 93.5 41513 ! 97^ 45219 46331 i 127.6 S 60297 47225 1 100.8 S 54969 54533 | 55023 68352 | 80.5 ! 90.8 ! 57163 62955 95.6 '67484 70799 95542 108249 113.3 163128 120.0 135940 163218 130470 125.1 127.6 173232 135762 204458 159359 128.3 139.8 188132 263009 280564 266011 267195 274180 273896  240288 260379 264789 304763 278267 320197  j 335510 ! | [ i !  329996 330181 364614 392725 402924  i 434063  204.0  209.5 225.3 228.2 233.3 215.7 205.3  214.7 206.4 204.5  192.5 202.7 204.0 210.9 232.2 232.0 226.1  227.3  137531 126974 118595 120149 117401  111399 126829 123330 147656 136072  166366 165520 161763 156558 157026 169278 178206 190965  (11) Total miscellaneous current prices ($000) (a) 28425 28881 32872 35635 37657 41306 54899  66812 70732 77825  81194 86060 96968  105406 108634 112009 155109 163388 168652 174936 190218 211959 215863 231418  255666  264081 281940  286918  306372 337093  344332  (12) Hardware price index 1935-39= (b) 100 96.4 96.7 101.0 104.3 101.6  109.1  113.5 120.0 120.7 120.5 119.7 120.8 129.7 152.6 I64.8  168.2 187.5 204.1 202.7 201.7 200.2 209.9 224.1 231.4 •  (13) Total miscellaneous 1935-39 prices ($000) I 29487 29867 32547 34166 37064 37861 ! 48369  55677  58601 64585  67831  71242 74763 69073 65919 66593 83043 80053 83203 86731 95014 100981 96324  100008  233.6  109446  239.4 242.0  110310  249.1 254.4  122992  247.2  266.1  116504 116069 132505  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) (2) (6) (5) (3) (4) Output Inventory Inventory Total Inventory jSear change production change as a1935-39 change current prices current prices % of output!prices (c)!1935-39 prices (3)-(2)xl00 1(4) x (5) (*rvy>) / ) ($000.000)L($000,000) ($000) (a) + 4.2 + -3726 707.8 + .6 ;1935 638443 - 42522 1936 657156 - 41.1 632.7 - 6.5 - 10820 1937 622.3 - 9.3 742114 - 1.5 798582 1938 + 35047 + 4.6 798.5 + 36.7 + 6.1 + 58.4 J1939 + 53598 880965 956.9 + 81.2 967.2 11940 + 77653 + 8.4 824955 808.2 955048 44.5 - 52589 - 5.1 J1941 +20.6 1220.8 ;1942 +251.5 1587529 +327253 -116780 8.1 1449666 - 68.5 845 4 J1943 72.0 1851798 ;1944 -128383 - 6.9 1043-9 1601362 -122.9 il945 -239291 -14.9 824.5 1887580 + 13502 + 6.5 + .7 11946 933.8 2074400 - 20.7 862.5 il947 - 2.4 - 50777 - 12618 930.1 1948 - 4.7 - .5 259H57 2603031 - 3.8 - 34.6 1949 909.3 - 98073 1950 +131842 + 5.4 1024.5 + 55.3 2449064 +115.0 1150.2 +10.0 +327165 3272814 il951 1952 + 8.6 +106,3 +282165 3297129 1235.7 1174.0 + 2.5 + 29.4 + 74559 2977074 1953 890.0 - 3.2 - 28.5 1954 - 77151 2396533 + 87.2 1118.2 2613682 + 7.8 1955 +202834 1956 1260.2 + 6.7 +.'84.4 +194967 2888483 - 4.6 - 45.8 1957 2558569 995.5 -118143 1958 2868472 - 1.6 1080.3 - 46924 - 17.3 - 2.2 - 23.7 - 63583 1075.1 1959 2840959 + 27.6 1148.0 I960 + 2.4 + 67825 2811803 - 92.2 1961 2757300 -271140 940.5 - 9.8 1962 3427028 +187498 + 70.4 1280.3 + 5.5 1405.2 + 8.0 +289942 +112.4 1963 3628053 - 35.4 - 2.7 1964 - 94587 3530569 1309.3 1405.2 + 52.5 + 64496 4002312 1965 + 1.6 Sources: (a) Canada, Dominion Bureau of Statistics, Handbook of Agricultural Statistics. Part I I Farmjjicaae 1926^-1965".(Ottawa: Queen's Printer and Controller of Stationery, June 19&7) pp.40-46. (1)  b  ;  0  ;  ;  :  !  T  (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 Table VIII, page 36 S  (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 w i l l 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 i s hoped that the theory  presented i s 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 i s presented using five quadrants, each  w i l l be described on an individual basis before their interrelation w i l l 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 i s considered available for investment. Conceptually the 45° line representing total income and the parallel line to the l e f t 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 investment purposes. Quadrant II represents the total revenue function. fied version the demand is perfectly inelastic.  In this simpli-  nil iv Additional FIGURE 9 Capital SCHEMATIC REPRESENTATION OF THE RELATION OF AGRICULTURAL INVESTMENT TO THE FARM INCOME PROBLEM  (116) Portrayed in quadrant III is the marginal productivity of agricultural 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 a l l 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 a l l 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 f a l l 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 i f 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 econometric 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 predescribed 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, i f 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 a l l 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 Edmonton , (Unpublished undergraduate essay, The University of Alberta, Edmonton, Alberta, circa 1964) 11  Anderson, D.S., The Apparent Decline in Capital-Output Ratios," Quarterly Journal of Economics #4 vol. 75, Nov. 1961, pp.615-634 ?:  f  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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