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Competitiveness
Competitiveness is a relative concept. It depends on how well the sector here is performing and how that compares with our international competitors. Improving the competitiveness of the industry is likely to hinge upon influencing how it uses its resources to increase the value of its output. Factors such as the exchange rate will also have a major bearing on competitiveness, but these tend to be determined in a broader macroeconomic context. There is little or nothing that can be done at the industry’s level that will have any influence on these.
England’s farming industry is made up from a large number of (mostly) small businesses. These businesses are generally price takers for both their inputs and their outputs – the individual businesses can do little to influence the prices they buy or sell at. The main thing that farmers can do to raise the value of the sector’s output compared to the cost of inputs is to improve how efficiently inputs are converted into outputs i.e. its productivity. Improving productivity relative to our peers will create competitive advantage. This will allow the sector to capture a bigger share of the market and to increase its earnings.
Indications are that improving the efficiency of farm businesses will also have a key role to play in improving their environmental performance. It should help to reduce their carbon footprint and lower their greenhouse gas emissions.
The Treasury has identified five areas or drivers that are of particular importance for improving productivity: physical capital (investment); human capital (skills); innovation and technological progress; competition; and enterprise.
More recent research suggests that three groups of factors are particularly important to productivity growth:
- education and skills;
- innovation and technology transfer; and
- business structures and organisation.
Well-managed businesses were found to perform significantly better than poorly managed ones, with higher levels of productivity. For agriculture, research evidence suggests that productivity is heavily dependent on the structure of the industry and that increasing farm size (and specialisation) is a key driver of productivity.
Broadly speaking, UK farming’s productivity record has been lacklustre with no significant improvement made in productivity since the mid 1980s. Research also shows that the gap between those farms on the frontier of performance and the rest has been increasing over time. Stakeholders seemed to agree with this picture of poor productivity growth when we spoke to them. They recognised that many producers’ performance had slipped back compared to their peers: It will be important for the sector to increase its productivity so it can sustain incomes over the longer term.
There is enormous variation in the performance of farm businesses. Achieving significant improvements in competitiveness is only likely with structural changes within the sector. Key drivers for raising productivity are increases in scale and specialisation. The increased use of Joint Venture Farming arrangements offers some potential to implement such changes.
With the possible exception of competition, stakeholders considered all of the Treasury’s ‘Five Drivers’ to be areas in need of further development. Given the generally fragmented nature of the industry and the fact that businesses are price takers, competition between businesses was not seen as an area of particular concern. Instead, stakeholders thought that greater co-operation and collaboration between businesses had the potential to raise productivity. This would make it possible to use resources more efficiently and to share knowledge.
However, it shouldn’t be forgotten that businesses find it difficult to enter the sector or expand (largely due to high land prices). This is thought to act as a brake on competition which reduces productivity growth.
Farm businesses can also improve productivity by benchmarking – comparing their performance against others. They can then take steps to follow the example of the best performing businesses.
- What is the relative importance of different productivity drivers and where should efforts be concentrated to yield the greatest impact in terms of improving productivity in agriculture?
- ‘Business structure and organisation’ are considered to have a major impact on driving productivity. What do you consider to be the implications of this for the agriculture sector in England in terms of future structural change?
- What do you consider to be the major factors that will drive the structure of the industry?
- How far does farming’s current structure inhibit (or promote) improving its competitiveness and what are the implications for structural change?
My comments are made with reference to the UK grain sector.
Grain yields have ceased to improve since the early 80′s. The scientific revolution of the 60′s and 70′s delivered huge advances in Plant Breeding and Agrochemicals in particular. These advances allowed UK farmers to improve their technical performance by some quantum. In the mid 80′s Europe went into surplus and from this time there have been disincentives to increase production. In the era of the early 80′s UK grain farmers were prosperous, their production was wanted, the consumer was still paying an ever lower proportion of disposable income on food and in terms of relative global efficiency UK grain farmers were near the top of the pile.
During the period between the mid 80′s and today, efficiencies in food production to the UK grain farmer have been restricted to a more knowledgeable (and hence lower volume) use of agro-chemicals, big improvements in machinery design, tractor horsepower and efficacy at transferring that horsepower to the soil. This has continued to reduce the real and relative cost of food to our consumers. Simultaneously it has enabled an improvement in the environment of our farmland. However these technologies have also been available (and largely invented by) our competitors. However in a context of remaining globally competitive, Europe (And the UK in some instances more particularly than the rest of the EU) has become, and continues to become increasingly uncompetitive, for it does not have access to the best of modern day scientific advances. Competitor crops yields continue to show significant year on year yield gains, whereas Uk yields are stagnant at best. New legislation, coupled with the forces of nature, will probably even make our yields fall whilst our costs of production will rise. (Here I am thinking of the removal of many agrochemicals and legislation to prevent the most economic use of fertilizers. At the same time, natures ability to manipulate weeds, insects and diseases to become resistant to our current and reducing armoury will cause an increasingly expensive and complex farming challenge.) Because of the EU attitude to science in food production, little conventional science or plant breeding is being undertaken to benefit the UK cereal grower. In contrast Maize, Soya, Sugar Beet, Cotton and many other crops that are being grown outside of Europe, are seeing significant gains in both yield terms and reduced costs of production. In particular both Genetic modification and hybrid plant seeds lead to the ability of our competitors to remain profitable at prices that now see our UK grain production in financial cuckoo land.
The environmental and financial benefits to a recession hit, population increasing and environmentally challenged world, where less inputs can produce more food at less cost of production per tonne are available to virtually all the worlds farmers other than Europe. Moreover if the world is to pull out of the global recession successfully, the increasing population will have increased expectations of how much food it desires!
Somewhat hypocritically The EU consumer can benefit from global food production methods and prices today even as EU farmers are not allowed to use the very techniques that allow for such low food costs!
As a UK grain farmer all I wish for is the chance of equal access to the cutting edge technology that would once again make UK farmers able to exploit the natural advantages of our soils and climate to the full.
As a world citizen I recognise the finite nature of our fossil fuel and fossil feedstock supply. Even the most skeptical citizen would admit the distinct possibility that the use of this feedstock is responsible for environmental damage. Therefore the most efficacious trapping of sunlight on our planet will be necessary to produce a sustainable solution to mankinds needs and aspirations.
Competitiveness of English Agric:
- good rain/ evapotranspiration balance – yields not determined by rainfall
- good soils
- yeoman farmers/ productivist ethic – flexible
- technical capacities
- economic integration ( dynamic/ adapt to ‘world as it is’ [signals])
- favourable public perception of farming and farm environment
- ample, and technically efficient, supplies of sprays and fertilizers
The priorities identified in the Commercial Farmers Group Competitiveness paper are relevant to Fresh Produce but we would put less emphasis on CAP Reform and even more on the Research and Development and Training, Education and Skills priorities. For Fresh Produce there are other very important elements. We have a fragile supply chain, primarily due to the apparent lack of interest in the wellbeing of UK primary Fresh Produce producers shown by the UK Retailers.This lack of concern in a “market” which does not operate freely (generally prices are dictated) results in a continual squeeze on Fresh Produce prices with a resultant lack of reinvestment and innovation at field level. At some stage Government, who have of course appreciated the retailers ability, through their dominance, to hold down prices, will have to decide whether medium and long term this retailer pressure is good for consumers.
The second important element for Fresh Produce is the availability of people to work in the field with the desire to perform capably and with relevant skills. Government through the SAW Scheme has been very helpful on this. The third element for Fresh Produce, particularly, is the availability of water; this will undoubtedly become an ever more pressing issue.
Finding alternatives for the Pesticides that are being lost will be critical for competitiveness in the future.
Finally the industry itself has not been good at collaborating whether it be on marketing or promotion or behaving as efficient businesses. This latter point is illustrated by the lack of enthusiasm for cost benchmarking and even when it is done, doing it inadequately.
I will comment on the sectors of agriculture that I have experience: cereals, oilseed rape, potatoes, sugar beet, peas for freezing and pigs.
Resilience in business is the ability to withstand shocks such as adverse trading conditions or major adverse weather events. Our business has built in some resilience by diversity of both geographical location and agricultural sectors. However a major part of resilience is the financial reserves built up over many years of profitable trading which provides the ability to finance shocks. Our and any other business can only remain competitive in the medium and long term if it is profitable, a profitable business is a competitive business and will be a resilient business, so the key to resilience and competitiveness is sustained profitability over a number of years.
Pig efficiency continually improves, we have the advantage of being close to our market but have been disadvantaged by the unilateral welfare regulations on stalls and tethers that the UK Government passed in the early 1990’s which came into force in 1997, this was a major cause of the decline in the size of the UK pig breeding herd from around 800,000 sows in 1997 to around 400,000 sows in 2009. This introduction of UK unilateral legislation (not EU legislation) to the pig sector whilst still allowing imports into the UK from welfare systems banned in the UK has had a catastrophic effect on the competitiveness and hence profitability of the UK pig industry. The pig sector has come through this “leaner but wounded” after several years of heavy financial losses and has only recently made up those losses and at the cost of several years of little re-investment in buildings which in the longer term will affect competitiveness. Unilateral legislation which damages a sector’s competiveness must never be allowed to happen again.
The UK has some of the most productive and highest yielding soils and beneficial climate for rainfed temperate agriculture in the world producing some of the highest global yields per hectare of wheat, barley, oilseed rape, potatoes (significant proportion now irrigated) and peas for freezing. However the UK has static productivity (yields) over the last 20 years in wheat, potatoes, oil seed rape, and peas. Year on year we are losing our competitive advantage. Sugar beet has been the exception with large yield increases over the last 20 years.
On a global scale there have been substantial improvements since 1996 in productivity of oilseed rape, soya, cotton, maize and barley. 4 of these crop productivity gains are largely due to GM technology, barley has been a catch up from the advances made with wheat in the 1970’s. We in the UK cannot use this technology, some of the problem is the EU regulatory regime for GM. The EU and the UK must adopt the commercial use of this technology as soon as possible, although there will be a time lag between approval of the technology and its application to crop varieties adapted to UK conditions.
The switch from funding research along the whole R&D chain which started prior to the Barnes report of 1989, to that of only funding basic research has put UK agriculture and horticulture at an increasing competitive disadvantage as each year goes by and must be reversed. We must encourage basic research scientists to focus their research towards industry problems, in other words move away from research for publication to research for development. We must attract young scientists into agricultural science as a career path, and create/maintain at least one specialist research institute for basic and applied research in each sector of agriculture (ruminants, pigs, poultry, cereals, potatoes, legumes, fruit, vegetables and horticulture).
One of the basics which many forget or do not know is the importance of the genebanks (seedbanks) as a resource for future breeding programmes particularly for traits that will help us feed the world with the challenges of climate change and more sustainable use of natural resources (water, soil, nutrients, changing pest and diseases etc). These genebanks require funding both for maintenance and characterisation of traits so that they are there and understood when required to provide the diversity of genetic material to help mitigate the effects of climate change and the more efficient use of natural resources.
There is tension between the production of food and the environmental schemes. In the UK it can be argued that both the Agricultural Policy has failed over the last 20 years as demonstrated by the falling level of self sufficiency of UK food production and the Environmental Policy has also failed by the decline in the indicator species used in the measurement of biodiversity. I pose the questions, can one policy deliver both food production and environmental benefits? Should there be one policy instrument for agriculture and another policy instrument for the environment? There is inevitably conflict between maximum food production and maximum biodiversity as both are competing for the same resources therefore an optimal balance has to be struck, this must take into account that best quality land produces the food so leaving more other land for nature. The existing environmental schemes are very bureaucratic and many argue do not deliver substantial environmental benefits and are not cost effective, a better solution must be found.
Thank you for all of your comments to date. These will really help us but in the final week we’d like to get as many contributions as possible to help us develop our thinking.
Although we haven’t analysed and assessed the responses in detail, some general points are beginning to emerge.
There appears to be widespread agreement amongst contributors that key to improving resilience is increasing and sustaining profitability, with diversification also being seen as helpful.
There is a wider range of views on what should be done in addressing the competitiveness of the industry. Some contributors have suggested that we need to move to more localised and smaller scale production whilst others have noted how small scale farmers can become tied to the business and unable to draw income from other activities. We have also seen views expressed on a need for larger and more efficient farms. With respect to benchmarking, some concern has been expressed about its practical application and the need for IT infrastructure.
Key risks of animal disease and price volatility have been identified by many contributors, as have impacts on the soil and water availability. The impact of ‘peak oil’ is another risk which has been raised by some contributors.
A number of you have expressed concerns over the impacts of regulation on farm businesses and we have received suggestions on how regulation might be better targeted for the industry.
There seems to be a large measure of agreement about the key areas that we identified for development to improve resilience and competitiveness. The relevance of developing and applying R&D has drawn a number of views, with a number of contributors seeing a need to enable cutting edge technology to be applied. The requirement for increased skill levels in the industry and to develop career paths has also been noted, though concerns over the ability of time-poor farmers to access training have also been raised.
The usefulness of joint ventures has been discussed but better marketing strategies and the use of derivatives have been said by some to be more appropriate for managing risks.
Although the summary above doesn’t capture everything that is in your posts, we will be drawing on the detailed and nuanced points to develop our analysis. We also look forward to seeing more post on these issues as we enter the last week of the discussion.
Andy
The competitiveness of England’s farming industry is something that needs to be addresses, as has been mentioned this has not improved much since the mid 1980s and there are some factors such as the weather that should give England a competitive advantage. In addition to the factors that have been mentioned already one factor that has not been identified as the drivers to improving productivity is confidence. If you have an industry that is confident about its own future, with the people and the businesses around it also confident about its future it will have a huge impact on the productivity and competitiveness of the industry. An industry that is confident about its future will attract people to work in the sector with higher skills levels because they see interesting and challenging industry with good career prospects. If you have an industry that is confident about the future with good people working in it, it is easier to attract physical capital. Currently often even people directly involved in agriculture do not have the confidence to invest in the sector. The uptake of new innovations and technology transfer often has a short term cost, although there can often, but not always, be significant long term gains. Again farmers need confidence to make the investment and take the risks involved in innovation and technology transfer.
In recent history agriculture has lacked this confidence about its future, yes poor profitability in some sectors may have been a factor but there are many other reasons, such as: the big challenges it has faced with BSE, Foot and Mouth, Blue Tongue, Swine Flu etc to mention a few, the negative publicity the industry has received, the fact that agriculture is so entwined with politics and Government, the comments and actions of the Government with relation to agriculture can have a big impact on its confidence about the future, which effects its confidence to invest and so effecting competitiveness in the long term.
Increasing confidence in a whole industry will not be an easy job however, some of the talk recently about world food security have enabled farmers to see started to see they do have a future and give them the confidence to invest in that future.
The Commercial Farmers Group (‘CFG’) has produced a paper “Let Agriculture Compete” which is available on its website http://www.commercialfarmers.co.uk
This paper highlights the growing importance of world-wide food security and hence the need for a competitive UK agricultural industry . The recent food price riots in food deficient countries demonstrated this, both directly, and perhaps more importantly through the total or partial food export bans which 40 countries subsequently introduced in response to the perceived food shortage in their own countries. The UK cannot assume that imported supplies will always be available at an affordable price.
The CFG paper goes on to list 10 factors affecting competitiveness of UK farming. In most of these, UK farmers are at a disadvantage compared with their main competitors in the EU and beyond. The paper then concentrates on 3 of these factors:
- The UK government approach to implementation of EU Common Agricultural Policy policies
- Research, development and technology transfer
- Education, training and skills.
There is, of course, a relationship between resilience and competitiveness – but the consultation places undue emphasis on resilience and insufficient emphasis on competitiveness.
Competitiveness and Resilience – Over the years the UK agricultural industry has proven to be highly resilient. Some may say too resilient because it has been possible for many inefficient farmers to survive – thus holding on to assets which could have passed to more efficient farmers. The paper lists some factors which have provided a high degree of resilience. Of these, the capital structure is the most important. Over 90% of farmers own at least some of the land which they farm plus one or more houses. The value of agricultural land and the associated housing is strongly inflated by factors unrelated to the profitability of farming – especially the attraction of the rural life style to non-farmers. As a result, the industry is financially very low-geared (10-20% depending on the values used). Exceptions to this generalisation are in the pig and poultry sectors and, to some extent, horticulture. Often these use specialist buildings and very little land – so resilience is lower in these sectors. This has been demonstrated clearly over recent years with pigs and poultry where there has been high price and input cost volatility and many UK producers have not been able to compete with imports from their continental counterparts where animal welfare standards are lower.
For most farmers, however, resilience is high – and they will be able to withstand the increasing price (and perhaps yield) volatility which we anticipate in future due to lower world stock:use ratios and lower levels of support.
However, where greater resilience is needed, the strongest method of encouraging it is through greater competitiveness. Greater competitiveness leads to higher profits which can be retained in the business to cushion future stocks – or can be invested in fixed assets, diversification, vertical integration or business restructuring – all of which will normally enhance resilience.
This is why CFG believes the majority of the emphasis, by far, should be on improving competitiveness.
Just querying the statement “Some may say too resilient because it has been possible for many inefficient farmers to survive – thus holding on to assets which could have passed to more efficient farmers.”
This begs the question “what is an efficient farmer”. An efficient farmer could be defined as one whose business is so structured that he can survive increasing bureaucracy, market prices that for beef and sheep remained at 1980s levels until the last year or so and still managed to keep a roof over the head of his family.
Indeed if you were to define a farm as efficient by return on capital, one where they maximised food production could well be less efficient than one where they padded out a bit of dog and stick farming with a combination of ‘horsey-culture’, caravan storage and rough shooting.
After all, given the low priority food production has had in the eyes of government for the last few decades, we could hardly define agricultural efficiency in terms of quantity of food produced
Jim
Just to follow up on the example given that “one person milking 100 cows cannot increase to 120 cows”
This is one area where regulation has impacted directly on competitiveness. In the 1970s and 1980s we expanded cow numbers gradually. We might have a cubicle house suitable for 60 cows, but we increased numbers to 80 cows because 10 of the extra would be dry and housed in an old shippon whilst the other ten could be high yielders pampered in another shippon. Very sub-optimal because we were carrying silage to them in wheelbarrows but it meant that we had the extra 20 cows producing milk, and therefore an increased income stream, which allowed us to put up the next cubicle house for 40 cows bringing up the numbers we could cope with to 100. Of course slurry storage didn’t increase but we carted it more often because when you know your land you know where you can get on with a couple of loads first thing in the morning.
With numbers up to 100 cows you then have the increased income stream to put in bigger slurry facilities which can cope with 140 cows, and you then up your numbers to 120 because, again, you can have 10 cows dry in one shippon and ten pampered high yielders in the other, and the wheelbarrow and fork came back into use. We could fund expansion from the income the expansion was already generating.
Planning and environmental regulations mean that now the whole process has to be ‘big bang’ in that you always have to have adequate slurry storage at all times and ‘creeping expansion’ is an awful lot more difficult to organise. Bringing in extra labour was easier because you could build gradual expansion round a young family member going through school and college, slowly training up an existing young employee, or the use of a contract milker to give you the chance of a weekend off occasionally, but with the big bang approach you’re stuck with having to fetch a new person into the team from day 1 with the extra costs that that cause.