Thank you, Mr. Chairman.
Canadian agriculture operates in a highly competitive global environment and is a major player in international markets. Canadian agriculture and agrifood exports have almost tripled since the early 1990s, from $10.7 billion in 1990 to $28 billion in 2006. This represents about 4% of total world trade in agricultural products. Canadian agriculture produces way beyond domestic demand for many crops and animals. Maintaining a competitive edge in agriculture in Canada is critical to ensuring long-term economic viability of Canada’s agrifood industry.
Although the Canadian agriculture and agrifood industry has continued to grow in value and importance, differing policy objectives, commodity types, farm sizes, household and farm operator types, and other factors have affected the overall competitiveness of individual farm operations and, inevitably, the competitiveness of the agricultural industry as a whole. Shifts in domestic policy, changes in regulations, new developments in agricultural technologies, and changes in international trade rules and procedures have affected the competitiveness of the Canadian agriculture and agrifood industry.
There are many examples of where changes in agricultural policies have significantly improved the competitiveness of Canadian agriculture. Removal of the subsidized transportation rates for prairie grains and oilseeds, accompanied by the end of “Crow offset” programs implemented by provincial governments, spurred growth in the red meat sectors in Canada. Prior to the BSE crisis in 2003, when exports of beef and live cattle from Canada became impossible, the Canadian industry exported about $4 billion worth of beef products and live beef animals annually. Similarly, changes in hog marketing regulations that enabled meat packers to negotiate with individual producers in the mid-nineties spurred investments that led to an increase in sows for breeding from 1.1 million in 1996 to 1.6 million ten years later and to an increase in exports of Canadian pork from $1.1 billion in 1998 to $2.7 billion last year.
In addition to changes in public policies, the competitiveness of the Canadian agriculture and agrifood industry would be improved by securing improved access to foreign markets for Canadian agriculture and food products, changing some regulations so that productivity is not impeded, stimulating private and public sector investment, and increased research and innovation.
In this short presentation, I want to focus on research and innovation in the Canadian agriculture and agrifood industry. Research is the foundation for improved productivity in the agriculture and agrifood industry. Improving productivity involves producing more output, or a higher quality of output, with the same amount of resources. This drives economic growth of the industry, resulting in higher incomes and general well-being.
Numerous studies have documented the relatively high rates of return to investments in agricultural research. Two studies that I have conducted showed that public investments in wheat breeding and beef research in Canada yielded annual returns in the order of 30% or more. Several other agricultural economists in Canada have found similar high rates of return to investments in agricultural research
Research in agriculture is fundamentally different from research in most other industries. First, agriculture is made up of many small firms that generally are too small to conduct their own research. Second, a lot of agricultural research is sequential in nature, meaning that new breakthroughs depend on research done in the past. Third, since much agricultural research is not patentable, there is little economic incentive for the private sector to invest in it. The public good nature of so much agricultural research is the main justification for governments to invest in this important activity that improves the competitiveness of Canadian agriculture.
In the early 1990s the Canadian government decided to change the way agricultural and agrifood research was funded. With the passage of the Plant Breeders' Rights Act of 1991, the government saw an opportunity to reduce its financial commitments to some types of agricultural research as the private sector became more engaged in what many plant breeding firms saw as excellent investment opportunities. Indeed, in the first ten years following passage of the Plant Breeders' Rights Act, private investment in plant breeding had increased by about three times. Several hundreds of new varieties were patented, and a high percentage of those were made available to agricutlural producers.
While reducing expenditures on plant breeding research, more government funding was allocated to research to increase productivity further up the value chain, or in research that might result in quicker payoffs. However, most private sector research went into finding new cultivars of canola, soybeans, and corn, while total research funding for traditional crops like wheat and barley has declined.
As a result, it has been found that total research and development investment in Canadian agricultural has shown no growth at all since 1990, and the total factor productivity, which is a measure of competitiveness, in the prairie crop sector has fallen to an average of 0.51% per year over the last 15 years. This is much lower than the historic growth rate of about 2% per year.
While firms in the private sector have invested a lot of money in crop grading research, they have been constrained by issues of industry concentration and market power, freedom to operate, and downstream externalities related to human health and the environment. The lack of private incentives for research related to plant and animal health, food safety, biosecurity, the environment, and the need to maintain a reservoir of reactive capacity suggests that publicly funded research is vitally important in these areas.
It seems clear that the Canadian government should re-examine its financial commitments to agricultural research. There is very strong evidence of its contributing role to increasing the competitiveness of Canadian agriculture and agri-food historically. There's a need to consolidate the agricultural-related research being done in dozens of public institutions, including universities, provincial agencies, and the National Research Council.
While the provision of additional public funding for agricultural research would be welcome, it is important to consider the effects of existing regulations on the incentives for researchers and hence on their ability to deliver improved competitiveness to the Canadian agriculture and agrifood industry. As Dr. Fowler noted previously, I have also found in a previous study that wheat breeders in Canada seldom focus on new cultivars that have much higher yields. With a highly regulated system for licensing new cultivars, wheat breeders have had to be conscious that any new cultivar would have to be as good as or better than all the agronomic disease and quality characteristics specified by the adjudication committees that operate under the aegis of the Canadian Grain Commission.
A major impediment to the development of higher-yielding cultivars was the requirement for KVD, which now has just been dropped in August 2008. Although the KVD requirement has now been abandoned, the committee system that is used to approve the release of new cultivars in western Canada has been found to suffer serious deficiency and inhibits the development of higher-yielding cultivars, as I've outlined in previous studies. Canada's major competitors have a much more streamlined system that not only gets new cultivars into the hands of farmers much more quickly but also aligns the scientists' incentives with those of the grain producers.
I consider that improving competitiveness is the most important long-term issue for the Canadian agriculture and agrifood industry. The Government of Canada has contributed greatly to making the Canadian agrifood industry competitive. However, Canada's competitors do not stand still and Canada's industry cannot afford to fall behind. The consequence would be lower incomes for those in the Canadian industry, as well as the loss of significant levels of foreign exchange annually earned by the Canadian industry. While there are many ways of improving Canada's competitiveness in the industry, research and innovation stands out as fundamental. The Canadian government should re-examine its historic role in this activity.
Thank you.