Raising the competitiveness of Scotland's agri-food industry
Published on 20 September 2011 in Food, health and wellbeing
Introduction
The European Commission considers productivity to be the most reliable long term indicator of competitiveness, and the Scottish Government's aim of growing the output of the Scottish agri-food industry to £12 billion by 2017 is intrinsically based on a growth in productivity. An unproductive industry will have wider impacts on its position in export markets and, worse still, could lead to loses in market share in the home market.
This briefing discusses the results of a research project which aimed to indicate how Scottish agriculture and the wider agri-food industry can improve its competitiveness through raising productivity at both the farm production and food chain level. The research found that productivity growth has been reducing over the twenty years since 1989, with the rate of slow down increasing over time. The study highlights a number of drivers of productivity of particular relevance to Scotland and discusses a number of areas which need to be explored further by both researchers and industry.
Key Points
The European Commission considers productivity to be the most reliable long term indicator of competitiveness. The Scottish Government’s aim of growing the output of the Scottish agri-food industry to £12 billion by 2017 is intrinsically based on a growth in productivity.
International comparisons of productivity growth are limited, although the evidence that is available suggests that UK agricultural productivity since the 1980s has been lower than countries that were previously comparable.
This research measured the productivity and efficiency of Scottish agriculture, and found that productivity growth has been reducing over the twenty years since 1989, with the rate of slow down increasing over time.
This reduction in productivity growth predominantly reflects in a large fall in output growth, possibly due to structural changes after reform of the CAP, with no corresponding adjustments for inputs. Thus, labour (output per worker) and land (output per hectare) productivity fell to negative levels in the post-2004 period.
A more mixed picture emerges at the farm level. Technical efficiency (TE) fell for general cropping and cereal farm types over the 1989-2009 period, whereas for specialist dairy and Less Favoured Area (LFA) cattle farms, efficiency remained stable. There was quite dramatic downward turbulence in the rate of efficiency for the specialist sheep sector. The LFA cattle and sheep sector has slowly increased mean efficiencies over this time as the impact of specialisation towards cattle and the removal of sheep from these systems may be improving efficiencies.
A review of productivity studies identifies a number of reasons for decline in productivity growth, including: falls in research and development funding; a shift in funding away from productivity towards wider social issues; the loss of advisory services focused on productivity gains; changes in industrial R&D; the negative consequences of subsidies, such as restricting access to new entrants and supporting avoidance of market risk; and increasing constraints on resources, predominantly through global economic and environmental change.
There is a paucity of evidence on the impact of recent CAP reforms on agricultural efficiency, although a recent study, by Barnes et al. (2010), did find a positive effect of recent reforms on English farming. It would therefore be difficult to estimate the possible impact of proposed future CAP reform on UK productivity and efficiency.
Poor productivity growth at the farm level has serious implications for the Scottish Government’s declared growth plans for Scotland’s wider agri-food industry. The study highlights a number of drivers of productivity which are particularly relevant for Scotland. These include: R&D funding trends and patterns; industrial R&D funding; the role of subsidies; the role of extension activity; and growing resource and environmental constraints.
To address these issues there are a number of areas which need to be explored by both researchers and industry. These include:
- Measuring and monitoring changes to productivity and efficiency;
- Measuring the impact of research and technologies on productivity;
- Measuring the impact of extension on productivity;
- Measuring farmer response to innovation adoption and perceptions of extension;
- Exploring options for increasing industry input into research, such as the role of co-operatives in adapting technology to suit regional characteristics;
- Extending productivity measurement to whole food supply chains and analysing the impact of market structures on farmer efficiencies;
- Exploring the targeting of subsidies and the role this plays in supporting productivity growth;
- Examining the role of other causal factors on productivity, such as farm size and access for new entrants into the industry.
Adopting some of these measures may allow Scottish agriculture to reverse the decline in productivity growth. The adoption of best practice measures from advice could also help to counteract some of the negative influence from increasing temperature fluctuations or the variability of a developing global economy.
Research Undertaken
This research measured the productivity and resource use efficiency of farms in Scotland. Productivity can be measured partially (e.g. output per labour input), or “totally” (i.e. accounting for all inputs and outputs). Most UK indicators only measure labour productivity, but this research also offers a total factor productivity (TFP) index for Scottish agriculture over the period 1989 to 2009. The indicators were developed in this study using the aggregate account of Scottish agriculture, which is published on a yearly basis, and gives an overview of how Scottish agriculture is using its resources for major commodities.
The research also uses an approach known as stochastic production frontiers to calculate the technical efficiency of Scottish farms. This approach takes a sample of farms of a particular type from the Farm Account Survey (FAS) data and estimates their relative efficiencies. The most efficient farms represent the best practice frontier i.e. they have the best use of resources and the highest level of efficiency. Once identified then other farms can be measured relative to this frontier and hence each farm gets a score from between 0 and 1.
Policy Implications
Productivity is the cornerstone of competitiveness and is, by implication, an important driver for the future sustainability of Scottish agriculture. Unfortunately, international studies suggest that UK and Scottish productivity growth has lagged behind that of our main international competitors over the last 20 years. Moreover, there is a worrying (productivity) gap between our best and average farmers.
Poor productivity growth at the farm level has serious implications for the Scottish Government’s declared growth plans for Scotland’s wider agri-food industry. Drivers that have been identified in previous reviews and those which are particularly relevant for Scotland are outlined below:
- R&D funding trends: falls in productivity in many developed countries can be linked to a corresponding fall in research and development budgets in the 1980s and 1990s. There is strong evidence to suggest that this has an influence and also offers some return to Government in terms of an investment. It is important to consider not just an increase in investment per se, but also where funds should be allocated.
- R&D funding patterns: there has been a shift away from productivity enhancing research towards public good work, but only recently has work been conducted on whether the two goals of productivity and the public good can be reconciled. Moreover, perhaps for meeting the multiple goals of the Scottish Government, other indices, such as those compiled for water quality by SEPA, should be considered.
- Industrial R&D funding: the private sector and, in particular, the role of the levy boards have a strong influence in productivity growth as their work could be considered mostly “near market” in nature. It is debateable, however, as to how well the private sector and levy boards assess the potential benefits of their investment on productivity.
- The role of subsidies: we find a strong negative effect of subsidies on farmer efficiency, i.e. those farms with a higher proportion of subsidy to output tend to perform less well. Subsidies, and entitlement to subsidies, tend to favour incumbent older generation farmers and protect producers from more adverse market risk. Hence the incentive for innovation-seeking behaviours may be dampened and also affect restructuring efforts.
- The role of extension activity: existing evidence suggests that the loss of public funding for extension services in England has contributed to observed falls in productivity growth, and that Scottish agriculture has a higher performance in terms of efficiency than English and Welsh agriculture. A factor in the latter may be the relative roles and funding of advisory work. In addition, how knowledge is exchanged and the role of significant rural actors, such as vets or other farmers, are quite significant in dictating the rate at which newer, more efficient techniques are adopted and these should be explored further.
- Growing resource and environmental constraints: a number of studies have pointed to increasing pressures on the quantity and quality of input resources, which include significant reductions in soil fertility, and loss of abundance in water resources. Further, increasing pressures on the agricultural system and a cause of growing variability of production will be a changing temperature. Climate change research is becoming an increasingly important dimension to understanding how productivity will be affected.
Author
Dr Andrew Barnes Andrew.Barnes@sruc.ac.uk
