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Economics of Structural Change in

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Article in Canadian Journal of Agricultural Economics/Revue canadienne d agroeconomie
November 2008
DOI: 10.1111/j.1744-7976.1993.tb03772.x

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Economics of Structural Change in Agriculture

Ellen Goddard, Alfons Weersink, Kevin Chen
and C a l m G. Turvey
Department ofAgricultura1 Economics and Business, University of Guelph,
Guelph, Ontario, Canada N1 G 2W1
INTRODUCTION

The structure of the agrifood system has

changed significantly over the past century. In
production agriculture, the changing structure
is often characterizedby a drastic decrease in
the number of farmers associated with a rapid
increase in average size, more reliance on
purchased inputs, and greater interdependence
between the farm and nonfarm sector. The
farm input industry has changed to meet the
increased reliance of the remaining farms on
purchased inputs such as fertilizers and machmery. The food processing sector has also
evolved with the aid of new technologies such
as food preservation to meet chang~ngconsumer preferences. As in the farm sector, both
non-production components of agriculture
have been characterized by increasing levels
of firm concentrationand integrationbetween
the sectors. Consumer preferences and purchasing patterns have also changed sigtuficantly as the structures of households and of
society have evolved.
Although there is a consensus that the
structure has changed, there is no agreement
on the implications of the changes for the
health and viability of the sector, the rural
community, the environment,and society. For
example, many farm organizations argue that
the family farm is essential to s o c d well-being and the competitive production of adequate food supplies while others argue that
there are efficiency gains associated with increases in farm size. Whatever the net effects
of structural change are, they may be influenced by appropriate actions if the causes of
the structural change are understood. Thls is
particularly important if the net effects of

Can.J. Agric. Econ. 41: 475489.

structural change are not coincidental with the

politicdsocial agenda of the country.
The purpose of this paper is to review the
economics of structural change in agriculture.
The paper begins with alternative definitions
of structural change and notes that the definition in agriculturehas generallybeen narrowly
focused on the number and size of farms.
Models proposed to explain structural
changes are then presented followed by a discussion of why we would be interested in
knowing the forces behmd the changes. The
paper concludes with an examination of why
we are interested in how agriculture is structured and the associated implications for future research.
DEFINITIONS OF STRUCTURAL
CHANGE
The New Palgrave: A Dictionary of Economics defines structural change as a change in
the relative weight of significant components
of the aggregative indicators of the economy,
such as national product and expenditure, exports and imports, and population and the
labour force. The focus is on the processes
in which economic growth brings about the
above structural change in various types and
either directly or indirectly through organizational and institutional changes. Organizational change is with respect to the degree of
specializationand strength of cooperation between production units while institutional
change deals with the nature of the economic
system such as command versus madcet economy. In order to be structural change, the
change in composition of the aggregate indicators for the organizations or institutions

476

CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS

must be permanent and irreversiblerather than

a transitory or reversible change that may result from temporary scarcities or temporary
exogenous shocks. Clearly structural change
is a normal evolution in an economy.
Approaches to examining structural
change on the basis of the Palgrave definition
involve either linlung relationships between
economic growth and structural change using
country panel data such as Chenery and Syrquin (1975) or investigating the process of
structural change on the basis of historical
experiencesbetween countries such as Todaro
( I 969) or Hayami and Ruttan (1985). Sources
of economic growth include population
growth, productivity increases arising from
scientific research and techrucal progress, and
evolution of ccfnsumer demand for goods and
services through increasing real incomes.
In an examination of such changes in Canad~anindustry, McFetridge defines industrial structure as a description of the essential
characteristics of productive activity (p.2).
Changes in this structure include changes in i)
what is produced in terms of the sectoral and
industrial composition of output, ii) where the
output is produced in terms of geographcal
distribution of economic activity, iii) what is
traded and with who; and iv) how the output
is produced. The latter dimensionof structural
change involves the distribution of labour and
capital inputs and the skdl composition of the
labour force. Baldwin and Orecki (1990), for
example, concentrate on employment sh& in
their examination of Canadlan inter industry
structural change. However, the more common focus of the fourth dimension of
McFetridges definition of structural change
is on the firm and market organizationand on
the methods of production
Withn research on the agricultural sector,
the concept of structural change has also focused on changes in how the output has been
produced. Brinkman and Warley (1983) provide a broad concept and delineate a number
of attributes associated with how farm output
is produced (see Table 1). It is interesting that
although Brinkman and Warley intended a
narrow definition of structural change at the
farm level of the market, the same concepts

are equally relevant for the wholesaling, pmcessing, and retailing levels of the marketing
chain. In fact, many are relevant for household
structure as well.
The previous concepts of structural change
are combined in Figure 1 which breaks up thc
term into its two components. The structure of
a sector is defined in terms of the characteristics of its productive activities as suggested by McFetridge. The definition is also
consistent with that of Perroux (1939) who
suggested that economic structure deals with
the proportions and relationshps that characterize a sector at any point in time. Upon these
relationships, a number of factors, whch will
be discussed further in the next section, come
to bear. If these causative factors bring about
permanent and irreversible changes to the dimensions characteriiing the sector, then structural change has occurred.
Within agnculture much of the focus of
structural change analysis has been on the
number and size of farms. Perhaps the cvolution of North American society from largely
rural to predominantly urban with fewer and
large farms was not a development expected
by researchers. The reality has direct implications for teachmg and research in the sector
and, inpart, has led to changes inthe definition
of the agricultural sector.

CAUSES OF STRUCTURAL CHANGE

The next step in understandingthe economics
of structural change is to examine the causative factors that bring about the permanent
changes in the relationships of the sector that
was defined above as structural change.
Brinkmanand Warley proposed an exhaustive
list of factors that may contribute to structural
change (see Table l), however, they did not
discuss the impact of each on structural
change. In fact many of the factors listed have
little &ect impact on structure when defined
in terms of the number and size of farms but
do have an impact when structure of agriculture is broadened to include the m e r e n t levels of the marketing cham. Their classlfication
of causal factors into four broad categories is
of interest. They define sector factors, public

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WORKSHOP PROCEEDINGS

Table 1. Agricultural Structural Change Attributes and Causative Factors

Structural A ttributeg

m s a t i v e Factors

Number of Farms

Sector Factors
Supply demand balance and
price cost margin
Market instability
Trade dependence
Technology
Factor proportions
Economics of size
Management Disparities
Farmer's goals
Structure of input and product
markets

Farm Size
Concentration
Type
Ownership and Control of Assets
Tenure Systems
Specialization

Public Factors
Structure regulation
Taxation
Credit
Commodity support
stabilization
Socialization of risk
Input subsidies
R&D and extension

Financial Structures
Market Integration and Control
Barriers to Entry
Ideological Conformity

and

Socio-economic Characteristics
Macro Factors
Inflation/interest rates
Exchange rates
Transport
Energy

Other Factors
Rural living
Land use control

Source: Brinkman and Warley (1983)

factors (aimed at specific commodlty sectors

or groups), public factors (aimed at the economy as a whole), and other issues. These
groupings are similar to the theories developed to explain number and size of farms and
summarized by Tweeten (1984) and Boehlje
(1993).

We have integratedthe review pieces along

withothers and highlighted eight major causative factors. These factors illustrated in Figure

1 include 1) technology, 2) prices, 3) human

capital, 4) economic growth, 5 ) demographics, 6) off-farm employment,7) related market
structure, and 8) public programs. The eight
causes of structural change are not mutually
exclusive but rather inter-related as will be
noted in the discussion of each factor below.
Although the theories were developed to explain changes in farm size and numbers, they

478

CANADIAN JOURNAL OF AGRICULITJRAL ECONOMICS

INDUSTRY STRUCTURE
Characteristics of Productive Activities
(what, where and how is output produced)

FACTORS AFFECTING STRUCTURAL CHANGE

Technology (economies of size, labor bias technical change
adoption rates)
Prices - Substitution effects (inputs and consumption), induced
innovation

Human Capital - Managerial ability, consumption patterns

Economic Growth - Non farm opportunities, product demand
Demographics - Farm entrants, consumption patterns
Off-farm Employment - Income effects, time allocation
Related Market Structure - Institutional development
Public Programs - commodity support, credit, taxation, monetary
and f w a l policy and research and extension

Fig. 1. Dimensions of structural change: Indushy structure and causal factors.

are also relevant to explain similar changes in variable costs. However in the long run,price
will be insufficient to cover all production
households and agribusiness fm.
costs unless the f m is at the optimal size.
Assuming constant retums to scale and thus a
Technology
flat
long run average cost c w e , the optimal
The shape of the long run average cost curve
size
is indeterminate (Sraffa, 1926).
(LRAC) is a major determinant of f m size.
Hallem (1391) summarized stuhes related
Optimal size is associated with the minimum
point on the LRAC. In the short run,a firm to economies of size in agriculture and conmay choose to produce at a different level cluded that the evidence from empirical work
provided price is high enough to cover its seem to support a sagging L shaped cost

WORKSHOP PROCEEDINGS

curve for much of production agriculture.The

L shaped curve implies that agriculture is a
quasi-constant cost industry. The presence of
increasing returns to size at low or moderate
levels, particularly for livestock operations
(Hallem, 1991), implies that firms of this size
must either leave the industry or grow to a size
consistent with minimum long run average
cost. Therefore,growth infirm size is a natural
consequence of economies of size. Rather
than attempting to lower unit costs, others
have argued that the reason for increasing the
scale of operations is to enable the firm to
obtain higher total returns. Thus, it is not the
existence of economies of size that has led to
larger firmsbut instead the absence of sigIuficant diseconomies that is also consistent with
the observed L shaped long run average
cost curve (Seckler and Young, 1978).
Technological change has lowered and
shifted the L shaped cost curve to the right
over time. The range of f m size in whch
increasing returns to size exist has subsequently increased creating continual impetus for larger firms.Small farms can still exist
under such a scenario provided they are willing to use income from outside the sector to
pay for the way of life enjoyed within agriculturejust as they would for any other consumptive good (Tweeten, 1984).
The rapid rate of technological change in
agriculturehas resulted in an annual growth in
total factor productivity of approximately 2.4
% from 1962 to 1978 (Capalbo and Denny,
1986). The increase in productivity has resulted in changes in the shares of inputs used
as well as effecting the level of the inputs.
Labour input use has fallen much more than
other inputs. Capalbo and Denny (1 986) found
aggregate agricultural input uses to have been
relatively stable during the 1962 to 1978 period. However, labour input use was found to
have declined by 3.2% annually while capital
input use and material inputs grew annually by
3% and 3.9% respectively. Similar results
were obtained by Karagiannis and Furtan
(1990) who found the growth rate in labour
use to be -0.7% for central Canada and -3.8%
for the Prairies over the period 1926 to 1987.
In both regions, it was machinery-using bias

479

in technical change that contributed the highest proportion of the labour-saving bias. The
reduction in the factor share of labour has
meant an increase in farm scale in order to
cover a given level of management and labour
costs (Tweeten, 1984).
Advances in the area of biotechnology are
said to be scale neutral for they do not involve
large capital investments as required with
most mechanical technologies. These later
technologies are indivisible implying the existence of a threshold firm size before any
economic advantage may be realized. However, even with scale neutral technical change,
adoption of new technologies tends to favor
largerfirms (Lu, 1985).L a r g e r f m generally
have more access to informationand financing
and have the management skills required by
the new technology. Feder and Slade (1984)
and Globerman (1975) found firm size to be
positively correlated with technology adoption although Just and Zilberman (1985) argue
that the rate of adoption increases with farm
size at smaller farm sizes and decreases with
increasing farm size at larger farm sizes. In
addition to size, Rogers (1962) and Zepeda
(1990) found education and industry involvement to have an effect on innovation. The
faster adoption rate by larger fm reinforces
their competitive advantage over small ones.
Differential technology adoption rates means
that industry structure will be a heterogeneous
mix of fm sizes irrespective of the input and
scale biases associated with technology.
New technology influences industry structure not only through how the output is produced but what output is produced and where
it is produced. For example, the development
of controlledatmosphere storage of apples has
increased the level of apple production in
North America. Structural change in the farming sector has resulted from changes in plant
varieties that permit regions to plant crops that
previously could not be grown.

Prices
Factor biases in technological change are not
the only reason for the significant reduction in
labour use within the farming sector. The substitution of capital for labour has also been

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CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS

caused by the relative prices of these inputs.

Labour saving technological change and an
increase in the price of labour relative to capital can both lead to a fall in labour employment. The growth rate of wages relative to
machnery price was 2.42% for central Canada and 1.22% for the Prairies over the period
1926-87 (Karagiannisand Furtan, 1990).Kislev and Peterson (1982) found that 99% of the
changes in average farm size for grain farms
in the midwestern United States can be attributed to the rising value of labour relative to
machnery services. In contrast, von Massow
et al. (1992) found that the major effect on the
dynamics of farm size distributions in the
Ontario hog sector is from technological advancements rather than price effects. Gardner
(1992) notes that determining whether the
changes in relative inputs and consequently
farm structure is due to price effects or factor
biases in technical change is hindered by data
problems dealing particularly with the measurement of labour use.
Hayami and Ruttan (1985) conclude that
technology and prices are not independent
events implying that these two causesof structural change are intricately related. In their
comparison of economic development forces
across countries, they found that the direction
of technical change is a function of relative
prices. Their induced innovation hypothesis
suggests that the development of the labour
saving technologies introduced into North
American agriculturewas induced by the high
ratio of the farm wage rate to the price of other
inputs. Karagiannis and Furtan (1990) found
the induced innovation model to be useful in
explaining the development of Canadian agriculture.
Relative price of inputs to outputs also
influences industry structure. Farm numbers
declined at a faster rate in the 1950sand 1960s
when farm prices were favorable than in the
1970s when prices were more favorable
(Tweeten, 1984).Similarly,vonMassow etal.
(1992) found that a favorable hog to corn price
ratio slowed the exodus of farmers leaving the
Ontario hog sector thereby slowing the increase in the rate of average farm size. Although high producer prices benefit all fm

in the short run,such prices sustained in the

long run would become capitalized into the
cost of farming assets. The increased level of
investment creates an entry barrier into the
industry and an increased level of firm concentration.
While the level of prices of received to
prices paid has fallen over time, the variability
in this price ratio has increased. Rewards towards competent risk management are enhanced as price variability is increased
(Tweeten, 1984).Risk management strategies
including output diversification, marketing,
and asset acquisitions tend be obtained more
easily by larger fm either because they have
the ability to manage such strategies or because they can spread the associated costs
across a larger output level. On the other hand,
smaller fm that have off-farm income can
use these earnings to buffer fluctuations in
farm income. Therefore, increases in the variability of farm prices hurt mid-sized farms to
a greater extent since larger farms tend to have
more sophisticated risk management strategies and smaller farms tend to have off-farm
income sources (Tweeten, 1984).

Human Capital
Whether new technology was induced by relative prices or not, its development, along with
other factors such as public education programs, has undoubtedly helped to increase the
level of human capital. At the sector level, an
increase in human capital allows the fm manager to more effectively process information
used to allocate the firms resources and to
evaluate new technologies. The size of the
firm which the manager is able to cost effectively operates subsequently increases with
increases in human capital (Boehlje, 1992).
Improvements in human capital are seen as a
major reason why farms have expanded over
time (Sumner and Leiby, 1987).The net effect
on f
m size is unclear for the increase in
human capital by those within the sector increases their opportunity for employment outside the sector as discussed below.
At the aggregate level, the increase in human capital has resulted in a more mformed
consumer. Awareness of the implications of

WORKSHOP PROCEEDINGS

hetary choices for health by consumers has

led to a reduction in red meat consumptionand
an increase in poultry. At the same time consumers are concerned about cholesterol and
fat. Industry groups have responded by improving grading, breeding, and feeding systems to mod@ products directly as well as by
increasing advertising and promotion to ensure consumers are aware of all aspects of
their product. The structural change in consumption patterns brought about partdly by
increases in human capital have produced sigruficant structural changes in the food sector
in terms of what is produced and in what form
it is provided to the consumer.

481

factor of structural change as the invisible

hand of nonfarm opporhmity as opposed to
the invisible foot of farm labor saving technology.

Demographics
The reduction in the number of farmers has
implications for the future structure of the
production sector. In his study of the joint
influence of economic and demographic factors on farm entry, Gale (1993) concluded that
the shrinking pool of potential entrants will
lead to further decline in farm entry even if
farm earning prospects are favorable. The
shnnlung of the number of young people
raised on farms may lead to a shdl way from
Economic Growth
the traditional arrangements of a single owner
The types of products produced and their vol- operator to more nontraditional entrants such
ume has been influenced by the growth in as diversified nonfarm business entities, farm
income by the average consumer as well as the corporations or vertically integrated food
increase in general knowledge of that con- processing or marketing firms (Gale, 1993).
sumer. The major impact of economic growth However, under present circumstances, Luijt
on the agricultural sector has been in the form and Hillebrand (1992) estimate the probability
in which consumers purchase their products. of a third person taking over a dairy farm to be
As incomes increase more and more of the only 5% and that the probability is affected
consumers food dollar has been allocated to- only marginally by the f m s income level.
wards processing until many foods purchased
Demographicsof the general population, in
are in consumption ready form. The micro- addition to their general knowledge and earnwave has sigdicantly enhanced t h ~ develops
ings level, have an influence on farm structure
ment. The farmers share of the consumers through what is produced. Declining birth
food dollar has declined precipitously (not rates and increasing longevity have skewed
necessarily reflecting an equivalent decline in the demographic profile in Canada and the
income or revenue) and more activity in the U.S. significantly. At the same time immigraagriculture and food sector is focused beyond tion patterns are changing the ethnic profile.
the farm gate.
These demographic changes may have conThe income earned by the average con- tributed to declining consumption of some of
sumer represents the opportunity cost to farm our traditional agncultural products such as
labour. The increase in Uus nonfarm income dairy products and an increased focus on nonover time has meant that the level of returns to traditional products such as ginseng, mustard
management and labour fromagriculhm must and spices.
also increase. Given the L shaped long run
average cost curve generally found in agricul- Off-farm Employment
ture, such an increase in a given level of re- The existence of off-farm employment opporturns canbe accomplishedthrough an increase tunities has served to counter the trend toin firm size. Thus, the increase in nonfarm wards fewer and larger firms. Off-farm
labour earning has forced the scale of farm earnings reduce the amount of farm income
firms to increase in proportion (Heady, 1962). required to meet a given level of purchasing
As the gap between farm and nonfarm labour power. Firms can operate at sizes not consisearnings closes, the impetus for larger farms tent with minimum cost provided such funds
will dampen Gardner (1992)terms this causal

482

CANADIAN JOCJRNAL OF AGRICULTURAL ECONOMICS

are available to cover farm losses. In addition,

the off-farm funds stabilize total household
income enabling smaller firms to better handle
farm price fluctuations. The increased employment of farm family members ofl@rm
has produced an increase in the number of part
time farmers who manage smaller and more
spccialized operations given the fewer hours
available for farm work.
The decision to work off the farm depends
on the marginal value productivity of labour
in agriculture versus the best alternative employment opportunity. Increases in human
capital have increased the general productivity
of labour. The impact on the operators decision to seek off-farm employment is indeterminate although most empirical studies have
found that the probability of the operator
worlung off the farm increases with education
(Huffman, 1980; Could and Saupe, 1989;
Lass el al., 1989; and Weersmk, 1992). In
contrast, the improvement in educational
skills and new technology which has reduced
the amount of home time required, has increased the off farm productivity of spousal
labour relative to that on the farm. As a result,
there has been a significant increase in the
proportion of farm families who have at least
one member with off farm employment (Bollman el al., 1992). While once considered a
transitional phase for new entrants or a short
term response to a financial crisis, off-farm
employment is now recognized a stable long
term condition (Olfert, 1992).
Related Industry Structure
The industrial organization literature discusses industry structure in terms of the relationship between structure, conduct and
performance not only within in its own industry but also with related industries (Caves,
1977).As illustrated in Figure 2, the structure
of an industy in terms of concentration and
integrationbetween markets is influenced not
only by the causal factors mention previously
but also by the conduct of the industry as
captured by pricing policies and product differentiation. The manner in which prices are
set is determined by the nature of the market
so that conduct of the industry is a fimction of

its structure. The ultimate performance of the

industry depends on both the structure and
conduct.
Forces such as technology changes the relationships between structure, conduct and
performance.Reimundetal. (1981)foundthat
with new technology, production shifts in
terms of area and methods occur whch then
prompts the development of new institutions
and relationships to manage the new structure
and associated risks. For example, the cattle
sector consisted of many packers with a significant number of cattle being produced on
grain farms as means to market gram and
utilize excess labour. As a result, farm income
variability was tied closely to the production
of other commodities.An increase in specialization and concentration in all sectors of the
cattle industry enabled increased contracting
as producers attempted to transfer the price
risk to the processing stage and packers tried
to reduce the quality and quantity risk.
Changes in market conditions have resulted in the development of vertical strategic
alliances (VSAs) between producers and
processors. A VSA is two or more firms cooperating rather than competing, but without
mergmg or any other form of joint ownership.
Using case studies of VSAs in the Canadian
agrifood industry, Howard et al. (1993) identified characteristics of successful VSAs .
Aside from the development of institutional anangements, such as vertical strategic
alliances and cooperatives, in response to the
increased concentration of the input supply
and output marketing fm,the impact on the
number and size of firms within the production sector of agriculture is unclear. Fewer
input suppliers may hurt small farmers who
may not have the same access to, or even be
aware of, alternativesavailable to larger fanners. In addition, smaller farmers may not be
able to meet as easily the demands of the
remaining product buyers as large farms. The
higher buyer concentration has generally been
found to reduce farm prices which again may
hurt smaller farms with higher average costs
of production However, the reduced risks of
production contracts may have a larger relative benefit to smaller farmers who do not

WORKSHOP PROCEEDINGS

Structural Change
Factors
(see Figure 1)

STRUCTURE

- concentration
-entry &exit

- market integration

483

CONDUCT

- product differentiation
- pricing policies
I

PERFORMANCE
-efficiency
- stability
- equity
Fig. 2. Relationship of structure, conduct and performance in institutional development
have the same access to risk reducing strate- cross price effect of output price on supply of
gies as larger farmers.
land is large relative to the own price effect of
land price on land supply. Preliminary evidence by Leathers (1992) suggests these cross
Public Programs
There are a number of government policies effects are large. The implication is that comaimed at the agricultural sector specifically or monly used farm programs, such as price supat the economy as a whole that can influence ports and land retirement programs, have the
industry structure. These include income en- effect of reducing the number of farmers.
Program benefits tend to become capitalhancement and stabilization commodity proized
into asset prices. Higher imestment costs
grams, credit programs, taxation, general
monetary and fiscal policy, and public re- create barriers to entry and enhance the cornpetitive position of larger farmers who are
search and extension.
Structural effects are one of the major rea- better able to pay higher input prices. Benefits
sons for the existence of government com- ofsuch policies then accrue to owners of capimodity programs (Brinkman and Warley, talized assets, such as land and quota, rather
1983). Price supports are designed to help than the desired beneficiaries which are the
marginal farmers remain in business, and re- operators of the f m .Reducing risk of insolstrictions on programs such as payment limi- vency also tends to favour larger farmers.
Finally, the transaction costs of participattations, do tend to favour smaller firms. For
example, quota allotments have inhibited the ing in farm programs may be high enough that
opportunitiesfor farm enlargement.However, smaller f m decide not to become involved.
if benefits are proportional to output, then Program beneficiaries would subsequently be
support programs can encourage farm con- mid to large sized fm.Given the conflicting
solidation and enlargement (Brinkman and influences on firm structure, the impact of
farm programs withm an individual sector deWarley, 1983).
The impact of alternative agricultural pro- pends on how programs are designed for that
grams on the number and size of farms de- commodity.
pends on condtions such as the whether the

484

CANADIAN JOURNAL OF AGRICULTURAL. ECONOMICS

Credit enables firms to obtain necessary

resources through debt financing. Farm expansion, particularly through the 1970s, was
promoted through the ready availability of
credit from financial institutions practicing
balance sheet lending on the expectations of
increasing growth in land prices. In contrast,
external crecht rationing occurred in the mid
1980s when banks were reluctant to lend to
farmers. Lowenberg-DeBoer and Boehlje
(1986) show theoretically that an operations
land base is positively related to the expected
capital gain and inversely related to f m c e
charges, such as interest rates and collateral
requirements. Higher levels of capital gains
also imply higher levels of debt use. Government programs which lower financingcosts of
credit can therefore lead to larger farm operations and a more vulnerablefinancial structure
for individual firms.
In Canada, taxation policy has beena major
factor influencing f m structure through its
alteration of incentives affecting resource use
and transfer (Brinkman and Warley, 1983).
Tax provisions which enhance the attractiveness of investing in farming include the use of
a cash as opposed to accrual accounting system. Taxes can be deferred which thereby
generates incentives for growth. Other provisions include special capital gains treatment,
which increase land prices (Baker, Ketchabaw
andTurvey, 1991)and expansionasbothnonfarmers and farmers try to take advantage of
the tax exemption, and farm property rollover
provisions, which promote growth witiun existing farm families over new entrants (Brinkman and Warley, 1983).Tax deductions, such
as investment tax credts and rapid depreciation allowances, also serve to encourage farm
enlargement by lowering the price of capital
further relative to the farm wage rate. The
value of these deductions increases with firm
size. Offsetting the consolidation encouraged
by the above tax provisionsare the progmsive
income tax rate smcture (Tweeten, 1984).
Favorable monetary and fiscal policy
would stimulate aggregate demand through
low real interest rates and low inflation rates.
Tweeten (1983) found that there maybe fewer
farms on average with such a policy. He also

noted that the impact of unfavorable monetary

and fiscal policy favours established famdy

farms, renters, corporate farms and part-time
small farms and away from the ideal mid-sized
family operation.
The f d element of public involvement
that can have an influence on industry structure is research and extension. Traditionally,
private research has emphasized mechanical
and chemical technologies that are labour saving while public research has tended to focus
on biological technologies which are generally scale neutral (Tweeten, 1984). An exception is disease control techniques whch have
permitted the development of large scale
swine and poultry operations. Public extension programs have also been geared towards
smaller family farm operations by providing
information that large firms can purchase from
private companies (Tweeten, 1984).However
given the desire to reduce government expenditures, the mandate and clientele of these
public agencies are presently in review suggesting the bias towards smaller operations of
these extension pmgrams may change in the
future.
SHOULD WE BE CONCERNED ABOUT
STRUCTURAL CHANGE?
Any or all of the possible causes chscussed in
the previous section may have contributed to
structural change in agriculture. While many
of the causal factors are inter-related, it is
important to understand the determinants of
structural change if the present structure is not
coincidental with the national policy agenda.
For example, althoughthe net effect of present
government policies on farm structure is inconclusive, the pmgrams could possibly be
modified to favour smaller farms. However,
before deciding upon the policy instrument to
mod@ structuraldimensions it is necessary to
ascertain what is the politically desired firm
structure and what trade offs are involved in
attaining the desired structure.
A fundamental element of the desired
structure by policy makers, farm organizations and the general public may be the famdy
farm that is often considered as the basic eco-

WORKSHOP PROCEEDINGS

nomic unit of agriculture and the central unit

of rural society (Brinkmanand Warley, 1983).
Although the family farm is considered to be
the ideal, there is confusion about what is
meant by a family farm. Boehlje (1992) notes
that two aspects of family farm structure are
often confused. The first is the relationship
between the owner of production assets and
the operator of those assets. The second is
whether the locus of control of the farm rests
with the family versus a corporate structure
that has limited personal ties. Delineating
these two dimensions is necessary in evaluating the attributes of family farms.
The desired structure of the agricultural
industry and whether we should even be concerned about the change could be evaluated in
terms of the following performance attributes;
1) economic efficiency, 2) income adequacy,
3) stability, 4) resource conservation, 5 ) ease
of access, 6) rural community health and,7)
quality of life. Given the L shaped long run
average cost curve found in agriculture,
Tweeten (1984) concludes that the gains to
private economic efficiency would be minimal ifthe system consisted of a few large firms
rather than family sized units.However, efficiencies could be improved within the family
farm units by improving the coordination between the entry and exit phases of the family
farm (Boehlje, 1992). Increases in farm size
and in the number of farm households with off
farm incomes are structural adjustments that
have occurred in agriculture in response to
earning differentials between sectors. While
income parity between farm and nonfarm sectors has generally been achieved, there is no
consensus on how structure could be modified
to enhance income adequacy. Similarly, the
effect on output stability from alternative industry structures is unclear (Tweeten, 1983).
While private costs and benefits have been
aligned, there may be advantages to altering
farm or industrial structure if there is a divergence between private and social values. An
example of such a divergence may occur with
environmental aspects of farm level resource
use. For example, Rahm and Huffman (1984)
and Noms and Batie (1990) both found the
probability of adopting conservation tillage

485

increased with farm size. However, the negative externalities associated with wastes from
livestock farms may increase with farm size.
The question of what causes larger farms
should be addressed conclusively if the negative or positive externalitiesare not coincidental with the public agenda.
Another equity issue involved in assessing
desired structure is the ease of access into the
industry. Growing capital and credit requirements have created a barrier to entry into most
farming sectors. Encouraging the leasing of
productive assets rather than conventional
ownership may improve accessibility into the
farming industry (Baker and Thomassin,
1991; and Turvey, 1992). Revising taxation
anangements which favour transfer of farms
within existing families may also ease access
thereby allowing new blood to enter into the
industry rather thanjust young blood (Brinkman and Warky, 1983). However, these are
hypotheses that need further testing.
The debate on the relationship between
farm structure and the health of rural communities began with Goldschmidt (1978) who
found that families associated with mid sized
farms contributed more to the economic and
social vitality of NIill communities than did
families associated with corporate type farms.
In communitiesthat are primarily agncultural,
each one to two farm families lost means
another family lost from the rural non farm
population (Tweeten, 1984). The depopulation implies an added burden on a reduced tax
base and an erosion of support for social and
civic institutions. Tweeten (1983~)estimates
that economic activity in rural communities
would decline by approximately 78 percent
from 1981 levels with only large farms remaining. However, the decline in nual communities would have occurred to a certain
extent without the increase in farm size and
associated reduction in farm population Improvements in transportation have enabled
people to afford to travel greater distances to
obtain services located within the NIill community. The overall impact on some agricultural communities of the change in farm
structure has also been offset by rural employment growthand migration of wban dwellers.

486

CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS

The impact of each of the possible causes of

fewer larger farms must be establishedif rural
community health is of paramount public concern.
In his evaluation of alternative farm structures, Boelhje (1987) that independence and
control of ones fi~tureare the only attribute
that provides a clear advantage for the owneroperator versus tenant-landlord and the family
versus corporate ways of organizing agriculture. Quallty of life on the farm is positively
related to farm size but other variables such as
income, age and education have a larger effect
than farm structure (Tweeten, 1984) Similar
results were obtained in a comparisonof dairy
farm families in New York and Ontario
(Coughler, 1992). Changes in farm structure
also imply psychc costs associated with the
adjustments. However, Tweeten and Brinkman (1976)found that most migrants from the
farm enjoyed a better life off the farm.
Similar issues relate to the number and size
of firms in the agriculturesector either providing inputs to farms or processing the output
from farms. The configuration of these industries is also important for the political agenda.
In some cases policies (such as supply management) aimed at ensuring a particular structure at the farm level of the market may have
impeded the development of a competitive
processing sector. If a concentrated processing or retailing sector is not in the public
interest, than an understanding of what
caused the concentration is clearly in the
public interest.
Although the literature provides some assessment of what is a desired structure at the
farm level of the agricultural market and to a
lesser extent beyond the farm gate, there is a
large gap in the literature about what impedes
or encourages that structure to develop. There
are many theories about what causes structural
change and much empirical evidence that
structural change has occurred but little empirical evidence to suggest what caused what.
In their analysis of the U.S.dairy sector,
Weersink and Tauer (1991) found that productivity increases &d not generally lead to
increases in average farm size. Instead, the
direction of causality appears to be from herd

size to productivity suggesting the existence

and exploitation of size economies in some
regions. The implicationof their results is that
since larger dauy farms are to be the rule,
current research should be supported which
will allow those farms to be as productive and
competitive as possible.
Further research of this sort is essential if
causal links are to be developed between economic forces and desirable or undesirable
change. Many of the theories concerning
causes of structural change include actions by
govemment or public agencies. A meaningful
assessment of structural change must incorporate a thorough understanding of how public
action affects structure if the structure of the
agrifood industry is to evolve in a manner
consistent with the public political agenda. It
is worth remembering at this point that structural change is a normal evolutionary process
in an economy and dmct interferencewith the
process will likely generate both costs and
benefits in an economy.
CONCLUSIONS
Structural change is an integral aspect of
evolving economies. In the agricultml sector
changes in the essential characteristics of
productive activities have occurred at the
farm level, at the agribusiness f m level, and
at the household levels of the marketing chain
In agricultural economics terms, much of the
focus of structural change research has been
on the issues related to number and size of
farms. Many theories have been developed to
explain the dramatic changes in farm structure
that have occurred over the last century in the
North America. Somewhat less attention has
been paid to similar issues surroundmg increased concentration in processing, wholesaling, and retailing of food products.
Even with much of the research agenda
focused clearly on how the number and size of
farms has changed, the development of an
optmal farm structure is very Micult considering the unique human, physical, and environmental resources present across farming
communities in North America. In spite of
that, much of the public policy agenda has

487

WORKSHOP PROCEEDINGS

clearly been established on a premise of optimality of a family farm structure. However, it

is not clear that public policy can do a good
job in determining "optimal" firm structure or
in acheving the goal gven the complexity of
forces that are theorized to impact on structural change. At the same time many of the
factors assumed to impact on structural
change are affected by public policy changes.
Therefore, an understanding of the causal factors is critical if the second round or indrrect
implications of particular policy changes are
to be clearly understood at the time policy
decisions are made.
Structural change may be as lfficult to
regulate as it is to explain. It is unclear if a
regulatory approach to constrain or encourage
structural change would ever be effective
given the myriad of forces in an economy that
may operate simultaneously to impact on
structure.
It is critical, however, that structural
change be monitored in an economy and in the
agrifood system in particular. Of paramount
importance is the setting of priorities in the
research and educational agenda that must
evolve with the structure. Witiun agnculture,
structural change in terms of number and size
of farms has had drrect implications for rural
infrastructure. It is of some importance to
establish how the rural infrastructure of medical services, child and elderly care, and education can manageably be handled in a
changng environment. Similar ramlfcations
are felt in urban environments when large
agrifood processing firms choose to relocate.
Financial services will also have to adjust as
the structure of agriculture changes. Ths
change will continue unabated with continued
investment in human capital and economic
growth.

NOTES
'Invited paper presented at the 1993 Annual
CAEFMS Workshop, August 20,1993, St. John's,
Newfoundland

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