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Arable Agriculture Industries In Canada And The United Kingdom Economics Essay

Executive Summary

Arable farming has always been a key contributor to the economies of both Canada and the United Kingdom. Technological advances over the years have promoted growth in the agricultural markets while financial turbulence and dire crop season weather have caused declines and struggles in the market.

The Structure → Conduct → Performance model was used to compare the arable agriculture market in Canada and the United Kingdom, focusing on the seeded commodities, most specifically wheat.

A structure analysis outlined the fundamental similarities in the two countries agricultural markets, with a discussion on the markets modeling of perfect competition and the higher use of “middle-men”, large agri-businesses which operate grain elevators or stores, in Canada over the United Kingdom.

Following with the discussion of perfect completion markets and the model’s relevance to the agricultural markets in the United Kingdom and Canada, the role of the Canadian Wheat Board and the European Union’s Common Agricultural Policy are conversed. From this it can be seen that the monitoring and intervention by governmental boards in both Canada and the United Kingdom to control the prices of grain results in very similar market conducts in both countries.

The main performance factors in arable agriculture are prices and growth. While prices in both countries can be seen to follow the same trends, growth indicators show a rise in the Canadian agricultural market over the past two years, while the British market has maintained stability at best. A following discussion concludes that the growth seen in the agricultural market can be attributed to the focus on and growth in the oilseed processes industry, resulting in an increase in canola seed crops, with advances in the fertilizer industry adding to the growth seen.

A final conclusion summarizes in tabular form the similarities and differences between the arable agriculture markets in Canada and the United Kingdom, recommending the investment in biofuels, ethanol productions, and fertilizer advancements to promote continued growth in both countries.

Word Count = 2,012

Table of Contents

Executive Summary 2

Table of Contents 3

1.Introduction 4

2.Structure of the Agricultural Industries in Canada and the UK 5

3.Conduct of the Agricultural Industries in Canada and the UK 7

4.Performance of the Agricultural Industries in Canada and the UK 8

5.Conclusions and Recommendations 10

6.References 12

Introduction

Agriculture has always played a major role in the both Canada and the United Kingdom, from the Canadian Aboriginals and the British serfs to modern day industrialized farming. As agricultural techniques have advanced over the centuries, opportunities for expansion and export have arisen, allowing for a growth in both the Canadian and British agricultural industries. The following report examines the differences and similarities between the agricultural industries in Canada and the UK.

The aim of this report is to compare the agricultural industries in Canada and the United Kingdom, noting similarities and differences in the industry in both countries. Comparison will be done using the Structure → Conduct → Performance (SCP) model.

To keep to the length of this report the main discussion area will be focused on agricultural crop production in Canada and the United Kingdom. When discussing prices the commodity of wheat will be used. Wheat prices will be based on the prices of Minneapolis Hard Red Spring Wheat in Canada and LIFFE Wheat in the United Kingdom, the two strains of wheat used as the contract basis for the sale of varying wheat products in both countries.

Structure of the Agricultural Industries in Canada and the UK

Agriculture has been a way of life for many in Canada and the United Kingdom. Statistics estimate that both countries have around 300,000 active farms. Farms in Canada, spread across the Canadian prairies into Ontario in the east, average an area of around 250 hectares, predominately seeded with wheat, canola, barley, oats and peas (Statistics Canada, 2006). In the United Kingdom, most farms are located in the south east of England where the climate is drier, with an average area of 50 hectares of seeded wheat, barley and oats (UK Agriculture, 2006). While both Canada and the United Kingdom have the same number of farms, farms in Canada are mainly arable, while the focus in the United Kingdom is on pastoral farming, with only 1/3 dedicated to arable farming.

Large agribusinesses, such as the publically traded Viterra and Paterson Grain (a subsidiary of Paterson GlobalFoods Inc,) and the privately operated Richardson International, Cargill, and Parish & Heimbecker, act as the “middle-men” in the Canadian agricultural trade process, collecting and storing grain from the farmers at elevators spread across the Canadian prairies and selling it to customers at prices monitored by the Canadian Wheat Board (CWB). Competition is fierce between the agribusinesses, with incentives being used to retain existing customers and poach new customers from the competition. Co-operative grain elevators still exist in Canada, but are becoming fewer and further between, as they are not able to compete with the customer incentives offered by the larger agri-businesses, finding themselves slowly forced to financial buyout and acquisition.

In the United Kingdom, large agribusinesses such as Frontier Agriculture (a subsidiary of Cargill PLC) and Openfield Cooperative, operate stores which act in the same way as the Canadian grain elevators, collecting and storing grain from local farmers and marketing it for commercial sale and export on their behalf. Unlike in Canada, British farmers have more of an opportunity to sell their product directly to the customer, skipping the “middle-men” that are heavily used in the Canadian agricultural structure. Distilleries, flour mills, and malting breweries buy directly from farmers as well as from public stores, allowing the farmer to potentially save on the storage and marketing costs charged by the large agribusinesses.

In both Canada and the United Kingdom, the sale of grain from the farmer to grain elevator, store, distillery, mill, or malting factory is one of the closest markets to model perfect competition. There are numerous farmers across both Canada and Britain; anyone is free to enter the market and start up a farm should they choose. In looking at the sale of wheat, for instance, the product is identical. There are different strains of wheat, however each strain has a set price at the point of sale. Farmers cannot market their wheat in an attempt to sell it at a higher price. If a farmer is selling LIFFE Wheat or Hard Red Spring Wheat they will only be able to sell at the market price for that strain of wheat. The theory of perfect competition also states that if perfect competition exists in the market, producers and consumers must be fully aware of the prices, costs, and market opportunities of the product (Sloman & Wride, 2009). The agricultural industry is a prime example of a market where this can be seen as the CWB and the EU make the prices of all agricultural commodities known to the public in real time.

Conduct of the Agricultural Industries in Canada and the UK

As Sloman and Wride (2009) describe, markets which follow the model of perfect competition can be looked at over the short run and the long run. In terms of the agricultural industry, the short run could be said to be the duration of a season, seeding or harvesting for example. The time period is too short for other farmers (competitors) to enter the market. The long run could be considered to be a crop year, from seeding to harvesting; enough time for new farmers to enter the market, an occurrence most often seen after a previously fruitful crop year.

Following the theory of perfect competition markets, high farmer profits over the long run should entice more farmers to enter the market. This is not generally seen in either the Canadian or British agricultural industries. Basic economic concepts state that all markets are fundamentally driven by supply and demand. Theoretically, in the case of agriculture, the more grain available, the lower the market price; the less grain available, the higher the market price, which in turn should lead to a higher profit for farmers. However, if this were the case, farmers would hoard their commodities after a good crop year, selling only when supply was scare and a high profit could be made. Grain, being a necessity of life with no suitable substitute, has a low price elasticity; if the price of wheat (in the form of bread for instance) increases, even drastically, people will still consume it. On the opposite end of the spectrum, if all farmers have a bad harvest and grain is scarce, the same situation would occur. To prevent a scarcity in world grain supply, governments must intervene and create stability in the market; in Canada this is done by the Canadian Wheat Board, in the UK commodity prices are monitored by the European Union (EU).

The Canadian government intervenes in the income of farms by monitoring the price of grain through ICE Futures Canada and providing subsidies for farmers if a crop year has been poor. While farm subsidies can be claimed in the United Kingdom, the British government focuses more on creating buffer stocks of grain, which are collected after a good harvest year and released as required during a poor harvest to stabilize price, supply, and farm income. By comparing statistics on the Global Market Information Database, it can be noted that the Canadian government was expected to provide $1 billion USD to farmers in 2010, in the form of loans used to ease credit restraints, while the British government does not directly supplement farmers, allowing farmers to instead apply for subsidies, in the form of monetary reimbursement per acreage of land owned, from the EU’s Common Agricultural Policy (CAP) program (GMID, 2010).

Performance of the Agricultural Industries in Canada and the UK

Wheat prices in both Canada and the United Kingdom plummeted in March 2008 at the onset of the 2008 global market crash, falling from a contract price in the area of £190/tonne to a low of £90/tonne in November 2008. The graph below, published by the HGCA, the cereals and oilseeds division of the British Agriculture and Horticulture Development Board (AHDB), shows the drastic drop in LIFFE Wheat prices and the low stabilized prices seen across the United Kingdom until the climb we started to see in June 2010 (HGCA, 2010), a similar pattern to that seen in the Canadian wheat market (CWB, 2010).

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Figure 1: LIFFE Wheat Prices To-Date

Source: HGCA (2010)

Trade prices in Canada and the United Kingdom are relatively similar and can be seen to follow the same trends, rising and falling in a similar fashion. This occurs because the CWB and the EU monitor these prices and fluctuations, setting their prices relative to those seen in competitive producing countries to retain sales.

As Dicken (2007) shows, until the end of the 1990’s, the agricultural industries in Canada and the UK were growing at roughly the same rate. The British agricultural industry then saw a small decline until 2000 when it started to stabilize, while in Canada the agricultural industry continued to grow. Both counties then saw a decline in agricultural outputs, due to a series of poor harvests. Growth hit a low in both countries in 2007, rising slightly in 2008 after a better than average harvest. However, since the financial crisis of 2008 and the start of the current economic recession, the British agricultural industry has started to decline further, unlike the Canadian agricultural industry which continued to grow. The output indices for the agricultural industries in Canada and the United Kingdom were collected from the Global Market Information Database and plotted in the following chart, showing the rise and fall in growth of the agricultural markets in both countries.

Figure 2: Agricultural Output Indices

Source: Global Market Information Database (2010)

The continued growth in the Canadian agricultural market can be attributed to a high demand for canola (Agriculture and Agri-Food Canada, 2010). Canola oil has become popular internationally, being promoted as a “heart-healthy” substitute to vegetable oil, which is made from rapeseed. The opening of two large canola crushing plants in Saskatchewan in 2009 rallied the Canadian grain market and helped it weather the storm produced by the 2008 global market crash. Canola is also used for biofuels in Canada, as seen with rapeseed in the United Kingdom. Growth can also be attributed to technological advancements in the fertilizer industry, allowing for larger crop yields and higher wheat grades.

Conclusions and Recommendations

Both the Canadian and British agricultural industries can be described as models of perfect competition in their structure, however, due to government intervention, they do not follow completely with the theoretical conduct of perfect competition markets. Despite government intervention, the performance of both the Canadian and British agricultural markets is still based on the conduct of the market, which is turn affects the market’s initial structure.

A comparison of the Structure → Conduct → Performance model for the Canadian and British agricultural industries is outlined below:

STRUCTURE

Canada

United Kingdom

Number and Size of Farms

Approx. 250,000 [canada-and-the-united-kingdom-economics-essay.php#ftn1" name="bodyftn1">1] with an average size of 250 hectares

Approx. 300,000 [canada-and-the-united-kingdom-economics-essay.php#ftn2" name="bodyftn2">2] with an average size of 57 hectares

Number of Buyers

< 50

< 50

Product Differentiation

None

None

Barriers to Enter/Exit

None

None

CONDUCT

Canada

United Kingdom

Advertising

High advertising levels from Agri-Businesses across the Canadian Prairies

Moderate advertising levels from Agri-Businesses and distilleries, mills, etc in the farming districts

Pricing Behavior

Prices controlled by the CWB

Prices controlled by the EU

Collusion & Mergers

Mergers and acquisitions seen in abundance

Mergers and acquisitions seen on occasion

PERFORMANCE

Canada

United Kingdom

Price

Varies with crop quality and demand; price ceilings implemented by the CWB

Varies with crop quality and demand; price ceilings implemented by the CWB

Product Quality

Varies with the crop year weather conditions

Varies with the crop year weather conditions

Technical Progress

High

Moderate – High

Figure 3: SCP Comparison – Canada vs. UK

Due to the struggles of the current agricultural market in the United Kingdom, new farmers have been hesitant to enter the market, unlike in Canada where profits from the production of canola have enticed new farmers to enter the market and current farmers to plant more acres of canola seed. Following the Structure → Conduct → Performance model of markets, the British agricultural market can be predicted to continue as is, with growth slowly starting to climb from year to year as the demand for biofuels increases. The Canadian agricultural market will continue to grow due to the current demand for canola and biofuels.

Technology is the key to growth in the arable agriculture industries of both the United Kingdom and Canada. With a push towards sustainability, the creation of biofuels and the production of ethanol have promising outlooks for the use of agricultural commodities. Both countries have invested significantly in these areas in the last few years, an investment which should continue in the following years. Canada has also seen a large growth in the fertilizer industry, with large agri-businesses focusing their 2010/11 capital plans on the construction of technologically advanced fertilizer blenders, a venture that the United Kingdom would be wise to follow.

It can be said that, fundamentally, the arable agriculture industries in the United Kingdom and Canada are equivalent, as shown by the use of the Structure → Conduct → Performance model. Minor differences do exist, as weather patterns, crop yields, and seeded commodities vary by geographic location. However, due to similar market structures and government monitor and intervention, both markets primarily follow the same growth patterns, an can be predicted to continue to do so for the foreseeable future.



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