The Position of Agriculture

Abstract

The position of agriculture follows quite unique global trends: The economic, political and social significance of agriculture reduces in line with increasing economic development. This is because agriculture is exposed to specific political and market conditions, which play a decisive role. The change in the position of agriculture is driven by a series of different internal and external conditions. Agriculture's share of total production, export, import, added value, employment, etc., is declining globally. Also the food industry becomes less important as economic welfare increases, even though this industry takes over a significant portion of the food processing that previously was performed on the farms or in the households. Overall, the development is characterized by resources being transferred from agriculture into other sectors, which means that agriculture is becoming less important.

5.1 Introduction

The economic, political and social significance of agriculture reduces in line with increasing economic development. The diminishing significance of agriculture is taking place all over the world, and the position and role of agriculture in society is changing and it is following relatively stable megatrends created by consistent drivers.

Other industries are not exhibiting the same development as agriculture. This is because agriculture is exposed to specific political and market conditions, which play a decisive role.

As people's basic needs for food are met, they seek to meet needs that are further up Maslow's pyramid of needs. The environment, animal welfare, biodiversity, landscaping, origin, sustainability, etc., come increasingly into focus. The role of farmers as producers and suppliers of food diminishes, which means that the economic position of farmers changes, and a number of negative externalities created by agriculture becomes more important.

Not only is agriculture's role as a producer of food changing, but also farmers’ political power and influence is changing.

The change in the position of agriculture is driven by a series of different internal and external conditions some of which are predetermined, while others can be influenced by the individual countries.

The major drivers behind the weaker position of agriculture, which may be interconnected, are briefly described below.

An important explanation for the weaker position of agriculture is that agricultural and food products generally have a low-income demand elasticity. This means that a given increase in income leads to a relatively small increase in demand. In other words: People can only eat their fill once, so an increase in income will not result in a large quantitative increase in the consumption of food. The relatively limited growth in demand will, therefore, also limit the growth in supply.

Another explanation is that increase in productivity is relatively substantial in agriculture. This means that a constant amount of agricultural produce can be produced with fewer resources, or that an increase in production can be achieved without a corresponding increase in the use of resources. Inputs such as labor are often removed as a result of productivity growth.

The agricultural industry consists of many small units—farms—which typically grow and become increasingly large. Exploiting economies of scale drives this development, which also releases resources such as labor for other sectors.

Productivity growth and the exploitation of economies of scale also contribute to lower costs per unit and thus also contribute to falling real prices for agricultural products. This means that—all other things being equal—the value of agricultural production falls.

Finally, an increasing division of labor is taking place between the primary agricultural industry and the agricultural supply and processing industry.

Whereas farmers previously accounted for a large part of direct sales to consumers, farms and agriculture are now more specialized and focus on agricultural production. As a result, part of the added value has moved from farms and agriculture to the processing industry such as dairies and meat companies, which are not defined or characterized as agricultural industries.

Overall, the development is characterized by resources being transferred from agriculture into other sectors, which means that agriculture is becoming less important. The transfer of resources is created by both pull and push effects: During economic growth, other sectors will demand labor and other resources from the agricultural sector. Excess labor in agriculture occurs as a result of mechanization, so labor in particular is pushed out of agriculture into other sectors.

5.2 The Significance of Agriculture

Agriculture and the up- and downstream industries change significantly in a country during economic development. The change is often very predictable and some clear global tendencies and megatrends can be identified.

Figure 5.1 illustrates the long-term decreasing significance of agriculture in two countries, the USA and Denmark.

Fig. 5.1

(Sources Own presentation based on Hansen [1983], Landbrugsraadet [several issues], Henriksen and Ølgaard [1969], Grigg [1992], Grubbs [n.d.], USDA [several issues], Lebergott [1966], and statistical data from FAO, Statistics Denmark, and World Bank)

Long-term change in the economic significance of agriculture: Denmark and the USA

As can be seen the figure presents a relatively similar trend in the two countries over a very long period. In recent decades, the development has been become asymptotic with the X-axis. The three food crises that have occurred since 2007 with sharply rising prices for short periods of time have resulted in increasing export value both nominally and relatively.

Korea, which is an example of a country that has experienced very rapid industrialization, has witnessed a sharp decline in the significance of agriculture in recent decades, cf. Fig. 5.2.

Fig. 5.2

(Note Data from around the Second World War until the end of the Korean War are both uncertain and atypical of the long-term development, which is why detailed figures for these years are to some extent omitted. Sources Own presentation based on Kim [2018] and statistical data from FAO, Korean Statistical Information Service and World Bank)

Long-term change in the economic significance of agriculture in South Korea

The agricultural labor force’s share of the total labor force declined from 60 percent in the mid-1960s to 13 percent in the mid-1990s, which confirms the very rapid change and adaptation in agriculture and in the whole of Korean society.

The decreasing significance of agriculture in a country may have a number of economic, market-related and policy implications:

• In a low-growth sector, the utilization of economies of scale and the benefits of productivity growth may be limited as the potential for increasing production is less.

• In a low-growth sector, excess capacity can occur more easily, which will often reduce earnings.

• The pressure for mergers and consolidation will increase as the companies’ potential for growth in the form of organic market growth is less. For this reason, growth through mergers and acquisitions becomes a more appropriate or attractive option.

• The opportunities for attracting capital to companies in low-growth sectors are often limited. Investors often prefer industries or companies with strong growth potential.

• The political attention on the sector diminishes as its economic contribution declines.

5.3 Share of Production

Agriculture's share of a country's total production and added value is a fairly clear and precise expression of agriculture's economic importance and position in a society.

Agriculture's share of total production in a country is falling, which is a very significant megatrend. The development appears to be relatively unaffected by economic cycles, food crises, structural changes or other internal or external influences. This megatrend can be identified through both time series analysis (the development over a long period of time in various selected countries) and cross-sectional analysis (snapshots of the situation in many countries). Both types of examples of megatrends are presented below.

Long time series of agriculture's share of total production are rare and often subject to a certain degree of uncertainty. Such time series require data on the value added in agriculture and in society as a whole, which can be very difficult to obtain many decades back in history. Despite these uncertainties, clear megatrends that show that agriculture's share of total production in a country is declining can be identified, cf. Fig. 5.3.

Fig. 5.3

(Note Delimitations and definitions are not consistent over time. In recent decades: Including fishing, forestry. Sources Own presentation based on Grigg [1992] and statistical data from World Bank)

The long-term decline in agriculture’s share of total GDP in selected countries

The figure shows long time series for four selected countries where relatively consistent data has been available.

The figure shows clear trends over time, and the share of agriculture for the four countries reduced over the entire period, so that it now amounts to just a few percent. The uniform trend, but different rate of change, also shows that while the natural conditions including access to resources for agriculture may differ between countries, the same driving forces are at play everywhere, which results in the same development in the long term.

When focusing on a slightly shorter time horizon and on regions rather than countries, a clear trend can still be identified with regard to agriculture's share of total production, cf. Fig. 5.4.

Fig. 5.4

(Note Including fishing and forestry. Sources Own presentation based on statistical data from World Bank)

Agriculture’s share of total GDP for selected regions

The figure shows that even with a relatively short time horizon (from the beginning of the 1960s) and with aggregated figures for regions and for the whole world, a clear trend in the form of a decrease in agriculture's share of the total production value can be observed.

As previously mentioned, agriculture's declining share of total production over time and in line with economic development can also be illustrated by cross-sectional data, which show agriculture's share of total production as a function of the countries' income measured in GDP per capita. In this way, an international pattern regarding the importance of agriculture emerges.

Figure 5.5 clearly illustrates the international pattern with regard to agriculture’s declining share of production and value creation with increasing economic welfare.

Fig. 5.5

(Note Added value is calculated for 2020 or for the last year with available data. GDP per capita is for 2020. Source Own calculations based on statistical data from World Bank)

Agriculture’s share of the countries’ gross factor income as a function of GDP per capita

For each country, the figure shows the correlation between the country’s level of economic development (GDP/capita shown on a logarithmic scale) and agriculture’s gross factor income in relation to the countries’ total gross factor income. Every point represents one country. As can be seen, despite large differences in the countries’ resources, etc., there is a clear tendency for agriculture to become less important with economic growth.

However, it is noteworthy that the migration of labor occurs so rapidly that the added value in relation to the remaining agricultural workforce increases sharply in line with economic development. This correlation between added value per work force unit and the level of economic development is shown in Fig. 5.6.

Fig. 5.6

(Note Added value is calculated for 2020 or for the last year with available data. GDP per capita is for 2020. Source Own calculations based on statistical data from World Bank)

Added value per agricultural work force unit as a function of GDP per capita

5.4 Share of Employment

Technological development and the mechanization of agriculture together with limited demand growth lead to a surplus of labor in agriculture, which results in the emigration of labor from agriculture to other sectors. Since technology develops gradually and its implementation on individual farms is also slow, the process is long-lasting and constant.

Agriculture's share of total employment will decline relatively smoothly without any significant fluctuations between time periods. This long-term reduction in agriculture's share of total employment can be seen in Fig. 5.7.

Fig. 5.7

(Source Own presentation based on Grigg [1992] and statistical data from FAO and World Bank)

Agricultural labor force (as a share of total labor force) for groups of countries, 1900–2050. From 1991: Developing countries = Low and middle income. From 1991: Developed countries = High-income countries

The figure illustrates a continuous reduction in agriculture's share of employment since the beginning of the twentieth century. On the one hand, the development has released labor for better and more attractive utilization in other sectors—often at a higher value and thus higher remuneration. The result is a favorable pull effect created by other industries which have lacked manpower. On the other hand, a push effect has pushed excess labor out of agriculture but without any immediate alternative employment in other industries. In this way, the change has had both positive and negative effects.

Figure 5.7 clearly shows differences in the extent of the share of agricultural employment between developed and developing countries. The trend is almost identical, but the employment rate is much lower in the developed countries. This pattern is illustrated more clearly in Fig. 5.8.

Fig. 5.8

(Note 2020 or latest year with available information. Source Author’s calculations based on statistical data from World Bank)

Agriculture’s share of the countries’ employment in agriculture (as a percentage of total employment) as a function of GDP per capita (2020)

As shown in Fig. 5.8 there is a very clear correlation between economic welfare and agriculture’s share of employment.

Employment in agriculture and in rural areas is correlated and exhibits broadly the same development. As rural development increasingly receives political attention and becomes an integrated part of agricultural policy, employment and economic activity in these areas outside the cities is important.

Currently, over half of the world’s population lives in cities, whereas the rural population is decreasing relatively on all continents. According to the FAO, this development is expected to continue in the coming years (see Fig. 5.9).

Fig. 5.9

(Note The projection 2022–2050 is conducted by UN/FAO. Source Statistical data from FAO)

Percentage of the population living in rural areas, 1961–2021, and projected to 2050

In 1950, 70 percent of the world’s population lived in rural areas and 30 percent lived in urban areas. However, by 2050, the opposite is expected to be the case. The population in rural areas will also decline in nominal numbers. In Europe, the population of rural areas will have declined by almost 40 percent by 2050.

5.5 Share of Export

Less developed countries are often characterized by the fact that agriculture is a very important business and is one of their comparative advantages, industrialization has not yet been completed, and agricultural goods, therefore, account for a significant share of the countries' exports. With increasing economic growth and industrialization, branches of industry other than agriculture are being developed, which also results in increasing exports.

Figure 5.10 illustrates this development for selected regions, the whole world and selected countries for the years 1961–2021.

Fig. 5.10

(Note 5-year moving average. Source Own calculations based on statistical data from FAO)

Agricultural exports as a share of total exports for selected regions and countries, 1961–2021

Because exports are derived from production, the significance of agricultural and food exports also declines with increasing economic growth. There is a definite pattern in that the poorest countries generally are very dependent on agricultural exports, but this dependency lessens as welfare increases (see Fig. 5.11).

Fig. 5.11

(Source Own calculations based on statistical data from FAO and World Bank)

Exports of agricultural products and food as a percentage of total exports—as a function of GDP per capita (2020)

The pattern is somewhat obscured by the fact that some of the poorest developing countries export very little due to overpopulation and food shortages. Correspondingly, there are poor countries which export relatively large quantities of raw materials such as metals, oil, etc., and relatively small quantities of agricultural products.

There are also atypical countries, e.g., Denmark and New Zealand, which have a very large agricultural export despite being highly developed countries.

The relatively good correlation between per capita GDP and the relative importance of agricultural exports is remarkable considering that parameters other than just economic growth affect the size of food exports. A country’s basic comparative advantage, agricultural policy, etc., will also, to a large degree, affect the size of food exports.

On the other hand, economic growth seems to create new competitive strengths outside the food sector, thereby reducing the agricultural sector’s role in trade.

The decreasing importance of food exports with increasing economic growth is only related to total exports. Thus, total food exports per capita increase in line with economic development (see Fig. 5.12).

Fig. 5.12

(Source Own calculations based on statistical data from FAO and World Bank)

Per capita food exports during economic growth (2020)

As Fig. 5.12 shows, food exports increase as countries become more developed. This occurs despite the fact that agricultural and food production become less important over the same period.

When looking at the trend in net exports (exports minus imports) of agricultural products in the economic development process, it should be emphasized that there is no clear picture. As can be seen in Fig. 5.13, net exports seem to either decrease or increase with increasing GDP per capita.

Fig. 5.13

(Note A few outliers have been omitted. Source Own calculations based on statistical data from FAO and World Bank)

Per capita net exports of and total international trade (exports + imports) in agricultural products as a function of GDP per capita (2020)

As can be seen in Fig. 5.13, most developing countries have a very small net export of agricultural products. However, the countries will increasingly become either net exporters or net importers of food products as the economy grows. In total, imports + exports of agricultural products increase significantly with increasing income. Thus, greater international specialization occurs during economic growth, whereby the countries adjust to a division of labor in relation to their comparative advantage.

The clear correlation between economic growth and international food trade highlights two relationships. Firstly, economic assistance for underdeveloped countries will, ceteris paribus, create new producers and consumers in the global market. Secondly, it seems that economic growth is a necessary precondition for participation in international food trade and specialization.

5.6 Share of Import

Countries' dependence on agricultural and food imports is also changing. In general, international trade in agricultural and food is accounting for a decreasing share of total trade as trade in industrial goods, cars, computers, machinery and, not least, services is increasing much more rapidly.

Furthermore, all countries have the basic resources necessary for domestic agricultural production. Therefore, agricultural production is a dominant industry in countries that are poorly developed in terms of technology, and thus food imports are small.

Additionally, many countries do not want to be overly dependent on food imports. A certain degree of self-sufficiency in food is—or has been—part of the agricultural policy of many countries. This goal also helps to reduce food imports. The liberalization of agricultural policy in recent years has weakened the potential to limit imports, although special exceptions have been applicable in cases in which a country's import dependence has increased too much (Safeguard measures).

The share of food of total imports does not vary to the same extent as was the case with agricultural exports. Very few countries’ food imports account for more than 30 percent of total imports.

The relationship between the countries’ economic development and the relative importance of food imports can be seen in Fig. 5.14.

Fig. 5.14

(Source Own calculations based on statistical data from World Bank)

Food import’s share of total merchandise imports during economic development (2020)

Time series data show a similar trend: The countries' food imports have accounted for a much smaller share of total merchandise imports in recent decades, cf. Fig. 5.15.

Fig. 5.15

(Note Individual countries: Five-year moving average. Source Own calculations based on statistical data from FAO and World Bank)

Food import’s share of total merchandise imports for least developed countries, high-income countries and selected countries

The figure shows a clear downward trend in that the least developed countries still depend relatively heavily on food imports.

The countries' relatively limited dependence on food imports, which is a result of the goals of food security and a reasonable degree of self-sufficiency, is illustrated with an example in Fig. 5.16. The figure shows the countries' degree of self-sufficiency for poultry meat and the countries' share of the world's total consumption of poultry meat.

Fig. 5.16

(Source Own calculations based on statistical data from FAO)

Global consumption of poultry meat from countries with varying levels of self-sufficiency (2020)

The figure shows that countries that are 95–105 percent self-sufficient in poultry meat account for more than 50 percent of global poultry meat consumption. A very low proportion of total consumption comes from countries with a self-sufficiency level of less than 75 percent.

In conclusion, the relative importance of food imports decreases over time due to several factors and driving forces:

• All countries have the resources to produce their own food, which limits the need for imports.

• The production and consumption of agricultural and food products increases at a slower rate than they do for other products during economic growth.

• Many countries want a certain degree of self-sufficiency in food, so they limit imports through agricultural and trade policy measures.

These fundamental drivers are likely to continue to apply in the future, and thus the megatrends will continue.

5.7 Share of Consumption

The demand for and consumption of agricultural and food products is an important parameter for the development and position of agriculture and the food industry.

Firstly, demand for agricultural and food products differs from the demand for other products. Food is a basic necessity, which we need to consume daily, and which cannot be replaced.

Secondly, the extent of the demand, its composition and development is crucial for future agricultural production. The value chain is now from fork to farm, so farmers have to adapt to a greater extent to market and consumer demand.

Thirdly, food is an essential consumer good. Therefore, it receives a great deal of attention in developed and developing countries with food security and food safety being very high on the economic and political agenda.

Fourthly—and the central point of this chapter—food accounts for a steadily decreasing share of total consumption. In line with increasing economic welfare and purchasing power, the demand for, in particular, durable consumer goods, services, holiday travel, cars, housing, etc., increases. In contrast, the consumption of food is more constant, as you “can't eat your fill more than once”. Consumption is changing toward more processed and more expensive food, but the increase in value is modest and the increase in quantity is even smaller. In addition, food prices often rise at a slower rate than the general inflation in society, which also means that the value of food consumption will decrease compared to total consumption.

Engel’s law and Engel’s curve are essential for explaining food demand and its decreasing share of total consumption. Engel’s law states that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises. Engel’s law was proposed by the German statistician, Ernst Engel (1821–1896).

This law does not suggest that the amount of money which is spent on food decreases with increasing income, but that the percentage of income spent on food increases more slowly than the percentage increase in income. In other words, the income elasticity of demand for food is between 0 and 1.

Engel’s law can be illustrated by Engel’s curve, which shows the relationship between the level of income and the level of food consumption.

There are two types of Engel’s curve. The first illustrates that absolute demand for and expenditure on food varies with income. In this case, one expects demand to increase at a decreasing rate as income rises. The second type illustrates that the proportion of household income (relative demand) spent on food varies with income. In this case, one expects demand to decrease as income rises.

Engel’s law and Engel’s curve can be illustrated in several ways depending on which axis, data and parameters are used. Figures 5.17, 5.18, and 5.19 present examples of the correlation between income and food demand using either cross-sectional or time series data.

Fig. 5.17

(Source Own presentation based on statistical data from FAO and World Bank)

Food consumption and level of economic development (2019)

Fig. 5.18

(Note Definitions are not identical in the sources used. Sources Author’s presentation based on Seale and Regmi [2006] and statistical data from FAO, USDA, and World Bank)

Food’s share of total consumption and level of economic development (2021 or most recent year with available data)

Fig. 5.19

(Sources Own presentation based on statistical data from Eurostat, Statistics Canada, Statistics Denmark, and USDA)

Food’s share of total consumption in selected countries

Figure 5.17 shows that food consumption—measured as daily food supply in calories—tends to increase with increasing income but at a decreasing rate, and that it is almost constant for high-income countries.

Figure 5.18 demonstrates that food’s share of the total consumption decreases significantly as income increases. On a logarithmic scale, the trend is very clear and decreasing—using cross-sectional data for almost all countries in the world—developing and developed.

Figures 5.17 and 5.18 show Engel’s law very clearly: As countries start to grow economically, demand for food increases, but food’s relative share of total consumption decreases simultaneously.

Figure 5.19, which is based on time series data, shows that the role of food decreases as income increases. Countries such as the US, Canada and France have witnessed a significant and constant decrease in food’s share of total consumption for several decades during which massive economic growth occurred.

Differences in calculation methods and definitions between the countries mean that the graph must primarily be used to illustrate a declining long-term trend in all countries.

5.8 Food Industry vs. Agriculture

Increasing specialization in the agro-industrial sector occurs in line with economic growth in a society.

In a developing country, a significant part of the supply and processing activity takes place in primary agriculture, i.e., on the farms. In line with economic growth, a greater division of labor occurs, so that supply and processing industries take over a significant portion of the food processing that previously was performed on the farms or in the households. This trend is likely to continue in the form of a global megatrend.

As can be seen in Fig. 5.20, there is a clear tendency for the food industry to acquire an increasing percentage of the value added in the agro-industrial complex.

Fig. 5.20

(Note Weighted average of 29 OECD countries. Source Own calculations based on statistical data from OECD and World Bank)

Distribution of value added in parts of the food sector in OECD countries

Therefore, this development will also contribute to reducing primary agriculture’s relative importance during economic growth. Agriculture is increasingly becoming a sub-supplier to the food industry and other related industries in or outside a food cluster.

When agricultural production and food processing take place in two different sectors, a strong and coherent value chain as well as an efficient market for their products are important. Structural development in order to strengthen vertical integration is crucial.

Therefore, the development of the food industry is affected by, on the one hand, generally weak growth in demand for food, and on the other hand, increasing added value and food processing.

5.9 The Significance of the Food Industry

Although the food industry absorbs a proportion of the employment and value added from primary agriculture during economic growth, it seems that it also becomes less important as economic welfare increases. This is because the increased processing in the food industry cannot compensate for the negative effect of the low growth in demand.

The relationship between economic growth and the significance of the food industry can be seen in Fig. 5.21, which shows that food typically comprises up to 60–70 percent of the total value added in the industry in the poorest developing countries, while it typically comprises 5–25 percent in countries with the highest incomes.

Fig. 5.21

(Note Food, beverages and tobacco [% of value added in manufacturing]. Source Own calculations based on statistical data from World Bank)

The food industry’s share of total value added in manufacturing during economic growth (2018)

A relatively clear megatrend can be observed: The food industry has a declining share of the total manufacturing industry during economic growth.

The declining importance of the food industry is mainly due to low growth in demand along with a dependency on local and national markets. For many years, the food industry’s raw materials and consumers have been preferentially local. In line with increasing liberalization and globalization, the food industry is becoming less reliant on local raw materials, so the connection with national agriculture can be expected to become weaker in the future. At the same time, more international sales will also mean that the food industry will no longer be so limited by low growth in demand, as growth can be achieved in the international markets.

Finally, it is also significant that raw materials from agriculture are playing an increasingly minor role in the food industry’s production and value creation. Innovation, processing, refinement, marketing, logistics, etc., are comprising an increasing portion of the costs compared to the cost of raw goods. Therefore, the food industry is becoming less dependent on agricultural production.