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Some aspects of Canadian agricultural price policy Medland, Stanley Lloyd 1950

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SOME ASPECTS OF CANADIAN AGRICULTURAL PRICE POLICY BY STANLEY LLOYD MEDLAHD A THESIS SUBMITTED IN PARTIAL PULPILMEHT 01? THE REQUIREMENTS PCS THE DEGREE OP MASTER OP SCIENCE IN AGRICULTURE IN THE DEPARTMENTS AGRICULTURAL ECONOMICS ECONOMICS f POLITICAL SCIENCE AND SQCIOLOl THE UNIVERSITY OP BRITISH COLUMBIA APRIL, 1950 ABSTRACT 07 SOME ASPECTS 07 CANADIAN AGRICULTURAL PRICE POLICY BY STANLEY LLOYD MEDLAND A THESIS SUBMITTED IN PARTIAL PULPILMEKT 07 THE REQUIREMENTS FOB THE DEGREE 07 MASTER 07 SCIENCE IB AGRICULTURE ^ II THE DEPARTMENTS 07 AGRICULTURAL ECONOMICS AND ECONOMICS, POLITICAL SCIENCE AND SOCIOLOGY a THE UNIVERSITY 07 BRITISH COLUMBIA APRILt 1950 Long-run price and Income e l a s t i c i t i e s of demand for a s r i -cultural producte are low* ¥hen agricultural prices move down-ward relative to other prices, and as standards of l i v i n g r i s e , people tend to consume about the same absolute amount of food. Conversely, the supply of agricultural products i n terms of out-put per farmer i s expanding* This leads to secular pressure downward on the returns to labor i n agriculture* Superimposed on this low return to labor for seoular reasons i s an in s t a b i l i t y of prioe mainly attributable tos ( 1 ) changes i n supply asGOelated with natural causes and an Inelastic market demand, and (2) changes In demand associated with the level of business activity In Canada and abroad* These forces operate through the price system* Price i n s t a b i l i t y and uncertainty affect the actions of farmers and loaning agencies* Instead of seeking to maximize profits i n the traditional sense* they seek the maximum profits that can be obtained with safety. The farmer's reaction to uncertainty i s to emphasize the use of a factor of production that i s willing or able to become a residual claimant* That factor i s labor, chiefly because i t i s self-employed and therefore no commitments are made In advance* The reaction of the loaning agency Is to limit the size of loans to a small percentage of the value of the fixed assets of the farm* The result Is that the movement of capital Into agriculture which i s necessary to take advantage of the modem labor-saving technology Is Inhibited and* as a consequence, the value of the marginal product of capital and i t s cost are not equated* The resulting inefficiency of labor In agriculture i s a lose to eoclaty. The existence i n Canada of a combination of factors of produotion within the farm, and an allocation of factors between agriculture and the rest of the economy vhich does not maximize the total net product, indicates that too great a burden of adjustment has been placed on the price system* We are therefore j u s t i f i e d i n seeking ways and means whereby the prloe system may he aided In i t s job of directing the correct com-binations of factors to the production of the various goods and services people want* Policy Reoomaendations (1) Canada should begin now to develop a strong agricultural prloe outlook program* Such a service could make a worthwhile contribution to the reduction of year to year prloe uncertainty. As soon as the outlook program proves i t s worth, the Government should consider backing Its price foreoasts with cash guarantees* The further reduction i n uncertainty would appear to be worth the cost* (11) The Canadian Government has adopted "a high and stable lev e l of employment and Income ••••• as a major aim of Government polloy w* The maintenance during a depression* by means of prloe policy# of 70 per cent of pre-depressi on farm income would he consistent with this aim* The assurance of farm income, from sale of farm products* at 70 per cent of the pre-depressi on level would substantially reduce risk aversion and oapltal rationing In agri-culture* The program would also allow greater investments i n people during a depression, thus Increasing the productivity of t h e l a b o r f o r c e * C o n s i d e r a t i o n s h o u l d h e g i v e n t o t h e p o s s i b i l i t y o f m a i n t a i n i n g C a n a d i a n f a r m i n c o m e b y means o f s m a l l p r i c e p a y -ments t e p r a i r i e f a r m e r s w h i c h w o u l d d i s c o u r a g e d i v e r s i f i c a t i o n d u r i n g a d e p r e s s i o n * i i i PREFACE Long-run pr i c e and income e l a s t i c i t i e s of demand f o r a g r i -c u l t u r a l products are low. When a g r i c u l t u r a l prices move down-ward r e l a t i v e to other p r i c e s , and as standards of l i v i n g r i s e , people tend to consume ahout the same absolute amount of food. Conversely, the supply of a g r i c u l t u r a l products i n terms of output per farmer i s very expansible. This leads to secular pressure downward on the returns i n agr i c u l t u r e . Superimposed on t h i s low return to labor f o r secular reasons i s an i n s t a b i l i t y of p r i c e mainly attributable to: (l) changes i n supply associated with natural causes and an i n e l a s t i c market demand, and (2) changes i n demand associated with the l e v e l of business activity, i n Canada and abroad. These forces operate through the p r i c e system. P r i c e i n s t a b i l i t y and uncertainty a f f e c t the actions of farmers and loaning agencies. Instead of seeking to maximize p r o f i t s i n the t r a d i t i o n a l sense* they seek the maximum p r o f i t s that can be obtained with safety. The farmer's reaction to un-certa i n t y i s to emphasize the use of a fac t o r of production that i s w i l l i n g or able to become a res i d u a l claimant. That factor i s labor, c h i e f l y because i t i s s e l f employed and therefore no commitments are made i n advance. The reaction of the loaning agency i s to l i m i t the siz e of loans to a small percentage of the value of the fix e d assets of the farm. The r e s u l t i s that the movement of c a p i t a l i n t o agriculture which i s necessary to take advantage of the modern labor-saving technology i s i n h i b i t e d and, i v as a consequence, the value of the marginal product of c a p i t a l and i t s cost are not equated. The p o s i t i o n of many farmers i s analogous to that of a man who f o r some reason i s forced to work with a wheelbarrow when he could be running a power shovel, when the cost of the power shovel i s much l e s s than the value of the product added by i t s use. The re s u l t i n g i n e f f i c i e n c y of labor i n agriculture i s a loss to society. The existence i n Canada of a combination of factors of production within the farm, and an a l l o -cation of factors between agriculture and the r e s t of the economy which does not maximize the t o t a l net product, indicates that too great a burden of adjustment has been placed on the pri c e system. We are therefore j u s t i f i e d i n seeking ways and means whereby the pric e system may be aided i n i t s job of d i r e c t i n g the correct combinations of factors to the production of the various goods and services people want. The h i s t o r y and l i t e r a t u r e of a g r i c u l t u r a l p r i c e p o l i c y indicate that Canada has a choice among three main price p o l i c y proposals. (1) P a r i t y p r i c i n g i s a plan for givi n g a g r i c u l t u r a l com-modities a purchasing power equal to that which they enjoyed i n some base period. (2) A pri c e p o l i c y of p o l i t i c a l expediieney would simply y i e l d subsidies to pressure groups whenever natural public oppo-s i t i o n could be overcome. (3) Forward p r i c i n g consists of announcing farm prices one production period i n advance. I t d i f f e r s from p a r i t y p r i c i n g i n that these announcements would be based on the best possible e s t i -mates of the pric e s that would occur, rather than upon some V h i s t o r i c a l r e l a t i o n s h i p . The forecasts would he hacked by pri c e guarantees up to 80 per cent of the forecast p r i c e . In periods of depression, forward p r i c e s would assume an additional r o l e , namely, that of being part of economy-wide measures to preserve and to enhance purchasing power of the economy as a whole. They would be based, not on forecasts, but on some f i x e d percentage of prices i n the three pre-depression years. The f i r s t of these, p a r i t y prices, has been condemned by most economists. In the United States the p o l i c y has lead to the accumulation of huge surplus stocks of farm products. Such a program e f f e c t i v e l y prevents the price system from operating to allo c a t e factors of production within agricu l t u r e , and between agriculture and the r e s t of the economy. The second, p o l i t i c a l expediency, may be dismissed as being not i n the public i n t e r e s t . The t h i r d , forward p r i c i n g , has received general approval from economists. I t i s frequently recommended as a price p o l i c y for Canada. The non-depression phase of the scheme i s designed to re-move part of the year to year p r i c e uncertainty. Farmers usually make t h e i r production plans on the basis of a hunch, or guess, as to what prices w i l l p r e v a i l when the i r products go to market. In order to minimize the e f f e c t of t h i s uncertainty, farmers prac-t i c e d i v e r s i f i c a t i o n , maintain f l e x i b i l i t y and l i q u i d i t y i n the farm business, and express a safety preference i n the choice of faetors emphasizing the use of labor rather than c a p i t a l . I f s u f f i c i e n t l y accurate p r i c e forecasts could be made by a govern-ment agency, and i f farmers had confidence i n them, much of the v i cost of year to year p r i c e uncertaincy could be eliminated. The second part of the forward price proposal concerns the maintenance of some percentage of pre-depression prices during periods of depression. Agriculture bears i t s depression burden not i n unemployment as secondary industries do, but i n low prices for farm products. I t i s suggested that i f the Government adop-ted an a n t i - c y c l i c a l p o l i c y , this phase of forward p r i c i n g could f i t i n and would e f f e c t i v e l y maintain a g r i c u l t u r a l purchasing power. In addition, i t i s argued that improvements i n labor e f f i -ciency, which would r e s u l t from a reduction i n income uncertainty, and the increased mobility and productivity of labor due to minimum investments i n farm people, would exceed the cost of depression payments to agri c u l t u r e . There i s one serious gap i n t h i s argument. I t i s known that income uncertainty i s a major cause of i n e f f i c i e n t use of labor i n agriculture, and that poorly fed and poorly educated children tend to grow up to be workers of low p r o d u c t i v i t y . There i s , however, as yet, no measure of the economic cost of these e f f e c t s . The writer i s of the opinion that these costs do exceed the costs of proposed depression period p r i c e assistance to agriculture. In the event that the Canadian Government does decide to adopt t h i s or some s i m i l a r plan f o r assistance to agriculture dur-ing depressions, one major consideration i n the administration of the p o l i c y would need to be the f l e x i b i l i t y of the p r a i r i e economy. P r a i r i e farmers are w i l l i n g and able to s h i f t produc-t i o n within quite a wide range of products whenever there i s a pric e advantage. This suggests that the simplest and l e a s t v i i c o s t l y assistance which could be given to a l l Canadian farmers during a depression period might be a program based on p r a i r i e wheat* The writer wishes to express appreciation to Prof. W. J . Anderson f o r his patient and constructive c r i t i c i s m of the thesis during the wr i t i n g . Discussions with Dr. Joseph A. Crumb were of great assistance i n orienting a g r i c u l t u r a l p o l i c y within the framework of general economic p o l i c y . The long-run analysis of Chapter 2, and a desc r i p t i o n of present a g r i c u l t u r a l p r i c e p o l i c y , were presented as a paper to the Un i v e r s i t y of B r i t i s h Columbia Economics Club i n January 1950. The analysis benefited much from the merciless c r i t i c i s m of the club members. F i n a l l y , thanks are due to my wife,Doreen Medland, f o r great care and e f f o r t i n the typing, to J . P. Clark f o r proof-reading, and to Mrs. Lo i s R a i t t who drew the charts. Un i v e r s i t y of B r i t i s h Columbia, VANCOUVER, B . C. A p r i l 12, 1951. v i i i TABLE OF CONTENTS CHAPTER PAGE PREFACE i i i 1. The A g r i c u l t u r a l Industry 1 (1) Development of the Industry 1 (2) Place i n the Economy . . 7 (3) Relative E l a s t i c i t y of Supply i n Expansion . . . 10 (41 The J u r i s d i c t i o n 11 15) Structure of the Industry 13 (6) F l e x i b i l i t y of the P r a i r i e Economy . . . . . . . 15 (7) Conclusion 19 2. The Income Problem: Chronic Low Income 20 (1) The Long-Run Sit u a t i o n 21 (i) Slowing Down i n Growth of Demand . . . . . 21 (a) Slackening of Increase i n Population . 21 (b) Low Income E l a s t i c i t y of Demand . . . 24 ( i i ) Acceleration i n the Growth of Supply . . . 25 (a) The Technological Revolution i n Agriculture. 25 (b) High Rural B i r t h Rates 26 (2) Agriculture's Share of the National Income . . . 27 (3) The Transfer Problem 29 3. Farm Income I n s t a b i l i t y . 32 (1) Variations i n Supply . . 32 (2) Variations i n Demand 34 (i) Agriculture's Reaction to Demand Decline . 34 ( i i ) Income E f f e c t s of Changes i n Demand. . . . 36 (3) Production I n s t a b i l i t y of Individual Farm or Area. • 42 i x 4 * Uncertainty and Resource Use 43 (1) E f f e c t s of P r i c e Uncertainty on the Individual Farm • • 43 (i) Year to Year P r i c e Uncertainty . . . . . . 43 ( i i ) Measures Farmers Take to Minimize the E f f e c t of Year to Year P r i c e Uncertainty 44 (a) D i v e r s i f i c a t i o n 45" (b) F l e x i b i l i t y 45 (c) L i q u i d i t y . 46 (d) Safety Preference i n Factor Choice . . 47 ( i i i ) Maximizing Net Income Over a Period of Time 48 (2) Between Agriculture and the Rest of the Econoiry. 49 (i) C a p i t a l Rationing 53 ( i i ) Risk Aversion • • 55 ( i i i ) E f f e c t s of C a p i t a l Rationing and Risk Aversion 55 !a) Combination of Factors 55 b) Scale of Operations 58 1. Tenancy 58 2. Machinery Investment 59 (iv) Government Loan P o l i c y 59 (3) Summary . 60 5. Limitations of P r i c e P o l i c y 62 (1) P r i c e P o l i c y and Income D i s t r i b u t i o n 62 (i) Income D i s t r i b u t i o n Goals . 63 (2) What P r i c e P o l i c y Cannot Do. . . 63 (3) What P r i c e P o l i c y Can Do 65 (i) Income D i s t r i b u t i o n 65 ( i i ; P r i c e Uncertainty • 65 ( i i i ) Long-Run Income Uncertainty 65 (4) Elements of a Desirable P r i c e P o l i c y for Canada. 66 X 6. Past and Present A g r i c u l t u r a l P r i c e P o l i c i e s 69 (1) The Board of Grain Supervisors 69 (2) Canadian Wheat Board 1919-20 70 (3) The Canadian Co-operative Wheat Producers Ltd.. . 70 (4) The Canadian Wheat Board 1935 71 (5) The P r a i r i e Farm Assistance Act 1939 75 (6) The Wheat Agreement 77 (7) The Wheat Co-operative Marketing Act 1939 . . . . 78 (8) The A g r i c u l t u r a l Products Co-operative-Marketing Act 1939 79 (9) The A g r i c u l t u r a l P r i c e s Support Act 1944 80 (10) Some Observations 82 7. Forward P r i c e s . . . . . . . . . . . . 86 A. Forward P r i c e s f o r One Production Period 87 (1) The Time Period for Forward P r i c e s . . . . . 88 (2) Transition Problems. . . . . . . . . . . . . 90 (3) S p e c i f i c i t y of Guarantees 91 (4) Commodities Included 91 (5) Forward P r i c e Schedules f o r Perishable Products 92 (6) The Problem of Forecasting 93 B . Long-Run Income Certainty and S t a b i l i t y 94 (1) Minimum Level of Farm Income or P r i c e s . . . 95 (2) D i s t r i b u t i o n of Income Payments • 96 (3) Administrative and Economic Issues 97 (i) Integration of Depression and Hon-depression Programs. . . . . . . 97 ($i) Duplication of Payments. 97 ( i i i i D i s t o r t i o n of Resource Use . . . . . . 98 (iv) The Role of Storage 98 (4) Summary . . . 99 x i 8. Three Major D i f f i c u l t i e s i n a Forward P r i c e Program for Canada . . . . 100 A. The Problem of Forecasting 100 (1) Forecasting the P r i c e of Wheat. . . . . . . 101 (i) The E l a s t i c i t y of Demand 101 ( i i ) Elements i n the Demand f o r Wheat For Use 102 ( i i i ) Speculative Demand 104 (ivj The World Market Supply . . . . . . . 104 (v) The E f f e c t of National P o l i c i e s on Demand, Supply and P r i c e 106 (vi) How Accurately Can the P r i c e lof Wheat be Forecast?. 108 ( v i i ) Assuring Forward Pr i c e s by Contract . I l l (2) Forecasting -the P r i c e s of Livestock and Livestock Products. 112 (i) The Demand f o r Farm Products Other Than Wheat. 112 ( i i ) The Supply of Farm Products Other Than Wheat. 112 (3) The Accuracy of Forecasts . . 113 3$. Subsidies to Agriculture A r i s i n g From a Forward P r i c e Program. • 116 C. P o l i t i c a l A c c e p t a b i l i t y of a Forward P r i c e Program 124 9. Conclusion • 126 Appendix i . • 129 Appendix i i 132 Appendix i i i . 134 Bibliography • 137 TABLES AND FIGURES x i i TABLES 1. Wartime Bacon Agreements With the United Kingdom* . . . 6 2. Current Value of Farm C a p i t a l , by Provinces, 1946 . . . 8 3* Net Values of Production by Industries, 1941-46 . . . . 9 4. Cash Income From the Sale of Farm Products, by Provinces, f o r Specified Years 1930-47 13 5. Cash Income From Sale of Farm Products, by Sources, 1947 14 ' 6. Numbers of Livestock and Poultry i n Saskatchewan and B r i t i s h Columbia, 1928-1932 17 7. Acreage and Production of Specified F i e l d Crops i n the P r a i r i e Provinces, 1939-44. 18 8. F e r t i l i t y by Occupation - Type Class 27 9. Index Numbers of P r i c e s , Production and Values of F i e l d Crops, 1909-10 to 1939-40, Canada 38 10. Hogs: Average Wholesale P r i c e s per 100 Lbs., at Toronto, 1890-1943 39 11. Canadian Farmers' Cash Income From Sale of Farm Products, 1926-1948 . 40 12. Deflated Gross Revenue From One Acre of Sumraerfallow Planted to Wheat Each Year 1912-1944 at Scott, Saskatchewan. 41 13. I l l u s t r a t i o n of the E f f e c t of P r i c e Cost Relationships of a Hypothetical Saskatchewan Wheat Farm 50 14. I l l u s t r a t i o n of the E f f e c t of Price-Cost Relationships, of a Hypothetical Fraser Valley Dairy Farm 51 15. I l l u s t r a t i o n of the E f f e c t of Price-Cost Relationships of a Hypothetical B r i t i s h Columbia Apple Producer . . 52 16. Estimated Marginal P r o d u c t i v i t i e s of Factors of Production on S p e c i f i e d Types of Iowa Farms, U.S.A..• 56 x i i i 17. C l a s s i f i c a t i o n of Growers by Gross Income, 1947. . . . 57 18. Farm Holdings by Size i n Manitoba, Saskatchewan and Alberta, 1946 58 19. Announcement and E f f e c t i v e Period of the Forward P r i c e s f o r Selected Commodities 90 20. Approximate World Wheat Supplies and Disappearance Annually From 1934-35 to 1944-45 . . . . 105 21. Wheat Production, Acreage and Y i e l d per Acre i n the World, and Y i e l d per Acre of Four Chief Exporters From 1928-1944 106 22. Difference i n Value of Canadian Wheat from That De-termined by the World Market 1946-47 to 1948-49. . . I l l 23. Total Supply and Exports of Meat Animals and Consumption Meats 1935-42 113 24. Computation of Cash Farm Income from Sale of Farm Products, Assuming Constant Y i e l d a to 1926, For Years 1926-41 117 25. Cost of Maintaining P r i c e Index at Various Percentages of 1927-29 Average, and Grand Total Expenditures of the Government of Canada f o r Selected Years. . . . . 118 26. Computation of Deflated Cash Income from Sale of Farm Products, Assuming Constant Y i e l d = to 1926, For Years 1926-41 119 27. Costs of Maintaining Various Percentages of Average Deflated Income of Three Pre-depression Years, Assuming Constant Y i e l d • 1926, f o r Period 1930-41 . 120 28. Computation of a Hypothetical Farm Income Series For a Future Depression Period Based on Adjusted Data From 1931-41 121 29. Costs of Maintaining Various Percentages of Average 1945-47 Deflated Income Over a Period of Eleven Years 122 30. Actual P r i c e of Wheat and P r i c e s Which Would Have Been Required to Maintain P r i c e Ratios at Long Time Averages, 1931-40 . 123 31. The E f f e c t of Size as Measured by Crop Acres, 1941-42 134 x i v 32. Relation of Size of Farm and Y i e l d s to Surplus, Gadsby-Drumheller-Innsfail Area of Alberta, 1943-44. 135 33. The E f f e o t on Labour Earnings of Increasing the Size of Farm at High, Medium and Low Levels of P.M.V.U. per Man, 200 Fraser V a l l e y Dairy Farms, 1946. . . . 136 FIGURES Following Page 1. Population Trends f o r Northwestern and Central Europe and U.S.A. 22 2. Population Trends i n Canada, 1871-1971. 23 3. Index Number of P h y s i c a l Volume of A g r i c u l t u r a l Production, Canada, 1935-1938 33 4. Total Production of Apples and P r i c e per Box (of B.C. Apples), Tree Census Areas of the Okanagan H o r t i -c u l t u r a l D i s t r i c t , 1935-1948. . . . . 34 5. Index Numbers of Deflated P r i c e and Production of Canadian F i e l d Crops, 1909-1939 35 6. Deflated Gross Revenue From One Acre of Summer fallow Planted to Wheat Each Year 1912-1944 at Scott, Saskatchewan. . . 40 7. C o e f f i c i e n t of V a r i a b i l i t y of Y i e l d of Wheat, Province of Saskatchewan, Canada, 1918-1935 . . . . 42 8. Index Numbers of P r i c e s of Canadian Farm Products, 1890-1937 . 44 9. Index Numbers of P r i c e s of Canadian Farm, F i e l d and Animal Products, 1890-1937 44 10. Feed P r i c e s and P r i c e s of Livestock and Livestock Products by Months, 1926-1938 44 11. P r i c e s of Wheat, Oats and Barley at Winnipeg, Annual Average 1908 to 1935 44 12. Purchasing Power of Beef C a t t l e , Hogs and Sheep at Toronto f o r Selected Periods 44 X V 13. The Gap Between the Amount of Loan C a p i t a l Desired by Capable Farmers and the Amount Available. 53 14. Cash Income From Sale of Farm Products of Canada, 1926-49, and Tractor Sales i n Western Canada, 1919-49 59 15. Meat Animals and Meats: Index Numbers of Output, Exports, Imports and Consumption, 1920-1939 . . . . 113 16. Variations i n Demand of a l l Food and Supply of a l l Food at D i f f e r e n t Levels of Wholesale P r i c e , the United States, 1922 to 1940 130 17. The Relationship of Size of Ranch to Ranch Income . . 135 SOME ASPECTS 07 CANADIAN AGRICULTURAL PRICE POLICY 0 SOME ASPECTS 01? CANADIAN AGRICULTURAL PRICE POLICY CHAPTER 1 THE AGRICULTURAL INDUSTRY (l) Development of the Industry At the end of the nineteenth century Canadian agriculture emerged from a period i n which i t had occupied a p o s i t i o n subor-dinate to the staple exports of f i s h , fur and lumber* At that time i t became the basis f o r staple exports of l i v e s t o c k , dairy products, f r u i t s and wheat. 1 Between 1886 and 1896 Canadian exports to the United King-dom doubled and i n another ten years had doubled again* The increase was due l a r g e l y to wheat, the production of which had become by 1906 the major Canadian export industry. Between 1896 and 1914, t o t a l Canadian exports jumped from $110,000,000 to over $431,000,000, with the value of 1914 wheat and f l o u r exports i n the neighborhood of $140,000,000.2 By 1914 wheat had be-come the basic a g r i c u l t u r a l export-from Canada, and commercial 1 See Easterbrook, ¥. T., ffarm Credit i n Canada. (Toronto 1938), V - v i i i . 2 Dominion Bureau of S t a t i s t i c s , The Canada Year Book, 1947, Ottawa, King's P r i n t e r , p. 875. .2 agriculture i n relation to Europe was largely confined to western Canada* Coincident^with changes i n composition, radical changes i n the direction of Canadian trade began to appear. While the United Kingdom share of Canadian exports was increasing,her share of Canadian import trade was diminishing. By 1896 oyer one-half of the Canadian imports were of United States origin and since that time United States dominance i n the Canadian market has been maintained. 1 In the decade immediately preceding World War I, the re-quirements of the growing industrial organization and the rapid settlement of the west led to large increases i n the imports of iron and steel products, and machinery and coal, i n addition to the consumer goods requirements of an expanding and relatively prosperous economy* The rapid increase i n import volume was complemented by an inflow of capital, principally from the United Kingdom* The growth of the wheat industry was the 2 greatest single dynamic force throughout this period* The War of 1914-18 added impetus to the already rapid growth of manufacturing industries, and their goods began to bulk larger on the l i s t of exports* Following the war the pro-portion of manufactured goods f e l l off slightly, and i n 1920 the eight leading exports, with their aggregate value exceeding 50 the per cent of /total exports, were the products of primary industry — wheat, meat, flour, planks and boards, newsprint, cattle, wood-pulp and f i s h . 1 Loc. c i t . 2 Loc. c i t * 3 Loc. c i t . While primary products continued to dominate the Canadian export trade during the inter-war years, there was a definite trend toward an increased quantity of manufactured exports* The United States became an increasingly important market for news-print and minerals, and i n turn for power and the agricultural products of eastern Canada* The pull of the United States was registered i n the tendency for the Canadian dollar to remain near par with the American dollar i n spite of wide fluctuations i n income from wheat i n relation to the European market. Wheat, as a basic export from a specialized region to Europe, tended to become a local centre of disturbance and to involve problems of direct transfer i n the establishment of an equilibrium between the p u l l of Burope and the United States. European t a r i f f and Import restrictions reduced the effective demand for Canadian agricultural products. 1 Thus importers would take only smaller quantities at the same price, or the same quantity at a lower price* Importers then required less Canadian dollars than pre-viously i n order to pay for their imports* Such a decline i n demand for Canadian dollars would ordinarily tend to force down g the exchange value of the Canadian dollar* 1 See Davidson, C. B., "Recent Legislation Affecting Inter-national Trade i n Farm Products, Proceedings, Canadian P o l i t i c a l  Science Association, 1933, pp. 106-126. 2 The following simplified example illustrates the effect on the returns to Canadian wheat producers of a f a l l i n the exchange value of the Canadian dollar. Assume; Liverpool price of wheat = 2/6 per bus. Exchange value £ = $4.00. Canadian producer gets 2/6 = 49.6y minus costs of handling and transportation. Assume: A decline i n demand for Canadian wheat so that Liver-pool price i s 2 S per bus. The producer now gets 2 S s 40j2f per bus. However, i f this decline i s followed by a decline i n value of the Canadian dollar relative to the pound so that £ = $4.96, then the farmer gets 2 S s 49.6y per bus. The effect of a B r i t i s h devaluation of the pound would, of course, make such readjustment impossible. 4 Due to the importance of commercial and financial transactions between Canada and the U.S.A., and the decline i n Canadian demand for American goods, the level of exchange In the 19301s remained near parity. The result was that the western farmer enjoyed no exchange advantage i n the world market and the whole burden was borne i n the export price. Even before the world depression of the 1930's began, the appearance of a world wheat surplus threatened to cause prices to slump. The world market was unable to absorb the unusually large world and Canadian crops of 1928. Between August 1, 1928, and August 1, 1929, the world wheat carry-over rose from 697 million bushels to 957 million bushels.-1- I t was the sharp f a l l i n export prices which pushed Canada down the incline of the depression. The income of large sections of the economy was based on these export prices, and when these values sank the repercussions were widespread. The impact of the loss of export income f e l l most directly upon the export producers and the con-struction and engineering trades. "The unequal incidence of the burden on the different groups and regions i n the country was the outstanding feature and the basis of the most serious pro-blems arising out of the depression." 2 The purchasing power of farm products i n terms of manufactured goods f e l l from a base of 100 i n 1929 to 64 i n 1932, and rose slightly to 67 i n 1933.3 It i s clear that agriculture, along with other exposed groups such as the unemployed and investors i n equities, bore 1 Canada, Report of the Royal.Commission on Dominion-Provincial Relations, Ottawa, King's Printer. Book I, p. 144. 2 Ibid, p. 147. 3 Ibid, p. 148. 5 the brunt of the depression. The effect of price decline alone would have been severe for agriculture, but i t was accompanied by a period of prolonged drought which effected the wheat produ-cing sector* For ten years the drought held almost unbroken over the best agricultural land of the Prairie Provinces* Standards of l i v i n g on prairie farms f e l l to almost unbelievably low levels, and was accompanied by serious disinvestment i n agriculture* The period i s now generally referred to by farmers as the "hungry t h i r t i e s " . 1 When war broke out i n 1939 the position of agriculture with respect to supplying the wartime food needs was much more favor-able than i t had been i n 1914. During the early months of the war there was no important increase i n demand for any Canadian farm product. During this period the chief problems were those of disposing of surpluses rather than of stimulating production. In order to f a c i l i t a t e the implementation of agreements with the United Kingdom, Canada set up several boards. The establishment of the Agricultural Supplies Board, which served as a central directive agency dealing with problems i n production and mar-keting of farm products, was follwed by a Bacon Board, a Dairy Board and a Special Products Board which handled eggs, flax fibre and other commodities* In March 1943, the Agricultural Food Board was set up as an over-all co-ordinating and liaison 2 agency. 1 For a lucid though extremely depressing account of the effect of depression and drought upon the wheat economy see B r i t n e l l , G. E., The Wheat Economy, The University of Toronto Press, 1939* 2 For a summary of wartime price policy see Shefrln, Frank, Wartime Prices of Farm Products, The Economic Annalist, Feb., 1945, p. 10. Canada's most outstanding achievement i n wartime food pro-duction was the increase i n hog marketings. Hog production had been on the increase i n Canada as a r e s u l t of good markets and an abundant supply of grains, and processing capacity was i n excess of normal requirements when the f i r s t contract was nego-ti a t e d * TABLE 1 WARTIME: BACON AGREEMENTS WITH THE UNITED KINGDOM1 ( M i l l i o n pounds) 1939-40 1940-41 1941-42 1942-43 1944-45 Minimum contract 291.0 425*6 600.0 675.0 900.0 Actual shipment 331.0 425.6 600.0 675.0 1103.8 Canadian dairy products also made an impressive contribu-t i o n to the war e f f o r t . During the year 1939, t o t a l milk pro-duction i n Canada was estimated at s l i g h t l y less than 16 b i l l i o n pounds; t h i s was increased to a high of 17.6 b i l l i o n pounds i n 1945. The 1944 contract f o r cheese c a l l e d f o r shipment of 150 m i l l i o n pounds; while shipments f e l l short of t h i s figure exports of butter to the extent of 7 m i l l i o n pounds helped to make up the shortage of the cheese contract. Shipments of eggs rose from j u s t over 15 m i l l i o n dozen i n 1941 to a high of nearly 90 m i l l i o n dozen i n 1945. Large crops i n 1939 and 1940 and the cutting o f f of western European markets i n the early part of the war resulted i n the a accumulation of/large surplus ; of wheat i n Canada. Under the 1 Canada Year Book, 1946, p. 202. 7 Wheat Acreage Reduction Act payments were made to farmers to encourage reduction of wheat acreage i n favor of coarse grains. By 1944, however, there was a strong demand for Canadian wheat, and this demand has been substantially maintained to date. The immediate postwar period w i l l be dealt with i n a further chapter i n the discussion of the Agricultural Prices Support Act, 1944,1 "An act for the support of the prices of agricultural products during the transition from war to peace." (2) Place i n the Economy Agriculture, including stock raising and horticulture, i s the most important of the primary industries of Canada. Accor-ding to the census of 1941, agriculture employs 25.2 per cent of the gainfully employed population and 30.5 per cent of the gain-f u l l y occupied males. A preliminary estimate indicates that during 1947 Canadian farmers 1 cash returns from the sale of farm products reached an a l l time recorded high of $1,990.6 million. The revised estimate for 1946 i s $1,752.7 million. Total receipts from the sale of livestock i n 1947 are e s t i -mated at $590.1 million as against $574.6 million i n 1946. Grains, seeds and hay together yielded a cash income of $654.7 million i n 1947, while vegetables and other f i e l d crops yielded $144.8 million. The current value of fa&a capital by provinces for 1946 i s shown i n Table 1. The items included i n the term "farm c a p i t a l B as used i n the table are: Lands and buildings; implements and 1 See Chapter 6, Past and Present Agricultural Price Policies. 2 The Canada Year Book. 1948-49, p. 353. 8 machinery, including motor trucks and automobiles; and livestock, including poultry and animals on fur farms. The value of lands and buildings for intercensal years i s based on the value of occupied farm lands reported annually by crop correspondents. Annual values of farm Implements and machinery are estimated on the basis of sales reported each year. TABLE 2 CURRENT VALUE OP FARM CAPITAL, BY PROVINCES, 1946 (In millions) Imple-ments Land and Buildings and Ma-chinery Live-stock Total P.E. Island 42.5 6.0 14.5 63.0 Nova Scotia 89.1 11.5 26.4 126.9 New Brunswick 76.6 11.3 26.2 114.1 Quebec 641.5 85.4 247.8 974.8 Ontario 1208.7 171.4 401.1 1781.2 Manitoba 337.6 63.8 99.8 501.2 Saskatchewan 892.3 146.9 187.5 1226.8 Alberta 644.5 114.7 183.6 942.8 B r i t i s h Columbia 133.3 16.9 40.9 191.2 Totals 4066.3 628.2 1227.9 5922.4 Source: The Canada Year Book, 1948-49, p. 355. Some indication of the relative importance of the industry i s given by Table 3. This table shows the net values of produc-tion by Canadian industries for the years 1914-46 inclusive. Net production represents total value under a particular 9 heading* less the cost of materials, fuel, purchased e l e c t r i c i t y and supplies consumed In the productive process* TABLE 3 BET VALUES OP PRODUCTION BY INDUSTRIES, 1941-46. (In millions) Industry 1941 1942 $ 1943 $ 1944 i 1945 $ 1946 * Agriculture 755.7 1361.7 1233.1 1533.8 1269.4 1483.3 Forestry 421.4 429.0 462.3 507.4 550.9 711.0 Fisheries 51.7 64.3 74.7 76.9 103.1 107.9 Trapping 15.1 23.8 21.6 24.0 21.5 31.0 Mining 497.9 514.1 475.5 454.0 413.6 422.0 Elec t r i c Power 183.1 200.3 200.8 209.8 210.0 220.5 Less duplica-tion i n forest production 1 41.6 47.0 64.0 61.3 64.5 69.2 Totals Primary Production 1883.4 2546.8 2404.5 2744.5 2504.0 2906.7 Construction 269.6 310.9 293.5 249.0 267.9 408.7 Custom & Repair 130.8 141.4 144.9 165.1 178.2 213.3 Manufactures 2605.1 3309.9 3816.4 4015.8 3564.3 3467.0 Totals Secondary Production 3005.5 3762.3 4254.9 4429.9 4010.4 4088.9 Less duplication i n manufactures'2 410.3 426.2 410.7 437.0 428.2 518.5 GRAND TOTALS 4478.6 5883.0 6248.7 6737.4 6086.2 6477.1 1 Eliminates duplication between agriculture and forestry totals. 2 Eliminates duplication under manufactures; this item i n -cludes items included under other headings. Source: The Canada Year Book, 1948-49, p. 1098. 10 (3) Relative E l a s t i c i t y of Supply i n Expansion A comparison of tne reaction of agriculture and of manufac-turing to tne strong wartime demand i s interesting. With the outbreak of war; transition, tooling and new equipment of manu-facturing industries was quickly organized and, by 1941, the remarkable gain i n the'net value of these industries over 1939 was 70 per cent. A further increase of 27 per cent took place i n 1942. The program was advancing toward peak production and in 1943 gained another 15 per cent of the preceding year. By 1944, net value of production had reached $4,015,776,010, which was about $2,073.3 million over 1940, or a total percentage i n -crease of 106.7. During the years 1945 and 1946 there was a curtailment of production and the figure of net production for the manufacturing industries i n 1946 dropped about 14 per cent below that of 1944. Agriculture was i n a favorable position i n 1940 as regards grain stocks i n storage; also acreages sown were at a high l e v e l . The crop of 1941, however, was light due to drought, but the dairying and livestock branches of the industry had expanded rapidly after the outbreak of the war. Only a slight increase i n value of production for the agricultural i n -dustry as a whole was f e l t . Por 1942 a record yield of grain and high production of hogs, eggs and cheese for overseas mar-kets brought about an outstanding percentage gain of 30.2 per cent over 1941. Net value of agricultural production i n 1943 showed a decline of 9.4 per cent for that year. Production value increased for 1944 by 24.4 per cent over 1943, and re-sulted i n the greatest output shown i n any year under review. In the f i r s t few years after the war, food was s t i l l i n great 11 demand and Canadian farmers found markets for a l l they could produce. The net value of agricultural production i n 1945 was $1,269,362,000, and increased to $1,483,263,000, or by 17 per cent i n 1946.1 (4) Jurisdiction It i s provided i n Section 95 of the B r i t i s h North America Act that, " i n each province the Legislature may make laws i n re-lation to agriculture i n the province"; i t i s also "declared that the Parliament of Canada may from time to time make laws i n relation to agriculture i n any or a l l of the provinces; and any law of the Legislature of a province relative to agriculture .... shall have effect i n and for the province as long and as far only as i t i s not repugnant to any Act of the Parliament of Canada". As a result of this provision there exist at the present time Departments of Agriculture with Ministers of Agriculture at their heads, in the Dominion and i n the nine provinces. The Dominion Department of Agriculture was constituted i n 1868 under the authority of 31 Vict.,c 53, with numerous func-tions that were by no means purely agricultural, including: (l) agriculture; (2) immigration; (3) public health and quaran-tine; (4) the marine and immigrant hospital at Quebec; (5) arts and manufactures; (6) the census s t a t i s t i c s , and the registration of s t a t i s t i c s ; (7) patents of invention; (8) copyrights; (9) Indus t r i a l designs and trade marks. In the course of time the purely agricultural work of the department came to demand greater attention; the non-agricultural 1 The Canada Year Book, 1948-49, p. 1096. 12 functions were one by one entrusted to other Departments of the Government. The Department of Agriculture i s now highly specia-l i z e d within i t s e l f . By 1949 the Department was divided i n t o f i v e services; science, experimental farms, production, marketing, and administration. Some sections have as many as twelve d i v i -sions, which are again .subdivided into s e c t i o n s . 1 The p r o v i n c i a l departments of agriculture have various branches. Among the most common are: f i e l d crops, dairy, l i v e -stock, veterinary, poultry, apiaries, f a i r s and i n s t i t u t i o n s , game regulations, women's bureau, marketing services and a g r i -c u l t u r a l representatives. Prom time to time farmers i n some parts of Canada express a desire for p r o v i n c i a l t a r i f f s . The a l l o c a t i o n of powers to the f e d e r a l and p r o v i n c i a l governments i n this respect was f o r -tunate. Our co n s t i t u t i o n i s so drafted as to e f f e c t i v e l y avoid t h i s creeping p a r a l y s i s of i n t e r n a l trade. Any such p r o v i n c i a l t a r i f f l e g i s l a t i o n would be incompatible with Section 91, Head 2, of the B r i t i s h North America Act. Section 91 enumerates the powers of Parliament. Head 2 i s the regulation of trade and commerce. 1 See Dominion of Canada, Report of the Minister of  Agriculture, 1949. (5) 13 The Structure of the Industry The data i n Table 4 Indicates the r e l a t i v e importance of each of nine provinces i n Canadian agriculture as measured by cash income from sale of farm products. TABLE 4 CASH INCOME FROM THE SALE OF FARM PRODUCTS , BY PROVINCES, FOR SPECIFIED YEARS 1930-47. Year Prince Edward Island Nova Sc o t i a New Bruns-wick Quebec Ontario f'OOO #'000 $»000 $'000 $'000 1930.... 1935.... 1940.... 1941.... 1942.... 1943.... 1944.... 1945.... 1946.... 1947 1... 7,323 3,831 7,237 8,551 11,171 14,060 13,734 16,468 17,217 18,978 16,242 13,859 17,171 20,064 21,576 25,694 28,008 27,274 34,193 33,098 12,867 8,847 15,518 19,448 25,172 31,369 33,116 35,604 35,855 38,273 82,781 64,662 120,780 144,963 174,450 200,435 222,562 236,390 251,869 295,824 216,859 155,263 233,541 286,591 356,203 386,160 404,807 453,078 472,927 546,290 Year Manitoba Saskat-chewan Alberta B r i t i s h Columbia Total #'000 $'000 #'000 $'000 $'000 1930.•.• 1935.... 1940.... 1941.... 1942.... 1943.... 1944.... 1945.... 1946.••• 1947 1... 48,312 36,128 64,978 81,648 103,422 146,112 176,815 153,182 170,823 185,893 122,393 108,103 150,854 161,955 195,825 327,634 543,689 409,618 399,182 434,104 95,419 98,912 127,192 154,408 168,887 220,447 £38,101 287,922 285,010 345,480 30,266 21,932 28,795 36,600 44,600 57,987 68,136 75,006 85,606 92,679 632,462 511,537 766,066 914,228 1,101,315 1,409,898 1,828,968 1,694,542 1,752,682 1,990,619 1 Subject to r e v i s i o n . Source: The Canada Year Book, 1948-49, p. 354. In order of importance i n 1947 the provinces were: Ontario 546.3, Saskatchewan 434.1, Alberta 345.5, Quebec 295.8, Manitoba 185.9, B r i t i s h Columbia 92.7, New Brunswick 38.3, Nova S c o t i a 33.1, Prince Edward Island 19 m i l l i o n s of d o l l a r s . * 1 4 The following data, Table extracted from a more detailed table i n The Canada Year Book, 1948-49, indicates the r e l a t i v e Importance of the major a g r i c u l t u r a l products. TABLE 5 CASH INCOME FROM SALE OF FARM PRODUCTS, BY SOURCES, 1947. Item $,000 Item $,000 Grain Seeds & Hav-wheat Wheat P a r t i c i p a t i o n C e r t i f i c a t e s Oats Barley Barley Adjustment Payment < Rye Flax Corn Clover & Grass Seed.• Hay & Clover To t a l s , Grains, Seeds & Hay • Vegetables & Other F i e l d Crops Li v e Stock-C a t t l e & Calves < Sheep & Lambs • Hogs Horses < Poultry -Tot a l Live Stock* 347,096 Dairy Products 324,397 F r u i t s . . . . . . 48,868 73,822 Other P r i n c i p l e 63,307 Farm Products-67,032 Eggs 103,857 Wool 2,573 5,299 Honey 7,611 32,373 Maple Products....... 9,544 45,584 Total, Other P r i n c i p l e 6,258 Farm Products 123,585 8,398 5,517 Miscellaneous & Other. 104,163 654,686 Total Cash Income from Farm Products........1,990,619 144,898  255,947 12,627 248,049 7,639 65,812 590,074 ± Cash Income From Sale of Farm Products, Canada Year Book, 1948-49, pp. 354. In terms of cash income from sales of farm products, wheat i s the single most important commodity. Cash income from wheat and p a r t i c i p a t i o n c e r t i f i c a t e s i n 1947 was $383.1 m i l l i o n . Dairy products followed with $324.4 m i l l i o n , c a t t l e and calves at $255.9 m i l l i o n and hogs at $248 m i l l i o n were t h i r d and fourth r e s p e c t i v e l y . When the commodities are divided into main groups they arrange themselves i n the orderJ. t o t a l grains, seeds and hay #654.7 m i l l i o n , t o t a l l i v e s t o c k #590 m i l l i o n , vegetables and other f i e l d crops #144.8 m i l l i o n . The Average Canadian wheat crop (about 95 per cent of which i s grown i n the P r a i r i e Provinces) for the ten year period 1929-38,was 309 m i l l i o n bushels. The average crop f o r the s i x war years, 1939-45, was 439 m i l l i o n bushels. Though Canadian farmers produce l e s s than 10 per cent of the world wheat supply, approximately two-thirds of t h e i r production accounted f o r 35-40 per cent of the world trade i n wheat i n the l a t e 1930 fs. The foregoing s t a t i s t i c s a l l point to one obvious conclusion. The p r a i r i e eeonomy, based l a r g e l y on wheat, i s the greatest single producer of a g r i c u l t u r a l income. In 1947 the P r a i r i e Pro-vinces produced approximately $965.5 m i l l i o n i n cash farm income from sale of farm products, or s l i g h t l y l e s s than one-half of the Canadian t o t a l of $1,990.6 m i l l i o n . (6) F l e x i b i l i t y of the P r a i r i e Economy The data i n the above tables indicate that the P r a i r i e Pro-vinces produce by f a r the largest part of the wheat i n Canada. This p r a i r i e produced wheat represents the major share of Cana-dian a g r i c u l t u r a l exports. The prices of staple exports are subject to great v a r i a b i l i t y due to changes i n world supply and demand. The r e s u l t i n g changes i n wheat pri c e s have serious 1 B r i t n e l l , G. E., & Fowke, V. C , Development of Wheat Mar-keting P o l i c y i n Canada, Journal of Farm Economics, (hereafter refer r e d to as JFE), Nov. 1949, p. 627. 16 repercussions i n the pr i c e s of other Canadian farm products* Such changes w i l l r e s u l t even i f the other products are sold l a r g e l y or even wholly i n the domestic market* The domestic market f o r a g r i c u l t u r a l products i s usually rather i n e l a s t i c * Where there i s l i t t l e or no surplus of a par-t i c u l a r commodity produced f o r export, the p r i c e w i l l e s t a b l i s h an equilibrium i n the domestic market* This p r i c e may, i n a period of d e c l i n i n g export markets, be high r e l a t i v e to the p r i c e of wheat which pr i c e depends upon the export market* This d i f -f e r e n t i a l would tend to r e s u l t i n a temporary surge of resources i n t o the production of coarse grains and l i v e s t o c k . 1 This r e a l l o c a t i o n would be only temporary f o r most of the resources so transferred* Even a small addition to the supply of previously domestic consumption products would r e s u l t i n the existence of export surpluses* As soon as i t became necessary to export, the domestic p r i c e would be adjusted to the export p r i c e . The data i n Table 6 suggest that t h i s happened. They are not conclusive. The coincidence of a prolonged drought on the p r a i r i e s would tend to d i s t o r t producers' normal reactions. Depending mainly upon the nature of the product, the ten-dency over the period was f o r Saskatchewan production to increase s u b s t a n t i a l l y . In the same period i n B r i t i s h Columbia, milch cows, other c a t t l e and swine reached t h e i r peak i n either 1929 or 1930, then f e l l o f f r a p i d l y . Expansion i n the B.C. poultry industry continued t i l l 1931. In that year i t f e l t the f u l l 1 See Lattimer, J . E., "Wheat i n Canadian Agriculture", S c i e n t i f i c Agriculture, Feb. 1938, p. 289-299. 17 e f f e c t of the large p r a i r i e production and de c l i n i n g world mar-kets. Prom 1931 to 1932 the B.C. poultry population was reduced from 4,409 thousand to 3437.2 thousand b i r d s . In that year Saskatchewan had added another 96.2 thousand b i r d s . This was a r e l a t i v e l y small increase compared to the 2 m i l l i o n birds added from 1930-31. The transfer of p r a i r i e resources into poultry was slowing down. TABLE 6 NUMBERS OP LIVESTOCK AND POULTRY IN SASKATCHEWAN AND BRITISH COLUMBIA, 1928-1932 ('000) Year 1928 1929 Milch Cows 1930 1931 1932 B r i t i s h Columbia.... 418.5 420 101.2 111.9 Other Cattle 429 117.6 424 76 453.6 115.2 B r i t i s h Columbia* * * * 762.9 746.9 283.9 291.8 Swine 785.9 273.4 764 170 874 141.8 B r i t i s h Columbia*... 602.2 599.9 53.7 63.1 497.9 64.7 940.4 51.9 898 51.7 B r i t i s h Columbia.••• Poultry 8450.3 9302.4 3747.3 3934.6 9507 3650 11507 4409 11603.2 3437.2 Data obtained from Livestock & Animal Products S t a t i s t i c s , Dominion Bureau of S t a t i s t i c s , 1932, p. 13. 18 Canada's experience during World War II i n a deliberate program of making such s h i f t s indicates much more c l e a r l y what can happen when the e x i s t i n g relationships of costs and p r i c e s of various products are altered. TABLE 7 ACREAGE AND PRODUCTION OF SPECIFIED FIELD CROPS IN THE PRAIRIE PROVINCES, 1939-44* (In m i l l i o n acres) Acreages 1939 1940 1941 1942 1943 1944 Flaxseed... 25.81 8.23 3.60 1.01 .30 27.75 7.81 3.62 .94 .36 21.55 9.30 4.88 .99 .94 20.65 9.67 6.41 1.25 1.47 16.09 11.79 7.90 .50 2.92 22.44 10.45 6.76 .57 1.30 (In m i l l i o n bushels) Product!on 1939 1940 1941 1942 1943 1944 Flaxseed.•. 494.0 213.5 81.0 13.7 1.9 525.0 229.0 83.0 12.2 2.9 282.0 211.0 99.0 11.7 6.3 528.4 500.0 241.0 23.0 14.7 267.0 392.0 204.0 5.9 17.6 428.3 392.1 182.8 6.9 9.4 & Quarterly B u l l e t i n of A g r i c u l t u r a l S t a t i s t i c s , October and December, 1941, p. 249; October 1942-March 1944, p. 41; October-December, 1944, p. 144. Quoted i n Fowke, V. C , Economic E f f e c t s of the War on the Canadian Economy, Journal of The Canadian P o l i t i c a l Science  Association, V o l . I I , August 1945, p. 373-387.  From 1940 to 1943 the wheat acreage was cut by 42 per cent, though h a l f that reduction was restored i n 1944. Coarse grains acreage increased by 63 per cent from 1940 to 1943, but declined somewhat i n 1944. By 1942 the P r a i r i e Provinces were providing 60 per cent of Canadian hog slaughterings as compared with 40 per cent of prewar years. 1 Patton, H. S., "Wartime Wheat P o l i c y i n Canada", JFE Nov. 1942, p. 784. By 1942 Alberta had a greater hog population than Ontario, while Saskatchewan followed close behind. The wartime change from grain to mixed farming on the p r a i r i e s was s u b s t a n t i a l l y a producer's response to changing cost-price relationships* CONCLUSION: This analysis has shown that there i s a r e l a t i v e l y high e l a s t i c i t y of s u b s t i t u t i o n between the production of wheat and mixed farming. I f there i s a serious f a l l i n export p r i c e s f o r Canadian wheat which i s not accompanied by a s i m i l a r priee f a l l f o r other farm products, p r a i r i e farmers w i l l be w i l l i n g and able to transfer resources to production of those r e l a t i v e l y p r o f i t a b l e products. The r e s u l t i n g increase i n supply of products which have an i n e l a s t i c demand w i l l tend to force t h e i r p r i c e s down to very low l e v e l s . I f t h i s i s true i t has exceedingly important p r i c e p o l i c y implications. The threat of low wheat p r i c e s hangs l i k e a sword over the rest of Canadian ag r i c u l t u r e . In the absence of pro-duction controls, e f f o r t s to subsidize the producers of hogs, eggs and poultry, or other l i v e s t o c k , through the p r i c e system during a period of low wheat p r i c e s would almost c e r t a i n l y r e s u l t i n substantial s h i f t s to these products i n the p r a i r i e economy. 20 CHAPTER 2 THE INCOME PROBLEM: CHROMIC LOW INCOME Perhaps the greatest paradox of the modern world i s the phenomenon on the one hand of m i l l i o n s of people inadequately fed, and on the other of exporting countries threatened with surplus food supplies. The huge stockpiles of the 1930's which-plagued North and South American countries were accumulated while people i n those countries themselves often went short of food and other necessaries. There i s l i t t l e i f any evidence to show that the long awaited "marriage of food and agriculture" i n the P.A.O. has produced or w i l l produce a solution to the problem. The strong postwar demand, much of which has been supported by Canadian and American government loans and more recently by American E.R.P., has tended to hide the underlying disequilibrium between world supply and e f f e c t i v e demand fo r a g r i c u l t u r a l pro-ducts. (For example, almost a l l of Canada's cred i t balance from trade with overseas countries i n 1946 was financed by loans and advances by the Canadian Government. These loans and advances i n 1946, together with o f f i c i a l contributions f o r r e l i e f and aid, t o t a l l e d about $954,000,000.) The second proposition of the Declaration i n the " F i n a l Act" of the Hot Springs Conference stated: " I t i s useless to produce more food unless men and nations 1 Dominion Bureau of S t a t i s t i c s , Canada 1949, The O f f i c i a l Handbook of Present Conditions and Progress, Ottawa, p. 224. 21 provide the markets to absorb i t * There mast be an expansion of the whole world economy to provide the purchasing power s u f f i -cient to maintain an adequate d i e t for a l l * With f u l l employment i n a l l countries, enlarged i n d u s t r i a l production, the absence of ex p l o i t a t i o n , an increasing flow of trade within and between countries, and orderly management of domestic and i n t e r n a t i o n a l investment and currencies and sustained i n t e r n a l and interna-t i o n a l economic equilibrium, the food which i s produced can be made available to a l l people." 1 The framers of t h i s statement apparently do expect the recurrence of food and f i b r e surpluses. (l ) The Long-Run S i t u a t i o n Prof. T. ¥. Schultz, i n h i s "Agriculture i n an Unstable o Economy, describes the long-run s i t u a t i o n as one characterized by a "slowing down i n the growth of demand f o r farm products" and an "acceleration i n the growth of supply". V i t h only s l i g h t modifications the analysis applies equally well to Canadian as to American conditions. (i) Slowing Down i n Growth of Demand (a) Slackening of Increase i n Population The f i r s t major cause of the slowing down i n growth of demand Schultz fin d s to be a slackening i n the increase i n population* Figure 1 indicates the expected population trends f o r the United States and Northwestern and Central Europe* 1 The 1943 Hot SpringsConference on Food and Agriculture grew out of a movement i n i t i a t e d by the League of Nations. I t re-sulted i n setting up of a Food and Agriculture Organization (F.A.O.) of the United Nations dedicated to the two-fold objec-t i v e of making agriculture more prosperous and at the same time providing better food and n u t r i t i o n the world over. 2 Schultz, T. ¥., Agriculture i n an Unstable Economy. McGraw-H i l l , New York, 1945. 3 o 260 240 220 200 180 160 140 120 100 80 60 40 20 Forth Western & "Central Europe United States41 260 240 220 200 180 160 140 9 o 120^ ioo g SO 60 40 4 20 1900 1910 1920 1930 1940 1950 1960 1970 Years Estimates Ignore war and international migration. •National Be sources Planning Board: Thompson and Welpton's Medium Fertility, Medium Mortality Estimates. FIGURE 1 - Population trends f o r Northwestern and Central Europe and U.S.A., observed 1900-1940 and projected 1940-70. Reprinted i n Food For The World. I t should be noted that t h i s projection of the trend of population growth i n the United States has not fared too well i n the l i g h t of postwar population f i g u r e s . Joseph S. D a v i s 2 argues that the domestic demand f o r American farm produce w i l l be much greater than Schultz has estimated. 3 As f o r foreign demand, how-ever, Davis reserves judgment. I f the generally accepted predic-tions of future U.S. population growth are subs t a n t i a l l y under-1 Food For The World, Edited by Schultz, T. W., University of Chicago Press, 1945, Population;The Long View by Frank W. Notes-t e i n , p. 36-57. 2 Davis, J . S., "Our Amazing Population Upsurge", JFE, Pro-ceedings Number, Nov. 1949, p. 765-778. 3 Schultz, T. W., Agriculture i n an Unstable Economy, esp. chap. i i i . estimated the outlook f o r Canadian agriculture i s l e s s pessimis-t i c . I f , however, the American Government continues to subsidize production of farm products f o r export, population growth w i l l matter l i t t l e . The trend of population growth i n Canada as estimated •by the Dominion Bureau of S t a t i s t i c s i s shown i n Figure 2. Notestien has c l a s s i f i e d the populations of the world into three general growth types: 1. Incipient Decline - The populations of northwestern, southern and central Europe, North America, A u s t r a l i a and New Zealand, may a l l be characterized as those of i n c i p i e n t decline. In a l l of them only immigration or the reversal of recent trends i n f e r t i l i t y can prevent the v i r t u a l termination of growth within a generation. 2. T r a n s i t i o n a l Growth - The stage of t r a n s i t i o n a l growth i s that i n which the decline of both f e r t i l i t y and mortality i s well established, but i n which the decline i n mortality precedes that of f e r t i l i t y and produces rapid growth. The populations of eastern Europe are nearing the end of t h i s stage; those of the Soviet Union and of Japan and of cer t a i n Latin-American countries are i n mid course. 3. High Growth P o t e n t i a l - More than h a l f the world's popu-l a t i o n has not begun i t s period of t r a n s i t i o n a l growth. Death and b i r t h rates remain close to pre-modern standards, and b i r t h rates have scarcely begun to decline. Therefore, they may be c l a s s i f i e d as populations with high growth p o t e n t i a l s . Egypt, Central A f r i c a , much of the Near East, v i r t u a l l y a l l of A s i a out-side the Soviet Union and Japan, the islands of the P a c i f i c and those of the Caribbean, and much of Central and South America f a l l i n t h i s c l a s s . The o v e r - a l l r e l a t i o n s h i p between world population and de-mand f o r farm products has been summed up by B l a c k . 1 "The slackening of increase i n population applies to only about one-h a l f of the earth's population, but the other h a l f i s too poor to buy the ever increasing food supplies." (b) Low Income E l a s t i c i t y of Demand The second cause of the slowing growth of demand i s the low income e l a s t i c i t y of demand f o r farm products. The income e l a s t i c i t y of demand i s a measure of the r e l a t i o n between changes i n income and changes i n the use of income. I t i s the r a t i o between the r e l a t i v e increase i n consumption of a product and the r e l a t i v e increase i n income with other factors remaining constant.* Income e l a s t i c i t y of demand i s s i g n i f i c a n t as an i n d i -cator of what i s happening to demand f o r farm products under the condition of increasing r e a l income. The r e s u l t s of most of the available analyses upon consumer expenditure data indicate an income e l a s t i c i t y of demand f o r farm products i n Canada and the United States between 0.4 and 0.1. Schultz accepts 0.25 as an approximation. 3 1 Black, John Donald and K i e f e r , Maxine Enlow, Future Pood and  Agriculture P o l i c y , Hew York, McGraw-Hill. 2 For example, when t family acquires 10 p.c. more income and expends the additional income i n such a way that the outlay of the family f o r a p a r t i c u l a r product increases 10 p . c , the r a t i o i s 1:1. Accordingly the r a t i o i s unity. I f , however, the i n -crease i n income of 10 p.c. r e s u l t s i n an increase of more than 10 p.c. i n outlay, the income e l a s t i c i t y of demand f o r that pro-duct i s said to be greater than unity and i s referred to as " e l a s t i c " , or "high i n e l a s t i c i t y " . 3 Schultz, T. ¥., Agriculture i n an Unstable Economy, p. 68. 2 5 The income e l a s t i c i t y of demand for food i n England has been estimated by C l a r k 1 as f a l l i n g within the range 0.4 to 0.7. I t should be noted that these e l a s t i c i t i e s are calculated at the re-t a i l l e v e l . They therefore include some additional services and wrappings so that income e l a s t i c i t y of demand at the farm l e v e l would be somewhat lower. ( i i ) Acceleration i n Growth of Supply (a) The Technological Revolution i n Agriculture. The t h i r d major factor contributing to the unequal growth of supply and demand i s the technical revolution i n progress i n a g r i c u l t u r a l production. Around 1900, spring wheat culture, f a l l ploughing and summer fallowing were the major adaptations to the semi-arid conditions and the short growing season of the p r a i r i e s . These techniques were followed by the large scale use of t r a c t o r s and trucks, and l a t e r by s e l f -propelled combines. One of the most important technological developments within the l a s t twenty years has been the introduc-t i o n of rust r e s i s t a n t v a r i e t i e s of wheat. A s o l i d stem saw-fly r e s i s t a n t wheat has also come into use during the l a s t few years i n parts of the p r a i r i e s generally subject to saw-fly damage. Some i n d i c a t i o n of the magnitude of the changer; i n inven-t o r i e s of farm machinery i n Canada during the period 1921 to 1946 i s given by the following f i g u r e s . Tractors on farms increased by 112,676 (292.8 per cent) from 1921 t o 1946. While there were only 15 t r a c t o r s per 100 farms i n 1921, there were 56 tractors per 100 farms i n 1946. Automobiles and motor trucks on farms increased from 73,359 i n 1921 to 184,077 i n 1946. Farms i n 1 Clark, C o l i n , The Conditions of Economic Progress, p. 443, MacMillan and Co., Limited, St. Martins Street, London. 26 possession of a car or motor, truck increased by 159*0 per cent i n 1946 as compared with 1921* While there were 20*9 per cent fewer grain binders and 13.9 per cent fewer threshing machines on farms i n 1946 than i n 1931, the number of grain combines increased 336.9 per cent during the fifteen years: In 1946 there were 144 combines to every 1,000 farms. 1 Technological improvements i n agriculture affect the e f f i -ciency of labor and the total quantity of farm products produced* If the movement of machinery and equipment into agriculture i s accompanied by a corresponding outward movement of labor, the re-sult i s a somewhat greater net product from about the same amount of the factors of production. I f the outward movement of labor does not occur, technological Improvement results not only i n i n -creased labor efficiency, but an increase i n the total quantity of factors of production i n agriculture* Given an inelastic de-mand, the increase i n supply of farm products w i l l result i n lower returns to labor* (b) High Rural Birth Rates* In addition to the three major factors above we find the phenomenon of high rural birth rates* Table 8 indicates that workers i n primary industries are the most p r o l i f i c . As a part of this group farmers have a mean standardized f e r t i l i t y rate of over double that of professional workers. This excess f e r t i l i t y contributes to the always overflowing pool of agricul-tural labor. 1 The Canada Year Book, 1948-49, p. 392. TABLE 8 27 FERTILITY BY OCCUPATION - TYPE CLASS Mean standardized number of children ever born to married women by occup at ion-type class of husband. Occupation- Mean Standardized Type Class F e r t i l i t y Rate I Professional 2.02 I I C l e r i c a l 2.21 I I I Trade & Finance 2.39 IV P u b l i c Service 2.82 V Personal Service 2.84 VI Transport & Communication 2.98 VII Manufacturing & Mechanical 3.11 VIII Construction 3.35 IX Laborers (not i n primary occupations) 3.98 X Primary Occupations 4.54 Farmers , 4.29 Source: Occupational Differences i n F e r t i l i t y , Dominion Bureau of S t a t i s t i c s B u l l e t i n No. F-3. (2) Agriculture's Share of the National Income Applying the Schultz analysis to. Canada we would expect to f i n d agriculture as an industry receiving a disproportionately small share of the national income. Widespread p u b l i c i t y , accom-panied by confusion and misuse, has been given to the data from the report of a s p e c i a l committee of The Royal Commission on Dominion-Provincial Relations. The i n t e r p r e t a t i o n of t h i s data by farm leaders has given r i s e to the slogan, "a f a i r share of the national income f o r a g r i c u l t u r e " . Such statements as those saying that agriculture,with about a t h i r d of the population i n Canada,obtained only 17.8 per cent of the national income i n 1926, 5 per cent i n 1932, and 15 per cent i n 1940 to 1942 have become commonplace. E. C. Hope has analysed the p o s i t i o n of agriculture i n the 28 Canadian .economy as revealed by the published data on national income. 1 Hope has made four adjustments i n the data as reported by the Royal Commission: 1. Adjustments f o r r e t a i l value of income i n kind; 2. adjustments f o r non-agricultural income earned by farmers; 3.o adjustments f o r wages of labor engaged i n a g r i -culture; 4. adjustments f o r wheat bonuses, P.F.A., P.F.I., and W.A.R. From the adjusted data he concludes that* " I t would appear on the face of the data used i n t h i s analysis that since 1926 agriculture has not i n any year received i t s proportionate share of the na-2 t i o n a l income". He suggests that t h i s r e s u l t i s due either to a permanent bias of about 4 per cent i n the c a l c u l a t i o n of a g r i -culture's share of the national income, or to some small intan-g i b l e value or psychic Income pertaining to agriculture, which balances the p a r i t y equation but which cannot be measured i n monetary terms. The f a i l u r e , by a wide margin, of some regions to a t t a i n a proportional income i n agriculture he a t t r i b u t e s to r e l a t i v e l y large populations i n these areas and a large number of small farms. No attempt i s made i n the analysis to explain the bias as a r e s u l t of an excess of labor i n the whole industry r e l a t i v e to the rest of the economy. I t appears reasonable to conclude that the persistent bias noted by Hope i s an i n d i c a t i o n that the 1 Hope, E. C , "Agriculture's Share of the National Income", Canadian Journal of Economics and P o l i t i c a l Science,9:384-393,1943. 2 I b i d , p. 391. 3 For a c r i t i c a l comment on the analysis see Burton, G. L., "Agriculture's Share of the National Income: A Comment?1, Canadian  Journal of Economics and P o l i t i c a l Science, 10: 206-209, 1944. 29 p r i c e system i s operating i n the usual way to bring about a transfer of labor from agriculture to other i n d u s t r i e s . The phenomenon of d i f f e r e n t rates of return to labor i n agriculture than i n the res t of the economy i n Canada i s not unique. Clark has stated that, "Generally speaking->.-*>• through-out the world, except i n A u s t r a l i a and Hew Zealand, the discrep-ancy between i n d u s t r i a l and r u r a l wages i s tending r a p i d l y to widen. In U.S.A. and Canada t h i s discrepancy has now become f a n t a s t i c . *.#»• the rate of movement of labor away from a g r i -culture i s as rapid as ever, but i t can only be concluded that the r e l a t i v e decline i n the demand for a g r i c u l t u r a l labor has been even more rapid s t i l l . This i s due mainly to the great i n -crease i n the volume of output per worker i n agriculture (which has been greater than i n industry) faced with a v i r t u a l l y stationary demand f o r a g r i c u l t u r a l products." 1 (3) The Transfer Problem Since i t i s desirable from the point of view of the economy as a whole to encourage rather than to discourage advances i n labor-saving technology f o r agriculture, and since farm people f o r many years to come are l i k e l y to have a very considerable natural increase i n t h e i r numbers, and inasmuch as the growth of demand i s l i k e l y to be les s for farm products than i t i s f o r goods and services of other producers the primary adjustment that i s necessary to approach an equilibrium i s the migration of people out of agriculture i n t o secondary and t e r t i a r y i n d u s t r i e s . Thus we have a transfer problem. What i s necessary i s a r e d i s -t r i b u t i o n of the working population to r e l i e v e agriculture of the 1 Clark, C o l i n , The Conditions of Economic Progress, p. 230. 30 excess supply of labor engaged i n , and dependent upon, farming f o r i t s income. ti . — the economic answer to a g r i c u l t u r a l poverty i s mobility: the easier the ' f l i g h t out of agriculture', which i s the i n e v i t a b l e accompaniment of a g r i c u l t u r a l progress, the l e s s unattractive w i l l agriculture have to be r e l a t i v e to industry i n order to accomplish the object of the r e l a t i v e unattractiveness -to drive resources out of a g r i c u l t u r e . " 1 The forces that determine the supply and earnings of a g r i -c u l t u r a l labor are at the root of the farm income problem. The higher than average b i r t h rate among farm people, and the d i f f i -c u l t y of migration r e s u l t i n an excess supply of farm labor. This excess i s further increased i n periods of i n d u s t r i a l unem-ployment by a reduction, i f not cessation, of normal migration and a tendency f o r a reverse flow of urban unemployed seeking to ride out the depression on farms. The comparative earnings of those employed i n agriculture depend upon the rate at which new labor-saving technology i s introduced, the pattern of change i n demand for d i f f e r e n t products accompanying increased consumer income, and the percentage of the population dependent upon a g r i -culture . In periods when a g r i c u l t u r a l output i s growing faster than the population, or at l e a s t than the purchasing power of the population, farm products are cheap and i n d u s t r i a l goods and ser-vices high. I t i s common to say i n such a period that the "terms of trade" are against a g r i c u l t u r e . When the terms of trade are against agriculture the obvious way of getting into good balance 1 Boulding, K. E., Economic Analysis and A g r i c u l t u r a l P o l i c y , Canadian Journal of Economics and P o l i t i c a l Science, 1947, p. 436. 31 with the rest of the economy i s to expand the output of indus-t r i a l goods and services with an accompanying s h i f t of a f r a c t i o n of the population from the farm to the c i t i e s . 1 The basic long-run s i t u a t i o n i s that there are too many people i n agriculture and not enough machinery and equipment. In consequence farm people pay too many bushels of wheat or hundredweights of meat or milk for the producer and consumer goods they buy from the c i t i e s . 1 Black, J . D., and K i e f e r , M. E., Future Food and Agriculture  P o l i c y . New York, McGraw-Hill Book Co., 1948, p. 80. 0 32 CHAPTER 3 FARM INCOME INSTABILITY" Violent f l u c t u a t i o n s i n income are c h a r a c t e r i s t i c of Canadian primary i n d u s t r i e s . Income fluctuations i n agriculture occur due to three main causes: (l) Variations i n supply; 1 (2) v a r i a t i o n s i n demand; and (3) production i n s t a b i l i t y of the i n d i v i d u a l farm or area, (l) Variations i n Supply Variations i n supply of Canadian a g r i c u l t u r a l products are most serious i n the production of the P r a i r i e Provinces. In Manitoba, Saskatchewan and Alberta farm production and income show wide f l u c t u a t i o n s . The climate and s o i l are such that the hazards of agriculture, coupled with a high degree of monocul-ture, r e s u l t i n large v a r i a t i o n s i n y i e l d s of wheat and coarse grains • P h y s i c a l factors a f f e c t production very d r a s t i c a l l y . E. C. Hope 2 r e f e r s to two prolonged periods of drought i n the P r a i r i e Provinces since 1813 - one from 1885 to 1896, and one from 1929 to 1937. A t h i r d period of drought occurred from 1838 to 1848. From 1862 to 1868 there was a period of dry weather, and from 1917 to 1921 there was a four-year period of drought; 1 Variations i n supply r e f e r here to variations i n quantity of a g r i c u l t u r a l products produced i n Canada f o r s a l e . Variations i n aggregate supply available i n the world market w i l l r e s u l t i n v a r i a t i o n s i n demand f o r Canadian products. 2 Hope, E. C., "Weather and Crop History i n Western Canada", C.S.T.A. Review, 1938, No. 16. 33 grasshopper outbreaks occurred i n 1818-20, 1857-8, 1864-8, 1874-5, 1920-2, and 1931-7. Rust, sawfly and early and l a t e f r o s t s also add to the hazards of production, thus contributing to the uncertainty i n agric u l t u r e . Variations i n t o t a l production r e s u l t mainly from weather hazards and changes i n acreages. The average y i e l d of wheat has varied i n Manitoba from 6.4 bushels i n 1937 to 26 i n 1915, i n Saskatchewan from 2,6 i n 1937 to 25.1 bushels i n 1915, and i n Alberta from 6 bushels i n 1918 to 26.8 i n 1942. 1 PKRCEHT 150 100 50 0 Source: 199 Domii 5 aion Bo, 1940 1945 IS reau of Stat 1 sties, Index of Farm Production. 48 FIGURE 3 - INDEX NUMBER OF PHYSICAL VOLUMR OF AGRICULTURAL PRODUCTION, CA5ADA, 1935-1938 (1935-39 • 100) 1 Coke, J . , A g r i c u l t u r a l Production, P r i c e s and Income i n Canada• Proceedings of the S i x t h International Conference of  A g r i c u l t u r a l Economists, Oxford University Press, 1948, p. 428. The Index of Farm Production was f i r s t published i n August of 1949. The index unfortunately does not extend backward past 1935. With the bulk of Canada's grain crops being produced i n the P r a i r i e Provinces, any extremely favorable or unfavorable weather conditions i n that area exercise considerable control over the t o t a l production of Canadian grain crops, and as a re-sult, markedly a f f e c t the index of farm production. Hot, dry weather i n western Canada during 1937 resulted i n y i e l d s per acre of grain at or near the lowest l e v e l s on record. Cool weather which characterized the entire western season i n 1942 had the opposite e f f e c t with records and near records being set f o r per-acre y i e l d s and t o t a l production. 1 • Y i e l d v a r i a t i o n i s not by any means confined to the p r a i r i e s . The tendency to b i e n n i a l bearing of B r i t i s h Columbia apples i s shown i n Figure 4. High y i e l d s o r d i n a r i l y r e s u l t i n low p r i c e s . (2) Variations i n Demand (i) Agriculture's Reaction to Demand Decline. The repercussions of world-wide business fluctuations have serious e f f e c t s upon Canadian farm income. The most impor-tant difference between agriculture and industry during f l u c t u -ations i n business a c t i v i t y i s the way i n which they react to v a r i a t i o n s i n demand. On the downswing of the business cycle most i n d u s t r i a l plants reduce production i n order to reduce costs. This i s possible because a large portion of most indus-t r i a l plants' costs are variable costs. Farms on the other hand, 1 Dominion Bureau of S t a t i s t i c s , Index of Farm Production, August 1949. 35 with a large proportion of f i x e d costs, which include family labor, lose l e a s t by maintaining production. With t h i s i n e l a s t i c supply function i n contraction a decrease i n demand i s r e f l e c t e d f u l l y i n p r i c e . 1 The reaction of Canadian agriculture to changes i n demand are shown i n Figure 5. Had i t not been for a four-year drought from 1917 to 1921 the production of a g r i c u l t u r a l products would have been considerably higher i n t h i s period. The very large production of 1928 i s attributable more to the bumper crops of the p r a i r i e s than to farmers' response to high World War I p r i c e s . The most s i g n i f i c a n t r e l a t i o n s h i p 5 i s the way i n which a g r i c u l t u r a l production i s maintained despite d r a s t i c p r i c e f a l l s . Had a period of severe drought not occurred on the p r a i r i e s i n the 1930 • s, Canadian a g r i c u l t u r a l production would l i k e l y have been maintained at a point very l i t t l e below that of the average of the eleven post World War I years. This would have occurred dn face of a drop i n price of more than 50 per cent from 1929 to 1932. K a r l Brandt has described the behavior and p o s i t i o n of world 2 agriculture during the world depression of the t h i r t i e s . Among the f i r s t signs of the world depression was a weakening of the pric e of a g r i c u l t u r a l products. E a r l y i n 1928 the world market p r i c e s of some of the world's chief a g r i c u l t u r a l staple commodi-t i e s began to s l i d e downward from the average l e v e l of the 1 The statement here that the supply curve of a g r i c u l t u r a l products i s i n e l a s t i c would at f i r s t appear to c o n f l i c t with Chapter 1. The supply curve i s e l a s t i c i n expansion, but i t i s i r r e v e r s i b l e . The supply curve i n contraction i s a d i f f e r e n t and much l e s s e l a s t i c one. 2 Brandt, K a r l , The Reconstruction of.World Agriculture, W. W. Norton & Company, Inc., New York, p. 57-91. 36 preceding three years. When the depression h i t bottom, one phenomenon was most s i g n i f i c a n t . The world's a g r i c u l t u r a l pro-duction was s t i l l at the peak l e v e l of previous prosperity. Total i n d u s t r i a l production was, at the same time, down 71 per cent of 1928 production, and i n many s p e c i f i c f i e l d s down to 50-40 per cent or l e s s of the production f o r that year. In the face of t h i s depression the s t a b i l i t y of food con-sumption i s remarkable. Total national consumption of food de-cli n e d only to the extent that l e s s food was imported i n some countries and not compensated for by additional domestic pro-duction. Otherwise during the depths of the depression the people consumed as much or even more food than they had at the peak of p r o s p e r i t y . 1 The f i n a n c i a l upheaval i n agriculture due to low prices,and a l l the hardship i t caused apparently helped a good deal to ease the suffering of unemployed and low income workers i n the c i t i e s , by providing an even flow of food at low pr i c e s . ( i i ) Income E f f e c t s of Changes i n Demand. In the aggregate both world supply and world de-o mand f o r a g r i c u l t u r a l products are i n e l a s t i c . A small change i n either w i l l r e s u l t i n a large change i n world p r i c e . The eff e c t s i n of such world p r i c e changes are fetlected/Canadian farm income. These ef f e c t s are f e l t not only by wheat growers and other pro-ducers f o r export markets, but within a year on nearly the whole 3 of Canadian ag r i c u l t u r e . 1 2 3 Ib i d , p. 91. See Appendix i . See Chapter 1. 37 The index numbers of the value of Canadian f i e l d crops exhibit a d e f i n i t e c y l i c a l pattern. See Table 9. On the base of 1926-27 s 100, values were low from 1909 to 1915 ranging from 35.1 to 54.3. As a r e s u l t of strong wartime demand and the d i s -l o c a t i o n i n postwar Europe, values rose s t e a d i l y to 139.1 i n 1920 then f e l l s l i g h t l y to 131.7 i n 1921. In 1922 values f e l l sharply to 87.1 and remained at about that l e v e l h a l f way through the 1920's. With somewhat higher pr i c e s and good y i e l d s value l e v e l l e d o f f at about 100 u n t i l the crash of 1929. Prom 1931 to 1932 the major contributing factor to the a g r i -c u l t u r a l depression was low p r i c e s . The years 1937 and 1938 saw some improvement i n p r i c e , but further d r a s t i c y i e l d reductions i n the crops of 1936-37 and 1937-38. Y i e l d improvements i n 1938 and 1939 were offset by a return to depression l e v e l p r i c e s . With some variations hog prices at Toronto have exhibited the sanB general tendency. 38 TABLE 9 INDEX NUMBERS OF PRICES, PRODUCTION AND VALUES OP FIELD CROPS, 1909-10 TO 1939-40 CANADA Pro- Deflated Crop Year P r i c e s duction Values P r i c e s 1  (Base 1926-27 = 100)  1909-10 75.6 63.8 48.3 1910-11 69.7 50.4 35.1 1911-12 72.6 74.5 54.1 1912-13 66.0 76.4 50.4 1913-14 68.8 72.8 50.0 1914-15 90.7 59.9 54.3 107.8 1915-16 83.7 89.2 74.7 93.4 1916-17 106.7 75.2 80.2 109.1 1917-18 138.7 74.6 103.6 107.9 1918-19 158.5 78.4 124.2 107 1919-20 178.7 77.8 139.1 113.5 1920-21 149.3 88.2 131.7 78.2 1921-22 101.1 83.4 84.3 68.6 1922-23 86.6 100.5 87.1 65.8 1923-24 72.4 112.4 81.4 55.9 1924-25 102.3 88.0 90.1 79.1 1925-26 102.1 98.4 100.4 79.4 1926-27 100.0 100.0 100.0 78.9 1927-28 96.5 110.4 106.5 76.2 1928-29 84.6 120.7 102.1 67.7 1929-30 104.9 82.1 86.2 84.8 1930-31 57.8 103.9 60.1 50.0 1931-32 46.8 84.5 39.6 45.8 1932-33 43.1 95.3 41.1 45.3 1933-34 55.7 74.0 41.2 60.4 1934-35 67.4 73.9 49.8 69.8 1935-36 55.9 83.1 46.5 58.0 1936-37 80.9 68.7 55.6 82.4 1937-38 77.2 65.4 50.5 74.0 1938-39 54.7 91.3 49.9 53.7 1939-40 55.4 103.9 57.5 55.7 Source: Monthly B u l l e t i n of A g r i c u l t u r a l S t a t i s t i c s , Dominion Bureau of S t a t i s t i c s , A g r i c u l t u r a l Branch, Jan. 1940, p. 31. 1 Deflated by D.B.S. index of pr i c e of commodities and ser-vices farmers buy, 1913-1948. 39 TABLE 10 HOGS: AVERAGE WHOLESALE PRICES PER 100 LBS., AT TORONTO, 1890-1943 Year P r i c e Year P r i c e 1890 4.63 1917 mm 15.55 1891 4.82 1918 - 18.17 1892 4.98 1919 - 19.59 1893 6.21 1920 - 18.98 1894 4.60 1921 - 11.72 1895 4.28 1922 - 12.63 1896 3.87 1923 - 9.76 1897 5.05 1924 - 9.10 1898 4.87 1925 - 12.85 1899 4.62 1926 - 13.32 1900 5.76 1927 - 10.35 1901 6.69 1928 - 10.51 1902 6.55 1929 - 12.38 1903 5.83 1930 - 12.32 1904 5.09 1931 - 7.39 1905 6.22 1932 - 4.66 1906 6.81 1933 - 5.54 1907 6.44 1934 - 8.60 1908 5.95 1935 mm 8.94 1909 7.30 1936 - 8.43 1910 8.48 1937 - 8.92 1911 6.62 1938 - 9.45 1912 7.69 1939 - 8.91 1913 9.03 1940 - 11.42 1914 8.29 1941 - 13.26 1915 8.47 1942 - 15.69 1916 10.54 1943 — 16.87 Source: Livestock & Livestock Products S t a t i s t i c s , Dominion Bureau of S t a t i s t i c s , A g r i c u l t u r a l Branch, 1943, p. 42. The combined e f f e c t of changes i n supply and demand on the cash income from the sale of farm products can be seen i n T a b l e l l . In Figure 6 the yearly deflated gross revenue from one acre of wheat at Scott, Saskatchewan, i s shown. The dash l i n e i n the chart, deflated gross revenue, y i e l d v a r i a b i l i t y removed,indi-cates changes i n purchasing power of the product of one acre. The chart shows quite c l e a r l y the c y c l i c a l r i s e and f a l l of farm income. TABLE 11 CANADIAN FARMERS CASH INCOME FROM SALE OF FARM PRODUCTS, 1926-1948 Cash Income Year $000,000 1926 963.4 1927 - 940.9 1928 - 1,072.5 1929 mm 936.3 1930 mm 640.5 1931 mm 450.4 1932 - 388.5 1933 - 402.0 1934 - . 491.6 1935 - 519.5 1936 - 580.1 1937 mm 640.0 1938* - 660.8 1939 - 717.0 1940 - 748.2 1941 - 896.4 1942 - 1,099.2 1943 mm 1,407.5 1944 - 1,829.9 1945 - 1,694.7 1946 - 1,742.8 1947 - 1,962.3 1948 - 2,449.9 1926 to 1944 - Quarterly B u l l e t i n of A g r i c u l t u r a l S t a t i s t i c s , Dominion Bureau of S t a t i s t i c s , January-March, 1945, V o l . 38-No. 1. TABLE 12 41 HEFLATED GROSS HBVENDE FROM ODE ACRE OF SDMHHHPALLOW PLABTED SO WBSkT EACH YEAR 1912-1944 A3? SCOTT, SASKATCSBWaU Yield Cash Price Price De- Deflated Gross From #1 Uorth Index De- flated Revenue, Yield Variability 1 Acre Basis Fort 1935-39 flated arose Year Fallow William = 100 Price Revenue Removed # < * 1912 22*5 95.5 -(34.1 113.56 25.55 18.78 1913 21.1 86.25 (84.1 102.66 21.64 16.96 1914 16.1 111.75 84.1 132.87 21.39 21.98 1915 40.0 93.88 89.6 104.77 41.91 17.33 1916 40,3 160.88 97.8 164.49 66.29 27.21 1917 17.3 221.0 128.6 171.85 29.73 28.42 1918 2.7 224.5 148.2 151.48 4*09 25*05 1919 6.2 263.0 157.5 166.98 10.35 27.62 1920 17.3 273.5 180.3 151.69 26.24 25.09 1921 26.0 148.12 147.4 100.49 26.13 16.62 1922 8.7 99.88 131.7 75.84 6.60 12.54 1923 28.0 106.25 129.6 81.98 22.95 13.56 1924 7.0 142.25 129.3 110.02 7.70 18.20 1925 20.7 137.5 128.6 106,92 22,13 17.68 1926 13.3 143.88 126.8 113.47 15*09 18.77 1927 14.7 145.12 126.7 114.54 16.84 18.94 1928 22.7 117. 125.0 93.60 21.26 15.48 1929 9.3 149.5 123.7 120,86 11.24 19.99 1930 20.8 78.1 115.7 67,50 14.04 11.16 1931 27.0 53.6 102.1 52,50 14.18 3.63 1932 20.5 51.9 95.1 54.57 11.19 9.03 1933 5.1 67.2 92.2 72.89 3.72 12.06 1934 12.8 82.3 96.5 85.28 10.92 14.10 1935 13.3 90.3 96.4 93.67 12.46 15.49 1936 4.7 103.9 98.& 105.80 4.97 17.50 1937 1.3 133.6 104.3 127.97 1.66 21.17 1938 8.7 63.3 101.3 62.18 5.41 10.28 1939 13.3 73.9 99.4 73.74 9.60 12.19 1940 12.7 71.7 107.4 66.76 8.48 11.04 1941 4.7 72.6 112.3 64.65 3.04 10.63 1942 29.3 89.6 125.1 71.62 20.98 11.85 1943 10.6 117.5 132.1 83.95 9.43 14.71 1944 27.1 125.0 138.9 89.99 24.39 14.88 ( i = 16.54) (2 ° 121.06) *Price index of Commodities and Services used by Farmers, D.B.S., not avail-able for 1913 and 1912; used index for 1914. Sources Wheat prices - Winnipeg Wheat Prices for 21 Years, 1908-9 - 1928-9. W. Sanford Evans Statistical Service, Winnipeg, Manitoba. Yield - Test Plots, Dominion Experimental Station, Scott, Saskatchewan. Price index lumbers of Commodities and Services used by Farmers 1913 te 1948. D.B.S. (3) P r o d u c t i o n I n s t a b i l i t y o f I n d i v i d u a l Farm or A r e a P r o d u c t i o n i n s t a b i l i t y o f the i n d i v i d u a l farm or a r e a i s one o f the major causes o f i n s t a b i l i t y i n p r a i r i e f a r m income. F i g u r e 7 i n d i c a t e s the c o e f f i c i e n t o f v a r i a b i l i t y of the y i e l d o f wheat i n v a r i o u s p a r t s o f Saskatchewan f o r the p e r i o d 1918-1935. I n 1937 the D o m i n i o n Economics D i v i s i o n i n c o - o p e r a t i o n w i t h the U n i v e r s i t y o f Saskatchewan and the Saskatchewan Department o f A g r i c u l t u r e c a r r i e d out a s tudy on the economic a s p e c t s of y i e l d i n s u r a n c e • 1 Some i n d i c a t i o n o f the c o m p l e x i t y of the causes o f y i e l d v a r i a t i o n may be g i v e n by l i s t i n g the f a c t o r s w h i c h i n v e s t i g a t o r s found to be s i g n i f i c a n t . 1 . S o i l and t o p o g r a p h y . C h e m i c a l , p h y s i c a l and b i o l o -g i c a l c h a r a c t e r i s t i c s o f the s o i l , ( p o t e n t i a l f e r -t i l i t y , a r a b i l i t y , t e x t u r e and s t r u c t u r e o f s o i l , s u b s o i l , t endency to d r i f t , l o c a t i o n w i t h r e g a r d to a x i s o f d r o u g h t a r e a ) . 2 . C l i m a t i c e l ements : R a i n f a l l , t e m p e r a t u r e , f l o o d , h a i l , w i n d , f r o s t . 3 . P r e v a l e n c e o f p l a n t d i s e a s e : R u s t , smut and r o o t r o t s . 4. I n f e s t a t i o n by b i r d s , a n i m a l s , r o d e n t s and i n s e c t s ; e . g . , g r a s s h o p p e r s , cutworms, s a w f l y , crows , s p a r -rows , b l a c k b i r d s , g o p h e r s , b a d g e r s . 5 . Farm p r a c t i c e f a c t o r s : (a) P r e p a r a t i o n o f the seed b e d , and s t a t e o f c u l t i v a t i o n , (b) s e l e c t i o n o f wheat v a r i e t i e s , (c) use o f t e s t e d and s e l e c t e d s e e d , (d) d e p t h , r a t e and date o f s e e d i n g , 1 Some i n f o r m a t i o n f r o m t h i s s t u d y was g i v e n by Hansen, ¥ . J . , Economic A s p e c t s o f C r o p ( Y i e l d ) Insurance w i t h R e f e r e n c e t o the P r o v i n c e o f Saskatchewan, P r o c e e d i n g s of the N i n t h Annual M e e t i n g  o f the C a n a d i a n A g r i c u l t u r a l Economics S o c i e t y , June 1957, p . 4 7 - 5 8 . FIGURE 7 COEFFICIENT OF VARIABILITY OF YIELD OF MEAf PROVINCE OF SASKATCHEWAN, CANADA 1918-1935 V////J/J/A Source: Economic Aspects of Crop (Yield) Insurance with Preference to The Province of Saskatchewan. Proceedings Ninth Annual Sleeting, Canadian Agricultural Economies Society, June, 1937. (e) treatment of seed f o r disease control, (f) adequacy of farm power, equipment and timeliness of farm operations, (g) s o i l d r i f t i n g control, (h) weed control, (i) insect control, (j) c u l t u r a l methods: Rotation and use of f e r t i l i z e r s , (k) condition and type of farm implements, (seed d r i l l ) • Y i e l d per acre i s the resultant of the unpredictable combi-nation of the foregoing f a c t o r s . The solution, i f there i s one for t h i s phase of farm income i n s t a b i l i t y , l i e s i n the f i e l d s of farm management and crop insurance. Further discussion of the production i n s t a b i l i t y problem i s beyond the scope of t h i s t h e s i s . 43 CHAPTER 4 UNCERTAINTY AND RESOURCE USE I t has been shown t h a t farm income i s u n s t a b l e , and t h a t a s u b s t a n t i a l p o r t i o n of t h i s i n s t a b i l i t y i s a t t r i b u t a b l e to p r i c e v a r i a t i o n s . These v a r i a t i o n s take the form of changes i n the g e n e r a l l e v e l o f p r i c e s f o r a g r i c u l t u r a l products and of s h i f t s i n r e l a t i v e p r i c e s between p r o d u c t s . The i n a b i l i t y of farmers to form s u f f i c i e n t l y a c curate e x p e c t a t i o n s of e i t h e r the l e v e l o f p r i c e s , or of r e l a t i v e p r i c e s from y e a r to ye a r w i l l be r e f e r r e d to as p r i c e u n c e r t a i n t y . 1 I n a d d i t i o n to y e a r to year p r i c e u n c e r t a i n t y the farmer i s unable to p r e d i c t the tr e n d of net income over a l o n g e r p e r i o d . Net income depends l a r g e l y upon the l e v e l of the p r i c e s of farm p r o d u c t s , and the p r i c e s o f the producer and consumer goods and s e r v i c e s farmers u s e . T h i s type of u n c e r t a i n t y w i l l be r e f e r r e d to as l o n g - r u n income u n c e r t a i n t y . Y e a r to year p r i c e . u n c e r t a i n t y mainly a f f e c t s the way i n which farmers use t h e i r l a n d , l a b o r and equipment. Long-run income u n c e r t a i n t y a f f e c t s the movement of c a p i t a l and l a b o r be-tween a g r i c u l t u r e and the r e s t o f the economy, and a l s o the way farmers use t h e i r l a b o r and c a p i t a l . ( l ) E f f e c t s of P r i c e U n c e r t a i n t y on the I n d i v i d u a l Farm ( i ) Year to Year P r i c e U n c e r t a i n t y . Y e a r to year p r i c e u n c e r t a i n t y c o n s i s t s of u n c e r t a i n t y 1 I n a d d i t i o n to y e a r t o year p r i c e u n c e r t a i n t y the farmer f a c e s u n c e r t a i n t y as to y i e l d s . o f the g e n e r a l l e v e l of a g r i c u l t u r a l p r i c e s and of the r e l a t i v e p r i c e s between p r o d u c t s . V a r i a t i o n s f rom y e a r to y e a r i n the l e v e l o f f a r m p r o d u c t p r i c e s are shown by the i n d e x o f p r i c e o f t o t a l f a r m p r o d u c t s - F i g u r e 8 f o r the p e r i o d 1890-1937. The r e -l a t i o n s h i p o f the p r i c e s o f f i e l d p r o d u c t s to p r i c e s o f an imal p r o d u c t s are shown i n F i g u r e 9 . The r e l a t i o n s h i p between f e e d p r i c e s and hog p r i c e s f o r the p e r i o d 1926-1938 i s shown i n F i g u r e 10 . F i g u r e 11 compares d o l l a r p r i c e s o f wheat, oa t s and b a r l e y a t Winnipeg f r o m 1908 to 1936. I f f a r m e r s c o u l d p r e d i c t the y e a r to y e a r changes i n the p r i c e l e v e l o f f a r m p r o d u c t s and the r e l a t i v e p r i c e s o f f a r m p r o -d u c t s , they c o u l d p l a n a c c o r d i n g l y . One method of p r e d i c t i o n w h i c h many farmers a p p a r e n t l y use i s s i m p l y to assume t h a t the p r e s e n t p r i c e w i l l c o n t i n u e . Johnson has t e s t e d t h i s method f o r a c c u r a c y i n the U n i t e d S t a t e s f o r the p e r i o d 1910 to 1943. He found t h a t the e r r o r s average f rom 12 to 3 5 p e r cent o f the mean p r i c e f o r the p e r i o d . 1 An e x a m i n a t i o n o f F i g u r e 8 w i l l i n d i c a t e the s e r i o u s i n a c -c u r a c y o f any r u l e o f thumb method farmers may use f o r p r e d i c t i n g f u t u r e p r i c e s . That the p r o b l e m of p r e d i c t i n g r e l a t i v e p r i c e s o f f a r m p r o d u c t s over a p r o d u c t i o n p e r i o d of one to t h r e e y e a r s i s an even more d i f f i c u l t one f o r the farmer, can be seen i n F i g u r e s 9, 10 and 12 . ( i i ) Measures Farmers Take to M i n i m i z e the E f f e c t o f Y e a r to Y e a r P r i c e U n c e r t a i n t y . I f s e l l i n g p r i c e can be p r e d i c t e d o n l y w i t h i n wide l i m i t s , 1 Johnson , D . ( J . , "A P r i c e P o l i c y f o r A g r i c u l t u r e C o n s i s t e n t w i t h Economic P r o g r e s s t h a t w i l l Promote Adequate and More S t a b l e Income from F a r m i n g , , , J . F . E . , U o v . 1945. rr -— i — 1-14- 44-\ i \ - h 1 -f-u-i-l - T Y 1 ism 4+f 4-iJ-L ! 1 1 i !• ' i • 1 — 1 — 1 — \ — I i ' i 1 4- .| j i I | I | ! ; | 1 ( ' 1 i i 1 T' AH P \KA(I, 1 1 ; 1 1 r p a . 1 1 \ 1 j • i i | — i — j — , | j m D i USD A. ] B9I [)" 7 • , i i i — i i ; i i 1 j I i j | /i I 1 ! 1 i i i 1 1 J_.l_ ! 1 i i ! ' l i 1 i f ] ! I Bast 1?13 i * 1 IX I i 1 r ! | mm Jt i i ! -1 M i M 1 i i ! M M i : ; c\ ; I ! ] 1 1 | M ! M i i i i i ' : i r i i i i 1 1 1 j 1 1 ! 1 , i I i | | ; | j t I J_ [ > i i J ( 1 1 I i 1 i i ! | i ! 1 j _ j i 1 ' 1 ' i 1 j I | j i I. i ; 1 ' ! 1 f • . . 1 : ! . 1 ! i i i i ! I I t  1 l f i | I I i j . 1 i- • 1 ! 1 : i I I i i i ', 1 1 ' I j ! 1 ; i . 1 1 _ [ i | j | ! ' l\i i ; l 1 i | | ! ! i — i j i — I 1 1 i 1 i i i i i I i I I I " i i i ! ; 1 f 1 ! ! M i ; 1 : ' ! i I i ! J i j i \ 1 i 1 ' h i l l ! : 1 ! . . L L 2 ?' 1 ! — j — j M ' 1 i i J 1 I i 1 ; ! i 1 i ! i i I j ! i ! f 1 1 i I f ! ! i j | • t i l ! ! ' I i 1 • 1 i i i : i ! 1 I i i L L i i i i f i r i r ; 1 ! 1 1 ! i . ' f 1 1 ii I ! i 1 • I I 1 ..L. . 1 .1 . l M I I | ° M I S 1 ! ! • ! ' : l I —[— 1 i ; i i ! ; 1 : ! ] ! ! 1 : 1 1 1 ! i 1 l ' I 1 i I I 1 1 1 ! M i l ! ! ! ; 1 1 1 ' n i l A J ! i i ! 1 I • ! ! | i I | 1 1 j | [ t ; II 31 a ! i M 1 i ! I I I ! : i i ! | : i t I ! i • ! i i i 1 ' • ' i 1 | M i i i : I i r ] 1 i 1 —1— M M ! 1 1 1 ! 1 1 i. ! ! i i l l : i ' 1 1 ] 1—' j 1 ; ! j 1 1 1 1 BIN ) 1 i i I ! !' 1 i M Mi l Ii : I i 1 i : M 1 1 • ! i ! ] 1 I ! I I ! 1 M ! i M i l 1 j 1 ; j ! i 1 I ! '. 1 i L 1 f I ] 1 I 1 ! I Li J \ I i i 1 j . , | ! i i i 1 i 1 J ! 1 i ' 1 * 1 ( 1 '! 1 1 1 1 i : ! | ' 1 1 1 1 I ! ' i ' 1 i 1 ' I 1 ' i i i ! i i : i 1 1 1 T—? ! 1 i I ~ M r | ' •! M M l ! 1 I 1 < i i j- 1 ! i i ! M M | 1 1 l I j 1 1 j . I i ! • ~ ! t | f i | ,\ / 1 ' ! | : i ! 1 ; l 1-i I I I i '• II i 1 . r i : I i ( ' — j — i ; .. • L • i ' L 1 i Z M i l . l : I i r ^ I i i 1 , • 1 I M M w fr ! 1 I ! 1 t i ! : M - i r r i 11 i I i i i M i i 1 1 M M i i l ! 1 ; ! i 1 i | 11 i i \ 1 ! i i 1 i i ' 1 ! ' > P? ! I ; i j i 1 1 i i i i Ml ! " 1 ' I I i i i I ! 1 Wi 1 1 ' : ' ; : ! j ! r 1 ; I i 7 • i\ i i i 1 i 1 I ! jJL! 4--..I- \ • ! 1 ! ; ' ! ! 1 : 1 t ! j M ! I I I i f i t : ' ' • i i ' i 1 ! ! ' i ' • i — i [•''' \ ! 1 i ! 1 ' III; 1 ' ' ; ' ', ' i ! I , ! 1 j ! 1 i i 1 M M ' irrr r 1 i j • 1 1 • • 1 1 i j . M T*- \ i ! l ' j i i 1 j | i 1 1/ i i f I I I ; ! . i ! ! I , ! ' j r i ><••••• » S : i_ 1 ; : i i : . j 1 : ! I I 1 I • , i 1 1 ! •! ft i ! 1 — J V - t e A -M M .1 — j — | — 1 j I i i . i ! ! j t —|—1—i i ' • i 1150 M I | ! I ! ! l l i i II 1 ii i i ! 1 ] i ! 1 ! i-i ! i i I I 1 i 1 i j 1 1 ; ! / i 1 1 N ! i i ' i i ' i i I | 1 — ! J ! > M ! ' .....JLl ... UU-t f i ! ' • i i I J M • i " f T f M 1 — I — 1 — ! ! i if <i i r r r r r 1 1 i 1 | ! i i i 1 — 1 1 — * • M M ; ' ! : I 1 / 1 J t ll / 1 ' 1 1 •[ 1; | 1 ' I ! i I t I | i i i M | ! 1 i J !1 ' /' * It l l • f i i- • I •. i > < I j i • i ! j t M i l ! t i l l ! ! ' I ( • /1 1 i i 1 i M M ' M M ! 1 I.I ' I i \! \ ! / ! /! \ 1 \ i 1 ; , i 1 1 M M ! 1 ! : 1 ! 1 i ' f r ! 1 / I • • i r ' i i , i i i i 1 j | ! i ! ; L L L L J _ L _ ' . M . : ; |l l i ! ^ N ^ ' / M T : I r ! ' 1 • 1 : — i — i : 1 X 9 M M i 1 ! ' f t i i • I ! 1 : i ! ! • r j ; — ! — i — 1 1 1 ! i ' j i j . ; i l l I i •; i i i • \ l 1 L j ! l ! 1 r J ! | i 1 i i i 1 i ! j I 1 ! I.I i i 1 ; M i l  r r I I j 1 r / i M M i 1 1 ' " i i i ; I i j ; f\ i i : t: ' 1 I 1 ! — ! — M M i i 1 1 |i ! I I I ; i i i ! ; i 1 i \ [ | 1 \f | 1'. [ I 1 i i i . 1 i —"—1— j — 1 — i — 1 j j 1 ! : j\ III ' i ! 1 i i | t 1—r—t— M ! ; [ 7! I' ! ' i i i _ M M - l l | / 1 ' 1 1 • : | I 1 1 I ' / ; I / LMTi P ' i l l I ' i 1 ! 1 1 0 i ( i i i ! ! J ; i M M i 1 ! ( 1 1 i ,. I j .[ [ I t . I i 1 M i • i 1 j | 1 .; _ . . i i ! i I i t ! 1 t ! 1 i f i i j 1 / ! • t[ 1 1 1 1 , ; *: 1 1 1 ! 1 M / L^T •i 1 / J ' i ! • ; i ) 1 1 / r ; J i M i i i ! 1.1 ; if 1 .• f . i i 1 f I I [ i ; 1 1 1 III L^\, 7 1 1 i 1' 1 i i i 1 1 1 1 I I / J _ I 1 ! \ ! / ' ! M M ! 1 ' ' i ! 1 ( I j t I i 1 1 | / A i j / \M V Animal i ( ._ i._ ! II i 1 1 ! ! i f i l l — ' — i — * — —y j 1—„. i . — \ — t Ii t i i 1 ' l i t 1 ! ! i i ! f I i i \ / 1 1 j ! I | ( i i ! In j l M i ! . i : ! ! j i r 1 ' 1 I i 1 17 5 i \ - - i M 1 i. ' I 1 : 1 ! ! I | j | : [ j i-1 XT • 1 1 I j 1 L 1 . .!' i.ir.-f ! • M ! 1 i i t i i 1 i i • 1 1 IV i I 1 I ! j . „ ! | i /I T ! M i 1 i 1 1 I 1 1 I 1 1 ' i ; I 1 t 1 i I 1 i V • — i L M i ! i . 1 i ! i t 1 1 ' 1/ ; ; i ,\Lmfi rx J I Ix 1U ex I t ' ; ! i 1 I i i s A • ; \! j t s » PA li lOt hi ftl i) ! ! ; 1 1 1 1 r-f- i t —f V ' ' J-f i i 1—r I 1 r • r •#l ! ,} j i ' i l 1 l \ 1 1 I 1 I ! 1 1 ! • i ! i ! t | t ;1 ! I ! ' i ™ I To ton on f_„j__i_ L Alsr .cuitiire 1— t 1 ! H - igirv 44 41 ]- H4+- 4- i i }' | | | 1 _ r I t T " L 1 1 1 • — r >A •4-r & A i in i 1 1 < n | IB w 1 i i H 1 19 !0 i • i i 30 2 Yt i 1 i 1 1 i | I I ! 1 \ 1 ; ! i ! i _ j ' 1 . . t_ i i i \ | 1 1 1 ; i r i i i i I j j ': \ i i_ 1 i i ; i 1 I | 1 i i i i I ! ' I t i 1 ! i ; i i ! i j 1 ! ! | ; ; | i i 1 i ! i I i ! M l — • _ _ u i -4- L . 1 i i i . , . [... hh+4 H 4 - K M M M M ! f j ' t r 1 j 1 1 i 1 M M • ; M M ~ i • -H-FIGURE 12 Index PURCHASIHG POWER OF BEEF CATTLE AT TOBOHTO 1868-1937 Average 1855-1932 • 100 1930 1935 1870 1880 1890 1910 1920 1900 12a CYCLES IB THE PURCHASING POWER OF HOGS AT TORONTO 1817-1937 Average 1910-14 = 100 1870 1880 1890 1910 1920 Index 1900 12b PURCHASING POWER OF SHEEP AT TORONTO 1870-1937 (Good Camps Since 1914) Average 1910-1914 = 100 1930 1940 A < A / I ft \ \ s I 1 V I f V m 18 80 18 90 19 00 19 10 19 20 19 30 194 12c 45 there are four measures or adjustments the farmer may make, or he forced to make, to protect himself against t h i s uncertainty. They are d i v e r s i f i c a t i o n , f l e x i b i l i t y , l i q u i d i t y and safety preference i n choice of f a c t o r s . (a) D i v e r s i f i c a t i o n . D i v e r s i f i c a t i o n means the combination of several enter-p r i s e s on one farm. There are several reasons f o r making such combinations. One i s the p o s s i b i l i t y of making the farm income more stable. Variations i n the (aggregate Value) t o t a l receipts from several products are les s than the average v a r i a t i o n for each product taken separately. There i s also the p o s s i b i l i t y of including some product with a high degree of income s t a b i l i t y . Another reason for d i v e r s i f i c a t i o n i s to obtain a more even sea-sonal d i s t r i b u t i o n of r e c e i p t s . The most important reason has been the p o s s i b i l i t y of combining supplementary or complementary enterprises within the farm. 1 The price r e l a t i o n s h i p between various a g r i c u l t u r a l products i s l a r g e l y unpredictable and subject to frequent change. In the l i g h t of the uncertain and constantly changing price r e l a t i o n -ships shown i n Figures 9-12 above, i t i s reasonable to conclude that d i v e r s i f i c a t i o n w i l l be car r i e d beyond the point which would y i e l d maximum net revenue. To the extent that t h i s departure from maximum net income i s attributable to unpredictable p r i c e s , i t i s a cost of pr i c e uncertainty. (b) F l e x i b i l i t y . F l e x i b i l i t y r e f e r s to the ease with which land, 1 Enterprises which make demands for labor and equipment at such times as.not seriously to c o n f l i c t are c a l l e d supplementary. Enterprises such that one d e f i n i t e l y makes a contribution to the other are complementary. (including b u i l d i n g s ) , labor, machinery and equipment can be sh i f t e d from one use to another as the need a r i s e s . The main contribution which a f l e x i b l e organization of the farm has to of f e r i s i n increasing p r o f i t expectations. The ad-option of f l e x i b i l i t y may be a reaction to either y i e l d uncer-ta i n t y or to pri c e uncertainty. I f the farmer produces only one product, his equipment must be large enough to handle not the average, but the maximum crop. Thus he s a c r i f i c e s the opportu-n i t y of handling most crops at a minimum cost. Additional f l e x i -b i l i t y i s required i f the farmer i s to make the best of h i s resources. He must be able to s h i f t from an enterprise which has become unfavorable f o r p r i c e or technological reasons to one which i s more favorable. In farming f l e x i b i l i t y plays a s i g n i f i c a n t r o l e . Farmers adjust the weights at which animals are marketed, and under cer-t a i n circumstances feed inventories are b u i l t up or: decreased. F l e x i b i l i t y i s u t i l i z e d to overcome natural hazards as well as to adapt the farm organization to changing economic conditions. For the i n d i v i d u a l farmer f l e x i b i l i t y increases costs, but en-sures greater p r o f i t s over a period of time. Even i f a farmer was assured of the s e l l i n g p r i c e , there would s t i l l be a need fo r considerable f l e x i b i l i t y to counteract y i e l d uncertainty. The part of the cost of f l e x i b i l i t y which i s d i r e c t l y a ttributable to price uncertainty, however, i s a cost to society which might i n part be eliminated by price p o l i c y . (c) L i q u i d i t y . L i q u i d i t y i s another type of adjustment which a farmer might make to uncertainty. This has been defined as the mainten-47 ance of cash balances or near moneys i n order that the f i r m may take advantage of favorable opportunities which require the use of cash, or to be able to maintain the c a p i t a l assets of the farm i n t a c t i n the face of favorable circumstances. Johnson i s of the opinion that the desire f o r l i q u i d i t y probably has very l i t t l e influence on resource a l l o c a t i o n i n a g r i c u l t u r e . 1 (d) Safety Preference i n Factor Choice. Risk aversion,or i n t e r n a l c a p i t a l rationing which i s a d i r e c t r e s u l t of uncertainty, i s one of the most important forces a f f e c t i n g the combination of factors i n agri c u l t u r e . Faced with uncertainty the farmer has tended to place greater emphasis on the use of labor, rather than c a p i t a l equipment, short and i n t e r -mediate investment rather than long time, and has l i m i t e d the size of the farm. The most important r e s u l t of t h i s uncertainty i s the undue emphasis which i s placed on labor.' A farmer who, for example, considers changing from horse to tractor power faces the pos s i -b i l i t y that one or two bad years may r e s u l t i n loss of a l l his equipment through-failure to meet hi s payments, thus c r i p p l i n g the farm. He i s therefore unwilling to replace horses and hired labor by a tractor despite the higher marginal productivity of new equipment. The wages of the farm operator and h i s family are not f i x e d . Labor becomes the re s i d u a l claimant, and farm operators usually "hang on"under adverse conditions u n t i l p r i v a t i o n forces evacua-t i o n , or government intervenes. When funds are borrowed to pur-chase c a p i t a l items, a commitment i s made which i s usually backed 1 Johnson, D. G., Forward P r i c e s f o r Agriculture, p. 56. 48 by the assets of the farm. A series of bad years may thus r e s u l t i n the loss of a l l or part of these assets. On a large propor-t i o n of Canadian farms a small contractual payment looms large r e l a t i v e to the net cash income. This no doubt r e s u l t s i n the employment of more family labor and economizing on the use of modern labor saving equipment. Lenders too,tend to he hesitant to make large loans to farmers when the r i s k of l o s s i s high. I t i s generally easier to get short term production loans than loans f o r purchase of capi-t a l equipment. The e f f e c t of uncertainty, known as r i s k aversion, i s to cause the farm operator to use more family and hired labor and l e s s c a p i t a l equipment. Hired farm labor i s similar to family labor i n that i t may be obtained on short term contract and wages may be adjusted quite r e a d i l y to changing economic conditions. The r e s u l t of t h i s e f f e c t i s to depress labor returns, and to maintain very high returns f o r many c a p i t a l items, ( i i i ) Maximizing Net Income Over a Period of Time Presumably a farmer plans his farm business so as to maxi-mize net income. However, i f there i s a good deal of uncertainty, he must consider also the p o s s i b i l i t y that serious losses i n one or two years may put him out of business, i n that case he has to s t r i k e a compromise between planning for maximum net income and planning f o r safety. This income and safety may mean that margi-nal returns from additional investment w i l l exceed marginal cost, but i t i s done i n the i n t e r e s t of safety. The p a r t i c u l a r combi-nation of the two most acceptable w i l l depend upon the subjective 49 preferences of the farmer, subject at times to the r e s t r i c t i o n s placed upon the use of c a p i t a l by a loaning agency. The f a c t i s , however, that c a p i t a l equipment w i l l tend to be used more spar-in g l y than i t would be used i f only net income had to be consi-dered. (2) Between Agriculture and the Rest of the Economy The f i r s t part of t h i s chapter discussed the e f f e c t s of year to year p r i c e uncertainty and the measures which farmers take to minimize i t s e f f e c t s . The second part deals with the nature and e f f e c t s of long-run income uncertainty. Long-run income uncer-t a i n t y r e f e r s to the farmers' i n a b i l i t y to forecast the l e v e l of net income over a longer period. P e r i o d i c fluctuations i n net farm income r e s u l t l a r g e l y from changes i n the farmers cost-price r e l a t i o n s h i p . In Tables 13 to 15 records for three types of hypothetical farms have been calcu-l a t e d f o r the period 1926 to 1946. In each case the calculations are based on constant y i e l d s and constant c a p i t a l investment. Year to year r e a l value of goods and services used by the farmer i s assumed to be constant. The l a s t column i n each table, opera-torfe labor income, represents the return which the operator re-ceived for h i s year's work and management. This figure i s i n addition to the value of the house rent and the products he and hi s family used from the farm. 50 TABLE 13 ILLUSTRATION OF THE EFFECT OF PRICE COST RELATIONSHIPS OF A HYPOTHETICAL SASKATCHEWAN WHEAT FARM ( l ) Assuming Constant Y i e l d s and P r i c e s , and Costs Varying In Accordance with Dominion Bureau of S t a t i s t i c s Indexes Cash Year Total Income Total (2) Expenses Net Income Cost of Family L i v i n g Operatoi's Labor Income 1926 4992 $ 3455 $ 1537 * 767 1 2304 1927 4214 3453 761 759 1520 1928 3626 3415 211 751 962 1929 3767 3385 382 744 1126 1930 3477 3204 273 720 993 1931 2163 2900 - 737 658 - 79 1932 1893 2739 - 846 620 - 226 1933 2285 2673 - 388 607 219 1934 2459 2770 - 311 620 309 1935 2362 2768 - 406 620 214 1936 3044 2809 235 623 858 1937 3251 2947 304 652 956 1938 2503 2890 - 387 646 259 1939 2627 2836 - 209 630 421 1940 2610 2827 - 217 676 459 1941 2787 3127 - 340 711 371 1942 3759 3417 342 750 1092 1943 4129 3575 554 769 1323 1944 4024 3729 295 780 1075 1945 4440 3783 657 780 1437 1946 4404 3880 524 799 1323 (1) For d e t a i l s of calculations see Appendix i i . (2) Total Expenses include cash operating expenses, cash costs of family l i v i n g , i n t e r e s t on c a p i t a l and depreciation. 51 TABLE-14 ILLUSTRATION OF THE EFFECT OF PRICE-COST RELATIONSHIPS OF A HYPOTHETICAL FRASER VALLEY DAIRY FARM (l) Assuming Constant Y i e l d s and P r i c e s , and Costs Varying In Accordance with Dominion Bureau of S t a t i s t i c s Indexes Cash Cost of Operator's Total Total(2) Net Family Labor Year Income Expenses Income L i v i n g Income 1926 $ 4205 t 4964 $ - 759 * 767 1 8 1927 4093 4961 - 868 759 - 109 1928 4368 4900 - 532 751 219 1929 4557 4853 - 296 744 448 1930 4214 4565 - 351 720 369 1931 2985 4075 -1090 658 - 432 1932 2278 3823 -1545 620 - 925 1933 2243 3719 -1476 607 - 869 1934 2809 3874 -1065 620 - 445 1935 3024 3870 - 846 620 - 226 1936 3020 3935 - 915 623 - 292 1937 3386 4154 - 768 652 - 116 1938 3350 3464 - 114 646 532 1939 3219 3978 - 759 630 - 129 1940 3386 4266 - 880 .676 - 204 1941 3936 4442 - 506 711 205 1942 4538 4903 - 365 750 385 1943 5034 5155 - 121 769 648 1944 5155 5400 - 245 780 535 1945 5283 5486 203 780 983 1946 5654 5641 13 799 812 (l) For d e t a i l s of calculations see Appendix i i . (2) Total Expenses include cash operating expenses, cash costs of family l i v i n g , i n t e r e s t on c a p i t a l and depreciation. 52 TABLE 15 ILLUSTRATION OF THE EFFECT OF PRICE-COST RELATIONSHIPS OF A HYPOTHETICAL BRITISH COLUMBIA APPLE PRODUCER(l) Assuming Constant Y i e l d s , P r i c e s Varying i n Accordance With a Computed Index and Costs with a Dominion Bureau of S t a t i s t i c s Index Index of(2) Value Cash Per Box Cost of Operator's 1935-39 Total Total(3) Net Family Labor Year * 100 Income Expenses Income L i v i n g Income 1935 97.5 $ 1813 * 2777 $ 964 * 620 #. 344 1936 109.0 2027 2823 - 796 623 - 173 1937 103.2 1919 2980 -1061 652 - 409 1938 94.0 1748 2916 -1168 646 - 522 1939 96.3 1791 2854 -1063 630 - 433 1940 85.5 1590 3060 -1470 676 - 794 1941 116.0 2157 3186 -1029 711 - 318 1942 153.1 2848 3515 - 667 750 83 1943 220.4 4099 3694 405 769 1174 1944 182.1 3387 3870 - 483 780 297 1945 206.5 3841 3931 - 90 780 690 1946 230.9 4294 4041 253 799 1052 1947 213.5 3971 4337 - 366 1948 208.8 3883 5008 -1125 (.1) For d e t a i l s of calculations see Appendix i i . (2) Index of value per box computed from data i n the Quarterly B u l l e t i n of A g r i c u l t u r a l S t a t i s t i c s . (3) Total expenses includes cash operating expenses, cash costs of family l i v i n g , i n t e r e s t on c a p i t a l and depreciation. The above tables give some i n d i c a t i o n of the e f f e c t on net income of s h i f t s i n farm cost price r e l a t i o n s h i p s . The resultant uncertainty of net income over a period of several years can be expected to a f f e c t the attractiveness of farm investments and therefore:(l) the movement of c a p i t a l and labor between a g r i c u l -ture and the r e s t of the economy, (2) the combination of factors within the farm. ( i ) C a p i t a l R a t i o n i n g . 53 The a n a l y t i c a l model o f the f i r m i s based upon the assump-t i o n t h a t t h e r e i s a v a i l a b l e to the f i r m an u n l i m i t e d s u p p l y o f c a p i t a l r e s o u r c e s a t g o i n g p r i c e s , and t h a t the e n t r e p r e n e u r may i n c r e a s e M s output and s c a l e u n t i l marginal , c o s t e q u a l s m a r g i n a l r e v e n u e . 1 T h i s i s the i d e a l and need not be t r u e i n any p a r t i c u -l a r c a s e . C e r t a i n l y i t i s not always t r u e i n f a r m i n g . W i t h a g i v e n v a l u e o f c a p i t a l a s s e t s a f a r m e r ' s b o r r o w i n g power i s r e l a -t i v e l y f i x e d to some r a t i o o f h i s unencumbered a s s e t s . F i g u r e 13 i n d i c a t e s the t h e o r e t i c a l model a d j u s t e d f o r t h i s s i t u a t i o n and sugges t s t h a t i t would c r e a t e a gap between m a r g i n a l revenue p r o -d u c t i v i t y and m a r g i n a l c o s t . FIGURE 13 - THE GAP BETWEEN THE AHDUJ9T OF LOAN CAPITAL DESIRED BY CAPABLE FARMERS AND THE AMOUNT AVAILABLE. % 0 i i Marginal Revenue Interest 4 1 >v Productivity Rate ( A B Supply of Capital f I n F i g u r e 13 , OA r e p r e s e n t s the amount o f c a p i t a l a v a i l a b l e to a f a r m e r . OB r e p r e s e n t s the amount r e q u i r e d to equate the m a r g i n a l p r o d u c t i v i t y o f c a p i t a l to tha t of the o ther f a c t o r o f p r o d u c t i o n . CD i s the gap between i n t e r e s t r a t e and m a r g i n a l revenue p r o d u c t i v i t y of c a p i t a l . 1 S c h u l t z , T . W . , " C a p i t a l R a t i o n i n g , U n c e r t a i n t y , and Farm Tenancy Reform", J o u r n a l of P o l i t i c a l Economy, X L V T I I (1940) , p . 309-24. o 54 What causes t h i s gap between the amount o f c a p i t a l the f a r -mer s h o u l d use a t g o i n g r a t e s o f i n t e r e s t and the amount t h a t he i s a b l e or w i l l i n g to o b t a i n ? I n a d d i t i o n to a s s e s s i n g the hones ty and a b i l i t y o f the f a r m e r , the l o a n i n g agency i s f a c e d w i t h a l l the d e c i s i o n s the farmer had to make r e g a r d i n g the l o a n . G r e a t c a r e i s n e c e s s a r y on t h e i r p a r t f o r u n f a v o r a b l e y i e l d or p r i c e s i t u a t i o n s may make i t i m p o s s i b l e f o r the farmer to f u l f i l l h i s c o n t r a c t . A t the same time i t reduces the v a l u e o f the s e c u r i t y . I n a g r i c u l t u r e , u n c e r t a i n t i e s a r i s e f r o m weather , d i s e a s e s and p e s t s , as w e l l as the p r o s p e c t i v e g e n e r a l economic s i t u a -t i o n . 1 As a r e s u l t o f these causes. , o f u n c e r t a i n t y l e n d e r s tend to be e x t r e m e l y c a u t i o u s . The e f f e c t i s t h a t i t i s d i f f i c u l t f o r a f a r m e r to o b t a i n s u f f i c i e n t c a p i t a l so t h a t the m a r g i n a l r a t e o f r e t u r n and the i n t e r e s t r a t e s are e q u a l . F o r example, i n o r d e r to be as c e r t a i n as p o s s i b l e o f repayment , or i f n e c e s s a r y o f complete s e t t l e m e n t o f the l o a n by s e i z u r e and s a l e o f f a r m a s s e t s , the r a t i o o f borrowed to owned c a p i t a l i s k e p t v e r y low, u s u a l l y no more than 50 p e r c e n t . T h i s i s the essence o f what 2 i s c a l l e d c a p i t a l r a t i o n i n g . 1 See Hudson, S . C , " F a c t o r s A f f e c t i n g the Success o f Farm Mortgage Loans i n Western Canada", S c i e n t i f i c A g r i c u l t u r e , M a r . 1941, p . 368-376. 2 T . W. S c h u l t z has d e f i n e d c a p i t a l r a t i o n i n g as f o l l o w s : By c a p i t a l r a t i o n i n g we mean t h a t "though the r a t e o f r e t u r n f rom e x t r a c a p i t a l i n p u t s on a f a r m i s g r e a t e r than the i n t e r e s t r a t e on c a p i t a l , the f a r m e r , l a r g e l y because of the burden of economic u n c e r t a i n t y c o n f r o n t i n g h i m , e i t h e r does no t want to borrow a d d i -t i o n a l c a p i t a l or c o u l d not o b t a i n i t i f he t r i e d . S c h u l t z , T . W . , A g r i c u l t u r e i n an U n s t a b l e Economy, p . 203. D . G a l e Johnson draws a s l i g h t l y f i n e r d i s t i n c t i o n , d i f f e r e n t i a t i n g between what he c a l l s e x t e r n a l c a p i t a l r a t i o n i n g and s e l f - i m p o s e d or i n t e r n a l c a p i t a l r a t i o n i n g . J o h n s o n , D . G . , Forward P r i c e s f o r A g r i c u l -t u r e , p . 8 9 . 55 ( i i ) R i s k A v e r s i o n . I n a d d i t i o n to the e f f e c t s o f e x t e r n a l c a p i t a l r a t i o n i n g , t h e r e may he c o n s i d e r a b l e i n t e r n a l or s e l f - i m p o s e d c a p i t a l r a -t i o n i n g . T h i s may be due to the p r e v a i l i n g o p i n i o n i n some r u r a l areas t h a t debt of any k i n d i s a bad t h i n g , to l a c k o f c o n f i -dence , or to i g n o r a n c e of the gap which may e x i s t between the i n t e r e s t r a t e and the m a r g i n a l p r o d u c t i v i t y o f a d d i t i o n a l c a p i -t a l . o ( i i i ) E f f e c t s o f C a p i t a l R a t i o n i n g and R i s k A v e r s i o n . The phenomena of r i s k a v e r s i o n and c a p i t a l r a t i o n i n g are c l o s e l y r e l a t e d , except t h a t the f i r s t i s the r e a c t i o n o f the f a r m e r , w h i l e the second i s the r e a c t i o n o f the l o a n i n g agency to much the same s i t u a t i o n . R i s k a v e r s i o n and c a p i t a l r a t i o n i n g have two e f f e c t s , (a) they tend to keep down the e f f i c i e n c y o f l a b o r by a f f e c t i n g the c o m b i n a t i o n o f f a c t o r s u s e d , and (b) they a f f e c t the s c a l e o f o p e r a t i o n s . (a) C o m b i n a t i o n o f F a c t o r s . There has u n f o r t u n a t e l y been l i t t l e i f any r e s e a r c h done i n Canada on the e s t i m a t i o n o f m a r g i n a l p r o d u c t i v i t i e s o f f a c t o r s o f p r o d u c t i o n i n a g r i c u l t u r e * There i s good r e a s o n to b e l i e v e t h a t the r e s u l t s o f s u c h work i f done would be c o n s i s t e n t w i t h s i m i l a r a n a l y s i s i n the U n i t e d S t a t e s as shown i n T a b l e 16 . Johnson has at tempted an e m p i r i c a l a n a l y s i s o f census d a t a p e r t a i n i n g to f o u r a g r i c u l t u r a l r e g i o n s i n the U n i t e d S t a t e s . H i s work i n d i c a t e d t h a t on the average f o r the f o u r r e g i o n s the m a r g i n a l p r o d u c t i v i t y o f c a p i t a l was a l i t t l e l e s s than t h r e e t imes the i n t e r e s t r a t e , w h i l e the m a r g i n a l p r o d u c t i v i t y o f l a b o r was $480 a man y e a r . A t an output o f |800 the m a r g i n a l 56 p r o d u c t i v i t i e s were 12 p e r cent f o r c a p i t a l and $390 f o r l a b o r . The l a t t e r i s a lmost i d e n t i c a l w i t h the average f a r m wage r a t e f o r 1939. A r e d u c t i o n o f 20 per cent i n the l a b o r s u p p l y would reduce the m a r g i n a l p r o d u c t i v i t y of c a p i t a l f r o m 12 p e r cent to a l i t t l e l e s s than 10 p e r c e n t . The d i f f e r e n t i a l between the r a t e o f i n t e r e s t and m a r g i n a l p r o d u c t i v i t y would remain v e r y wide, r a t i o n i n g and any r e d u c t i o n i n c a p i t a l / w o u l d r e s u l t i n the use o f more c a p i t a l . 1 TABLE 16 ESTIMATED MARGINAL PRODUCTIVITIES OP FACTORS OF PRODUCTION ON SPECIFIED TYPES OF IOWA FARMS, U . S . A . M i s c e l -l aneous L i v e - O p e r a -E q u i p - s t o c k t i n g L a n d L a b o r ment & Feed Expense A l l Farms .0465 .0791 .2013 .8390 .3931 N o r t h e a s t D a i r y A r e a .0331 .0973 .1484 .6588 .3783 C a s h G r a i n A r e a .0615 .1066 .1809 .4177 .3693 Western Meat A r e a .0382 .0302 .2410 .7130 .4037 S o u t h e r n P a s t u r e A r e a .0187 - . 1091 .3133 2.6419 .4025 E a s t e r n Meat A r e a .0398 .0685 .2147 .5012 .3407 C r o p .• .0447 - . 2491 .1791 .2633 .6239 Hog .0114 .0590 - . 2293 .7890 .5457 D u a l & D a i r y .0201 .0211 .1380 .5389 .4637 G e n e r a l .0201 .2815 .3404 .9913 .5469 S p e c i a l .0757 - . 0 2 0 9 .0404 1.5936 .4459 "Large" .0515 .0400 .2591 .4411 . 4164 » S m a l l , , .0468 .1030 .2084 1.4698 .3751 S o u r c e : Heady, E . 0 . , " P r o d u c t i o n F u n c t i o n s From a Random Sample o f Farms" . J F E , Nov . 1946, p . 989-1004. The m a r g i n a l p r o d u c t i v i t i e s i n d i c a t e a p p r o x i m a t e l y the r e t u r n w h i c h might be expec ted on the average f rom the a d d i t i o n o f one d o l l a r ' s w o r t h o f v a r i o u s p r o d u c t i v e a g e n t s . 1 Johnson , D . G . , " C o n t r i b u t i o n o f P r i c e P o l i c y to The Income and Resource Prob lems i n A g r i c u l t u r e " , J F E , Nov . 1944, p . 631-664. f&BLB 17 CLASSIFICATION OF GROWERS BY GBOSS INCOME Calendar Year 1947 Based on Reports from 32 Packing-Houses Number of Growers Percentage of Reported Percentage of Reported Pereentago of Reported SISfBICf Reported Growers with Gross Growers with Gross Growers with Gross (#0-500 Group Income Over $500, Income #2,000-3,000* Income #3,000-5,000* Excluded) Less fban $2,000* (1) (2) (3) Kelowna, Rutland, Glenmere, Okanagan Centre and Westtoank.... 748 29.41$ 13.37$ 19.39$ Oliver, Osoyoos, Kaleden and Kererasos... 569 35.32$ 16.17$ 18.10$ Pent leton and Baramata.. 436 20.64$ 12.39$ 28.67$ 368 47.28$ 19.29$ 19.84$ 542 31.74$ 13.84$ 20.11$ Totals 2,663 * In calculating the percentages for each district, growers with gross income of #0-500 were excluded; these totalled 941 for a l l districts. •a 58 (b) S c a l e o f O p e r a t i o n s . C a p i t a l r a t i o n i n g and r i s k a v e r s i o n e f f e c t i v e l y l i m i t the s c a l e o f farm o p e r a t i o n s . Some i n d i c a t i o n o f the s i z e o f f r u i t farms as measured by gross income i s g i v e n i n T a b l e 1 7 . Farm h o l d i n g s by s i z e i n the P r a i r i e P r o v i n c e s are shown i n T a b l e 1 8 . TABLE 18 FARM HOLDINGS BY S I Z E IN MANITOBA, SASKATCHEWAN AND ALBERTA, 1946 S i z e M a n i t o b a Saskatchewan A l b e r t a 1-50 a c r e s 4,276 1,719 3,154 51-100 a c r e s 3,331 1,405 1,753 101-200 a c r e s 16,709 29,305 28,292 201-299 a c r e s 3,837 3,349 3,849 300-479 a c r e s 14,845 39,390 25,759 480-639 a c r e s 5,722 19,965 9,694 640 and over 5,728 30,479 17,040 TOTAL 54,448 125,612 89,541 S o u r c e : Canada Y e a r Book, 1948-49. 1 . Tenancy Faced w i t h the n e c e s s i t y o f supplement ing h i s own a s s e t s a farmer may r e n t or b o r r o w . S i n c e he i s a b l e to r e n t a much h i g h e r r a t i o o f r e n t e d t o owned a s s e t s than he can o b t a i n by b o r -r o w i n g , many farmers f i n d tenancy i n whole or i n p a r t the o n l y r o u t e by w h i c h they can o b t a i n the use o f more l a n d and e q u i p -ment. Tenancy as i t has d e v e l o p e d i n Canada tends to be w a s t e f u l o f the n a t i o n ' s r e s o u r c e s . 1 C a p i t a l r a t i o n i n g has had s t r i k i n g e f f e c t s upon l a n d t e n u r e i n the P r a i r i e P r o v i n c e s . There has 1 See Van V T i e t , H . , "Land Tenure P r o b l e m s " , S c i e n t i f i c A g r i -c u l t u r e , M a r . 1941, p . 388-394. 59 been a d e f i n i t e change i n the p r o p o r t i o n o f owner-operated farms t o the number o f a l l farms d u r i n g the p a s t t w e n t y - f i r e y e a r s . A r e d u c t i o n f r o m 78.5 per cent i n 1921 to 61 .9 per cent i n 1946 i s r e c o r d e d . I n 1946, 1 6 . 4 p e r cent o f a l l farms were o p e r a t e d by\ t e n a n t s as compared to 10 .6 per cent i n 1921. The percentage o f farms where the o p e r a t o r owns p a r t o f the l a n d and r e n t s a d d i -t i o n a l l a n d has a l s o i n c r e a s e d d u r i n g the same p e r i o d from 10.0 to 21 .3 p e r c e n t . The l a r g e s t percentage i n c r e a s e i n tenant and p a r t owner p a r t t enant o p e r a t e d farms o c c u r r e d i n S a s k a t c h e w a n . 1 2. M a c h i n e r y & Equipment Inves tment . Income u n c e r t a i n t y r e a c t s through c a p i t a l r a t i o n i n g and r i s k a v e r s i o n to cause g r e a t f l u c t u a t i o n s i n a g r i c u l t u r a l i n v e s t -ment. S i n c e farm income over a p e r i o d o f y e a r s i s so u n c e r t a i n f a r m e r s make by f a r the g r e a t e s t p a r t o f machinery purchases i n good t i m e s . As shown by F i g u r e 14, i n p e r i o d s o f low farm income f a r m e r s d r a s t i c a l l y cu t p u r c h a s e s o f new t r a c t o r s . As soon as t h e r e i s a r i s e i n f a r m income t r a c t o r s a l e s zoom upward. The e f f e c t on the r e s t of the economy of such v i o l e n t f l u c t u a t i o n s i n purchase o f p r o d u c e r goods must be s u b s t a n t i a l . ( i v ) Government L o a n P o l i c y . The most n o t i c e a b l e f e a t u r e o f f a r m c r e d i t i n Canada i s the absence o f i n s t i t u t i o n s s p e c i f i c a l l y d e s i g n e d to meet the r e -quirements o f a g r i c u l t u r a l c r e d i t . L e n d i n g p r a c t i c e s worked out i n the e a s t b e f o r e 1900 have proved l e s s s u i t a b l e under wes tern c o n d i t i o n s . There has been l i t t l e i f any e f f o r t made to adapt t h e m . 2 1 The Canada Y e a r Book , 1945-49, p . 391. 2 See E a s t e r b r o o k , ¥ . T . , Farm C r e d i t i n Canada . 60 The C a n a d i a n Government has r e c o g n i z e d the c a p i t a l r a t i o n i n g p r o b l e m and sought to meet i t by the p r o v i s i o n of l o a n c a p i t a l . The C a n a d i a n Farm L o a n B o a r d makes l o a n s on the s e c u r i t y of f i r s t mortgage on l a n d s a c t u a l l y o p e r a t e d by the borrower up to and not exceed ing 50 p e r cent of the a p p r a i s e d v a l u e o f such f a r m l a n d s . Ho l o a n may be i n excess o f $5 ,000 , and l o a n s are r e p a y a b l e on an a m o r t i z e d p l a n over p e r i o d s up to t w e n t y - f i v e y e a r s . F u r t h e r a d -vances on second mortgages may be made to b r i n g the aggregate to f e ^ o o . 1 (3) Summary Farmers are f a c e d w i t h p r i c e and income u n c e r t a i n t y . P r i c e u n c e r t a i n t y c o n s i s t s o f the y e a r to y e a r v a r i a t i o n i n the l e v e l o f a g r i c u l t u r a l p r i c e s , and of r e l a t i v e p r i c e s between p r o -d u c t s . L o n g - r u n income u n c e r t a i n t y i s due to the f a r m e r s ' i n a -b i l i t y to p r e d i c t changes i n the c o s t - p r i c e r e l a t i o n s h i p over a l o n g e r p e r i o d . The c o s t s o f y e a r to y e a r p r i c e u n c e r t a i n t y take the form of uneconomic combinat ions o f f a c t o r s o f p r o d u c t i o n w i t h i n the f a r m . The s p e c i f i c measures used by farmers to min imize the e f f e c t s o f y e a r to y e a r u n c e r t a i n t y are d i v e r s i f i c a t i o n , f l e x i -b i l i t y , l i q u i d i t y and s a f e t y p r e f e r e n c e i n f a c t o r c h o i c e . L o n g - r u n income u n c e r t a i n t y a f f e c t s the movement o f c a p i t a l and l a b o r between a g r i c u l t u r e and the r e s t of the economy. B e -cause o f the u n c e r t a i n t y of f a r m income, l e n d e r s are u n w i l l i n g to l e n d s u f f i c i e n t c a p i t a l to a g r i c u l t u r e . Even when such c a p i t a l 1 Canada Y e a r Book, 1946, p . 185 . i s a v a i l a b l e , many farmers are averse to b o r r o w i n g . The r e s u l t i s a low m a r g i n a l p r o d u c t i v i t y o f l a b o r and a h i g h m a r g i n a l p r o -1 d u c t i v i t y o f c a p i t a l . 1 F o r ev idence on the a f f e c t o f s i z e o f farm b u s i n e s s upon o p e r a t o r s ' l a b o r income, see Appendix i i i . 62 CHAPTER 5 LIMITATIONS OP PRICE POLICY P r i c e has two major f u n c t i o n s . One i s the a l l o c a t i o n o f r e s o u r c e s , and the o t h e r , the d i s t r i b u t i o n of income. The d i s -t r i b u t i o n o f income depends upon the ownership o f r e s o u r c e s and the p r o d u c t i v i t y o f those r e s o u r c e s . Attempts to improve income d i s t r i b u t i o n by r a i s i n g the p r i c e o f the p r o d u c t o f some f a c t o r s i s not n e c e s s a r i l y c o m p a t i b l e w i t h the i d e a l o f maximum t o t a l income from those r e s o u r c e s . However, i f p r i c e can be guaranteed so as to s t a b i l i z e the r e t u r n to the r e s o u r c e s employed i n an i n -d u s t r y , i t can l e a d to b e t t e r use of r e s o u r c e s f o r the reasons d e v e l o p e d i n the p r e c e d i n g s e c t i o n . Any i n c r e a s e i n t o t a l p r o -d u c t i v i t y over and above the c o s t o f s t a b i l i z a t i o n i s a net g a i n to s o c i e t y . ( l ) P r i c e P o l i c y and Income D i s t r i b u t i o n • I t i s a f a c t t h a t an economy i s no t g e t t i n g the most out o f i t s r e s o u r c e s when the m a r g i n a l c o s t of a p r o d u c t i v e f a c t o r i n any use f a i l s to e q u a l i t s m a r g i n a l revenue p r o d u c t i v i t y , or when the m a r g i n a l c o s t f a i l s to e q u a l the o p p o r t u n i t y c o s t o f the f a c -t o r . The income p r o b l e m , however, i s no t so p r e c i s e . The d e c i -s i o n as to whether an income prob lem e x i s t s must be based upon s o c i a l v a l u e s which are h i g h l y s u b j e c t i v e . The b e s t t h a t can be s a i d i s t h a t an income p r o b l e m e x i s t s whenever the d i s t r i b u t i o n of income, e i t h e r a t a p a r t i c u l a r t i m e , or t h r o u g h t i m e , does not s a t i s f y the g e n e r a l l y accepted w e l f a r e c r i t e r i a . ( i ) Income D i s t r i b u t i o n G o a l s . Out o f the g r e a t body o f economic and s o c i a l l e g i s l a -t i o n i n v a r i o u s n a t i o n s , t h e r e appear to be f o u r income g o a l s w h i c h i n a g e n e r a l way have r e c e i v e d a c c e p t a n c e . 1 These g o a l s may be used as a b a s i s f o r d e t e r m i n i n g the c o n t r i b u t i o n o f p r i c e p o l i c y to the s o l u t i o n o f the income p r o b l e m . The f o u r g o a l s a r e : ( l ) A c h i e v i n g a minimum s c a l e of l i v i n g f o r peop le , d e f i n e d i n terms o f h e a l t h , e d u c a t i o n , n u t r i t i o n , h o u s i n g , p u b l i c s e r -v i c e s , and c u l t u r a l o p p o r t u n i t i e s ; (2) a c h i e v i n g a r e d u c t i o n i n the g e n e r a l d i s p a r i t y of income d i s t r i b u t i o n ; (3) a c h i e v i n g a p a r i t y or e q u a l i t y o f income among b r o a d economic or o c c u p a t i o n a l g r o u p s ; and (4) a t t a i n i n g a h i g h degree of s t a b i l i t y i n the aggregate l e v e l of income. (2) What P r i c e P o l i c y Cannot D o . The i n t e r r e l a t i o n s h i p s between the r e s o u r c e and the income p r o b l e m are as f o l l o w s . I n the f i r s t p l a c e , even w i t h f u l l em-p loyment , there are l a r g e numbers i n a g r i c u l t u r e who l a c k s u f f i -c i e n t r e s o u r c e s to p e r m i t them to earn s a t i s f a c t o r y incomes . P a r t of the r e a s o n i s t h a t an e n t e r p r i s e economy does not encour -2 age s u f f i c i e n t l y inves tment i n p e o p l e . Among the i m p o r t a n t p o s i t i v e measures t h a t w i l l make f o r a b e t t e r d i s t r i b u t i o n . o f the n a t i o n ' s l a b o r f o r c e over the y e a r s are inves tments i n p e o p l e which enhance t h e i r m o b i l i t y and 1 Johnson , D . G a l e , Forward P r i c e s f o r A g r i c u l t u r e , p . 109 . 2 I b i d , p . 111 . 64 p r o d u c t i v i t y . E d u c a t i o n , m e d i c a l s e r v i c e s , n u t r i t i o n and h o u s i n g a l l f a l l i n t o t h i s c l a s s . A s t r o n g case can he made f o r g r e a t l y e n l a r g e d p u b l i c g r a n t s and a i d s to r u r a l f arm communit ies and f a m i l i e s f o r such i n v e s t m e n t s . 1 F o r the most p a r t i t i s the b e s t equipped of r u r a l y o u t h who l e a v e f o r the c i t i e s . R u r a l farm p e o p l e b e a r a w h o l l y d i s p r o p o r t i o n a t e share o f the c o s t o f r e a r -i n g and e d u c a t i n g the c h i l d r e n of the n a t i o n - c o s t reckoned i n terms of f o o d , c l o t h i n g , s h e l t e r , m e d i c a l a t t e n t i o n and e d u c a t i o n . Investments of t h i s type enhance v e r y a p p r e c i a b l y the economic p r o d u c t i v i t y of the i n d i v i d u a l , and e s p e c i a l l y s i g n i f i c a n t i n a d e v e l o p i n g economy demanding c o n s i d e r a b l e l a b o r m i g r a t i o n , they 2 i n c r e a s e h i s m o b i l i t y as a f a c t o r of p r o d u c t i o n . Programs to i n c r e a s e the p r o d u c t i v i t y and m o b i l i t y o f f a r m p e o p l e must be t i e d d i r e c t l y to the p e o p l e . Most a t tempts to p r o v i d e a h i g h e r s t a n d a r d o f l i v i n g through the p r i c e system, i n the hopes of r e a c h i n g the poor, are doomed to f a i l u r e . P r i c e r a i s i n g i n c r e a s e s income i n p r o p o r t i o n to the p r o d u c t i v i t y and ownership o f r e s o u r c e s , t h e r e b y widening the gap between h i g h and low income f a r m e r s . The g r e a t b u l k of r u r a l f a m i l i e s i n need of a s s i s t a n c e on the b a s i s o f s o c i a l w e l f a r e c r i t e r i a produce so l i t t l e f o r market t h a t they are h a r d l y a f f e c t e d by the p r i c e s y s -tern. '.• The achievement o f even s m a l l i n c r e a s e s i n p o o r e r f a r m e r s ' incomes t h r o u g h p r i c e p o l i c y would l i k e l y be accompanied by v e r y l a r g e w i n d f a l l g a i n s for' l a r g e o p e r a t o r s . S u c h g a i n s 1 The F a m i l y Al lowance A c t 1944 was a s t ep i n t h i s d i r e c t i o n . I t was i n t r o d u c e d as a b a s i c s o c i a l s e c u r i t y measure des igned to a s s i s t i n p r o v i d i n g e q u a l o p p o r t u n i t y f o r a l l Canad ian c h i l d r e n . 2 F o r an extended t rea tment o f t h i s p o i n t see S c h u l t z , T . V . , R e d i r e c t i n g Farm P o l i c y , The M a c M i l l a n Company, Hew Y o r k , 1943, p . 68 -71 . 65 would "be a t the expense of Canad ian t a x p a y e r s and c o u l d h a r d l y "be c o n s i d e r e d f a i r . (3) What P r i c e P o l i c y Can Do Though p r i c e p o l i c y can do r e l a t i v e l y l i t t l e toward d i s t r i -b u t i n g income more e q u a l l y , i t can a s s i s t i n s t a b i l i z i n g income, ( i ) Income D i s t r i b u t i o n . The r o l e o f p r i c e p o l i c y i n the development of programs to i n c r e a s e p r o d u c t i v i t y and m o b i l i t y of r u r a l peop le i s m a i n l y t h a t of making p o s s i b l e the use of more c a p i t a l per man, thus i n -c r e a s i n g l a b o r e f f i c i e n c y . The movement o f c a p i t a l i n t o a g r i c u l -t u r e , due to the r e d u c t i o n o f u n c e r t a i n t y , would f r e e farm l a b o r to m i g r a t e . F a i l u r e to p r o v i d e f o r t h i s m i g r a t i o n , however, would r e s u l t i n f u r t h e r underemployment o f l a b o r and a lower m a r g i n a l r e t u r n to t h a t l a b o r , ( i i ) P r i c e U n c e r t a i n t y . I t may be p o s s i b l e f o r f o r e c a s t e r s to p r e d i c t f a i r l y a c c u r a t e l y the g e n e r a l l e v e l of a g r i c u l t u r a l p r i c e s and the r e l a -t i v e . p r i c e s of commodit ies which w i l l p r e v a i l at the end of a p r o d u c t i o n p e r i o d . I f t h i s can be done the Government c o u l d o p e r -ate an o u t l o o k program backed by p r i c e g u a r a n t e e s . W i t h such a program i n o p e r a t i o n , y e a r to y e a r p r i c e u n c e r t a i n t y would be l a r g e l y e l i m i n a t e d . ( i i i ) Long-Run Income U n c e r t a i n t y . The i n s t a b i l i t y o f net f a r m income as has been shown 1 r e s u l t s l a r g e l y from the i n t e r r e l a t i o n s h i p s between a g r i c u l t u r e and the r e s t o f the economy5! r a t h e r than from f a c t o r s p e c u l i a r 1 See Chapter 3 and 4. 6 6 to a g r i c u l t u r e . The major p o r t i o n of the i n s t a b i l i t y o f farm income, except i n i n d i v i d u a l c a s e s , a r i s e s f r o m the f l u c t u a t i o n s i n g e n e r a l p r i c e l e v e l s a s s o c i a t e d w i t h l e v e l s o f employment and expor t demand. The g r e a t e s t c o n t r i b u t i o n w h i c h can be made toward a t t a i n i n g s t a b i l i t y o f f a r m income i s the s o l u t i o n of the prob lem of the b u s i n e s s c y c l e i t s e l f H o w e v e r , so l o n g as such a s o l u t i o n i s not f o r t h c o m i n g , something can be done to s t a b i l i z e aggregate a g r i c u l t u r a l income d u r i n g the c y c l e . Such measures s h o u l d be c o n s i d e r e d as s i m i l a r to unemployment i n s u r a n c e i n o ther s e c t o r s o f the economy. There i s l i t t l e doubt t h a t i t would be p o s s i b l e by means of p r i c e p o l i c y to m a i n t a i n farm incomes throughout a d e p r e s s i o n a t some f i x e d p e r c e n t a g e o f the p r e d e p r e s s i o n l e v e l . Assuming t h a t s u c h a p r i c e p o l i c y i s d e s i r a b l e , t h e r e are a number o f p e r t i n e n t q u e s t i o n s to be a s k e d . F i r s t , would the C a n a d i a n economy be a b l e t o s tand the s u b s t a n t i a l cash payments to farmers w h i c h might be n e c e s s a r y under such a scheme? Second , would the scheme be p o l i -t i c a l l y a c c e p t a b l e ? An attempt w i l l be made to answer these q u e s t i o n s i n a l a t e r c h a p t e r . (4) E lements of a D e s i r a b l e P r i c e P o l i c y f o r Canada A peacet ime a g r i c u l t u r a l p r i c e p o l i c y f o r Canada d i v i d e s i t -s e l f n a t u r a l l y i n t o f o u r main p h a s e s : 1. The t r a n s i t i o n f r o m war to p e a c e . 2 . The adjustment o f c e r t a i n commodit ies which have s u f f e r e d a c o n s i d e r a b l e permanent d e c l i n e i n demand. 1 Johnson , D . G a l e , Forward P r i c e s f o r A g r i c u l t u r e , p . 204. 67 3 . P r i c i n g d u r i n g the b u s i n e s s c y c l e . 4 . P r i c i n g d u r i n g p e r i o d s o f normal demand. Phase one and two b o t h r e q u i r e p r i c e p o l i c i e s w h i c h w i l l f a c i l i t a t e o b v i o u s l y n e c e s s a r y s u p p l y a d j u s t m e n t s . The sudden c e s s a t i o n of the s t r o n g wartime demand, or a permanent d e c l i n e i n demand f o r a s p e c i f i c p r o d u c t , w o u l d * i n the absence 6f some p r i c e or income a s s i s t a n c e , r e s u l t i n v e r y s e r i o u s income r e d u c t i o n s f o r f a r m e r s . I t i s neces sary , f o l l o w i n g such a d e c l i n e , to a l l o w p r i c e s o f a g r i c u l t u r a l commodit ies concerned to f a l l below t h a t l e v e l , a t which the i n d u s t r y , or the a f f e c t e d segment o f the i n -d u s t r y , would m a i n t a i n i t s p r e v i o u s l e v e l of p r o d u c t i o n . J u s t how f a r be low such a l e v e l p r i c e s shou ld be a l l o w e d to f a l l depends upon the accepted minimum w e l f a r e s tandards of s o c i e t y . The burden o f downward adjustment i s l a r g e l y upon l a b o r . P r i c e p o l i c y a lone can c o n t r i b u t e v e r y l i t t l e to such adjustments . G i v e n a h i g h l e v e l of employment i n the r e s t of the economy, p r i c e p o l i c y can do two t h i n g s to f a c i l i t a t e a d j u s t m e n t . One i s t h a t i t vcan a v o i d a r b i t r a r i l y s e t t i n g p r i c e s so h i g h as to en -courage excess l a b o r to s t a y i n a g r i c u l t u r e . The o t h e r i s t h a t i t can h e l p to m a i n t a i n minimum l e v e l s o f l i v i n g f o r farmers d u r -i n g the p e r i o d o f a d j u s t m e n t . P r i c e p o l i c y d u r i n g the downswing of the b u s i n e s s c y c l e s h o u l d not attempt to m a i n t a i n farm income by h o l d i n g up the l e v e l o f market p r i c e s . 1 Income a s s i s t a n c e to farmers as to some o ther groups i n the economy i s n e c e s s a r y a t t h i s t i m e . Such 1 Most schemes f o r m a i n t a i n i n g p r i c e of f a r m p r o d u c t s d u r i n g the downswing o f the b u s i n e s s c y c l e have some element of p r o d u c -t i o n c o n t r o l , dumping, or p h y s i c a l d e s t r u c t i o n . The f i r s t has been shown by e x p e r i e n c e i n the U . S . A . to be l a r g e l y i n e f f e c t i v e . Dumping i s l i k e l y to cause r e t a l i a t o r y measures . P h y s i c a l d e s -t r u c t i o n o f food and f i b r e i s ex tremely d i s t a s t e f u l to the p u b l i c . a s s i s t a n c e to a g r i c u l t u r e s h o u l d m a i n t a i n minimum l e v e l s o f l i v i n g . I t shou ld a l s o i r o n out enough of the c y c l i c a l low to p r e v e n t s e r i o u s d i s i n v e s t m e n t i n a g r i c u l t u r e and i n farm p e o p l e . A s s i s t a n c e should not he at a l e v e l h i g h enough to encourage a b a c k - t o - t h e - l a n d movement, f o r t h i s would o n l y aggravate the l o n g - r u n prob lem of l a b o r e f f i c i e n c y . P r i c e p o l i c y , f o r p e r i o d s of normal demand,should r e s u l t i n l e v e l o f p r o d u c t i o n f o r a l l a g r i c u l t u r a l p r o d u c t s , i n d i v i d u a l l y and c o l l e c t i v e l y , c o n s i s t e n t w i t h the b e s t p o s s i b l e e s t imates o f demand at the end of the p r o d u c t i o n p e r i o d . I t s h o u l d not o r d i -n a r i l y r e s u l t i n s u b s t a n t i a l income t r a n s f e r s to f a r m e r s . 69 CHAPTER 6 PAST AND PRESENT AGRICULTURAL PRICE POLICIES 1 The Dominion Government has in t e r f e r e d with the open market determination of the pri c e s of a g r i c u l t u r a l commodities i n several ways* Most of the methods have been developed to control or a f f e c t the p r i c e of wheat; some of these have been adapted to p r i c i n g other farm products* The methods used include: the encouragement of co-operative marketing, pr i c e s t a b i l i z a t i o n measures, government wheat boards, pr i c e c e i l i n g s , and more re-cently, the use of f l o o r prices to aid i n the period of t r a n s i -t i o n from war to peace* This p r i c e interference has been supple-mented by a program of d i r e c t cash payments to farmers* These payments are designed to mitigate the e f f e c t s of extreme p r i c e and production i n s t a b i l i t y * During the recent war, the Govern-ment also resorted to large scale subsidies i n order to bring f o r t h the required production of farm commodities, while holding the l i n e against i n f l a t i o n by means of p r i c e c e i l i n g s * (l) The Board of Grain Supervisors E a r l y i n 1917, centralized buying on behalf of a l l i e d govern-ments e f f e c t i v e l y cornered the Winnipeg market, and by the end of the year i t became obvious that the open market could not operate 1 The material i n th i s chapter i s p a r t l y based upon B r i t n e l l , G. E., Dominion L e g i s l a t i o n A f f e c t i n g Western Agriculture, 1939* Canadian Journal of Economics and P o l i t i c a l Science, 6:275-282, 1940. at the same time as cen t r a l i z e d buying* The Board of Grain Supervisors was therefore established on June 11, 1917* This Board took over a l l wheat produced i n Canada* There was no trading i n futures u n t i l July 21, 1919* (2) The Canadian wheat Board 1919-1920 Ten days aft e r the l a t t e r date futures trading was closed again; a new board, The Canadian Wheat Board, had been appointed* This Board was appointed because i t did not appear that either c e n t r a l i z e d buying, or an open and stable market, would e x i s t i n 1919-20. The Board of Grain Supervisors had paid f i x e d p r i c e s , the new Canadian Wheat Board paid an advance to the producer, and gave him p a r t i c i p a t i o n c e r t i f i c a t e s e n t i t l i n g him to h i s propor-tionate share of any surplus above the i n i t i a l p r i c e . Trading i n wheat futures began again i n 1920, and wheat pr i c e s soon began to f a l l * The farmers associated high wheat prices with the monopoly marketing of wheat, and continually agitated f o r the return of the Wheat Board* In 1923, when a l l e f f o r t s had f a i l e d , attention was turned to the p o s s i b i l i t y of co-operative marketing. (3) The Canadian Co-operative Wheat Producers L t d . The Canadian Co-operative Wheat Producers Ltd., began opera-tions as a central s e l l i n g agency of the three p r o v i n c i a l p o o l s . 2 These co-operatives handled a large share of the grain crop from 1 For a comprehensive review of government a c t i v i t y i n the marketing of Canadian wheat, 1917 to 1939, see The Grain Trade contributed by Dr. T. W. Grindley, Canada Year Book. 1939, pp. 569-80. 2 See The Diary of Alexander James McPhall. edited by Harold A. Innis, U n i v e r s i t y of Toronto Press, Toronto, Canada, 1940. 71 1923 to 1930. With the f a l l i n prices and d i f f i c u l t y of selling, the Cen-t r a l Selling Agency got into deep water i n 1929. In that year they f a i l e d to s e l l their share of the huge crop of 1928. In 1930, the three Provincial Governments gave assistance i n the form of financial guarantees. In 1930-31, the Dominion Govern-ment was again involved i n wheat marketing. At this time, John I. McFarland was appointed manager of the Pool's Central Selling Agency, and Dominion Government guarantees were given to the hanks. The Central Selling Agency, with no change of name, now he-came a government stabilization agency. Under the direction of Mr. McParland, financed by the banks, guaranteed by the Dominion Government, and using as a base the accumulated stocks of the Canadian Co-operative Wheat Producers Ltd., the agency entered into the buying and selling of wheat and wheat futures for the purpose of stabilizing the market. The holdings of the Canadian Co-operative Wheat Producers Ltd., varied from 39,935,000 bushels i n November 1930, up to 213,688,000 bushels at July 31, 1935, and f e l l to 205,187,000 bushels at December 2, 1935. (4) The Canadian Wheat Board, 1935 In 1935 the Government passed the Canadian Wheat Board Act. 1 The legislation provided for a voluntary marketing organization to purchase wheat from farmers at a fixed price, and issued par-ticipation certificates which entitled the producers delivering 1 Statutes of Canada, 25-26, George V, C. 53. 72 to the Board to receive a share of any profits realized by the Board* The purpose of the Board was to provide a buffer between western farmers and the chaotic conditions i n the international wheat market* The Board, subject to the approval of the Govern-or- in-Council, was to set the price at the beginning of each year* In the event of loss, the d e f i c i t was to be transferred to the Domini on Government* The Canadian Wheat Board Amendment Act, 1939,1 contains two important changes: the one designed to afford the maximum pro-tection to the smaller producers, the other to relieve the pres-sure to which the Board was annually subjected i n setting the i n i t i a l payment* Accordingly, the Board may, henceforth "buy wheat •.•.not i n excess of five thousand bushels from any one producer i n any crop year 0, and an enacted i n i t i a l payment of seventy cents per bushel basis BTo. 1 Manitoba, i n store Fort Wil-liam, i s substituted for the power previously given the Board to set the i n i t i a l price* The Board has exercised i t s power of price setting from Sep-tember 6, 1935, to date* The minimum price for Ho* 1 Northern wheat was announced on September 6, 1935, at 87-$- cents* The mar-ket price was slightly below this for about eight months of the crop year, and the Board handled 150,700,000 bushels of the total country marketings, amounting to 216,300,000 bushels* In each of 1936 and 1937, the Government announced that the Board price would only become effective i f the market price f e l l below 90 cents* This did not occur, so the Board received none of the 1 Statutes of Canada, 3 Geo. VI, C 39. 73 crops of 1936 and 1937. Dr. Grindley has made some comments on the basis upon which the Board fixed the price i n 1935.1 He has mentioned three pos-sible bases: (1) one possible of attainment through sales on the market; (2) one that would enable farmers to (a) "get by", (b) cover production costs, (e) make a pro f i t ; (3) a price calcu-lated to compensate roughly for the farmer's burden through t a r i f f protection of Canadian industries, or one that would avoid large government expenditures for r e l i e f * He concluded that pro-bably no one of these bases was transcendent at the time of price fixing, and that their weight w i l l vary i n different years* I t i s reasonable to suppose that the 1935 price was based on the concept of f a i r market value - a reasonable Interpretation of what was considered possible of attainment by sales during the crop year* I f Dr. Grindley i s correct i n this assumption, the fixing of the 1935 price represented an attempt to predict supply and demand, ani to set a price for Canadian wheat which would equilibrate the two* When the Winnipeg price of wheat f e l l below the Board price i n 1938 due to the appearance of large world wheat supplies, the Government did not hesitate to act* The Prime Minister announced a base price of 80 cents per bushel, basis So. 1 Manitoba Nor-tern, i n store Fort William. It was also declared that Canadian wheat would s t i l l be competitive on the world market. I t should be noted that such a policy i s , i n effeot, export subsidization. The Canadian Wheat Board suffered great losses on the hand-1 Canada Year Book, 1939 » p. 575. l i n g of the 1938-39 crop, amounting to about 61*5 millions*' 1' As a result of these large losses, coupled with severe criticism from eastern Canada, the price for the 1939 crop was set at a minimum of 70 cents. Deliveries by any one grower were limited to 5,000 bushels, and the plan was extended to cover wheat grown i n eastern Canada* At 70 cents, the price was considerably above the market price, and apparently was to some extent, a resultant of the p o l i t i c a l pressure from the west and the criticism from the east. The regulations and controls introduced during the war years were mainly an extension of pre-war arrangements to maintain minimum prices. These arrangements involved restrictions on pro-duction of wheat and government purchase and sale of wheat. En-couragement was also given to the production of feed grains i n -stead of wheat, and a ban was placed on the export of feed grains so as to conserve domestic supplies. Following the outbreak of the war, the Canadian Wheat Board sold through the usual channels; offering wheat i n the cash and futures markets at Winnipeg at prices determined i n those mar-kets. In June 1940, the Board sold 50 million bushels to the B r i t i s h Cereal Import Committee at above market price, and i n 1940-41 sold 100 million bushels. The 70 cent basis continued for the f i r s t year of the war, and a good deal of the 1939 erop was marketed through trade channels. In 1939-40, farmers could deliver their excess supply (excess over 5,000 bushels) to a co-operative pool at an I n i t i a l payment of 56 cents under the terms 1 S r i t n e l l , G>. E., and Fowke, V. C., "Wheat Marketing Policy i n Canada? JFE, Nov. 49, p. 634. of the Wheat Co-operative Marketing Act* 1939. (5) Prairie Farm Assistance Act 1959 In the year 1940. the average price of wheat daring August-October was less than 80 cents. Accordingly, the year was, for the purposes of the Prairie Farm Assistance Act 1939, declared to he an emergency year. 2 The Prairie Farm Assistance Act 1939, cannot s t r i c t l y speaking he classified as price policy; however, i t s operation, at least i n the ease of "national emergency", i s so closely related to market price that i t i s necessary to include the Act i n this chapter. The-Act provides two quite separate and distinct methods of approach to the problem which may be presen-ted by conditions i n a particular year. One method i s classified as "crop failure assistance"; the other as "national emergency". A "national emergency" i s clearly meant to cover a situation caused by a combination of low prices and low yields when the financial burden of maintaining the farmer on the land becomess too heavy for the individual, the municipality, or the province. 3 Any crop year i n which the average price i s less than 80 cents per bushel may be declared by the Governor-in-Council to be an emergency year for the purposes of the Act. (The Act states that "average price" means the average of the daily closing prices of Ho. 1 Manitoba Northern wheat i n store Fort William, between the t h i r t y - f i r s t day of July and the f i r s t day of November i n any year as ascertained by the Minister pursuant to regulations.) 1 Statutues of Canada, 3 Geo. VI, C. 34. 2 "The Prairie Farm Assistance Act, 1939? Statutes of Canada. 3 Geo. VI, C. 50. 3 B r i t n e l l , G. E.,"Dominion Legislation Affecting Western Agriculture* 1939'j The Canadian Journal of Economics and P o l i t i -cal Science, G: 1940, p. 279. 76 In an emergency year the sums payable to farmers based on township yield and price are as follows: l i g h t to twelve bushels per acre ten cents per acre, for each cent to ten by which the average price i s less than 80 cents per bushel. I f the yield i s four to eight bushels. $1.50 per acre i s paid, and i f the average yield i s not more than four bushels per acre, the award i s $2.00 per acre. Ho award i s made with respect to more than one-half of the cultivated land of the farmer, nor with respect to more than two hundred acres of land. In years when no "national emergency" i s declared, assis-tance i s available on application by the Provincial Government, i f i n areas of specified size (in Saskatchewan 135 townships) the average yield of wheat as a result of anything other than h a i l , i s five bushels per acre or less. Provision i s made for, "award to each farmsr i n a crop failure area by way of assistance a sum of two hundred dollars; or a sum not exceeding two dollars and f i f t y cents per acre with respect to half the cultivated acreage of the farmer not to exceed two hundred acres, whichever i s the greater". (Sec. 4(2)). The minimum and maximum a farmer may receive are thus #200 and #500 respectively. The. price of wheat i s not a consideration i n the payments under the crop failure assistance section of the Act. Under the Prairie Farm Assistance Act a levy of one per cent of the sale price of a l l grain i s deducted from the price paid to the farmer at the time of sale, and becomes part of a special account i n the Consolidated Revenue Fund called the Prairie Farm Emergency Fund. This fund, however, makes up a small proportion of the total payments required, the remainder necessarily comes 77 from the Dominion Treasury. Payments for the crop year 1940-41, totalled #6,693,112.1 The levy probably produced a revenue of about $2,000,000. (6) The wheat Agreement In Septembers 1943, the Canadian Government ordered discon-tinuance of wheat trading on the Winnipeg Grain Exchange. This action was taken due to transportation d i f f i c u l t i e s , and the fear that the steady rise i n the Winnipeg price might jeopardize Canada*s long-run wheat control program and act as an additional threat to the general price stabilization program*2 At the same time the i n i t i a l advance paid to farmers for wheat delivered to the Canadian Wheat Board was raised from 90 cents to $1.25, plus participation certificates, basis carload lots of Ho. 1 northern i n store Fort William - Port Arthur or Vancouver. On the 24th of July, 1946, the Canadian Government signed a wheat agreement with the United Kingdom. Under the agreement the United Kingdom undertook to buy and Canada undertook to s e l l the following quantities: i) within crop year 1946-47 160,000,000 bushels i i within crop year 1947-48 160,000,000 bushels i i i ' within crop year 1948-49 140,000,000 bushels lv) within crop year 1949-50 140,000,000 bushels The price per bushel to be paid by the United Kingdom to the Canadian Government, basis No. 1 Manitoba Northern, i n store Fort William - Fort Arthur, Vancouver or Churchill, was as follows. 1 Wheat Studies of The Food Research Institute, Vol. XVIII, Sept. 1941-May, 1942, p. 118. 2 See Skeoch, L. A., "Changes i n Canadian Wheat Policy", Canadian Journal of Economies and P o l i t i c a l Science, November 1943, IX, 565-69. 78 In respect of wheat bought and sold In the crop year: i) 1946-47 i i ) 1947-48 i i i ) 1948-49 iv) 1949-50 fl.55 $1*55 not less than $1.25 not less than §1.00 The actual price paid for the wheat to be bought and sold within the crop years 1948-49 and 1949-50 was to be negotiated and set-tled between the United Kingdom Government and the Canadian Government not later than 31st December* 1947. and 1948 respec-tively* "In determining the prices for these two crop years* 1948-49 and 1949-50, the United Kingdom Government w i l l have re-gard to any difference between prices paid under this agreement i n 1946-47 and 1947-48 crop years, and the world price of wheat i n the 1946-47 and 1947-48 crop years." 1 (7) The Wheat Co-operative Marketing Act 1939 The Wheat Co-operative Marketing Act provides that any co-operative association or associations of primary producers, or any elevator company or association of elevator companies ope-rating or controlling one hundred or more country elevators i n the Prairie Provinces or B r i t i s h Columbia, may set up a selling agency to market wheat on a co-operative basis* The Dominion Government may agree to guarantee the sum of sixty eents per bushel, basis No. 1 Northern, Fort William* Out of this guaran-tee the selling agency may make an advance to the producers* Provision i s made for the return of any surplus to the grower; and any loss which may result through failure to realize the i n i t i a l payment, plus marketing costs, w i l l he borne by the Dominion 1 Dominion of Canada, O f f i c i a l Report of Debates* House of Commons, Vol* 6, 1946, p. 4848. 2 Statutes of Canada. 3 Geo. VI, C. 34. 79 Government* Organization under the Act has not been on a large scale* (8) The Agricultural Products Co-operative Marketing Act 1939 1 According to the terms of this Act, "agricultural product" means any kind of grain other than wheat, milk and milk products, vegetables and vegetable products, livestock and livestock pro-duets, f r u i t and f r u i t products, poultry and poultry products, honey, maple syrup, tobacco, and any other product of agriculture designated by the Governor-ln-Councll* The main purpose of the Act i s similar to that of the Wheat Co-operative Marketing Act* The Dominion Government may guaran-tee to any group of producers who form a co-operative association and enter into an agreement as defined by the Act, an i n i t i a l payment on any specified product up to eighty per cent of the average wholesale price of the product i n the three preceding years* As i n the case of the Wheat Co-operative Marketing Act, provision i s made for the distribution of any surplus to the pro-ducers, and for charging any loss to the Dominion Government* The passing of this Act, so far as the author knows, i s the f i r s t time Canada has attempted to use prices or price relationships at a point or period of time i n the past as a direct basis for price setting* 2 This i s a marked contrast with United States 1 Statutes of Canada, 3 Geo. 71, C. 28. 2 TJais Act i s classified by the Government as marketing rather than price legislation. "Another problem concerns the p o s s i b i l i -ty of producers 1 groups attempting to use the Act for the purpose of price support. The Government has made i t quite clear that the Act i s not intended as a means of supporting prices, but for assistance i n financing the orderly marketing of agricultural products on a voluntary pool basis." Turner, A* H., Canadian Marketing ana Price Support Legislation i n Canada, JFE, Nov. 1949, p. 594-609. 8 0 a g r i c u l t u r a l p r i c e p o l i c y * In that country a g r i c u l t u r a l p r i c e s are set at a percentage of p a r i t y . P a r i t y p r i c e , as defined by ex i s t i n g l e g i s l a t i o n , means a priee f o r a farm product that w i l l give i t a purchasing power equal to that which i t enjoyed i n some base p e r i o d . 1 I f i n a period of f a l l i n g p r i c e s , a g r i c u l t u r a l producers i n large numbers are able to take advantage of the Act, substantial losses may be sustained by the Dominion treasury. The use of an average of the pri c e of the three previous years w i l l tend to keep the p r i c e relationships up-to-date with absolute and r e l a -t i v e changes i n demand. The l i m i t a t i o n of i n i t i a l payments to eighty per cent of the previous three years 1 average, as well as the provision f o r control within t h i s l i m i t by the Cabinet (Sec. 2 ( i i i ) ) , w i l l further reduce losses, and give f l e x i b i l i t y to the administration of the Act. Wartime a g r i c u l t u r a l p o l i c y was at a l l times subject to the overriding purpose of v i c t o r y . I t was designed to bring about increased production of desired products, and at the same time* i t was the p o l i c y to prevent i n f l a t i o n by the se t t i n g of p r i c e c e i l i n g s . This resulted i n a host of subsidies, most of which have now been discontinued. (9) The A g r i c u l t u r a l P r i c e s Support Act Perhaps the most i n t e r e s t i n g l e g i s l a t i o n which w i l l a f f e c t 1 The development of the p a r i t y price concept and a det a i l e d explanation of the computation of p a r i t y p r i c e s i s given in Chap-ters 14 and 15 of Geoffrey Shepherd, A g r i c u l t u r a l P r i c e Analysis, 1947, Iowa State College Press. 2 See Shefrin, Frank, A g r i c u l t u r a l P o l i c y : Subsidies and Bonuses 1943, The Economic Annalist, Feb. 1944, also P r i c e s , Bonuses and Subsidies by the same author i n Economic Annalist, Deo. 1942. 81 Canadian agriculture during the postwar period i s The Agricul-tural Prices Support Act, 1944.1 Under this Act an Agricultural Prices Support Board sets minimum prices at which the Govern-ment w i l l buy, or private agencies may buy. The Act applies to any natural product of agriculture except wheat, designated by the Govemor-in-Council, and includes processed meat, dairy and poultry products, i f so designated.^ The Board i s authorized to buy at the Board price or to pay to the producers of an agricul-tural product the difference between a price prescribed by the Board and the average market price, as determined by the Board, during a specified period i f such average price i s below the pre-scribed price. The only hint given to the Board on where to set the prices i s found i n Section 9(2)• n I n prescribing prices under paragraphs (a) and (c) of subsection one of this section, the Board shall endeavour to ensure adequate and stable returns for agriculture by promoting orderly adjustment from war to peace conditions and shall endeavour to secure a f a i r relationship be-tween the returns from agriculture and those of other occupations." A l l prices so prescribed are subject to the approval of the cabinet. Expenditures under the Act, other than administrative ex-penses, are to be drawn from the Consolidated Revenue Fund, i n an amount not to exceed two hundred million dollars. No date of 1 Statutes of Canada, 8 Geo. 71, C. 29. 2 Effective August 1, 1949, oats and barley produced i n the three Prairie Provinces are marketed through an oat and barley pool operated by the Canadian Wheat Board. I n i t i a l payments are based on support prices announced by the Federal Government on March 15, 1949, less charges before delivery. , 82 termination i s specified i n the Act. (10) some Observations Up u n t i l 1943, the Canadian Government had i n one way and another interfered with the open market pricing of Canadian agri-cultural commodities* The Government had created the Board of Grain Supervisors, and used the Central Selling Agency as a Government stabilization agency, and through the Canadian Wheat Board set minimum prices for wheat from 1935 to June 1943* This interference was never designed as a permanent policy* I t was made necessary by the exigencies of the moment. Upc to that time the Government held the view that wheat should be marketed by private trade under the "open market" system* The loss of $61*5 million on the 1938-39 crop, and the storm of protest which the loss occasioned, did much to confirm this opinion. The decision to re-establish the Canadian Wheat Board i n 1935 was only partly a recognition of the necessity for stabilization a c t i v i t i e s as such. I t was probably more closely related to the impending general election. The price set by the Board i n 1935 was l i k e l y a shrewd appraisal of f a i r market value and what the farmer 1 The amount spent under the agricultural Prices Support Act 1944, up te March 1948, with breakdown was as follows. 1. Total #807,618.90. 2. Administration #75,212.23. 3. To meet net operating loss of meat board, dairy products board, and the special products board i n respect to over-seas contracts for 1946-47, #109,305.18. 4. Price support i n respect to the 1946 potato crop i n eastern provinces, #123,101.49. 5. Price support i n respect to the 1947 apple crop i n Nova Scotia, #500,000.00. Canada, House of Commons Debates, Mar. 3, 1948, p. 1832. 83 needed to "get by". The Board did not apparently have the ser-vices of specialists i n the prediction of demand* After the heavy loss on the 1938-39 crop. Parliament took over the task of setting the i n i t i a l fixed price. The Board had apparently been subjected to "pressure 0 by various groups, so was now relieved of this responsibility. In the postwar period we have had transition price policies such as the Wheat Agreement and the Agricultural Prices Support Act* These policies have been designed to ease the change from war to peacetime conditions of demand. Their essential purpose i s to prevent farmers' incomes from f a l l i n g to very low levels while postwar adjustments are being made. Canada's long-run postwar agricultural price policy has not yet been f u l l y formulated* I t appears, however, that the Govern-ment w i l l oontinue monopoly marketing of wheat and coarse grains. With regard to other commodities, the Agricultural Prices Support Board has to date been very careful to avoid large expenditures* There are two main reasons: F i r s t , i t has an annual fund of only |200,000,000, and second, large price support expenditures now would set a precedent* With the coming into effect of the Prairie Farm Assistance Act 1939, income payments to Canadian farmers became an estab-lished principle of our agricultural policy* There i s l i t t l e doubt that such payments are preferable to r e l i e f as they bear no stigma; indeed, the scheme might he more seriously c r i t i c i z e d on the grounds that i t presents the i l l u s i o n of an insurance scheme based on the actuarial principle* The terms of the Act, however, would bear careful review and examination to see 84 whether: ( l ) i t encourages the continuation of some sub-marginal farms, (2) i t encourages the most desirable s i z e of farm as judged by economic and s o c i o l o g i c a l standards* A g r i c u l t u r a l p r i c e supports are now regarded by some econo-mists as the "core" of Canadian a g r i c u l t u r a l p r i c e p o l i c y * 1 While t h i s view i s without doubt applicable to the United States, the author believes i t to be le s s tenable i n Canada* As pointed out above, the mere existence of the Canadian Wheat Board Act, the A g r i c u l t u r a l P r i c e s Support Act, and the two Co-operative Marketing Acts provide the machinery f o r price supports, but com-mit the Government to no speeifio p r i c e or "percentage of p a r i t y " . The emphasis i n Canadian a g r i c u l t u r a l p r i c e p o l i c y has not shi f t e d back from control to interference* Instead, Canada has i n 1949 signed the International Wheat Agreement* By the terms of t h i s Agreement, Canada agrees to supply 203 m i l l i o n bushels of wheat annually for four years at a price l i m i t e d to a maximum of $1.80 f o r each of the four years* The minimum i s #1*50 per bushel for the f i r s t year and 10 cents l e s s f o r each succeeding year* We can expect to have a period of very considerable control of the prices of a g r i c u l t u r a l commodities* This being the case, i t i s necessary to study the economies of such p r i c e control* The decision to control has been made* Our problem now i s the choice of s p e c i f i c p o l i c i e s which w i l l contribute to better 1 See E r i c Englund," The Hext Twenty-Five. Years i n World Agriculture^ with Special Reference to Canadian Agriculture? A g r i c u l t u r a l I n s t i t u t e Review, A g r i c u l t u r a l I n s t i t u t e of Canada, Ottawa, Canada, p. 3 0 . resource allocation and the reduction of i n s t a b i l i t y and uncer-tainty. A further requirement i s that policies chosen must be p o l i t i c a l l y acceptable and consistent with the capacity of the economy to absorb any losses they may incur. 36 CHAPTER 7 FORWARD PRICES Canadian farmers have envied their American cousins ever since the United States adopted the policy of parity prices. Canadian economists have joined their American counterparts i n condemning parity prices* Economists point out that a price based upon some past relationship rather than actual or expected supply and demand interferes with the alloc at ive function of the prloe system*1 The position of the c r i t i c who has no alterna-tive to offer i s , however, a d i f f i c u l t one* In 1940, T. W. Schultz suggested forward prioing, and this provided the neces-sary alternative* The principle of forward pricing for agricul-tural products i s now widely supported by agricultural and other economists* In a paper given to the American Economic Association i n December, 1940, T* W* Schultz, speaking of loans made by the com-modity Credit Corporation, recommended (l) that loan rates be based, not upon percentages of parity, but on "production, mar-keting, and consumption c r i t e r i a " , and (2) that these loan rates he announced "well i n advance of the time that farmers start 1 Parity prices are a type of forward prloe i n that they are announced i n advance of production decisions* They are based upon the principle of giving agricultural commodities a purchas-ing power equal to that which they enjoyed i n some past "base period"* Forward prices, as visualized by Schultz, would be based, not on some past relationship, but on the best possible estimates of future supply and demand* making plans for the production of the new crop." These recommendations have evolved into a policy proposal now known as forward prices* The scheme i s designed to improve farm labor efficiency* This would be accomplished by the Govern-ment setting the price of important agricultural commodities one production period ahead* I t i s argued that farmers could then proceed with their production plans knowing what relative prices would be* Host of the costs of price uncertainty for one produc-tion period would thus be avoided* In depression periods forward prices would take on a d i f -ferent role* During a depression compensatory payments would be made to farmers* These payments would be equal to the difference between market price and the announced forward price* The for-ward price during a depression would be based not on estimates of supply and demand, but on a proportion, say 85 per cent, of the average price of the three pre-depression years* Such a policy would considerably reduce the price uncertainty and fear of de-pression which are the main causes of risk aversion and capital rationing* A* Forward Prices for One Production Period This section deals with pricing for a normal production period* 2 D. Gale Johnson described this part of the proposal as follows: "Put another way, our purpose i s to outline a forward price policy which i s not intended to result i n income transfers 1 Schultz, T* ¥*, "Economic Effect of Agricultural Programs", American Economics Review, XXX: 3 (February 1941),pp. 127-54. 2 Normal i s here taken to be a period i n which the economy i s operating at high levels of employment, and i n which the relative price mechanism i s effectively operating to allocate resources. to farmers and w i l l r e s u l t i n such transfers only i f the p r i c e expectations as formulated are i n e r r o r . " 1 The following i s e s s e n t i a l l y a summary of the main economic and administrative problems of such a program as Johnson saw them. The appraisal of major d i f f i c u l t i e s l i k e l y to be encountered i n operating such a p o l i c y i n Canada w i l l be l e f t to the next chapter, (l) The Time Period For Forward P r i c e s The timing problem consists of two parts. These parts are the point i n time at which to make the announcement, and the period of time for which the p r i c e should be e f f e c t i v e . The timing of the announcement should be such as to allow farmers a s u f f i c i e n t period f o r comparison of alternative oppor-t u n i t i e s before commitments have to be made* The forward p r i c e s f o r a l l products should form an integrated whole* and no product can be considered an en t i t y i n i t s e l f . The "production period" i s considered to be the time r e -quired to bring about a s i g n i f i c a n t change i n production opera-t i o n s . For crops the production period i s considered to be the time required f o r planning, planting or seeding, growing, harves-t i n g and marketing the bulk of the crop from any one year's harvest• In d e f i n i n g production periods f o r l i v e s t o c k , i t i s neces-sary to refer to periods i n which operations are concentrated i n order to determine stopping and st a r t i n g points. The peaks of the spring and f a l l p i g crops are a case i n point. Dairy c a t t l e are generally bred to c a l f i n the spring to take advantage of summer pasture, or i n the f a l l to use surplus labor to advantage and to coincide with high p r i c e s . Breeding on the range f o r beef c a t t l e 1 Johnson, D. (*., Forward P r i c e s for Agriculture, p. 178. 89 and sheep i s generally timed to take advantage of the spring and summer grass* For hogs and poultry the production periods can be f a i r l y v e i l defined* For each of the two hog crops, a period of 16 months encompasses the planning and f i n a l marketing of most pro-ducers* For poultry, a period of about 16 months i s necessary to include egg production and marketing of surplus laying stock* A period of 16 to 18 months should prove adequate for milk products prices* Forward prices for beef cattle offer the greatest d i f -f i c u l t y i n definition of the production period* These d i f f i c u l -ties arise from the lengthy time between breeding and slaughter, and the importance of the feeder market* If forward prices were set for feeders only, the period could be limited to 18 months* Two basic rules are offered for use as appropriate guides i n the determination of the length of period and time of announce-ment . (i) the time of announcement should provide a sufficient period for comparison of alternative opportunities before commit-ments must be made, and ( i l ) the forward price should extend suf-f i c i e n t l y far into the future to permit the completion of the marketing for the particular production period* A storage policy for feed grains to stabilize consumption i n time, to the extent consistent with the equation of marginal costs and gains from storage, i s compatible with a forward price program* Given a system of forward prices for livestock pro-ducts, a storage program may be used as an implementing technique to achieve forward prices for feed grains* Table 19 i s an adaption of a similar table given by Johnson to indicate suitable announcement dates and effective periods of the forward p r i c e s f o r selected commodities* 90 TABLE 19 ANNOUNCEMENT AND EFFECTIVE PERIOD OF THE FORWARD PRICES FOR SELECTED COMMODITIES Commodity Announcement E f f e c t i v e Period Wheat Feb. 1951 July 1951-June 1952 Barley Feb. 1951 July 1951-June 1952 Hogs Spring N O T * 1950 Sept.l951-Feb. 1952 Hogs F a l l Mar. 1951 Feb. 1951-Aug. 1952 Poultry Jan. 1951 June 1951-May 1952 When the above dates and periods are considered i n the l i g h t of present production p r a c t i c e s , they measure up quite w e l l . I t i s important to r e a l i z e that f o r most commodities the forward p r i c e w i l l have to extend from sixteen to twenty-four months* (2) T r a n s i t i o n Problems I t i s argued that the problems of t r a n s i t i o n from one f o r -ward p r i c e to another w i l l not be unduly serious. For any crop product the f a c t that changes are made when marketing i s at a low ebb w i l l minimize the d i f f i c u l t i e s . Movements upward w i l l cause the l e a s t d i s l o c a t i o n because present p r i c e s would tend to r i s e to the new p r i c e , l e s s the cost of storage. Transition problems f o r l i v e s t o c k which are produced more or l e s s continuously w i l l be more serious* In the event of a r i s e i n the next period, producers w i l l withhold marketings and proces-sors w i l l increase inventories* This w i l l tend to promote an orderly t r a n s i t i o n * In the event of a p r i c e reduction f o r the next period, however, the only natural l i m i t to bunch marketing would be the f a c t that p r i c e i s announced during the time when 91 marketing i s at a minimum* I t may be necessary to provide a schedule of transition prices so that adjustment may take place over a period of a month to six weeks* (3) Specificity of guarantees The maximum and minimum limits of specificity have been de-fined* The minimum degree of specificity would be a national average farm price* The maximum would be a forward price which includes specific location, seasonal and grade differentials* Such differentials would be relatively easy to arrive at i n Canada* We are accustomed to location differentials, and grading standards are well established and understood for most products* A simple procedure for including grade location and seasonal d i f -ferentials has been suggested* The forward price would be announced for an area* I f the actual prices received i n the area are on the average below the forward price, payments would be made to producers for the amount of the d e f i c i t * This plan would give price assurance to producers, yet the incentive to find the best possible market outlet would be maintained* ( 4 ) Commodities Included Canadian agriculture i s based largely on less than a dozen crops and livestock products* There are i n addition many minor products which compete for the use of agricultural resources* The choice of products to Include i n such a forward price program would depend upon the administrative and technical problems i n -volved, and the economic relationships among commodities i n pro-duction* I t i s believed that the techniques of direct subsidy payments would solve most of the technical and administrative problems* Where the e l a s t i c i t y of substitution between two commodities i s large, one commodity may be excluded i n order to simp l i f y pro-blems of administration without materially a f f e c t i n g resource use* However, some areas apparently d i f f e r s i g n i f i c a n t l y i n e l a s t i c i t y of sub s t i t u t i o n between commodities* . I f attention i s given to t h i s v a r i a b i l i t y , not many of the feed grains can be excluded* In any ease where farmers are l i k e l y to f i n d i t desirable to s h i f t from a product not included to those that are, the product should be included* F a i l u r e to include such a commodity must cause f a i r l y serious oosts of f l e x i b i l i t y * The r e l a t i o n s h i p between factors and products must also be considered* The p r i c e e f f e c t s going from outputs to inputs indicate that outputs and inputs are highly subs t i tut able. In the short run, the reverse i s not true* Hogs are an example* A f a l l i n the p r i c e of barley w i l l often r e s u l t i n a withholding of hogs f o r breeding, with a view to large p r o f i t s l a t e r * For-ward pri c e s f o r either hogs or barley alone would probably not s t a b i l i z e hog production. As a consequence, i t would be neces-sary to include forward pr i c e s f o r both the input and the output i n the program* (5) Forward P r i c e Schedules f o r Perishable Products I t i s recommended that f o r perishable crop products, a p r i c e schedule, rather than a single forward priee, be established* The p r i c e schedule would be so calculated that the l e v e l of f o r -ward p r i c e s would vary inversely with the average y i e l d * This 93 would s t a b i l i z e t o t a l return per acre planted regardless of the y i e l d which materialized* (6) Problems of Forecasting A very large part of the gain from forward p r i c i n g would come from the elimination of p r i c e uncertainty to the producer rather than the accuracy of forecasts* The gains from the reduc-t i o n of c a p i t a l rationing* increasing the size of the farm, and recombination of factors are a l l of t h i s sort* I t has been argued that the errors i n p r i c e forecasts can be as great as those of a l l farmers together, and s t i l l r e s u l t i n enough net gains to j u s t i f y i t s adoption. 1 There are good reasons, however, f o r stressing the accuracy 2 of estimates. Obviously the gains w i l l be greater i f estimates are r e l a t i v e l y accurate. Important inaccuracies w i l l lead to substantial transfers of income to agriculture, accompanied by serious p o l i t i c a l repercussions i n the rest of the economy. There are two major aspects to the forecasting problem. One • i s the estimation of r e l a t i v e p r i c e s within a g r i c u l t u r e ; the other i s the estimation of the d o l l a r l e v e l of p r i c e s , or the r e l a t i v e l e v e l of a g r i c u l t u r a l and non-agricultural p r i c e s . I f the errors i n the d o l l a r l e v e l of estimates are not greater than f i v e to ten per cent and are normally d i s t r i b u t e d , they would not have a major impact on the use of a g r i c u l t u r a l resources* Errors i n estimates of r e l a t i v e p r i c e s are of greater importance* The e l a s t i c i t y of substitution of outputs i n a g r i -culture i s large. Thus with p r i c e certainty, errors i n forecast 1 Johnson, D. (J., Forward P r i c e s f o r Agriculture, p. 195* 2 This problem w i l l be examined i n d e t a i l f o r Canada i n the following chapter. 94 of some Importance w i l l lead to a d i s t r i b u t i o n of outputs mar-kedly d i f f e r e n t from that required to maximize consumer s a t i s f a c -t i o n . I t i s suggested, i n order to keep subsidies at a minimum, that the forward p r i c e announced be the expected equilibrium p r i c e , but to pay subsidies only when the market p r i c e i s 10 per cent or more below the forward p r i c e . The establishment of such a range would reduce the degree of price certainty, but only to a l i m i t e d extent. The best estimate of r e l a t i v e p r i c e s would s t i l l be the r e l a t i v e forward p r i c e s . Johnson has estimated the cost i n the United States of ope-ra t i n g such a program on a 10 per cent error permitted basis. I f demand conditions are reasonably stable, annual subsidy expendi-tures should not exceed $100 to $200 m i l l i o n and would probably average no more than $50 m i l l i o n . B. Long-Run Income Certainty and S t a b i l i t y A substantial portion of the i n s t a b i l i t y of Canadian net farm income r e s u l t s from the i n t e r r e l a t i o n s h i p s between a g r i c u l -ture and the r e s t of the A t l a n t i c economy rather than from f a c -tors p e c u l i a r to a g r i c u l t u r e . Extended periods of c y c l i c a l l y low farm incomes tend to lead to disinvestment and f a i l u r e to provide adequately f o r the welfare of farm f a m i l i e s . The stoppage of technological change and adaptation, the maintenance of stringent c a p i t a l rationing, and the u n d e r u t i l i z a t i o n of many human resour-ces, are a l l products of income i n s t a b i l i t y . Much of the thinking of American a g r i c u l t u r a l economists on t h i s problem has been i n terms of income transfers to agriculture during depression periods. The purpose of such transfers would 95 be to protect farm income i n the aggregate from the unpredictable changes generated i n the r e s t of the economy* The proposals hare generally been to maintain farm income during depressions by the establishment of some minimum farm return per unit of product equivalent to a set percentage of pre-depression prices*' 1' The general arguments i n favor of such a plan, and d i f f i c u l -t i e s anticipated, as viewed by Johnson, w i l l be presented here i n summary. ( l ) Minimum Level of Farm Income or P r i c e s Factors favoring a r e l a t i v e l y high minimum l e v e l of income are as follows: A r e l a t i v e l y high minimum income l e v e l would permit farmers to make long-run investments, thus l i m i t i n g capi-t a l r a t i o n i n g . I t would reduce the s o c i a l hardships which farm people suffer during depressions. A high minimum l e v e l would maintain farm purchasing power. Among the most important r e s t r i c t i o n s upon how high such a l e v e l can be set i s the danger of a t t r a c t i n g too many resources into a g r i c u l t u r e . This i s p a r t i c u l a r l y true i f the assistance i s not s e l f - l i q u i d a t i n g , i n other words, i f nothing i s done to hold down the l e v e l of farm incomes during prosperity. One of the proposals does make provision f o r t h i s . 2 The suggested c r i t e r i a f o r when income payments should com-mence are changes i n national income, or the l e v e l of employment. 1 Apparently the f i r s t such proposal was by T. V. Schultz, "Two Conditions Necessary f o r Economic Progress i n Agriculture", Canadian Journal of Economics and P o l i t i c a l Science. X (August 1944), pp. 310-11. There have been numerous others. See Johnson, D. Or., Forward P r i c e s f o r Agriculture, p. 206. 2 See Shepherd. G. S.. A g r i c u l t u r a l P r i c e P o l i c y , e s p e c i a l l y Chap. 28. Most writers favor the choice of some s p e c i f i e d l e v e l of employ-ment at which income transfers to agriculture should begin* (2) D i s t r i b u t i o n of Income Payments A choice of three bases f o r d i s t r i b u t i o n of payments i s pos-s i b l e * One i s to r e l a t e payment to producers i n terms of resour-ces owned or controlled* Another i s to r e l a t e payment to produc-t i o n or output* A t h i r d i s to d i s t r i b u t e payments among farmers on the basis of t h e i r undertaking c e r t a i n f a i r l y s p e c i f i c tasks, such as s o i l conservation, crop adjustments and b u i l d i n g programs* 1 Johnson's view i s that the function of the p a r t i c u l a r pay-ments made during a depression should be kept reasonably clear cut - to ameliorate the impact of c y c l i c a l l y f l u c t u a t i n g incomes upon farm people* This suggests that the payment should be made as a p r i c e payment* Income payments made as p r i c e payments only, would be r e -gressive f o r two reasons* F i r s t , a small percentage of the farmers would receive most of the payments* Second, those f a r -mers who depend i n part on outside employment would get l i t t l e assistance* f o r these reasons i t i s suggested that the payments should include a minimum t o t a l sum which would be paid to each bona f i d e farm family i n l i e u of p r i c e payments. The suggested payment i s twenty d o l l a r s per year per family member* There i s the further problem of how compensatory payments are to be d i s t r i b u t e d among products* One suggestion i s that 1 The l a t t e r i s the view of John D* Black. See Black, J . D., and K i e f e r , M. E., Future Food and Agriculture P o l i c y . 9 7 production of various products be evaluated i n terms of p r i c e r e -l a t i o n s h i p s among a g r i c u l t u r a l products which would p r e v a i l i f f u l l employment existed at the time* The average l e v e l of a l l farm p r i c e s would be determined by the c r i t e r i o n determining the t o t a l amount of payment* An alternative i s that the extra a g r i -c u l t u r a l p r i c e relationships be based on the average p r i c e s of three depression years* S p e c i f i c a l l y * the average p r i c e f o r each commodity would be determined f o r the pre-depression years* The minimum assured p r i c e f o r each commodity would be t h i s average price* reduced by the percentage change i n the average l e v e l of p r i c e s required to maintain net a g r i c u l t u r a l income at the chosen percentage of pre-depression l e v e l * (5) Administrative and Economic Issues (i) Integration of Depression and Non-depression programs* The onset of a depression af t e r non-depression forward pri c e s have been set involves an integration problem* The p r i c e s e t t i n g agency would be faced with the decision of whether to maintain the announced p r i c e , or to immediately change to the lower p r i c e * The f u l f i l l m e n t of the conmitments i s considered to be desirable from the point of view of long-run effectiveness of the p r i c e p o l i c y * I t i s considered u n l i k e l y that income trans-f e r s from t h i s procedure w i l l be very large* In Johnson's opinion the emergence from a depression i s not l i k e l y to e n t a i l serious problems i n administration* ( i i ) D uplication of Payments. There are several opinions on the seriousness of d u p l i -cation of payments. Johnson argues that since i n h i s proposals there i s no forward p r i c e for feed grains* i n f l a t e d sales w i l l 98 not be a major problem* Some economists believe, however, that sales back and f o r t h between farmers i n order to duplicate pay-ments would be common*1 ( i i i ) D i s t o r t i o n of Resource Use* When there i s a general f a l l i n wholesale prices farmers would be able to buy large quantities of cheap feed grains as feed f o r liv e s t o c k * They would s e l l the product at market p r i c e plus compensatory payment* Other users of grains, such as m i l -l e r s and brewers, would be at a disadvantage* Therefore, resource use would s h i f t toward l i v e s t o c k production* S i m i l a r l y , farmers would be able to buy feeders and f i n i s h them to get com-pensatory payments. I t i s suggested that the solution to t h i s d i f f i c u l t y may be found i n one of two techniques. One i s subsidize the non-a g r i c u l t u r a l use i n the same way that the a g r i c u l t u r a l use i s subsidized* The other i s to require the farmer buying the pro-duct to make the compensatory p r i c e payment. This procedure would equalize the r e l a t i v e buying power of farmers and non-farmers* I t would appear that i t could be r e s t r i c t e d to r e l a -t i v e l y few commodities, probably feeder c a t t l e , wheat and barley, (iv) The Role of Storage. Storage should r e t a i n the role of attain i n g the appro-pri a t e d i s t r i b u t i o n of consumption i n time by s t a b i l i z i n g the amount available f o r consumption from year to year despite y i e l d f l u c t u a t i o n s . P u b l i c storage should also be used to off s e t changes i n private storage which r e s u l t from the maintenance of farm pr i c e returns while markets f a l l * 1 Shepherd, 6* F., A g r i c u l t u r a l P r i c e P o l i c y , p. 376. 99 (4) Summary* Forward prices during a depression would be a program of i n -come maintenance* The major features of such a program would be as follows: 1* When a depression has started, a series of forward pri c e s w i l l be announced which w i l l give agricu l t u r e i n the aggregate an estimated 75 per cent of the pre-depression net a g r i c u l t u r a l income* 2. The forward p r i c e s w i l l have time spans of approximately one production period* They w i l l be determined on the basis of the average p r i c e of the l a s t three pre-depression years* 3* Market prices w i l l be permitted to seek t h e i r own l e v e l , and the difference between the market prices and the depression forward p r i c e s w i l l be paid to a g r i c u l t u r a l producers as a com-pensatory payment* 4* For ce r t a i n products such as the major feed grains, no compensatory payments would be needed because t h e i r p r i c e w i l l depend upon l i v e s t o c k p r i c e s * 100 CHAPTER 8 THREE MAJOR DIFFICULTIES IB A FORWARD PRICE PROGRAM FOR CANADA The previous chapter outlined a program of forward pr i c e s as vi s u a l i z e d by some a g r i c u l t u r a l economists i n the United States* Such a program appears to f u l f i l l most of the requirements of a desirable p r i c e p o l i c y f o r Canada. Three major d i f f i c u l t i e s of forward p r i c e s as an a g r i c u l t u r a l price p o l i c y for Canada w i l l now be considered. 1 A. The Problem of Forecasting Johnson maintains that errors i n pri c e forecasts can be as great or greater than the c o l l e c t i v e errors of a l l farmers, and the net gains from a forward p r i c e system would s t i l l j u s t i f y i t s adoption. The gains, he believes, are l a r g e l y from the elimina-t i o n of p r i c e uncertainty to the producer, rather than the accuracy of forecasts. * The gains from the reduction of c a p i t a l rationing, increasing the si z e of the f i r m and recombination of factors are a l l of t h i s s o r t . " 3 The f i r s t two of these, how-ever, would be l a r g e l y the r e s u l t of his long-run counter-c y c l i c a l program of pri c e maintenance rather than the e f f e c t of certainty within one production period. 1 These are not by any means the only d i f f i c u l t i e s with such a scheme. A l l the others, however, appear to lend themselves to more simple solutions than do these three. 2 Johnson, D. G., Forward P r i c e s f o r Agriculture, p. 195. 3 Ibid, p. 195. 101 There are two main aspects to the forecasting problem. One i s the estimation of r e l a t i v e p r i c e s within a g r i c u l t u r e ; the other i s the estimation of the d o l l a r l e v e l of a g r i c u l t u r a l p r i c e s . Errors i n estimates of the r e l a t i v e l e v e l are l i k e l y te have the more serious e f f e c t on e f f i c i e n c y . This i s because the p o s s i b i l i t y of t r a n s f e r r i n g f a c t o r s of production from one output to another i s very great. Errors i n the estimate of the average l e v e l of farm p r i c e s which r e s u l t i n large income transfers to farmers are not consistent with the best use of a l l resources. In addition they are l i k e l y to generate p o l i t i c a l storms i n Canada s u f f i c i e n t l y great to paralyze the program. (l) Forecasting the P r i c e of Wheat The greatest single forecasting problem which the p r i c i n g agency would face i s that of predicting the world p r i c e of wheat one production period i n advance. An examination of the nature of the world demand and supply of wheat emphasizes t h i s point. (i) The E l a s t i c i t y of Demand. Three calculations of the e l a s t i c i t y of demand for wheat have received considerable attention. These may be summarized i n terms of the c o e f f i c i e n t s of e l a s t i c i t y of demand stated by the authors i n t h e i r c alculations or i m p l i c i t i n t h e i r assumptions. 1 Gregory King (1899) e B -.36 R.A. L e h f e l t (1914) e a -.61 G.E. Warren & E.A. Pearson (1928) e = -.71 to 1.23. The e l a s t i c i t y of demand for actual consumption i s so small that no trustworthy measurements have been obtainable. 2 The following 1 Working, H., "The E l a s t i c i t i e s of Demand for Wheat", read before the meeting of the Econometric Society held i n Chicago, I l l i n o i s , Dec. 28, 1936, and summarized i n Econometrica, V. Bb. 2 (1937), pp. 185-86. 2Loc* c i t . 102 are estimates of upper l i m i t s by Holbrook Working. For the period 1921-35, f o r which Working used the per capit a u t i l i z a t i o n , l e s s seed and les s changes i n stocks, he ob-tained an e l a s t i c i t y of demand of H = 0.24 - 0.09. This i s very close to that of Schultz H • 0.21 - 0.04 f o r the period 1921-34.1 The f a c t that the world demand f o r wheat i s very i n e l a s t i c i s of paramount importance i n the consideration of p r i c e p o l i c y . An i n e l a s t i c demand means that with a given demand function a large world crop means a small world p r i c e . ( i i ) Elements i n the Demand for Wheat For Use. The use of a single f i g u r e as a measure of the e l a s t i c i t y of demand f o r wheat assumes a constant e l a s t i c i t y throughout the whole range of the demand curve. This assumption i s not v a l i d f o r wheat. Joseph S. Davis has defined s i x main elements i n the demand f o r wheat f o r use, which d i f f e r with respect to impor-tance, stratum or l e v e l , and degree of e l a s t i c ! t y . 2 (a) The demand f o r seed, s l i g h t l y v a r i a b le but somewhat • Inversly e l a s t i c ; (b) a f a i r l y constant and highly i n e l a s t i c demand f o r food use; (c) a variable but somewhat e l a s t i c demand f o r food use; (d) a highly e l a s t i c demand f o r food use i n a low-price stratum; (e) the demand f o r feed use, including another highly e l a s t i c demand element for a low-price stratum; (f) a demand f o r i n d u s t r i a l use, t h e o r e t i c a l l y highly e l a s t i c , but of a price stratum so low that i t i s of almost n e g l i g i b l e p r a c t i c a l importance. 1 Schultz, H., The Theory & Measurement of Demand, The Univer-s i t y of Chicago Press, Chicago, Illinoiso,1938, p. 400. 2 Davis, J . S., "The World Wheat Problem", Wheat Studies, V o l . 8, Nov. 1931-Sept. 1932, of the Food Research I n s t i t u t e , Stanford University, C a l i f om i a , pp. 409-444. 103 Of these s i x elements,the most important to consider i n pr i c e forecasting are (b) and (c); (b) There i s a highly i n e l a s t i c demand f o r wheat f o r food i n countries where wheat f l o u r and bread are among the cheapest staples of the customary diet, and are bought and consumed i n a l -most the same per capi t a quantities from year to year, p r a c t i -c a l l y regardless of whether prices are high or low* Such countries include the United States, Prance, Canada, A u s t r a l i a , Great B r i t a i n and probably several others* In addition, there . are l i m i t e d classes of people i n almost every country who c o n t r i -bute a portion of t h i s demand* At present well over a t h i r d , and possibly over h a l f of the world wheat production, goes to supply t h i s most i n e l a s t i e element i n the demand* (c) The t h i r d element i s a demand f o r wheat f o r food i n countries, or among classes, where i t i s a staple of the d i e t , but not the cheapest cereal food i n common use, and where more wheat or l e s s of other cereals w i l l be used i f wheat can be aff o r -ded* This demand for wheat i s of substantial quantitative impor-tance - second only to the constant element mentioned above* I t represents perhaps a fourth to a t h i r d of t o t a l consumption nowa-days, i f Russia be included* This demand i s moderately e l a s t i c s The more expensive wheat i s , the l e s s of i t these people consume; the cheaper wheat i s the more they eat of i t * To a considerable extent, however, i t i s not the absolute p r i c e of wheat which determines consumption, but rather the price r e l a t i v e to other cereals. The f i r s t three elements l i s t e d i n the demand for wheat account f o r almost a l l the world's wheat consumption i n years of s c a r c i t y , and somewhat larger absolute quantities i n years of abundance. The remaining three probably have not absorbed as much as 1 0 per cent of the world's crop i n any peacetime year, and the average over any such five-year period has probably not exceeded 5 per cent* ( i i i ) Speculative Demand. In addition to these various classes of demand f o r wheat f o r d i f f e r e n t uses, there i s a speculative demand that varies greatly i n i n t e n s i t y with anticipations of price advances or p r i c e de-c l i n e s * Farmers, dealers and m i l l e r s , as well as speculators proper, contribute to t h i s element of demand* The burden of a surplus i s lessened i f the d i s p o s i t i o n to hold wheat i s strong and widespread, and increased i f t h i s d i s p o s i t i o n i s weak or li m i t e d * Moreover, through e f f e c t s on p r i c e s , e l a s t i c elements i n d i s p o s i t i o n , and acreage and production, the condition of t h i s speculative demand may a f f e c t even the volume of the surplus or shortage* (iv) The World Market Supply of Wheat. The world market supply of wheat i s o r d i n a r i l y very i n e l a s -t i c * Most exporting countries usually place almost t h e i r entire surplus over domestic requirements on the market, regardless of price* Certain wheat marketing p o l i c i e s have at times contributed to the accumulation of wheat carryovers even i n the absence of s p e c i f i c intentions to withhold wheat from the market* Accumu-l a t i o n has occurred i n the hands of such marketing organizations 105 as the Canadian Wheat Pool. Government intervention by the Federal Farm Board i n the United States i s worth noting. While such measures succeeded i n maintaining domestic price* they probably had very l i t t l e e f f e c t on the world market. In contrast to the constant nature of the world market de-mand f o r wheat the market supply i s subject to considerable change annually* TABLE 20 APPROXIMATE WORLD WHEAT SUPPLIES AND DISAPPEARANCE ANNUALLY FROM 1934-35 TO 1944-45 World Ex - U.S.S.R. ( M i l l i o n bushels) Year August-Julv I n i t i a l Stocks Crop USSR Exports Total Supplies Disap-pearance 1934-35 1,187 3,491 2 4,680 3,742 1935-36 938 3,561 29 4,528 3,778 1936-37 750 3,515 5 4,270 3,758 1937-38 512 3,802 43 4,357 3,763 594 4,564 34 5,192 4,042 1939-40 1,150 4,197 -b 5,347 3,947 1940-41 1,400 3,915 8 5 , 323 3,773 1941-42 1,550 3,943 -b 5,493 3,708 1942-43 1,785 4,079 -b 5,864 3,864 1943-44 2,000 3,925 -b 5,925 4,500 1944-45 1,425 3,982 -b 5,407 — b - net imports Source: World Grain Review & Outlook, 1945. Farnsworth, Helen C , and Timoshenko, V. P., Food Research I n s t i -tute, Stanford University, p. 275. I t can be seen from Table 21 that world y i e l d per acre i s remarkably constant. This i s not true of the y i e l d s per acre i n the four major exporting countries, United States, Canada, Aus-t r a l i a and Argentina. The l a t t e r v a r i a t i o n s are the more s i g -n i f i c a n t due to th e i r greater e f f e c t on world p r i c e . TABLE 21 106 WHEAT PRODUCTION, ACREAGE AND YIELD PER ACRE IN THE WORLD, AND YIELD PER ACRE OF FOUR.CHIEF EXPORTERS FROM 1928-1944 PRODUCTION ACREAGE YIELD ( M i l l i o n Bushels) (Millions) (Bushels per Acre) • • World : World Four : World Four I Ex - Chief : Ex - Chief : Ex - Chief Year : USSR. Exporters : USSR. Exporters : USSR. Exportei 1928 _ 4,040 1,990 266.2 132.9 15.2 15.0 1929 - 3,593 1,419 259.7 127.9 13.8 11.1 1930 - 3,886 1,753 267.7 131.9 14.5 13.3 1931 - 3,881 1,674 264.7 124.9 14.7 13.4 1932 mm 3,878 1,654 268.1 129.0 14.5 12.8 1933 - 3,813 1,297 271.5 129.6 14.0 10.0 1934 - 3,491 1,176 265.0 119.4 13.2 9.8 1935 - 3,561 1,196 267.3 119.9 13.3 10.0 1936 - 3,515 1,250 276.2 131.1 12.7 9.5 1937 - 3,802 1,449 284.6 140.8 13.4 10.3 1938 - 4,564 1,815 287.8 140.6 15.9 12.9 1939 - 4,197 1,603 270.1 120.7 15.5 13.3 1940 - 3,915 1,735 264.4 120.5 14.8 14.4 1941 - 3,943 1,663 261.6 114.5 15.1 19.2 1942 - 4,079 1,922 242.1 100.1 16.8 15.4 1943 3,925 1,485 243.8 96.7 16.1 15.4 1944 - 3,982 1,720 257.0 112.0 15.5 -Source: World Grain Review and Outlook, p. 276. (v) The E f f e c t of National P o l i c i e s on Demand, Supply and P r i c e . The t h i r d element i n the demand f o r wheat mentioned above i s moderately e l a s t i c . 1 On the whole, i t i s t h i s element i n the de-mand for wheat that, i f allowed free play, would afford the greatest contribution to wheat pr i c e s t a b i l i t y by leading to en-larged consumption when wheat i s abundant and cheap, and to con-t r a c t i o n when wheat i s r e l a t i v e l y scarce and dear. I t i s t h i s 1 There i s a demand f o r wheat f o r food i n countries, or among classes, where i t i s a staple of the d i e t , but not the cheapest food i n common use. 107 element which i s p a r t i c u l a r l y r e s t r i c t e d by government p o l i c i e s i n many countries i n times of surplus. National p o l i c i e s w i l l l i k e l y play an ever greater part i n determining the e f f e c t i v e world supply and demand of wheat. Such p o l i c i e s are not only extremely d i f f i c u l t to p r e d i c t , but t h e i r r e s u l t s even i n hindsight present formidable problems of appraisal.' C o n f l i c t i n g views on the p r i c e e f f e c t of the U.S.A. export subsidies of 1938-39 give some i n d i c a t i o n of the d i f f i -c u l t y . The United States Department of Agriculture Bureau of Economics pub l i c a t i o n , "The Wheat Si t u a t i o n " , stated that no noticeable decline i n world wheat prices occurred because of sub-s i d i e s i n 1938-39. I t was estimated that i n the previous four-teen years, an increase of 60 m i l l i o n bushels to the world supply had been connected with a reduction of 5 eents i n the p r i c e at L i v e r p o o l . The a r t i c l e went on to say that the subsidies d i d not change the world supply of wheat. The quantity of wheat which was sold i n i n t e r n a t i o n a l trade would probably have been about the same with or without the United States subsidy. 1 Timoshenko c r i t i c i z e d the assumption and contended that, on the contrary, the subsidies had the e f f e c t of lowering the world p r i c e by at l e a s t 10 cents per b u s h e l . 2 Nelson has i n turn attacked Timoshenko and argued that the actual p r i c e for the year was 3.4 cents, rather than 10 cents l e s s than the most probable p r i c e . 3 The year 1931-32 was admittedly a very unusual one f o r the 1 Quoted i n Nelson, R.S., "Export Subsidies and A g r i c u l t u r a l Income", JJE, V o l . XXIII, Aug. 1941, pp. 619-631. 2 Wheat Studies, October 1940, p. 83. 3 Nelson, R. S., op. c i t . , p. 624. 108 world'wheat trade. Estimates of the e f f e c t of some national p o l i c i e s during the period give an i n d i c a t i o n of what can happen however. Combining the e f f e c t s of i n t e r n a t i o n a l trade and other wheat market r e s t r i c t i o n i n I t a l y , France and Germany, i t has been estimated that consumption was reduced i n 1931-32 by f u l l y 135 m i l l i o n bushels, while production was increased by 105 m i l l i o n . 1 I t has been estimated that i f no r e s t r i c t i o n s had been i n e f f e c t the carryover might have been reduced by 400 m i l l i o n bushels. Under normal conditions, and i f the general l e v e l of prices were about the same as 1932, a change i n t o t a l accounted-f o r world supplies of 400 m i l l i o n bushels may be expected to re-s u l t i n a change of between 15 and 20 cents per bushel i n the 2 p r i c e of wheat at L i v e r p o o l . (vi) How Accurately Can the P r i c e of Wheat be Forecast? The problem of forecasting the world market price of wheat one year i n advance i s at once s t a t i s t i c a l , p o l i t i c a l and b i o -l o g i c a l . The problem i s made even more d i f f i c u l t by the very i n e l a s t i c nature of the demand curve f o r wheat f o r use. As f o r how accurately the p r i c e of wheat could be predicted, we simply do not know. Given comparable s t a t i s t i c s prediction,/f^rmulae, such as that developed by Bosland probably would not be very s u c c e s s f u l . 3 Bosland 1s formula, i n any ease, was based on information a v a i l -able i n October and predicted only for the crop year. E. W.Pjettee 1 World Trade B a r r i e r s i n Relation to American Agriculture, United States Government P r i n t i n g O f f i c e , Washington: 1933,p. 167. 2 I b i d , p. 170. 3 Bosland, C. C«» "Forecasting the P r i c e of Wheat", Journal of the American S t a t i s t i c a l Association, June, 1926, pp. 149-161• 109 has appraised the short term forecasting of commodity p r i c e s i n the United States f o r the period 1920-29. 1 Only those predic-tions made within some s i x months of each c y c l i c a l turning point were included. The turning points were considered to he the 1920, 1922, 1923, 1924, 1925-26, 1927, 1929. His conclusion, after examining the professional forecasts, was that the fore-casters hare been mostly r i g h t l e s s than h a l f the time. Assuming that the forecasting agency could remove any cause of consistent hias, t h e i r errors should he d i s t r i b u t e d evenly among plus and minus mistakes. The negative errors may r e s u l t i n production of too much coarse g r a i n . P o s i t i v e errors, i f large enough, w i l l r e s u l t i n substantial income transfers to farmers. I t cannot be assumed, however, that the errors w i l l be normally d i s t r i b u t e d . Crop f a i l u r e and increases i n speculative demand may go hand i n hand. Increased t a r i f f s , quotas, mixing rule s and export subsidies ar^ the world's answer to large crops. Wheat pric e forecasts might well be l i k e the l i t t l e g i r l with the c u r l . When she was good she was very good, and when she was bad she was h o r r i d . I f forward prices f o r wheat are to be announced i n February to be e f f e c t i v e July to June i n c l u s i v e , the data must be c o l l e c -ted i n January. By that date world carryover (ex-Russia) figures should be f a i r l y d e f i n i t e , and the trend of business should be showing up. There w i l l be no i n d i c a t i o n of y i e l d s , or even 1 Pettee, E. W., Forecasting the Commodity P r i c e L e v e l , 1850-1930. An appraisal of 150 Predictions; A Part of a D i s s e r -t a t i o n submitted to The Faculty of The D i v i s i o n of The S o c i a l Sciences f o r Ph.D. Private E d i t i o n , d i s t r i b u t e d by The Univer-s i t y of Chicago L i b r a r i e s , Chicago, I l l i n o i s . 110 intention to plant. Very l i t t l e evidence as to national p o l i c i e s w i l l be a v a i l a b l e . Under these circumstances, errors i n supply estimates w i l l probably frequently be i n the neighborhood of one to two m i l l i o n bushels, and occasionally as high as four m i l l i o n or more. In the post World War II era conditions of trade are such that an increase i n supply of 400 m i l l i o n bushels might r e s u l t i n a change i n p r i c e of say 20 cents. 1 I f the forecast p r i c e were 2 $1.00, the Government would then pay farmers 10 cents per bushel. The cost under these circumstances would be i n the neighborhood of $40 m i l l i o n . Supposing that such an error occurred on the average every f i v e years, the average cost per year would be $8 m i l l i o n . Even i f the actual cost would be considerably higher than t h i s , i t probably would be p o l i t i c a l l y acceptable. Judged beside the annual expenditure of $200 m i l l i o n allowed the A g r i c u l t u r a l P r i c e s Support Board, the figure i s small indeed. I t seems that a forward p r i c e for Canadian wheat i s a p r a c t i c a l and workable concept. The task of forecasting p r i c e i s an exceedingly complex one, however, and hot to be entered i n t o l i g h t l y . I t would appear that despite the d i f f i c u l t i e s and inaccuracies the gains from such a program would outweigh the cost. These gains would r e s u l t from the increased labor e f f i c i e n c y and better a l l o c a t i o n of fac t o r s 1 This i s nothing more than a"guesstimate". In 1927 Eolbrook Working estimated that i n a year of short supply, a difference of 3 per cent i n the amount of wheat available would make a d i f f e r -ence of 15 or 20 per cent i n the p r i c e . Working, H., "Fore-casting the P r i c e of Wteat", V o l . XI, Wheat Studies, July, 1929, p. 273-287. ' ~ 2 Johnson's suggestion i s that payments be based on the d i f -ference between market p r i c e and 90 per cent of the forward p r i c e . I l l of production among products made possible by the program. ( v i i ) Assuring Forward P r i c e s by Contract. At the close of World War II the Canadian Government entered into negotiations with the United Kingdom f o r a contract to sup-ply wheat. The contract announced on July 25, 1946, was to cover the crop years 1946-47 to 1949-50 i n c l u s i v e . 1 Such contracts as the present one are l i k e l y to provide a pri c e certainty which i s very expensive f o r Canadian farmers. I t i s impossible to prepare accurate estimates of what the wheat agreement cost Canadian farmers. There i s evidence, however, that from 1946-47 to 1948-49 the sum would be i n the neighborhood of $500 m i l l i o n . Estimates prepared by the Sanford Evans S t a t i s t i c a l Service were based upon p r i c e per bushel at an average Saskatchewan point, compared with the farm p r i c e i n the United States. The estimates indicate a difference i n value of Canadian wheat from that deter-mined by the world market as shown i n Table 22. TABLE 22 DIFFERENCE IN VALUE OF CANADIAN WHEAT FROM THAT _ DETERMINED BY THE WORLD MARKET 1946-47 TO 1948-49 2 Difference i n value based Crop Year on U.S. P r i c e 1946-47 $ 126,322,686 1947-48 233,580,351 1948-49 140,705,941 Total - 500,608,978 1 See Chapter 6, Shepherd has referred to t h i s contract as a sort of forward p r i c e . Shepherd, G. S., A g r i c u l t u r a l P r i c e P o l i c y p. 289. 2 Average P r i c e s Received by Farmers i n Canada and the United States i n the Crop Years 1945-46, 1946-47, 1947-48 and 1948-49. Prepared by the Sanford Evans S t a t i s t i c a l Service, d i s t r i b u t e d by the Winnipeg Grain Exchange. 112 (2) Forecasting the P r i c e of Livestock and Livestock Products The writer has searched the Canadian l i t e r a t u r e of a g r i c u l -t u r a l economics i n vain f o r an analysis of the factors underlying the supply and demand f o r Canadian farm products other than wheat* Even i n the absence of such an analysis, some comments can be made* (l) The Demand for Farm Products Other Than Wheat* (a) There i s a high c o r r e l a t i o n between the p r i c e of wheat and that of other farm products* (b) The aggregate demand f o r domestic consumption i s l i k e l y very i n e l a s t i c . (c) The aggregate export demand i s e l a s t i c * but subject to large and unpredictable s h i f t s . 1 (d) Demand f o r any i n d i v i d u a l product i s l i k e l y to be very e l a s t i c because of the easie of sub s t i t u t i o n . ( i i ) The Supply of Farm Products Other Than Wheat. (a) The aggregate short-run supply beyond one production period of farm products,other than wheat* i s e l a s t i c * (b) Some of these products, such as hogs, may have a backward sloping short-run supply curve. These hypotheses may be tested against some of the previous data. P r i c e s of f i e l d crops and animal products would be expec-ted to na i n t a i n about the same general r e l a t i o n s h i p * See Figures 9 and 11. There would not l i k e l y be large d i s p a r i t i e s between r e l a t i v e p r i c e s of various products over a period. See Figures 4 and 12 a, b and c. 1 Among the most serious and unpredictable of these changes i n demand are those attributable to United States trade p o l i c i e s * See Rothwell* G. B., "Beef Cattle Production a Problem", Scien- t i f i c Agriculture, Oct. 1936, pp. 74-82. 113 For any product which can he absorbed e n t i r e l y i n the domes-t i c market, the domestic market w i l l set the p r i c e * As soon as the quantity available becomes large enough r e l a t i v e to demand to make exporting worthwhile, the pr i c e to the producer w i l l f a l l to the world market price, l e s s costs of tra n s p o r t a t i o n . 1 The i n e l a s t i c i t y of domestic demand and fluctuations i n exports and imports of meats are indicated by Figure 16 and Table 23. TABLE 23 TOTAL SUPPLY AND EXPORTS OF MEAT ANIMALS AND CONSUMPTION MEATS 1935-42 (Revised) (In m i l l i o n s of pounds) 1935 1936 1937 1938 1939 1940 1941 1942 Beef Supply 643.2 667.7 672.5 686.9 667.5 696.1 759.7 779.9 Beef Exports 13.8 12.7 17.7 5.8 4.5 3.9 7.9 16.0 0 olv© 0—V© QJL Supply 117.4 125.9 145.4 128.9 131.0 137*5 143.4 129.3 Calves-Veal Exports - - - - - -Sheep & Lambs-Mutton & Lambs Supply 70.7 68.3 67.5 66.3 67.3 59.7 66.5 66.6 Mutton & Lambs Exports .3 .2 .3 .2 .2 .2 *3 .6 Hogs Pork Supply 591.6 667.9 721.2 666 733 992.8 1088.9 1165.1 Hogs Pork Exports 30.3 49.6 37.3 27.2 44.9 61.0 71.6 55.6 Total supply i s t o t a l dressed weight of net slaughter i n Canada, plus f i r s t of year stocks, plus imports. (3) The Accuracy of Forecasts Estimates of the p o s s i b i l i t i e s of successful general farm pr i c e forecasting must, of necessity, be based upon the r e s u l t s 1 See The discussion of problems of an export industry i n Davidson, C. B., " A g r i c u l t u r a l P o l i c y i n Canada", S c i e n t i f i c  Agriculture, Sept. 1939, pp. 1-19. FIGURE 1 5 240 .T ANIM4LS AND MEATS; INDEX NUMBERS OF OUTPUT, EXPORTS, IMPORTS AND CONSUMPTION 1920-1939 220 (1926-30 = 100) J I L 1920 J I I L J I L I I I 1925 1930 1935 1940 Source t Estimates of Production, Slaughter and Export of Meat Animals in Canada, 1939, Dominion Bureau of Statistics, of the l a t e 1920's. During that period the United States Bureau of A g r i c u l t u r a l Economics, and a number of state agencies, under-took to forecast for yearly and monthly periods the prices of farm products. The forecasts varied i n s p e c i f i c i t y from an actual statement of expected p r i c e to a suggestion that the p r i c e might he higher, or lover, than that of the previous period. The unfortunate r e s u l t of the correct forecast of a decline i n cotton p r i c e s i n 1927 was that many people jumped to the conclusion that the forecast had caused the decline. This l e d to the p r o h i b i t i o n of cotton-price forecasting by any employee of the federal govern-ment. There i s a wide d i v e r s i t y of opinion as to the possible accuracy of p r i c e forecasts. Johnson was of the opinion the reasonable success of the outlook programs during the l a t e twen-t i e s indicates that p r i c e forecasts - accurate within an error of 10-15 per cent - are p o s s i b l e . 1 I t should be noted that John-son's estimate was based on United States conditions of demand and supply. In that country a much larger proportion of the t o t a l a g r i c u l t u r a l output i s domestically consumed. The p r i c e making forces, therefore, tend to be l a r g e l y the factors of sup-ply and demand within the country. The prices of many Canadian products depend part of the time on the domestic narket, and part on the world market. A survey of the American l i t e r a t u r e on forecasting the p r i c e of farm products i n the l a t e twenties would indicate that John-son's estimate'of 10-15 per cent i s somewhat o p t i m i s t i c . In 1927 1 Johnson, D. <S., Forward P r i c e s for Agriculture, p. 199. 115 E z e k i e l pointed out that the "determination of even an approxi-mate postwar trend i s rendered d i f f i c u l t by the short period a v a i l a b l e . 1 , 1 Nevertheless, f o r the year 1925, the average d i f -ference between the actual average p r i c e each month fo r hogs and the p r i c e s forecasted was only about 50 cents, or 4 per cent on the p r e v a i l i n g l e v e l . On the other hand, comparison of fo r e -casted prices from July 1925, to June 1926, with the actual prices, indicate that from August to December the forecast missed by a considerable margin, the actual p r i c e running $2.50 to #3.50 below the lower l i m i t s of the forecast - an error of about 20 per cent. A study of f a t c a t t l e p rice forecasts made s i x months i n advance has been done by John A. Hopkins, J r . Under the condi-tions of his study, the average difference between the actual pr i c e s and the forecasts was 3.8 per cent of the ordinates of secular trend. The differences exceeded 5 per cent i n 11 months out of 47, and of these, two differences were greater than 8 per cent. 2 There has apparently been very l i t t l e work done on the fo r e -casting of a g r i c u l t u r a l p r i c e s for periods as long as those r e -quired by a forward p r i c e program. Forecasting f o r periods up to two years may be possible . The a v a i l a b i l i t y and character of the data w i l l l i k e l y be the l i m i t i n g f a c t o r . 3 The short time which has elapsed since World War I I ; the 1 E z e k i e l , Mordeeai, "Two Methods of Forecasting Hog P r i c e s , " Journal of the American S t a t i s t i c a l Association, V o l . XXII, Mar. 1927, pp. 22-30. 2 Hopkins, J . A. J r . , "Forecasting C a t t l e P r i c e s " , JFE, V IX, Oct. 1927, pp. 433-46. 3 See Stine, 0. C , "Data Needed for P r i c e Forecasting", JFE, V o l . 12, 1930, pp. 107-118. 116 lack of world supply and demand data and the l i m i t a t i o n s of the available techniques w i l l prejudice the success of any general farm p r i c e forecasting program. In view of these d i f f i c u l t i e s , i t would appear that a g r i c u l t u r a l p r i c e forecasts backed by p r i c e guarantees, would at present be a p o l i c y fraught with great danger. Such a forward p r i c e program, i f adopted immediately i n Canada, might lead to unwarranted s h i f t s between products and to large subsidies to farmers. B. Subsidies To Agriculture A r i s i n g From a Forward P r i c e Program The major income transfers to agriculture which would arise from a forward p r i c e program are the proposed "compensatory pay-ments" for depression periods. Johnson has proposed that farm pri c e s be maintained during periods of depression at 80 per cent of the average of the three pre-depression years. Tables 24 and 25 are an attempt to estimate the cost of maintaining prices of a g r i c u l t u r a l products during the period 1930-41 at various per-centages of pre-depression l e v e l s . This i l l u s t r a t i o n i s based on the assumption of constant y i e l d s equal to 1926 throughout the period. Government of Canada grand t o t a l expenditures f o r the period 1930-39 are also shown. Estimates of expenditures required to maintain pr i c e s to farmers at the eighty per cent l e v e l are obviously inconsistent with the grand t o t a l government expenditures. Canada would be hardly l i k e l y to accept an a g r i c u l t u r a l p o l i c y which required the a l l o c a t i o n of h a l f to two-fifths of a l l government expenditure to a g r i c u l t u r e . Maintenance of the 70 per cent l e v e l would cost considerably l e s s , but would s t i l l be high r e l a t i v e to t o t a l expenditures. 117 TABLE 24 COMPUTATION OP CASH FARM INCOME PROM SALE OP FARM PRODUCTS, ASSUMING CONSTANT YIELD • TO 1926, For Years 1926-41. <1> (2) (3) wholesale P r i c e Index Numbers (4) Cash Income A Assuming Constant Actual Cash In- of Canadian Y i e l d a 1926, and Unit E l a s t i c i t y come From Sale of Farm Products Year Farm Products 1935-39 « 100 of Demand $000,000 $000,000 1926 963.4 144.4 963.4 1927 940.9 138.6 924.9 1928 1072.5 136.3 911.4 1929 936.3 140.8 939.3 1930 640.5 119.5 797.7 1931 450.4 78.9 526.0 1932 388.5 65.5 437.4 1933 402.0 69.3 462.4 1934 491.6 83.5 556.8 1935 519.5 89.2 595.4 1936 580.1 97.9 653.2 1937 640.0 117.4 783.3 1938 660.8 102.9 686.9 1939 717.0 92.6 617.5 1940 748.2 96.1 641.6 1941 896.4 106.6 711.0 A Column (4) was computed by s h i f t i n g the wholesale p r i c e index Column (3) to base 1926 * 100 and multiplying the new index number f o r each year by $963.4 m i l l i o n . The farmers' d i f f i c u l t y i n depression periods stems l a r g e l y from h i s changing cost-price r e l a t i o n s h i p . In the following tables an attempt i s made to estimate the,costs of maintaining during depression various percentages of average deflated income of three pre-depression years. Tables 26 and 27 show estimates of the costs, had such a p o l i c y been i n e f f e c t during the period 1930-41. The estimated costs (shown i n Column (5), Table 27) TABLE 25 118 COST OP MAINTAINING PRICE INDEX AT VARIOUS PERCENTAGES OP 1927-29 AVERAGE*, AND GRAND TOTAL EXPENDITURES OP THE GOVERNMENT OP CANADA PGR SELECTED YEARS Cost of Maintaining P r i c e Index at Various Percentages of 1927-29 Average Government of Canada Grand Total Expend! tures $000,000 Year $000,000 $000,000 $000,000 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 34.7 306.4 395.0 370.0 275.6 237.0 179.2 49.1 145.5 214.9 190.8 121.4 213.9 302.5 277.5 183.1 154.5 86.7 53.0 122.4 98.3 28.9 121.4 210.0 185.0 90.6 52.0 29.9 5.8 440.0 448.0 531.8 458.2 478.1 532.6 532.0 534.4 553.0 680.8 A Average p r i c e index 1927-29, (base 1926 = 100) « 96. This corresponds to an average annual cash income assuming 1926 y i e l d of .96 x $963.4 m i l l i o n A $924.9 m i l l i o n . 90%, 80% and 70% of t h i s • $832.4, $759.9, $647.4 m i l l i o n s respectively.  of maintaining deflated income at the 70 per cent l e v e l are $4.4, $57.2, and $17.6 m i l l i o n for 1931, 1932 and 1933 respec-t i v e l y . Such expenditures would have been considered large at that time. They would not, however, have been inconsistent with an a n t i - c y c l i c a l p o l i c y , had one been i n e f f e c t at that time. In Table 28 an attempt i s made to estimate costs of main-taining deflated income during a period of depression at various percentages of average 1945-47 deflated income. The actual i n -come data used as a basis f o r c a l c u l a t i o n i s that developed i n Table 26. The highest expenditure at the 70 per cent l e v e l (Column 4) would be $352.2 m i l l i o n . The cost would exceed $250 119 m i l l i o n i n f i r e of the eleven years. I t would appear that t h i s l e v e l of income transfers to agriculture would he consistent with an a n t i - c y c l i c a l p o l i c y . TABLE 26 COMPUTATION OF DEFLATED CASE INCOME FROM SALE OF FARM PRODUCTS, ASSUMING CONSTANT YIELD = TO 1926 For Years 1926-1941. (1) (2) (3) ( 4 ) * (5) Deflated Cash Income Col.(4) Deflated by Wholesale Cash Income D.B.S. P r i c e P r i c e Index Assuming Con- Index Numbers Actual Cash Numbers of stant Y i e l d = of Commodities Income From Canadian Farm to 1926, and and Services Sale of Farm Products Unit E l a s t i - Used by Farmers Year Products 1935-39 * 100 c i t y of Demand 1935-39 = 100 $000,000 $000,000 $000,000 1926 963.4 144.4 963.4 765.2 1927 940.9 138.6 924.9 734.6 1928 1072.5 136.3 911.4 733.2 1929 936.3 140.8 939.3 760.6 1930 640.5 119.5 797.7 691.8 1931 450.4 78.9 526.0 515.7 1932 388.5 65.5 437.4 459.9 1933 402.0 69.3 462.4 500.9 1934 491.6 83.5 556.8 575.8 1935 519.5 89.2 595.4 615.7 1936 580.1 97.9 653.2 665.9 1937 640.0 117.4 783.3 750.3 1938 660.8 102.9 686.9 675.4 1939 717.0 92.6 617.5 621.9 1940 748.2 96.1 641.6 599.6 1941 896.4 106.6 711.0 607.2 A Column (4) was computed by s h i f t i n g the wholesale p r i c e index i n Column (3) to base 1926 a 100, and multiplying the new index number for each year by $963.4 m i l l i o n . I t has been shown that during a depression, p r a i r i e farmers tend to s h i f t from the production of wheat to the tem-p o r a r i l y more p r o f i t a b l e coarse grains and l i v e s t o c k . The small 120 reduction of wheat supply r e s u l t s i n l i t t l e or no change i n the \ worid p r i c e of wheat. The r e l a t i v e l y large increase of coarse grains and l i v e s t o c k products leads to a serious p r i c e f a l l i n the domestic market. This i s because the domestic demand f o r these commodities i s smaller and l e s s e l a s t i c than the world de-mand for Canadian wheat. TABLE 27 COSTS OP MAINTAINING VARIOUS PERCENTAGES OP AVERAGE DEFLATED INCOME OF THREE PRE-DEPRESSION YEARS, ASSUMING CONSTANT YIELD * 1926, FOR PERIOD 1930-41. (1) (2) (3) (4) (5) (6) (7) Cost i n Deflated i | of Main-* Cost i n i \ of Maintaining x t a i n i n g Various % of Pre- Various ? » of Pre-depression Depression Deflated Income Deflated Income Year $000,000 $000,000 10% 80% 90% 70% 80# 90# 1930 mm mm mm 1931 4.3 78.6 152.9 4.4 80.2 156.0 1932 60.1 134.4 208.7 57.2 127.8 198.5 1933 19.1 93.4 167.7 17.6 86.2 154.8 1934 - 18.4 92.7 - 17.8 89.6 1935 - - 52.8 mm - 51.1 1936 - mm 2.6 - - 2.6 1937 - - - - mm mm 1938 mm - - - - -1939 - - 46.6 - - 46.3 1940 mm mm 68.9 - - 73.7 1941 mm 61.3 — — 71.8 A Average deflated income of three pre-depression years * $742.8 m i l l i o n ; 90%, 80% and 70% equal $668.5, $594.2 and $520.0 m i l l i o n r e s p e c t i v e l y . x Columns (5), (6) and (7) are derived from (2), (3) and (4) by i n f l a t i n g by the D.B.S. Index of Commodities and Services used by Farmers. TABLE 23 121 COMPUTATION OF A HYPOTHETICAL0 FARM INCOME SERIES FOR A FUTURE DEPRESSION PERIOD BASED ON ADJUSTED DATA FROM 1931-41 (1) (2) (3) Deflated Cash Income Deflated Cash Income C o l . (2) M u l t i p l i e d by Year From C o l . (5), Table 24 Adjusting Factor A |000,000 $000,000 1930 691.8 1,106.9 1931 515.7 825.1 1932 459.9 735.8 1933 500.9 ° 801.4 1934 575.8 921.3 1935 615.7 985.1 1936 665.9 1,065.4 1937 750.3 1,200.5 1938 675.4 1,080.6 1939 621.9 995.0 1940 599.6 959.4 1941 607.2 971.5 A The adjusting f a c t o r i s used to create a new hypothetical deflated income series which bears the same yearly r e l a t i o n s h i p to the series i n Column (5), Table 26, as the average deflated income 1945-47 bears to average deflated income 1927-29. The adjusting f a c t o r » 1.6. In Table 29 the long-time r a t i o s of wheat, oat and barley pr i c e s are taken as a norm. For each year the pr i c e of wheat which would have resulted i n a "normal" r a t i o to the pr i c e s of each of oats and barley are then calculated. The actual p r i c e s of wheat are also shown. I t i s found that with minor exceptions wheat was underpriced i n the periods 1931-34 and 1939-43, and overpriced i n 1935-38 and 1944-46. I f the Canadian Government decides to support farm income during a future depression, the most economical program might be one based on p r a i r i e wheat. Compensatory payments to wheat f a r -mers would encourage them to stay i n wheat, rather than s h i f t i n g 122 to coarse grains and l i v e s t o c k . P r i c e s of these other products would not then he forced to such low l e v e l s . In Table 29 e s t i -mates have been made of the costs of maintaining the "normal" r a t i o for oat and wheat pri c e s during 1931-34. This" b i t of evidence i s f a r from conclusive. I t does suggest, however, that had $90-$100 m i l l i o n been spent i n 1931-34 i n encouraging wheat farmers to stay i n wheat, i t might have done a better job of maintaining farm income than $300 m i l l i o n d i s t r i b u t e d between a l l farmers could have done i n 1931-38. TABLE 29 COSTS OP MAINTAINING VARIOUS PERCENTAGES OP AVERAGE 1945-47 DEFLATED INCOME*, OVER A PERIOD OP ELEVEN YEARS, ASSUMING ADJUSTED DEFLATED INCOME AS SHOWN IN COL.(3), TABLE 28 (1) (2) (3) (4) (5) Cost i n Deflated $ of Main- Cost i n $ of Maintaining t a i n i n g Various % of Average Various % of Average Year 1945-47 Deflated Income 1945-47 Deflated Income* 80# 10% Q0% 1930 _ _ 1931 3.6 122.0 3.7 124.4 1932 92.9 211.3 88.3 200.9 1933 27.3 145.7 25 . 2 134.5 1934 - 25.7 - 24.9 1935 - - - -1936 - - — -1937 - - - _ 1938 - - mm mm 1939 mm mm — m, 1940 - - — _ 1941 — — -A 1945-47 cash income from sale of farm products, deflated by D.B.S. composite index of pr i c e of commodities and services used by farmers then averaged. 1945-47 average = $1,183.8 m i l l i o n , 80% and 70% - $947.0 and $828.7 m i l l i o n r e s p e c t i v e l y . x Columns (2) and (3) i n f l a t e d by D.B.S. index numbers of com-modities and services used by farmers, August 17, 1944. 123 TABLE 30 ACTUAL PRICE OP WHEAT AND PRICES WHICH WOULD HAVE BEEN REQUIRED TO MAINTAIN PRICE RATIOS AT LONG TIME AVERAGES** 1931-40. (1) (2) (3) (4) P r i c e P r i c e Required to Required to X Equate to Equate to Cost of Actual Long Time Long Time C o l . (3) Equating Wheat Oat Wheat Barley Wheat Oat to Wheal Year P r i c e Ratio Ratio - C o l . (2) P r i c e Ratio t $ * # #000,000 1931 .38 .51 .45 .13 40.3 1932 .35 .40 .40 .05 15.5 1933 .49 .55 .51 .06 18.5 1934 .61 .68 .81 .07 21.3 1935 .61 .51 .50 1936 .94 .91 1.19 1937 1.02 .91 .87 1938 .59 .51 .48 1939 .54 .64 .57 .10 31.0 1940 .52 .59 .55 .07 21.3 1941 .55 .87 .74 .32 99.2 1942 .77 .83 .79 .06 18.5 1943 1.13 1.23 1.14 .10 31.0 1944 1.21 1.15 1.30 • 1945 1.15 1.13 1.15 1946 1.14 1.13 1.14 A Long Time P r i c e Ratios are Oat P r i c e - . 4 7 •D „T - n - Wheat P r i c e Barley P r i c e - . 5 3 Wheat P r i c e Source: Canada Year Book, 1941-48 x Assuming y i e l d equal to long time average of 310 m i l l i o n bushels. 124 C. P o l i t i c a l A c c e p t a b i l i t y of a Forward P r i c e Program Forward p r i c i n g f o r normal periods, i f introduced a f t e r a few years of successful forecasting, would not face serious p o l i t i c a l d i f f i c u l t i e s . The great danger once the scheme were i n operation would be that of large p o s i t i v e e r r o r s . Such errors might be r e a l forecasting errors, or might aris e from p o l i t i c a l expediency. The r e s u l t would be u n j u s t i f i e d large income trans-f e r s to farmers and possibly p o l i t i c a l storms. Such storms could e a s i l y lead to abandonment or paralysis of the program. The opinion p r e v a i l s , among many non-farm people, that the impact of depression i s l e s s serious on farm people. They point out that you can " s t i c k i t out" and get your "three square meals \ a day" on the farm during a depression. Without entering into the controversy, i t i s clear that t h i s f e e l i n g would m i l i t a t e against depression p r i c e guarantees for farmers. The urban work-man may say, "Why should I favor depression p r i c e guarantees f o r the farmer who i s more secure than I am now?" I t i s clear that forward p r i c e s during depression periods, i n the absence of a general anti-depression p o l i c y , would be neither j u s t i f i a b l e nor p o l i t i c a l l y acceptable. I f the Canadian Government adopted an economy-wide program to maintain employment and enhance purchasing power during depres-sion, i t i s doubtful that the electorate would begrudge some assistance to a g r i c u l t u r e . 1 The Canadian Government has en oocasion indicated i t s attitude toward a n t i - c y c l i c a l p o l i c y . In 1 This i s the impression gained from debates on farm p r i c e s , Canada, House of Commons Debates, 1944, pp« 5573-5634. 125 1945, the Government announced, "unequivocally i t s adoption of a high and stable l e v e l of employment and income, and thereby higher standards of l i v i n g , as a major aim of Government p o l i c y " . 1 In the same year, Hon. J . L. I l s l e y (Minister of Finance) said, "In carrying out i t s employment p o l i c y i t w i l l at times be necessary f o r large d e f i c i t s to be incurred while at the same time expenditures are being increased or taxation reduced i n 2 order to aid employment." 1 Employment and Income, King's P r i n t e r , Ottawa, 1945, p. 23. 2 Dominion-Provincial Conference 1945, Dominion and P r o v i n c i a l  Submissions. Ottawa, King's P r i n t e r , 1946, p. 113. 126 CHAPTER 9 CONCLUSION P r i c e p o l i c y should not he regarded as a c u r e - a l l for the problems of Canadian a g r i c u l t u r e . I t can make i t s greatest contribution by a s s i s t i n g the p r i c e system i n i t s function of a l l o c a t i n g factors of production within the farm and between agriculture and the r e s t of the economy. Reasonably accurate pr i c e forecasts, one production period i n advance, backed by price guarantees, would help. The assurance to farmers during depressions of 70 per cent of pre-depression income from sale of farm products would su b s t a n t i a l l y reduce r i s k aversion and c a p i t a l r a t i o n i n g , and lead to increased labor e f f i c i e n c y i n a g r i -culture. In the absence of any comprehensive anti-depression p o l i c y , depression forward pr i c e s would merely r e s u l t i n large income transfers to farmers. This would be neither j u s t i f i a b l e nor p o l i t i c a l l y acceptable. In the presence of a successful a n t i -depression p o l i c y , payments to agriculture under a forward price program would l i k e l y -be much smaller. The economic l i t e r a t u r e of Canadian a g r i c u l t u r a l p r i c e p o l i c y i s a f i e l d which i s f e r t i l e , but as yet has., produced, l i t t l e * The Canadian Government authorizes the spending of up to $200 m i l l i o n per year to support prices of farm products other than wheat, .and has entered into an i n t e r n a t i o n a l wheat agreement, yet there i s 127 p r a c t i c a l l y no published analysis of the pr i c e e l a s t i c i t i e s of demand and supply of Canadian farm products. With regard to al l o c a t i o n of factors of production, estimates of the d i s p a r i t y between the marginal productivity of c a p i t a l i n agriculture and the i n t e r e s t rate, are obtainable only i n a general way by obser-vation and by inference from scattered production function studies* (l) P o l i c y Recommendations (i) For Normal Periods* (a) Canada should begin now to develop a strong a g r i -c u l t u r a l p r i c e outlook program* Such a service could make a worthwhile contribution to the reduction of year to year p r i c e uncertainty. (b) As soon as, but not before, the suggested outlook program proves i t s worth, the Government should consider backing i t s p r i c e forecasts with cash guarantees. The further reduction i n uncertainty which such guarantees would give would appear to be worth the cost. (c) The adjustment of certa i n commodities which have suffered, or may suffer a considerable permanent decline i n de-mand, i s a separate problem. Some compromise has to be made be-tween rapid r e - a l l o c a t i o n of the factors of production and minimum l e v e l s of l i v i n g i n the affected segment of the industry. The present A g r i c u l t u r a l P r i c e s Support Act has to date operated successfully i n t h i s sphere. ( i i ) For Depression Periods. In the event of another depression, i f the Canadian 128 Government adopts an a n t i - c y c l i c a l p o l i c y , a forward p r i c e pro-gram could f i t i n . I t would operate e f f e c t i v e l y to maintain farm income and purchasing power. The costs of such a program would he high, hut the gains correspondingly great. The assurance of a farm income from sale of farm products during depression, of 70 per cent of the pre-depression l e v e l , would contribute a great deal to the reduction of c a p i t a l r a t i o n i n g and r i s k aversion i n a g r i c u l t u r e . The r e -s u l t would be a greater labor e f f i c i e n c y i n agriculture and a larger net product from Canadian resources as a whole. In addition to the improvement i n the combination of f a c t o r s , the maintenance of 70 per cent of pre-depression farm income would allow additional investments i n people. The productivity of the labor force would thus be increased. Consideration should be given to the p o s s i b i l i t y of maintaining Canadian farm income by means of small p r i c e payments to p r a i r i e wheat growers which would discourage d i v e r s i f i c a t i o n during a depression. 129 Appendix i THE SWINGS IN FARM INCOME So f a r as the author knows there i s no published analysis of the e l a s t i c i t y of demand f o r aggregate farm products produced i n Canada* The following chart and analysis are l a r g e l y an adapta-t i o n by John D. Black of the o r i g i n a l analysis by W i l l a r d Cochrane. 1 Curve DED shows the quantities that the buyers of the United States foods, i n the period before the war, were i n the habit of buying at d i f f e r e n t l e v e l s of wholesale prices of farm products. The quantities and the prices are expressed as percentages of the averages. Thus at p r i c e 200, they took amount 113; at p r i c e 100, amount 140. At the upper end of the scale, they took only 83 at p r i c e 300. This i s what an i n e l a s t i c demand curve i s l i k e — a small change i n the amount bought accompanying large change i n p r i c e . In the chart, the r a t i o of p r i c e changes to changes i n amount taken, i s roughly 3 to 1. Given such a demand curve, what happens i f war comes and s h i f t s the demand to the r i g h t — a l l the way to D}Di, l e t us say. The amount that the buyers stand ready to take at d i f f e r e n t prices are a l l increased sharply. I f the supply indicated by curve SS remains the same, pric e s w i l l r i s e from X to X]_. I t may be, however, that the farmers have unused capacity to produce, 1 Cochrane, Willard, Farm P r i c e Gyrations — "An Aggregative Hypothesis", JFE, June, 1947. as they did i n 1941, and w i l l step up t h e i r production quickly to SxSi* Then the pr i c e w i l l tend to s e t t l e down around Xg. I f the war demand then r i s e s s t i l l more to D 2 D 2 * a n a the farmers have no more land, man power and equipment, as happened i n 1944 and 1945, pric e s w i l l s t a r t up again to Xs* 400 300 9 o £ 200. 100 1 iw 1 S 8 \ \ 100 „_ , 200 300 Supply Figure 16 - Variations i n demand of a l l food and supply of a l l food at d i f f e r e n t l e v e l s of wholesale p r i c e , the United States, 1922 to 1940. 1 The l o c a t i o n of the points X, X i , X 2 » X 3 and X 4 , also depend on the slope of the supply curve SS. As drawn, i t i s highly i n -e l a s t i c and r e a l l y represents the way i n which the t o t a l supply of farm products behave when farm p r i c e s go down i n the short run. I t i s a well known f a c t that the t o t a l a g r i c u l t u r a l production of 1 Black, J . D., and K i e f e r , M. E., Future Food and Agriculture P o l i c y , p. 88. " the United States* and most other countries* contracts very l i t t l e with d e c l i n i n g prices* Thus when a business recession sets i n and demand for farm products f a l l s o f f , as to D 3 D 3 i n the chart, prices have no place to go except down to X4« 132 Appendix i i BASIS AND CALCULATIONS OP PRICE COST RELATIONSHIPS OP THREE HYPOTHETICAL FARMS (1) Index Numbers Used (i) D.B.S. A l l Canada P r i c e Index of Commodities and Services Used by Farmers, 1935-1939 s 100. This i s a composite index which includes equipment and materials, tax and i n t e r e s t rates, farm wage rates and farm family l i v i n g costs. ( i i ) D.B.S. Wholesale Priee Index Numbers of Canadian Farm Products, 1935-1939 a 100. ( i i i ) D.B.S. Index of Farm Family L i v i n g Costs, 1935-1939 = 100. (iv) Index of value of B r i t i s h Columbia apples at „ shipping point, computed from p r i c e data i n The Quarterly B u l l e t i n of A g r i c u l t u r a l S t a t i s t i c s , 1935-1939 = 100. (2) Choice of Farms The three hypothetical farms were chosen as follows: (i) A Saskatchewan Wheat Farm. The income record f o r 1946 was assumed to be as follows: Total Income $4,404 Cash Operating Expense $1,441 Cash Costs of Family L i v i n g 799 Interest on C a p i t a l @ 5% 1,050 Depreciation 590 Total Expense 3,880 Net Income 524 Cash Costs of Family L i v i n g 799 Operator's Labor Income $1,323 133 ( i i ) A Fraser V a l l e y Dairy Farm. The Income Record f o r 1946 was assumed to he as follows. Total Income #5,654 Gash Operating Expenses $3,442 Gash Costs of Family L i v i n g 799 Interest on C a p i t a l @ 5% 1,000 Depreciation 400 Total Expenses 5,641 Net Income 13 Cash Costs of Family L i v i n g 799 Operator's Labor Income $ 812 ( i i i ) A B r i t i s h Columbia Apple Producer. The Income Record f o r 1946 was assumed to be as follows: Total Income $4,294 Cash Operating Expenses $2,292 Cash Costs of Family L i v i n g 799 Interest on C a p i t a l @ 5% 650 D epr eci a t i on 500 Total Expenses 4,041 l e t Income 253 Cash Costs of Family L i v i n g 799 Operator's Labor Income $1,052 (3) Assumptions Constant y i e l d s were assumed f o r the entire period. The quality and quantity of commodities and services each farm used were also assumed to be constant. 134 Appendix i i i THE RELATION OF SIZE OF FARM BUSINESS TO OPERATORS' LABOR INCOME There i s usually a p o s i t i v e c o r r e l a t i o n between size of farm and operator's labor income. The following data are taken from various farm management studies. TABLE 31 THE EFFECT OF SIZE AS MEASURED BY CROP ACRES, 1941-42 Crop Acres Per Farm Number of Farms Average Labor Earnings Edmonton Whole Milk Shippers: Less than 140 140 or more 19 23 816 1,418 Edmonton Inspected Cream Shippers: Less than 270 270 or more 24 19 1,105 1,308 Calgary Whole Milk Shippers: Less than 200 200 or more 18 17 2,077 2,752 Source: Dairy Farm Business i n Alberta 1939-43. Marketing Service - Economics D i v i s i o n , Dominion Department of Agriculture, Technical B u l l e t i n No. 67. 135 TABLE RELATION OP SIZE OP FARM GADSBY - DRUMHELLER OF ALBERTA, 32 AND YIELDS TO SURPLUS - INNSFAIL AREA 1943-44. Size Group, Number of Acres Farms Surplus 0-199 200-399 400-699 700+ 34 - 70 15 •••256 13 80 23 510 85 80 52 130 8 600 25 940 35 1,000 120 860 26 70 15 1,400 7 1,640 17 2,680 65 1,230 12 1,370 7 3,400 6 3,940 7 4,960 32 3,080 Source: Farm Business i n Central Alberta, Marketing Service, Economics D i v i s i o n , Dominion Department of Agriculture, p. 23. Bib. P u b l i c a t i o n 823, Technical B u l l e t i n 73, July 1949. FIGURE 17 TEE RELATIONSHIP OP SIZE OP RANCH TO RANCH INCOME 1938-39, 1939-40, 1940-41. RANCH INCOME PER RANCH UNIT 9.00 7.00 5.00 3.00 1.00 .75 1 1.5 2 3 4 5 6 7 8910 15 RANCH UNITS ( i n hundreds) Notei Lower s o l i d l i n e shows 1938-39; middle dotted l i n e , 1939-40; upper broken l i n e , 1940-41. Sourcei Cattle Ranching i n Western Canada, Marketing Service, Economics D i v i s i o n , Dominion Department of Agriculture. B u l l e t i n No. 55, p. 62. 136 TABLE 33 THE EFFECT OH LABOUR EARNINGS OF INCREASING THE SIZE OF FARM . AT HIGH, MEDIUM AND LOV LEVELS OF P.M.W.U. PER MAN, 200 FRASER VALLEY DAIRY FARMS, 1946. P.M.W.U. Per Man Size of Farm (P.M.W.U.) No. of Farms Labour Earnings (l) Low 50-149 125-149 1 150-399 2 400-699 11 29 -4 634 296 XX (2) Medium 150-249 125-149 150-399 1 400-699 2 92 25 XX 833 1,093 (3) High 250-349 125-149 150-3991 400-699 2 700 and over 3 22 13 8 XX 1,166 1,944 2,784 1 One-man farms approximately. 2 Two-man farms approximately. 3 Larger than two-man farms. Source: Anderson, ¥. J . , Farm Organization and Labour Earnings  of Whole Milk Producers of Lower Fraser Valley, 1946. 137 BIBLIOGRAPHY Anderson, ¥. J . , Farm Organization and Labour Earnings of Whole Milk Producers of Lover Fraser Valley. 1946, Department of A g r i c u l t u r a l Economics, The University of B r i t i s h Columbia, Vancouver, Canada, December, 1948. Black, John Donald, and K i e f e r , Maxine Enlow, Future Food and Agriculture P o l i c y , Hew York, McGraw-Hill. Booth, J . 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