Douglas Hedley was looking at cost curves, and especially at the impact of technology and farm size on cost of production. It was supposed to be a straightforward bit of economic analysis.
But there was a problem, a big problem. The lines he was drawing didn’t really look like curves at all.
It was 2004 and the chalk was billowing around his blackboard as Hedley, agricultural economist, professor and former assistant deputy minister of Agriculture and Agri-Food Canada, worked his way through the math.
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The textbook cost curve in agriculture slopes continously down and to the right. The more bushels or the more pounds you produce, the lower your cost of production per unit.
But that isn’t what Hedley was seeing, especially when he factored in technology and farm size.
By and large, the changes that Canadian farms have adopted over the years have been relatively small and evolutionary. This has resulted in a slow increase in the effects of economy of scale in agriculture, so although farms have been getting larger, the pressure to grow hasn’t been intense.
That’s going to change. Many new technologies are better adapted to larger and larger farms, sometimes because of their cost and sometimes because a new on-farm grain handling system, for instance, might need a certain amount of throughput in order to be efficient.
As a result, larger farms gain much more from these innovations than small farms, so the traditional small economy-of-scale advantage in farming may be widening.
What Hedley’s calculations were showing him was that some of these new technologies are so powerful, they shift farming into the next gear of productivity and margins. It isn’t a slow upward curve. It’s a jump.
It’s this phenomenon that Hedley coined “jump-shift.”
“The long run average cost curve is clearly not smooth and continuous,” says Hedley.
Commodity-based farms that don’t make jump-shifts will become equity burners, eating capital and relying on subsidies, says Hedley
Hedley points to no-till as an example. Prior to no-till, the typical farmer needed a medium-sized tractor, a disc, cultivator, plow, a planter or small seed drill, and a sprayer. That’s a lot of steps, each with a size constraint. In the East, for instance, the maximum width for planting would be about 12 rows of corn at about five miles per hour.
With an airseeder, however, that same farm can have one very large tractor pulling a single unit that will cultivate, spray, fertilize and seed up to 90 feet wide at eight miles per hour.
Not only is it more efficient, but suddenly as well, the medium sized tractors, plows, cultivators, sprayers and seeders that farmers had invested in will become nearly worthless.
The technology isn’t continuous, Hedley says. In other words, you can’t continuously upgrade the old planter and disc and suddenly end up with an air-seeder.
And because the technology isn’t continuous, its benefits aren’t either. That’s why the cost curve jumps. The newer technology replaces this long-run average cost curve with a new one, starting to the right of the old one and considerably lower.
“It’s this discontinuity in the long-run average cost curve that I call the “jump shift” in technology, marketing or scale,” says Hedley.
Hedley predicts it’s going to happen more and more as farms consolidate, because larger farms benefit even more than smaller farms from undergoing a major change. Plus, they’re often more likely to have the capital or the leasing mentality to do it.
Hedley peppers his discovery with a warning. If Canadian farmers are going to continue to produce commodities, they must be ready and able to make those shifts and to continue expanding.
“It only takes one guy with the capital to get there,” Hedley says. “As soon as he’s there, he starts to lower the price for others.”
“In the future you’re going to have to do a substantial change at least once, maybe twice.”
Historically, technological change was most often smooth and continuous. Farmers could keep up by making small changes on an ongoing basis. When the new technologies were more revolutionary, the speed of their introduction was typically slow.
Today, by contrast, you can’t expect the technology that you launch your farm career with will be continuously up-gradeable through your career. You’ll need to make completely new investments in technology at least once, and more likely twice during your farming lifetime, Hedley says.
You’ll also have to swallow. The asset value of your previous investments will plummet.
The kicker is that if you don’t make these investments, your relative efficiency and your net returns will drop. Then you’ll be forced to either change technologies or eat capital for the second half of your career.
The smaller commodity-based farms that don’t make jump-shifts will become equity burners, eating capital and relying on subsidies to continue in business.
Many of these smaller farms are already moving toward niche marketing, where they can operate without much debt and where they can innovate. For larger farms that intend to keep producting commodities, however, Hedley sees myriad opportunities coming down the research pipeline — such as genetics, traceability, food safety, and a whole range of new products — to let farmers use jump-shift strategies to maintain their competitiveness.
“This (agriculture) is not GM (General Motors),” says Hedley. “We’re talking about independent individuals.”
