In this chapter we will present income and cost calculations from four different types of farms, in order to illustrate the level of support, the relationship between different forms of support, and the relationship between product-specific income, including product-specific support, and variable costs. The calculations, presented in figures 3.3, 3.4, 3.5 and 3.6 , are based on income and cost data from four of the model farms used by the Budget Committee for Agriculture (Budsjettnemnda for jordbruket, 1998). In many ways, the chosen farms can be considered as typical representatives for Norwegian agriculture.
3.3.1 Explanation of the calculations
The figures for present income and costs (two bars on the left) are based on farm accounts from 1996, which then have been adjusted to 1998 prices and subsidy rates.
The sources of income are divided into the following groups, the colour indicating the type of support (yellow, blue or green box) according to the WTO-classification:
•
World market value of the goods (grey)•
Market price support (yellow box)•
Base deficiency payment (yellow box)•
Regional deficiency payment (blue box)•
Headage support (direct support, blue box)•
Structural income support to dairy farming (direct support, blue box)•
Acreage and cultural landscape scheme (direct support, blue box)•
Direct support, mainly the vacation and replacement scheme (green box)•
Additional support (green box) to replace previous price support The costs are divided into:•
Variable costs 1 (concentrates, forage, fertilizer, seeds)•
Variable costs 2 (electricity, rental costs of machinery and land, expenses due to animal production purchase of livestock)•
Variable labour costs (only grain production)•
Fixed costs (administration, insurance and maintenance costs)•
Interests and depreciation•
Return to labour (and own capital)In the two right-hand bars, the ”yellow box” support has been removed. In addition, costs have been adjusted to the expected decline of prices on input factors such as feed concentrates, milk products and live animals. The factors used to convert existing Norwegian prices on products and input factors to world market prices are presented in Table 3.1 (Norwegian price x factor =
“world market price”) . These are estimates based on prices in the OECD PSE-database. The adjustment of domestic prices to an estimated ”world market price level” is naturally associated with a large degree of uncertainty.
Table 3.1 Factors used to convert Norwegian price level to ”world market price level”
Income and expenses World market price factor
Grain 0.45
Seed, plants 0.55
Feed concentrates 0.60
Milk and dairy products 0.50
Beef/live cattle 0.45
Mutton & lamb/live sheep 0.85
Wool 0.25
Roughage 0.55
The return to labour and own capital is kept at the same level for both scenarios.
In order to compensate for income reductions caused by the removal of ”yellow box” support, it has been assumed that a new ”green box” support has been introduced (marked ”additional support (green box)” in the figures).
3.3.2 Results
The calculations indicate that farm support is absolutely necessary to enable today’s form of agriculture, and therewith also for the maintenance of an agrarian cultural landscape. However, the calculations represent a very static approach to the issue, and can be mainly regarded as a worst case scenario; a situation in which it is assumed that a farmer will purely continue the same production strategy. When possible, farmers will also change their strategies in adaptation to price changes. Nevertheless, in a short term perspective the calculations can be quite accurate.
The figures illustrate that the most important of the present direct support schemes are characterized as ”blue box” support, according to the GATT/WTO criteria. Most important is the acreage and cultural landscape scheme. On cattle and sheep farms, headage support and the replacement scheme also contribute significantly. Regional deficiency payments are important for the western Norwegian dairy farm and the sheep farm. In figures 3.5nd 3.6 the results for dairy farms in two different regions are shown, western (fjord landscape) and eastern Norway (lowlands, best farming region). Direct support represents a much larger share of the income on the farm in western Norway than on the farm in the eastern lowlands. Differences in income are due to both farm size and varying support rates in the different regions.
0
Revenue Costs Revenue, wmp Costs, wmp
Acerage
Figure 3.3 Revenue and costs on a 40 ha grain producing farm (region 2). Present situation (1998) and the present situation calculated with ”world market prices” (wmp) on grain. NOK per farm.
Source: Calculations based on the Budget Committee for Agriculture (1998) (Norway) and OECD (1998)
0
Revenue Costs Revenue, wmp Costs, wmp
Direct support
Figure 3.4 Revenue and costs on a sheep farm with 122 ewes in Norway’s mountain and valley region.
Present situation (1998) and the present situation calculated with” world market prices” (wmp) on mutton/lamb and wool, excl. base deficiency payments. NOK per farm
Source: Calculations based on the Budget Committee for Agriculture (1998) (Norway) and OECD (1998)
0
Revenue Costs Revenue, wmp Costs, wmp
Direct support
Figure 3.5 Revenue and costs on a dairy farm with 12 cows in western Norway. Present situation
(1998) and the present situation calculated with ”world market prices” (wmp) on milk, beef and concentrates, excl. base deficiency payments. NOK per farm
Source: Calculations based on the Budget Committee for Agriculture (1998) (Norway) and OECD (1998)
0
Revenue Costs Revenue, wmp Costs, wmp
Direct support (green)
Figure 3.6 Revenue and costs on a dairy farm with 23 cows in eastern Norway. Present situation (1998) and the present situation calculated with” world market prices” (wmp) on milk, beef and concentrates, excl. Base deficiency payments. NOK per farm
Source: Calculations based on the Budget Committee for Agriculture (1998) (Norway) and OECD (1998)
3.3.3 Variable costs and market price
In order for a farmer to have the financial incentive to, e.g., cultivate, sow and harvest his/her grain fields for a single year, the variable costs for these operations must be covered by the product-specific income, in this case income from selling the grain. In other words, the short term requirement is that the marginal costs do not exceed the marginal income. The figures above show total figures. Supposing here that the variable costs are independent of the production volume, the relative ratio between variable costs and sales income (incl. product-specific support) corresponds to the ratio between marginal costs and marginal income.
An important issue in this connection is which costs are to be considered as variable. This is also a question of the period of time one is considering. The costs characterized as variable in the presented calculations are listed in chapter 3.3.1.
A problem can arise in the transition from product-specific support to other forms of support if the variable costs exceed the variable income. Such a situation requires contracts on farm practice, etc. if a farmer is to have any economic motivation for implementing cultural landscape maintenance.
The calculations show that the production income, given world market prices (i.e., excluding ”yellow box” support), actually covers the variable costs. Even though these are individual cases, with some uncertainty with regard to the data and the conversion to the world market price level, they nevertheless indicate that it should be possible to significantly reduce the present level of product-specific support while increasing the share of non-product-specific support, and still maintain sufficient financial incentive for farmers to harvest crops and to continue their production.