Some aspects of Canadian agricultural price policy

Long-run price and income elasticities of demand for agricultural products are low. When agricultural prices move downward relative to other prices, and as standards of living rise, people tend to consume about the same absolute amount of food. Conversely, the supply of agricultural products in terms of output per farmer is expanding. This leads to secular pressure downward on the returns to labor in agriculture. Superimposed on this low return to labor for secular reasons is an instability of price mainly attributable to: (1) changes in supply associated 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 instability and uncertainty affect the actions of farmers and loaning agencies. Instead of seeking to maximize profits in the traditional sense, they seek the maximum profits that can be obtained with safety. The farmer's reaction to uncertainty is to emphasize the use of a factor of production that is willing or able to become a residual claimant. That factor is labor, chiefly because it is 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 is necessary to take advantage of the modern labor-saving technology is inhibited and, as a consequence, the value of the marginal product of capital and its cost are not equated. The resulting inefficiency of labor in agriculture is a loss to society. The existence in Canada of a combination of factors of production within the farm, and an allocation of factors between agriculture and the rest of the economy which 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 justified in seeking ways and means whereby the price system may he aided in its job of directing the correct combinations of factors to the production of the various goods and services people want. Policy Recommendations (i) Canada should begin now to develop a strong agricultural price outlook program. Such a service could make a worthwhile contribution to the reduction of year to year price uncertainty. As soon as the outlook program proves its worth, the Government should consider backing its price forecasts with cash guarantees. The further reduction in uncertainty would appear to be worth the cost. (ii) The Canadian Government has adopted "a high and stable level of employment and Income…..as a major aim of Government policy. The maintenance during a depression, by means of price policy, of 70 per cent of pre-depression farm income would be consistent with this aim. The assurance of farm income, from sale of farm products, at 70 per cent of the pre-depression level would substantially reduce risk aversion and capital rationing in agriculture. The program would also allow greater investments in people during a depression, thus increasing the productivity of the labor force. Consideration should be given to the possibility of maintaining Canadian farm income by means of small price payments to prairie farmers which would discourage diversification during a depression.Land and Food Systems, Faculty ofGraduat