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Research Issues for Future Agriculture: an economist’s perspectiveRoss KingwellDepartment of Agriculture, Western Australia & University of Western Australia Abridged version of an Invited Keynote Address to the symposium “Agricultural Sustainability: The interface between the sciences and economics”, University of Sydney, 27 May, 2005 |
In 2005 drought conditions gripped many parts of NSW, Vic and Qld, and fuelled pessimism about agriculture and its ability to be a sustainable use of the land and water resource. However, the longer term view of agriculture can defensively be more positive. For example, on the basis of international comparison, agricultural businesses in Australia have demonstrated a consistent ability to be both internationally competitive and capable of responding to a variety of trends and challenges. Further, in general, Australia’s main export-oriented agricultural industries have not relied on large transfer payments from governments or domestic consumers (FAO 2003, see Tables 9.2 & 9.3). As a result over the decades raw food prices in Australia have been persistently and sufficiently low so that the raw food component of an Australian consumer’s annual expenditure is a relatively low declining share. So for Australian consumers the Australian agricultural sector has been a relatively low cost source of food and fibre. Governments across Australia have not needed to introduce policies that consistently deliver huge taxpayer or consumer transfers to the farm sector. The farm sector compared to international competitor counterparts is relatively lowly protected, remaining fairly flexible and mostly reasonably prosperous (Martin 2005).
Australian
agriculture currently operates amidst several trends. Among the key trends
are:
(i) consumer-focused production
Across the farm sector and its supply chains there is an increased focus on
responding to consumer-driven demands for such things as food safety, animal
welfare, environmental protection, product quality, affordability, variety
and availability. Also, as the structure and size of populations change in
Australia and in overseas countries importing Australian agricultural
products, and as their wealth and dietary habits change, then what is
demanded from Australian farmers will be greatly affected.
Although it may seem that agricultural businesses will be increasingly constrained by such consumer wants and concerns, the reality for many farmers (especially in broadacre industries) is that there is an increasing array of enterprise, production and marketing options available to them.
(ii) a
lessening of statutory marketing
Gradually agriculture is shifting away from statutory marketing of
agricultural commodities. Increasingly farmers are producers and marketers.
However, this enhancement of marketing options for farmers has placed
further demands on them to either become more competent as marketers or at
least to know who represents value-for-money in the provision of marketing
advice.
(iii)
altered sources of agricultural R&D funding and R&D provision
Of relevance to many providers of agricultural R&D is a shifting emphasis
within agricultural R&D funding. If you stepped back 30 years most of the
funding for agricultural R&D was supplied by the federal and state
governments and channelled through CSIRO, the universities and state
departments of agriculture. Often the focus of the R&D was to lift
production and productivity within agricultural industries. However, now the
direct government funding to CSIRO, the universities and state departments
of agriculture is less likely to be allocated to agricultural R&D. Within
these organizations are competing demands for the funds, so funds that once
may have been spent on agricultural R&D are now allocated to other
activities within the organization such as regulation, public sector
compliance, natural resource management, biosecurity or other R&D priorities
such as post-farm gate issues.
Funding from state governments for agricultural R&D has in recent years in some states experienced a real decline, causing either a rationalization of these services or a shift towards greater dependence on other sources of funds. Currently, state departments of agriculture are debating the merits of rationalizing their R&D efforts to avoid duplication and to create a needed critical mass of R&D effort in key areas. As an illustration, in Western Australia, a single state public sector provider of agricultural R&D has been formed, Agricultural Research – Western Australia; a collaboration between the University of Western Australia, Curtin University, Murdoch University and the Department of Agriculture, Western Australia.
At the federal level, government has shifted from block grants for agricultural R&D to contestable or conditional funding that requires collaborative agreements. For example, since the commencement of the cooperative research centre programme in 1990, and up until 2004 (DEST 2004), agricultural cooperative research centres have received 22 per cent of all the federal funds allocated to cooperative research centres.
Another change in funding for agricultural R&D has been the emergence of the many statutory R&D corporations (e.g. GRDC, MLA) whose mix of grower levies, matched to a ceiling of taxpayer funds, has delivered an increasing pool of R&D funds to a wide range of R&D providers. Increasingly these statutory R&D corporations are setting national R&D agendas and are directing the nature and extent of collaboration between various R&D providers.
A further change in R&D funding and service provision has been the emergence, particularly in the grains sector, of more private firms (Kingwell 2005). Mostly these firms are additional funders of R&D activity, although some, such as multi-nationals, are also R&D providers. Their commercial focus is to develop products, typically new varieties, subject to intellectual property protection. The return on their R&D investment is through seed sales, end point royalties or complementary inputs.
On balance, it would seem that the farm sector has been reasonably well-served by funds for agricultural R&D in recent decades, with more funds coming from growers through either their levy payments or their purchases of inputs protected by intellectual property, although real funding for agricultural R&D from state governments appears to have declined in recent years. The growing relative importance of the industry levy funds has meant that the large R&D corporations exert increasing power over providers of agricultural R&D such as state departments of agriculture, university and CSIRO agricultural R&D groups.
(iv) a more
challenging physical environment
The environment of farming appears to be one that on average is becoming
gradually warmer and drier. Climate change is affecting agriculture and, if
the predictions unfold, the ability of farms to adapt to the change in their
environment will be greatly tested. Dracup et al. (2003) summarise a number
of projected changes to agricultural management as a result of climate
change. Many other authors (Howden et al. 2001, Howden and Meinke 2003,
Howden 2003, Van Ittersum et al. 2003, Fuhrer 2003, Love 2004, John et al.
2005) outline how various enterprises or regions could be affected by
climate change. Across Australia there is variation in the predicted nature
of the climate change, with some regions such as the south-west of Western
Australia forecast to be particularly adversely affected.
The resource condition of some farmland is also being affected by prolonged drought, salinisation (Greiner 1996, George et al. 1997, Kingwell et al. 2002) and acidification (Dolling and Porter 1994). Loss of natural biodiversity (State of the Environment Advisory Council 1996, Productivity Commission 2001) in farming regions and agricultural weed and pest incursions to and from natural habitats adjacent to farmland are problematic. An increasing array of herbicide resistant weeds represents a growing challenge to many farming systems (Alemseged 2001, Weersink et al. (forthcoming)).
(v) more
market opportunities but less social vibrancy?
Greater liberalization in global trade is generating more market
opportunities for Australian agricultural exporters due to their comparative
advantage in servicing some markets (e.g. Soon-Bin 2005). Further trade
opportunities are emerging from the burgeoning wealth of large growing
populations in several Asian countries (FAO 2003). Real price increases for
meat over the first two decades of this century have been forecast by the
CIE (2001).
Some authors suggest a possible reversal to agriculture’s declining terms of trade while others forecast that the cost-price squeeze will continue to influence farming (Pinstrup-Andersen and Pandya-Lorch 1998, Tweeten 1998), restricting its profitability. De-population or slowly growing populations in inland rural regions, linked to increasing farm size and a decline in the size of farm families, will weaken or restrict the social vibrancy of many of these inland regions. Climate change may also make inland living less attractive.
Against the
backdrop of these trends, and others not listed due to space constraints,
what are the key challenges for agricultural businesses? In my view the key
challenges are to develop farming systems, farm businesses and
organizational and reward structures that ensure farm activity is:
(i) based on least-cost, effective and socially accepted methods of meeting
community and political expectations regarding biodiversity, animal welfare,
land, water and air stewardship, and food and environmental safety
(ii) profitable, locally and in some cases internationally competitive
(iii) meeting the social and familial expectations of owners and/or
operators.
Answering these challenges is no simple, easy task. There are a range of pressures, wants and perceptions at work (Bennett et al. 2003). Farm owners want financially viable farming systems and businesses that are not unduly stressful to manage. Rural communities want farming systems and businesses that maintain rural populations and rural lifestyles. Consumers, at least local consumers, want farm businesses to supply a diversity of high quality food ingredients that are safe, nutritious, reasonably priced, produced humanely and without damage to the environment. Governments want farming systems and businesses that deliver export earnings, taxation revenue, employment and minimal environmental damage. They want the visual amenity of rural landscapes maintained and do not want a form of agriculture that requires or relies on large transfer or subsidy payments from government or consumers.
A variety of
approaches is available to respond to these challenges (Bennett et al.
2003). The list of options includes:
(i) formation of environmental markets (Stoneham et al. 2003, King and Kuch
2003, Woodward 2005)
(ii) greater environmental regulation (Harrington and Morgenstern 2004)
(iii) mandatory quality and environmentally assured farm management and
supply chain management
(iv) R&D investment to achieve environmentally benign farm production
processes
(iv) enforced accelerated adjustment to achieve environmental and social
goals
(v) reliance on education and moral suasion (Pannell 2005)
In this paper the focus is on agricultural R&D and its potential role in ensuring that agriculture can respond to the challenges already mentioned, and in that sense be sustainable. In concentrating on the role of agricultural R&D, I am not suggesting that R&D is the sole panacea for enhancing the sustainability of agriculture. The other approaches do have a legitimate role in particular circumstances as the desired means of advancing the sustainability of agriculture. However, the focus on agricultural R&D is due the fact that it is an approach that often has received inadequate attention from policy-makers (Pannell 2005).
Historically, agricultural R&D in Australia has been crucial to the performance of the farm sector (Mullen and Cox 1995, Cox et al. 1996, Mullen 2002; Zhao et al. 2003) and this is likely to remain true (Kingwell and Pannell (in press)). Future agricultural R&D will assist farmers to meet these challenges while also ensuring wider community expectations are met. Mullen (2002), for example, draws on a range of empirical studies and argues that even if only a third of productivity gains in Australian agriculture could be attributed to Australian R&D, the benefit-cost ratio of the investment in Australian agricultural R&D would be more than 2.
Kingwell and Pannell draw on updated forecasts of Mullen (pers. comm.) to paint a very bleak picture of what would be the state of broadacre agriculture in Western Australia in the absence of productivity gains. Although investment in agricultural R&D can occasionally deliver a leap in productivity, more often productivity gains involve small increments. In turn these improvements in productivity often depend on R&D findings from projects funded several years, if not decades, earlier (Alston and Pardey 2001, Mullen 2002). As Pardey and Beintema (2001) observe: “It is the accumulation of research results over the long haul that accounts for the differences in agricultural productivity observed around the world.” (p.2). An implication of these findings is that without maintained investment in agricultural R&D the long-term prospects for agricultural prosperity and sustainability in Australia are worrying.
To beneficially invest in agricultural R&D are there issues deserving special R&D commitments? One broad area is innovation for a warming, drying environment. If the climate change predictions for Australia (e.g. CSIRO 2001, Pittock 2003) are accurate, and there is debate about this (Howden and Meinke 2003, Nicholls et al. 2003, Essex and McKitrick 2002), then the ramifications for the Australian farm sector are potentially serious (e.g. John et al. 2005).
Agricultural
R&D will need to deliver incremental knowledge and innovation that will
reduce the likely losses and adjustment costs associated with climate
change. Some practical illustrations of possible endeavours are:
(i) water harvesting tillage systems
(ii) low cost surface sealants on farm dam catchments that allow run-off
from small rainfall events (e.g. <10 mm)
(iii) low cost desalination plants that use saline groundwater to supply
water to stock or irrigated crops
(iv) greater drought tolerant crops and pastures
(v) improved pasture and crop management decision support systems based on
satellite imagery technology
(vi) assessment of genetic variation across and within sheep breeds
regarding their production response to extreme heat
(vii) effect of prolonged dry conditions and extreme heat on weed and pest
ecology, especially weed seed survival
(viii) housing, building, machinery and outdoor clothing design to
accommodate extreme heat.
Another broad area for agricultural R&D is labour-saving and management-enhancing technologies innovation. The rationale for this is that Australia’s workforce is ageing and labour scarcity is already rising. The size of farm families is shrinking, so farm family labour is becoming scarce as is affordable labour from non-family skilled and un-skilled sources. In the absence of policy change, the difficulty and expense of attracting and retaining farm workers is likely to remain and probably worsen, so innovations that either save on labour or that help retain labour will be useful to farmers.
Further, commercial farms are growing in size at a single location or are diversifying spatially. A consequence is an increased likelihood that a farm will be characterized by greater land heterogeneity, with more soil classes and different landscapes. This heterogeneity, when combined with the spatial comparative advantage of enterprises, means that enterprise diversity often may be desirable. However, the increasing farm size, the maintained or increased enterprise diversity, and the plethora of technology options for the different enterprises will all increase the time and knowledge demands on the farmer. As a result, a limiting factor on farm performance will be the ability of the farmer to manage their time and resources to boost farm profitability. Farmers will benefit from knowledge and innovations that facilitate their management.
Also an
emerging social challenge for many farm families will be how to ensure that
the lifestyle of farming remains attractive to the next generation of
farmers and their partners. Can farm businesses maintain their growth and
profitability and generate lifestyle benefits for all members of the farm
family? So labour-saving, management and socially-enhancing technologies are
likely to be important contributions of agricultural R&D. Again some
practical illustrations of possible topics are:
(i) controlled traffic systems for crop sowing, spraying and harvesting that
become increasingly de-skilled and robotic
(ii) development of sheep strains and/or technologies that make crutching or
jetting unnecessary
(iii) low-cost effective remote-sensing technologies to facilitate
monitoring and management of enterprises
(iv) enhancements in farm buildings, structures, machinery and material
handling technologies to facilitate farm work and to make work practices on
farms safer
(v) information management systems to assist decision-making by time-pressed
farm owners and operators
(vi) organizational innovation, such as greater separation of management and
ownership, to facilitate farm management.
Another broad
area of agricultural R&D arises from the likelihood that the community’s
attention to the environment will not diminish. It is increasingly likely
that consumer and voter sentiment will cause agricultural R&D to focus on
future farm systems and technologies that are both profitable and
environmentally beneficial. A few potential illustrations could be:
(i) profitable crops or tree species that include returns as renewable
energy or carbon sinks
(ii) increased salt tolerance of crops and fodder shrubs that are profitable
yet which restore the visual amenity of salt-affected landscapes
(iii) cost-effective vermin and weed control to enhance native biodiversity
(iv) improved climate prediction systems that more accurately forecast the
extent and duration of drought to facilitate de-stocking, protecting land
and vegetation resources.
(v) low-cost quality assurance systems for farm production.
A last broad area for agricultural R&D is innovation to support farm enterprise diversification. In general, diversified farm businesses in Australia have proved resilient and profitable. Diversity has enabled businesses to cope with variation in climate and to capitalise on changes in the relative prices of agricultural commodities. It has enabled generations of farmers to be equipped with a range of management skills, created flexibility and supported entrepreneurial action. For these positive outcomes to continue it is necessary for agricultural R&D itself to be diversified, especially across enterprises and industries, so that enterprise diversification at the farm-level can continue to be supported through a variety of innovations.
Because we all lack perfect foresight it would seem unwise to advocate use of public funds for spending in only one area of agricultural R&D. Developing forecasts, particularly medium or long-term forecasts for agricultural industries, is known to be difficult (Godden 1999, Freebairn 1975). Technical innovation, pest and disease, policy and market changes are often difficult to predict. For example, Perry et al. (1980) when speculating about broadacre farming in the 1980s pointed to a bold future of grass-free pastures and grassweed-free crops made possible by herbicides. There was no mention of weeds developing resistance to herbicides. Few market and country analysts predicted the rapid economic downturn in several Asian economies in the 1990s. Yet this downturn affected the cattle and wool industries in Australia. So strong caution is merited when making judgements about what will be the future of farming systems and agricultural industries and their R&D requirements. Hence, the preceding list of broad topics for future agricultural R&D, and the examples of R&D, are best viewed as a set of possibilities rather than certitude.
In defining future avenues for agricultural R&D can interaction between economists and scientists be valuable? Historically this interaction has not always been positive. Personalities at times have fuelled divisions rather than collaboration. Mullen (1996) has discussed why economists and scientists find cooperation costly, observing that cooperative work can be a frustrating and expensive process.
For many scientists, their research often needs to be narrow in focus to facilitate the creation of publishable findings in journals. However, this narrow focus can limit the applicability of the research to real world settings, and lessen its accessibility to other disciplines or groups, including policy economists. Economists may judge the work of the scientists as being only partially relevant and inadequate while some scientists may view the information requests of the economists and policy advisers as being imponderable, undeliverable and an intrusion on their research endeavour. The goals and tasks of the scientists and economists are sometimes so different that collaboration risks being unproductive for both parties.
Kingwell (1999) also describes another situation where cooperation between scientists and economists is unlikely and even where antagonism is very likely. The case involves economists employed to conduct a benefit cost analysis of scientists’ R&D programs, yet the scientists are suspicious that the outcome will not be favourable. In this situation it is understandable that the scientists may be uncooperative, dismissive, aggressive or highly critical.
Having illustrated difficult or failed cooperation between scientists and economists, are there counter-examples?
In their interaction with scientists what can economists offer of use to scientists? The economist’s toolkit and mindset is sufficiently rich such that what the economist can offer ranges from simple, fairly common sense insights through to almost counter-intuitive or paradigm-challenging views. For example, take the case of the profit equation for a single enterprise, occasionally used by economists.
where,
π = profit ($)
p = price of the commodity or product ($)
y = yield or stocking rate (t/ha or dse/ha)
a = area allocated to the enterprise (ha)
c = variable costs of production ($/ha)
f = fixed costs of production ($)
For the profit of the enterprise to be improved, one or a combination of the
following changes need to occur through R&D innovation:
(i) traits of the enterprise product need to be beneficially altered so that
it attracts a higher price in the market place (p)
(ii) the yield of the product
increases1(y)
(iii) the adaptation characteristics of the enterprise are altered to widen
its area of suitability and economic comparative advantage (a)
(iv) technical or organizational innovation lowers the cost of variable
inputs or input requirements of the enterprise2
(c¯)
(v) fixed or overhead costs associated with the enterprise can be reduced (f¯)
(vi) characteristics (e.g. environmental externalities, variability,
hazards) associated with the enterprise (and not captured by the profit
equation) can be altered to increase its attractiveness to farmers.
The profit equation, when made the core of an interactive sensitivity analysis involving scientists, can generate insights and findings of great assistance to scientists. It can help identify what characteristics of the enterprise can be most easily and cheaply altered by R&D to generate the largest gains in profit. To be valuable and useful, the application of the profit equation requires collaboration between the scientist and the economist. Often it works best with a team of scientists who each have particular knowledge and capabilities in advising which characteristics of the enterprise can feasibly be altered.
Associated with the profit equation is what economists call the break-even analysis. This is relevant in situations where scientists are keen to introduce a new enterprise to a farming region. The break-even analysis will reveal to the scientist what yield (and/or price) the farmer needs to receive in order to break-even, or in other words, to cover their costs. This information is valuable to the researcher because it reveals what the yield (and/or price) requirements need to be before profits begin to be generated. Often in practice the break-even analysis can be extended to reveal what the yield (and/or price) of the new crop needs to be before it is competitive against the enterprise currently adopted by farmers.
Economists can also provide useful information to research scientists when they collaborate with a range of scientists and others to jointly develop more complex farming system or supply chain models. The simple profit equation cannot capture the complexity of farming or the complexity of supply chains. In the case of a whole farm there can be complementarities, adverse and beneficial, between enterprises; important spatial issues of land heterogeneity; various environmental impacts on and off the farm and temporal issues of nutritional demand, feed quality and cash flow. Harrison and Tisdell (1994) comment how traditionally agricultural economists have ignored interdependencies and a number of sustainability questions, although there is still debate and confusion over what “sustainability” means (Pannell and Schilizzi 1997).
So, in some circumstances, there can be merit in constructing farming system or supply chain models that include financial and environmental impacts, in order to generate insights for researchers about R&D needs and opportunities. In other cases the construction of multi-industry or sectoral models (Ahammad et al. 2001, Johnson and Islam 2003, Zhao et al. 2003) provides valuable information about a range of impacts beyond the farm gate.
Another way economists and social scientists can provide assistance both at research initiation and at later stages is through identifying the likely desirable and undesirable features of the intended or actual research that will facilitate or impede its beneficial adoption or implementation. Some economists and social scientists are aware of the broad literature, including empirical studies, that identify the main factors that influence farmers’ adoption of innovations (Feder et al., 1985; Lindner 1987; Feder and Umali, 1993; Rogers, 1995, Marra et al. 2003), including those relating to natural resource management issues (Cary and Wilkinson 1997, Barr 1999, Pannell 1999 & 2001, Marsh, 2001). An awareness of that knowledge at the outset and at later stages in agricultural R&D can assist scientists to change or improve their R&D efforts to ensure its beneficial impact is greater through a wider, faster or more appropriate adoption of the new knowledge, technique or product.
A related and more usual way economists can and do assist research teams is through ex ante analyses of their research programs. Often economists are employed in ex post assessments of research projects. However, a potentially more valuable exercise is to use ex ante analysis. In this case the research team and the economist collate a range of information about the unfolding or intended research program including time-lines of costs, predicted research outcomes and their probabilities of success, characteristics of the knowledge or product being developed and its likelihood of being adopted by farmers and beneficially altering their profits. The economist can conduct a financial analysis to identify how worthwhile might be the investment in the team’s R&D program. The results of the analysis, when combined with sensitivity analysis, can be the subject of discussion with the research team. Assuming the team has already confirmed that all the assumptions and data that underpin the analysis are sound, the discussion can then focus on how the nature of the team’s research program can be altered either to become financially attractive or be made even more worthwhile as an R&D investment.
A further area where economists can usefully collaborate with other researchers is in foresight exercises. Economists often have access to trade and market data and related analyses which can help reveal possible future market opportunities. Understanding how changes in various countries’ population size, population structure, income, diet, domestic agricultural production capabilities, freight and trade agreements could provide or lessen export opportunities for Australian agricultural commodities is a role for some economists and trade specialists (e.g. Ma et al. 2004). These economists provide useful input in any strategic discussion on market opportunities and associated R&D requirements of agricultural industries benefiting from those opportunities.
A final area where collaboration between economists and scientists is needed and may be helpful concerns the formation of markets for environmental goods and services, including carbon markets, biodiversity markets and refinements to water markets to provide environmental flows. The formation and proper functioning of these markets is no simple task, and for the markets to operate cost-effectively requires economists and scientists to collaborate in establishing appropriate metrics, business rules and verification methods (van Bueren and Bennett 2004, Bennett 2005, King 2005).
This paper firstly has outlined some key trends affecting the sustainability of agriculture, and some emerging challenges for agriculture. Secondly, this paper has listed some possible opportunities and topics for future agricultural R&D that may assist agriculture to respond profitably to those challenges. Thirdly, this paper has looked at the interaction between economists and scientists and illustrated how economists can assist scientists in their R&D efforts.
To ensure that interaction between economists and scientists is appropriate and beneficial is not a simple task. Developing incentive structures to reward collaboration and building a culture of cooperation can involve large commitments of time and effort (transaction costs) with staff whose opportunity cost of time is already high. A challenge for research fund managers and research leaders is to discover low-cost, effective ways of encouraging beneficial interaction between economists and scientists so that end-users of R&D and participants in the R&D process will all be advantaged.
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1: An assumption here is that
there is no offsetting downward movement in price of the farm product nor
that offsetting additional expenditure on inputs is required.
2: An assumption here is that
where fewer inputs are required there is no offsetting reduction in yield.
Also where input costs are reduced then typically additional yield can be
generated through higher rates of application of the now cheaper inputs.
***
Citation: Kingwell, R.S. (2005) Research issues for future agriculture: an economist’s perspective. SEA Working paper 1903. CRC for Plant-based Management of Dryland Salinity, University of Western Australia, Perth.
http://www.crcsalinity.com.au/newsletter/sea/articles/SEA_1903.html
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