Agricultural Farmgate Prices

At a time when Wales aims at being a bigger food exporter to sustain rural communities one has to be sure to understand agricultural markets (WG – White Paper Agricultural Policy 12-20). Farming has its own peculiarities that render a number of the neoclassical paradigms void, and thus rendering the implementation of those dangerous to farming sustainability.

This work is based on interviews with farmers of different region of Wales, England and France over the last years and a critical reading of Boussard J.M “Economie de l’agriculture” (Fr) – Agricultural economics – Edition Economica 1987.

In the British isles we have a temperate climate, but in every part of the world there tends to be some seasonality in weather patterns. For Wales, winter is wet, cold and vegetation growth tends to come to a halt (at different rates depending on types of land). Summer months would be warmer and dryer, the bulk of the vegetation growth would then take place. Cattle, sheep or human needs would be roughly the same all year long and need to be covered. Summer months are thus month of fodder and food storage for Wales farming. But one knows that different years return patterns and there is always a risk of being taken aback.

As for our food consumption we know that despite needing the same amount of nutrients, our body as an ability to store energy as fat and we tend to eat different amounts every day. Sometimes specific food at specific times of the year.

There is a disjunction between the two and it is important to understand from the outset that we need to store or exchange some goods to deal with this issue.

Nota: reminder of the definition of food sovereignty: “Food sovereignty is the right of each nation to maintain and develop its own capacity to produce its basic foods respecting cultural and productive diversity.” Patel 2009.

• A farm as an economic operation:

There are many farms and each of them is a separate and different economic operation. It uses production factors including : tools, building (capital), some inputs, energy (manpower, animal power) and land. Those in different amount, chosen, used consciously in order to have the best crop and livestock system function.

A farming system is in essence sustainable if it can be reproduced year on year using a range of resources. (by the author)

The best doesn’t necessarily means the most profitable one. But we assume that there is a sustainable optimum given the farmer’s objective and his target revenue. Why sustainable first? Because on a farm traditionally family run there is no will to leave the farm. Secondly the farm has to return at least every year (or production cycle) enough to feed the family (and pay taxes, the rent…), the necessary inputs (seeds, oat to feed horses…), and the land fertility all in order to repeat the production cycle. Farming is not a fast speculation, one will plough in a crop, harvest it way before he will be paid as it has usually been the case.

Maintaining this sustainability clearly meant that the more capital and resource a farm had the less averse to risk it would be. Mainly a risk of losing a crop because of the weather, at a time when there were little options than to work more. The production mix out of the farm and the cropping system logic (as well as the peak working times spread) aimed at alleviating those risks. The food self-sufficiency of the farm meant that it was selling little but diversified income, balancing the act depending on the fortunes.

Example: keeping more grain than what is actually needed, cattle playing a role as an insurance and winter reserve in traditional breeds… Use of the multiple historic pillars of welsh farms to pay the rent (sheep, beef, milk, crop, chicken…). From an economic point of view it doesn’t make sense except there is a risk mitigation element to take into account.

Other important farm characteristics:

• Farms tend to be centred, all the more in the UK with most activities and land revolving around the farmyard.
• There is a notion of maximum distance that one can work with on a farm (either for sending animals to graze or to crop), it limits the unit range and size.
• Farming is a relatively large scale activity (except if you do not produce fodders or crops, there were dairy farms in town at some point)

• Finally all changes that one might make in the farming system will take months or years before being visible and whether it is possible to assess it's efficiency. When there is some lives at stakes one has to progress carefully. 

• A transformation from a rural society linked to an agricultural revolution

Our societies have evolved tremendously from being predominantly rural (18^th century) into industrial and now tertiary economies focused on towns. Farming played it’s part (whether it caused, resulted from it or was parallel to it is not our topic today) in enabling this move by increasing its production tremendously from a similar area of land and with a gradually reducing workforce (first as a share of total population and then in real terms).

Overall the density of food producer and consumers was very much disseminated and gradually one concentrated when the other couldn’t.

This increase in land productivity was at the time the result of the implementation of the 18^th century agricultural revolution linked to the adoption of “ley farming”. Namely a greater land production on mixed semi-autonomous farm by maximising the use of the workforce all year round and using a diversity of crops providing all year round fodder. The agronomy logic behind the rotation was allowing for an increased sustainable land fertility with minimal use of inputs (slag, lime and later guano) and capital.

Farms were very autonomous, mostly and were geared towards self-sufficiency. They needed very few inputs. Thus the economic operation of producing and selling foot was only

Welsh Black Cow on of the traditional mixed breeds of Wales. Geoff 1967 (National Library Of Wales)

In the 18^th century (and beginning of the 19^th century) food couldn’t be carried far afield safely. Indeed food produces go sour and this at different rates. One always needed to transform them in order to store them. Transportation would rely on boats and animal power. Most crops would be stored to form milieu less adequate for germs development (most under a form were water and nutrients availability for potential pathogens would be reduced – dried, concentrated, fermented, salted…). Even then food was a biological hazard and during winter month there would be reduced amounts to eat.
 

Thus there was a complementary use of the landscape between areas depending on how far they were from consumption centre (this also meant a relatively low number of buyers already, the drovers). Providing fresh perishable vegetables, milk, finished cattle some farms would be close to the cities. Cream, butter or store producers could be located further away.

The 18^th century agricultural revolution witnessed :

• The end of feudality in the UK and the move into landownership (rents to be paid)
• Enclosure for adoption of agricultural revolution
• Increase in the amount of output for most farms
• Farms were also providing horsepower and textile fibres (wool, flask…)

Henzell, T., 2007. Australian Agriculture. Gives a very good account of historical transformation in food production and exportation.

Before the 19^th century only bottled, couple casked goods would have been traded between countries (often the driest ones sometimes physiologically as mentioned above) mostly by waterways. The revolution of food transportation technique was twofold.

Trading via the sea was the easiest mean of transportation but was still slow and depended vastly on the whims of the elements, thus was sometimes unreliable (by the author)(Bristol 2019)

First with the advent of steam for transportation (steamboats, first used to carry mail and passengers then with a broader usage) travel time was shortened considerably. Steel construction technique offered a whole new range of safe and easy containers for food products. The implementation of steam railway took more time as it required more infrastructure but gradually it innerved every continent. Manutention of product was also greatly simplified. Panama and Suez canals also transformed travel time for boats across the world. Travel was faster and cheaper though still taking days (thus very perishable products like milk couldn’t be carried long).

Farming output (thus the share sold) was boosted by the use of imported inputs (slag, slime, guano…) carried by those new means of transport but it gradually got assisted by other world food exporter (first on grain, wool and then on other produces…). As industries began to be more important in the UK economy it was decided to remove barriers on food imports and offer a testbed for liberal ideologies.

Nota: fuelling rent increases as well.

Secondly food conservation techniques and their wholescale adoption. Apertisation was a great leap forward for the food and by the end of the 19^th century refrigeration was also a possibility.

This move linked to the development of the industry led to the advent of the first food transformation industries (and abattoirs, preserves…) (Described in the Jungle Sinclair 1906). No scrap from production were left without repurposing keeping on the tradition still going in rural areas. The beginning of a concentration of the processing and delivering sector.

• Opening on world markets provoked the first worldwide agricultural prices crisis

In 1870 fuelled by increasing productions from Australia and the USA agricultural prices went down quickly. Farms had to adapt in the UK with its border wide open. There was a reduction in the acreage of cereals grown and many farms went bankrupt!

Farms that implemented a successful agricultural revolution and where about to mechanize found their increased output to be worth much less. The agricultural depression lasted until WWI. Farm adjusted to lesser prices of corn or wool by moving towards more perishable products, livestock based products.

A new market risk had appeared changing the optimum for farms. There was a huge reduction in the cultivated area and on the number of labourer needed. Only producers of perishable food close to consumption centres managed to stay afloat. Many farms were abandoned either the furthest, with poor land or high rents (the two first combined can still be guessed in the uplands today).

Example: in St Davids peninsula farm that got abandoned. Farms in Bala area abandoned. Even with risk price managed by diversity of production it wasn’t enough. In comparison a milk bottler doing rounds near Haverfordwest managed it easier and maintained a high land productivity.

The 20^th century was the fossil fuels century. From these compounds many derivatives were formed and a whole civilisation was put together to replace steam and steal. On the locomotion side, the explosion motor was a revolution it allowed farms to be much more accessible and closer to the consumption centres (along with tarmacked roads), tractors were later available reducing the manpower necessary for peak working times of the cropping system. Shipping undertook a revolution with use of containers and specialized ship. Accompanied by motorisation improved mechanization offered the possibility to substitute man and human power for increased capital cost.

New inputs gradually became available for farms (fertilizer, phytosanitary products) as well as new infrastructure equipment (greenhouses, irrigation ramps and even buildings) to realize the potential of new varieties (crops, breeds…). This allowed farms to depend less from the milieu (either type of land or climate) at an increased capital and input cost, for a much increased product. Those inputs price were linked to fuel prices as they tend to be derivatives, most are not produced in the UK. Interestingly, with the development of biofuels even input prices that were not linked not fuel (soybean, maize, cereals) are now linked to it.

A 5000L milk bulk tank, the production of farm through specialisation has increased but on one output. Farmers can hardly sell all their milk themselves. A 200 Dairy Cows farm would produce enough milk for 38 thousand people (0.1 l of milk per day). Geoff 1973 (National Library of Wales)

But the biggest change in the 20^th agricultural century was the focus on quality and characteristics of farm outputs. Those were first about improving the sanitary quality of the milk production through different handling techniques from producer to consumer. The management of agricultural products from the farm to the consumers to be handled gradually without the need from men's hands. Secondly, as the food transformation industry continuously developed to feed a growing and more concentrated urban population there was a drive for standardisation through an homogenisation of expectations. Grading, marketing and selling were therefore paramount and among the aims of the Milk Marketing Board (UK) in 1932 and have been at the heart of the industry for years.

All those drivers, costly in themselves to implement and adapted to one orientation (or one group of products) as “industrial tools” resulted in a farm specialisation, dropping the previous diversity of outputs. The work productivity increase resulted in an amalgamation and reorganisation of farms. Each farm depending (still) on it’s bio-climatic conditions focused on some products.

But even then there were still a plethora of farms compared to a handful of player in the rest of the industry. But before the advent of supermarkets the distribution was divided. As long as agricultural output prices were guaranteed by governments this imbalance in power was corrected. But when they were not there it ends up in greater price variations.

Nota: for example taxes, grading tend to be billed to the farmers

You might want to drive every day, but one needs food 3 times per day (or 4,5. If more please go see my dad), You could drive your car all day long (and even then you would be limited by the body fatigue), but over a year one would not be able to swallow more than a certain amount of food, most bodies have a satiety feeling (again if not…). The nature of agricultural demand is therefore finite. The demand’s elasticity is low. And many produces are available to feed our bodies, there is a high interchangeability. I can buy potatoes, swedes or meat and at some point I should be full, though I still need to be careful about my nutrients intake and avoid deficiencies.

When drawing price vs demand graphs one sides represents starvation and the other satiety. On agricultural products and particularly staple products this tilting point is very sensible. For other products it is due to how perishable they are.

An example of the price vs quantity graph for both demand and offer on agricultural products , the curve of offer is S shaped in a short timeframe as a result of farming system functioning (rotations, inertia...). The demand is here of low elasticity as shown on the graph with a low response to price variation in terms of consumption; very typical of a staple product. By the author from Boussard 1987.

Most agricultural products are sold on open markets where prices are set as a result of demand from bulk buyers (usually only a handful due to the extreme concentration of the transformation sector) but farms can also have a contract (either on a fixed price or fluctuating) ensuring him to have someone to buy the output but in exchange of given characteristics at given times. It could be done directly with the transformation industry (enterprise or a coop) or a broker.

Those markets tend to feature cyclical prices; mostly on a yearly basis linked to food production pattern (climate linked) or societal consumption trends (lamb at easter, roast at Christmas, salads and barbecue during summertime…) which means that both the demand and the offer fluctuate. Seasonally most of the time.

• But how not to be dependent of those market characteristics?

It is possible for a farm to abstract itself from those variations either by producing items that don’t feature wild price variations. Mostly niche markets, with specific characteristics, reduced volume with a relative organised rarity (or controlled total output) providing stable prices. Those produces are differentiated from others and are branded as a different experience.

Low demand elasticity offer for products, there is a high sensibility to price with increased volumes being consumed for small variations of prices. Here we did not represent an agricultural produce, but the successive adjustment to price would be relatively quick to come to the balance point. Agricultural product can get close to those curves on high demand produces recognised or when the possible quantity sold is very close to the optimum. It would not be the case with a S shaped curve, explaining partially the cyclical logic of some agricultural markets with high variations. By the author.

For example the registered “comté” cheese in France has controlled amount produced every year. A farm shop would allow farmers to set their own price for their products. Producing into schemes. Besides a “comté” doesn’t feel like a “gruyère” or cheddar (all the more the 3kg bricks).

This picture is a tale of product differentiation on Camembert with very different prices and characteristic, and different tastes. You can make sure that the more expensive ones are special. French supermarket tend to have more product references in their shelves compared to the UK ones for the same produces. (By the author)

On the flipside this 1kg brick of cheddar is a commodity and the price of milk to make it was probably rock bottom, I could swap it with another type of brick and probably get the same taste/experience (By the author).

• A matter of scale to understand price setting ?

Another key factor in price settings for farm outputs is the possibility of external competition, either from other farms in the area, the country or the world… Trade barriers (standards, tariffs, quotas) can limit agricultural output link to world prices. The more trade (in and out) and the more support for it in other countries will on the flipside increase the link with world prices.

Trade is another risk or an opportunity, because producing inside one's favourable climate context can be quite rewarding to compete with a comparative advantage during some time on some market. On the flipside in areas on similar production cycle different fortunes on products output (i-e linked to climate) can lead to disastrous outcome.

Example: Even without export subsidy new Zealand has a comparative advantage to supply the UK market over winter and springtime simply because of lower production cost associated with opposite climate alternance. While during this season UK producer willing to produce lamb would have to abstract themselves from the milieu, it requires more inputs and capital (directly or indirectly).

Examples: Russia's drought while the rest of the western hemisphere experienced good crops.

Though one must remember that only a handful of the volume of agricultural goods are considered as agricultural commodities and thus have a quote on world trade exchanges.

Example: USDA 2009-2018 1.7% of the butter was traded on SPOT markets. Most of the rest of the products is already “attributed, contracted”.

• Are farm able to make the most of those parameters to enter the market economy

Farms strategic decisions tend to look at a mean income as well as minimum possible income strategy rather than a profitability maximisation from production factors. In this regard purely market based decision are not usually made, all the more when information to farmers is filtered and government support favours some type of decision. Farmers only hold bargaining power when then sell a distinct product and when they are associated together to face the concentration of the rest of the farming industry. Though those processes are not easy to put into place and deal with. The market is not free before or after farmers.

Through the 20th century governments in the western hemisphere have favoured a specialised model with high unrefined outputs (not transformed as they were before). Using technical equipment to lower the offer curve at position 2 for example. Other mechanism on markets were put in place to favour the uptake of those chances leaving behind the high level of resilience; markets prices were secured by market control tools (storage, demand, export subsidies) to lift up the demand curve or limit the offer one. (even structural measures as helping farmers to exit farming could be seen as way to move the balance)

In the food shop, when a consumer buys a product, he exercises it's market power. Though, given the limited number of options both in terms of retailers and products offered, this choice is rigged and the market is not free either on this side. We need to eat and even if there is little choice we will buy something, we might not even be able to get

The story is similar on the farmer side often constrained by the sheer might of their production and it's relatively short shelf-life (perishability) and the fact that it has a lot of inertia, farmer's have no choice in terms of markets they have access to. Besides as mention evolution prospects are circumvented by current farm structures and farms are liable to market whims (on very small quantities) as well as climatic ones.

Finally the extreme dissemination of production units as well as consumers makes it hard to challenge dominant actors in the supply chain that hold an oligopoly. Therefore reducing our choice. Particularly in the UK the number of outlets to buy food has not increased tremendously.

A small presentation with examples on this topic produced for a presentation to the Welsh Government in December 2021.