Productivity in agricultureProductivity in agriculture

Christine HolleranDepartment for Environment Food and Rural Affairs

Agricultural Statistics and Analysis Team

Productivity in agricultureProductivity in agriculture

• Key component of competitiveness; how well an industry turns inputs into outputs.

• Total Factor Productivity (TFP) shows the volume of output leaving the industry per unit of all inputs.

• TFP = (Total output at market prices) /

(Total inputs+entrepreneurial labour)

Productivity in UK agriculture - trendProductivity in UK agriculture - trend

Total Factor Productivity of the agricultural industry up to 2006 with projections up to 2011

0

20

40

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140

1973

1975

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1981

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1987

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ind

ex 2

000=

100

Actuals to 2006

Baseline projection

Assuming high productivity gains

Research project on productivity in Research project on productivity in agricultureagriculture• Efficiency and Productivity at the Farm

Level in England and Wales 1982 to 2002 (David Hadley)

• Productivity and International Competitiveness in European Union and United States Agriculture (Eldon Ball, Jean-Pierre Butault and Carlos San Juan Mesonada)

• http://statistics.defra.gov.uk/esg/reports/productivity%20research/default.asp

Efficiency and Productivity at the Farm Efficiency and Productivity at the Farm Level in England and Wales 1982 to 2002 Level in England and Wales 1982 to 2002 • Farm level data for England and Wales.

• Productivity growth results from technical change and change in efficiency.

• Relative technical efficiency.

• For eight different farm types; cereal, dairy, sheep, beef, poultry, pig, general cropping and mixed farms.

• Most farm types close to efficient frontier.

The frontier production functionThe frontier production function

X

Y

0 X1

Y1

Y2

ResultsResults

• Majority of farms close to the efficient frontier.

• Frontier of efficiency is being pushed out by technical change.

• Returns to scale close to one implying that the average farm for each type is close to optimal scale.

Technical change and returns to scaleTechnical change and returns to scale

Technical change (%)

Returns to scale

Cereals 5.8 0.909

Dairy 2.0 1.068

Sheep 2.0 0.972

Beef 3.3 1.011

Poultry 1.6 0.977

Pigs 3.5 1.006

Gen Cropping 4.2 0.977

Mixed 5.2 1.073

Mean efficiencyMean efficiency

Cereals 0.765

Dairy 0.899

Sheep 0.776

Beef 0.815

Poultry 0.905

Pigs 0.887

Gen Cropping 0.785

Mixed 0.745

Efficiency changeEfficiency change

Cereals 0.00%

Dairy - 0.43%

Sheep - 0.76%

Beef - 0.24%

Poultry 0.00%

Pigs - 0.48%

Gen Cropping - 0.95%

Mixed - 0.95%

Factors effecting efficiencyFactors effecting efficiency

• farm debt

• farmer age

• levels of specialisation

• ownership status

• proportion of gross margin derived from subsidies

CaveatCaveat

• Whilst these results seem reasonably robust…

ConclusionsConclusions

• technical change is pushing the frontier outwards for all farm types

• but, average levels of efficiency are declining

• generally, the average farms represented in these samples are close to optimal scale

• scale of operation is the most obvious difference between efficient and less efficient farms

Productivity and International Productivity and International Competitiveness in European Union Competitiveness in European Union and United States Agricultureand United States Agriculture• Productivity is important to international

competitiveness

• International comparisons of TFP for 11 EU countries and the USA

• Measure of international competitiveness

International Comparisons of International Comparisons of productivityproductivity

TFP relative to 1996 US level

0.20

0.40

0.60

0.80

1.00

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Source: Defra Statistics

Ireland Netherlands SpainItaly Belgium UKFrance Denmark US

International CompetitivenessInternational Competitiveness

• Total Factor Productivity

• Relative prices of outputs

• Exchange rates

International CompetitivenessInternational Competitiveness

• Purchasing power parities (PPP)

• Relative prices of output

• Units of national currency required to purchase the same amount of output as purchased by one dollar

• Divide by the exchange rate

• PPP in terms of relative prices in dollars

• International Competitiveness

Results relevant to UKResults relevant to UK

• 1973 - UK price 95% of the US price implying a competitive advantage relative to the United States in 1973

• European inflation in the 1970s led to a peak in US competitiveness by 1980

• Temporary European advantage by 1984

• UK least competitive country in the sample by 2002, with prices 40% higher than the US

Input pricesInput prices

• higher intermediate input prices are one reason for the high EU output PPPs.

• Capital inputs were more expensive in the EU countries than in the US

• European agricultural wage averaged only 50% of the US level

To summariseTo summarise

• … international competitiveness depends on the price of output, which is a function of the domestic output price and the exchange rate. The domestic output price will depend on input prices and TFP

Possible further researchPossible further research

• Identify the characteristics of UK farms at the efficient frontier

• Assess the regional variation in farm level productivity

• Determine the extent to which UK farms move to, remain at, or drop back from, the frontier

• Consider the future productivity response of UK farms that would follow further CAP reform

Possible further researchPossible further research

• Assessment of the environmental and animal health and welfare performance of farms at the efficient frontier

• Widen the farm level analysis of productivity to cover other EU Member States

• Use data published on farm level accounts from countries exporting in a free-trade environment

Productivity in agricultureProductivity in agriculture

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