Agribusiness News October 2022 – Productivity Matters

Why so important?

“Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” The words of Nobel prize winning economist Paul Krugman capture why most governments place so much emphasis on the pursuit of productivity growth. The Scottish food industry has ambitious growth targets. Achieving these targets requires a step improvement in productivity at both the farm and chain levels.

Technical know-how

But what exactly do we mean by productivity? The output achieved by a farmer obviously depends on the use of inputs like feed, fertiliser, and labour. A farmer that gets more output from the same level of inputs (or the same output from less inputs) achieves greater productivity. So, farm productivity is strongly linked to how well a farmer runs their business. Countries achieving higher levels of farm productivity, are marked by both access to the best technologies and farmers capable of exploiting them.

Worsening terms of trade

Scotland is a big food (and drink) producer so productivity matters because it is key to competitiveness. Exposure to international (and British) competition is rising. The current impact of high fertiliser, feed and fuel prices is obvious and already driving changes in farm management. Perhaps more onerous longer term, our trading arrangements with the EU, Australia and New Zealand have become tougher – less free with the EU and freer with our antipodean mates. Kiwi sheep farmers, for instance, produce far more lambs per person which gives a big unit-cost advantage.

The drive for higher productivity also comes from a declining work force. Not simply less east European workers, but less sons and daughters wanting to succeed given the often better pay and conditions with off-farm jobs.

Direct farm support will also decline. While area payments are likely to continue in Scotland post 2024, funding of vital services like education, health and care seem likely to shrink the overall (c.£600m) farm budget pie. Allocating more of that pie to encouraging public goods provision, will further reduce the share allocated to area payments.

Regulations and rules to protect the environment will also affect how the agricultural industry does things. Environmental compliance pressures should, however, be less onerous than in many competitor countries. The Scottish dairy industry, for instance, is unlikely to face the nitrogen emission rules affecting Dutch dairy farmers. New Zealand sheep production is already dropping and expected to go lower as land goes into trees, sparking concerns about processor viability.

Creating the conditions for better productivity

Countries achieving high productivity invest more in R&D and knowledge transfer processes. Digitisation to enable precision farming, gene editing to reduce chemical use, vertical farming to save on land are exciting new technologies. Governments can encourage companies to invest in R&D via a supportive funding and regulatory framework. Converting great research into proven commercial technologies is the holy grail. The Dutch are masters at it.

Yet probably more important is how well an industry adopts the best technology. Scottish farmers have access to globally developed technology, ideas, and systems. Getting widescale take up of these “spillover” opportunities can mitigate relatively low investment in R&D at the domestic level. Effective knowledge transfer is critical to competitiveness.

Better measurement at all levels important

UK (including Scottish) agricultural productivity has underperformed most other developed countries since the 1980’s according to the OECD, a global think tank. Interestingly, American research found that while both the UK and Dutch took a similar approach to deregulating agricultural research in the 1980’s, agricultural productivity growth has diverged sharply since. There is little evidence to suggest that Scottish agricultural productivity has fared much better than the UK figure.

Better measurement is part of the answer. OECD benchmarking using total factor productivity, especially as it is developed to account for environmental impact, is clearly important. Yet it is almost meaningless to normal people. Some useful metrics would help farmers understand how farm level actions affect national productivity. The Welsh government is consulting on making future support conditional on farmers calculating a range of key performance indicators annually.

Grants, better advisory systems, and support for chain level collaboration are also options directly available to governments to improve take up of new thinking and improve productivity. How to best to shape and fund these options will be an important part of the current Scottish policy consultation process.

Kev Bevan, 07368 825877