Chapter 2. Productivity and sustainability challenges for food and agriculture

This chapter outlines the main challenges and opportunities for food and agriculture in the reviewed countries, provides an overview of trends in the sector’s productivity and sustainability performance across countries, and identifies main knowledge gaps for a full understanding of the situation.

    

Despite their differences, the food and agriculture sectors in reviewed countries face common opportunities and challenges, and countries can thus learn from each other's experience in many areas.

• The growth and diversification of global demand offers opportunities to traditional exporters of agro-food products, but also the development of markets for products with specific attributes, in which competition is primarily based on quality. Most reviews encourage countries to diversify into these higher value products.

• For OECD competitive agro-food exporters, the main challenges are to respond to increased competition on global commodity markets, in particular from faster growing emerging economies, while facing stricter environmental requirements from domestic regulations and markets, and growing uncertainties about market access.

• At the same time, the lack of competitiveness and capacity in food processing industries is an issue for at least some part of the sector in many countries, limiting the expansion of agriculture, innovation and export capacity in the food system.

All countries also need to improve productivity growth and sustainability to foster a competitive and viable sector, which is able to sustainably respond to changing demand, generate adequate income for farming families, and contribute to the rural economy, in particular in countries and regions where agri-food activities are significant.

• Continuous innovation in technologies, practices and organisation facilitate the development of a more productive and environmentally sustainable food and agriculture sector. Acceptance of innovation by consumers and society is thus crucial.

• Improving productivity further remains a challenge both in highly performing countries, where easy adjustments have already occurred, and in less performing ones, which require changes in incentives and disincentives. Structural change, including farm consolidation and diversification of activities, can help in that regard. Structural change is happening in all countries but is more or less pronounced depending on how long ago it started and how fast it occurred. However, small, and low-income farms, with often lower productivity, remain in most countries.

• Despite a wide diversity of situations, environmental pressures are increasingly decoupled from agriculture productivity. Sustainability issues affect most countries but differ in terms of nature and extent, both between and within countries. In some countries, water scarcity is the main problem, while in others it is pollution from nutrients. Progress has been observed at least in some dimensions of agriculture sustainability in all reviewed countries, even if environmental pressures remain high. Percentage change in agriculture’s negative impacts on the environment has at least not exceeded percentage change in productivity gains (thereby experiencing relative environment decoupling) in most countries, with some countries reducing these impacts while increasing productivity (absolute environment decoupling).

• Climate change will modify the natural conditions for agriculture and increase uncertainties everywhere. This will affect the range of adapted products, and thus productivity, and type and degree of stress, from water, heat but also pests and disease, so adaptation is crucial.

Main challenges and opportunities for food and agriculture

The countries reviewed display a wide diversity of size, geographical location, natural conditions, economic situation, and policy environment (Annex B). The structural, economic and environmental performance of their food and agriculture sectors reflects this diversity, which also illustrates the different pathways to improving productivity and sustainability.

Growing demand for more diverse types of food from wealthier consumers offers opportunities to compete on quality rather than only on low prices in traditional large markets as well as smaller niche markets. Market signals guide the industry in responding to changing and more diverse demand, while government’s role is to ensure markets function well using regulatory and competition policy. At the same time, societal preferences impose new challenges. Both developments require improved traceability along the food chain.

Main structural, productivity, sustainability and climate change challenges facing the food and agricultural sector in reviewed countries are summarised in Table 2.1. They include natural handicaps for farming, remoteness, labour and skills shortage or low labour productivity depending on the country, insufficient scale of operations, persistence of productivity gaps across farms and firms, land and water resource scarcity, natural resource management, water pollution by nutrients, vulnerability to natural disasters, the need to curb greenhouse gas emissions. Climate change is expected to increase uncertainties, variability and constraints in many cases, but will also offer new growing opportunities in some countries.

Productivity and sustainability improvements are essential for the sector to meet these challenges and respond to opportunities. In most reviewed countries, food and agriculture productivity and sustainability performance has improved, although significant differences across and within countries is observed. Annex A contains the definition of concepts and indicators used in the report.

Table 2.1. Summary of main challenges for food and agriculture
	Structural challenge	Productivity challenge	Sustainability challenge	Climate change challenges and opportunities
Argentina	Investment in rural and transport infrastructure	Regional and product differences in productivity growth	Deforestation, increased use of inputs affecting water and air quality	Increasing frequency of extreme weather events, melting of glaciers
Australia	Increasing differences between small and large farms. Remoteness of some farms	Availability of new technology. Drought and water shortages constrain productivity growth	Water and soil constraints, Greenhouse Gas (GHG) emissions	More severe water constraints
Brazil	Dualistic structure	Large productivity gap between subsistence and commercial farms	Land management, GHG emissions	Not included in the review
Canada	Production quotas, weak food industry, and small domestic market	Mainly in the dairy sector	Land management affecting biodiversity, regional water quality issues from excess nutrients	Better growing conditions in some regions, increased frequency of extreme weather events (floods, droughts), potential increase in pest and disease
China	Small farms dominate. Income gap between rural and urban households	Water resource constraints, small farms	Water resources constraints, pollution of soils and water, and expansion of intensive livestock production	Rising temperatures, more frequent extreme weather events, spread of pests and disease
Colombia	Small, subsistence farms	Large differences by commodity sector. Low productivity in dairy farms due to small scale, high input prices, poor transport infrastructure and inefficient value chain	Land management affecting biodiversity, GHG emissions, and intensive use of inputs	Rising and more erratic precipitations causing soil degradation. Rising temperatures requiring moving production in higher altitudes (Coffee). Melting of glaciers and disappearance of moorland
Estonia	Dualistic structure	Productivity driven by a small number of larger farms, high growth rates reflecting catch up	Local water pollution by nutrients	Better growing conditions despite potential increase in pests and diseases, and rainfall variability
Japan	Increasing differences between small and large farms	Labour shortages and ageing	High nutrient surplus driven by intensive use of fertiliser, GHG emissions.	Increased frequency of extreme weather events (typhoons)
Korea	Small farms dominate. Income gap between rural and urban households	Productivity gap with manufacturing sector, small farms	High nutrient surplus. Expansion of intensive livestock production, increasing nutrient surplus and GHG emissions	More typhoons; more erratic monsoons; warming in the South
Latvia	Dualistic structure	Productivity driven by a small number of larger farms, high growth rates reflecting catch up	Local water pollution by nutrients	Better growing conditions, increase in pest and disease, and rainfall variability
Netherlands	High land prices	Sustain growth with higher constraints	Water pollution by nutrients, GHG emissions and biodiversity	Increased frequency of extreme weather events, Water management
Sweden	Areas with natural handicaps (northern latitudes)	Low and declining growth rate for some sectors	Eutrophication, biodiversity and GHG emissions	Better growing conditions, prolonged cultivation period, climate favourable to other crops
Switzerland	Areas with natural handicaps (mountains)	Low and declining growth rate	Nitrogen surplus does not meet country targets	--
Turkey	Large number of small farms	Productivity gap between small and larger farms	Water scarcity, water quality and soil erosion	Increased water stress and temperature increase affecting agriculture
United States	Labour shortage	Declining growth rate	Water scarcity, pollution and soil erosion particularly in certain regions	Higher frequency of extreme weather events, higher water constraints in some regions
Source: Country reviews.

Trends in productivity growth

The most comprehensive productivity indicator is the Total Factor Productivity (TFP), which reflects the efficiency with which firms combine inputs to produce outputs (Annex A). According to USDA estimates, TFP has been the main source of agricultural production growth in recent decades. Since 2000, agricultural TFP growth has been strong — above 2% per year — in Estonia and Latvia (reflecting a catch-up following a decade of regression) as well as in the People’s Republic of China (hereafter “China”), Brazil and the Netherlands, and to a lesser extent Japan and Turkey (Figure 2.1). In all these countries except China, annual TFP growth has increased since 2000, compared to the 1990s’ annual average. In other reviewed countries including major agricultural producers and exporters, however, annual TFP growth is now lower than in the 1990s. This is particularly the case in Canada, Korea and the United States, although TFP continues to grow at an annual rate of close to 2%, and in Australia, where annual TFP growth is around 1.2% according to USDA estimates. TFP growth is also around 1.1% per year in Sweden,1 Argentina, Switzerland and Colombia. Finally, TFP growth in Korea and especially Japan, which are net importers, is relatively strong.

In Canada and the United States, agricultural TFP growth over the long term mainly allows output growth without increasing input use, while in Estonia, Korea, the Netherlands and dairy farms in Australia, the decrease in input use, in particular labour, also contributes to TFP growth. In Australian broadacre farms, productivity growth over the long-term has been driven by reduced input use rather than output growth, while dairy productivity growth in the long term is mostly due to increased output rather than decreased inputs; but a structural shift post-2000 following deregulation (input use declining faster than output).

Figure 2.1. Total Factor Productivity in primary agriculture, 1991-2000 and 2001-15

Annual percentage growth

1. EU28 and OECD averages. 2. 1991-2000 data are not available for Estonia and Latvia.

Source: USDA (2018), Economic Research Service, International Agricultural Productivity: www.ers.usda.gov/data-products/international-agricultural-productivity.aspx (accessed October 2018).

 StatLink https://doi.org/10.1787/888933998500

Most reviews find that labour productivity growth, facilitated by farm consolidation and the adoption of labour-saving technologies, has been faster than TFP growth.

There are also large differences in productivity growth by farm type, size and regions as illustrated in some country reviews and recent OECD farm-level analysis. For example, over the period 2002-14, TFP growth in Sweden averaged 2.1% per year in pig farms, 1.7% in dairy farms and 1.3% in cattle farms, while TFP decreased by 0.9% per year in cereals, oilseeds and protein crop farms, reflecting faster growth in labour, capital and material inputs than output (OECD, 2018b). Moreover, regional differences in farm performance are a common feature of Swedish farms. In the case of rice in Korea, the 25% farms that have by far the highest market shares achieved a higher productivity growth at about 4% per year over the period 2003 to 2015, compared to 2% for the 50% average farms and 1.3% for the 25% smallest ones (OECD, 2018c). The productivity gap between the smallest 25% and the largest 25% of farms increased from 3.0 to 3.9 times between 2003 and 2015. The analysis indicates that the productivity growth of a small number of large-size farms is driving the TFP growth of the Korean rice sector. This is also the case of Estonian dairy farms (Kimura and Sauer, 2015). Recent OECD analyses also find that significant differences in farm-level productivity persist within countries, often linked to structural change dynamics (Box 3.1).

Productivity gaps thus remain significant among farms and production systems and improving the productivity of farms lagging behind remains a challenge even for the strong performing countries. Wider adoption of innovation and further economies of scale are required to bridge the gap between weaker and stronger performers, although several studies suggest focusing on the best-performing farm groups would be more efficient to improve overall productivity (e.g. Kimura and Sauer, 2015). Improving productivity growth more sustainably, while coping with new constraints and uncertainties from climate change, adds to the challenge.

Trends in sustainability performance

Agri-environmental issues also vary in scope and severity in the reviewed countries, and the sustainability performance of agriculture differs by country and indicator. For instance, Figure 2.2 shows the performance of reviewed countries in terms of nutrient balances per hectare of utilised agricultural area. While an average decrease of per area nitrogen and phosphorous surpluses was observed between 1990-92 and 2012-14, not all countries face the same evolution, and the most recent figures do not all show a continued positive trend for all countries (Australia, Japan and Korea). Table A B.3 shows the evolution of reviewed countries in terms of resource management and selected environmental impacts.

If agricultural land use has been reduced, water and especially energy use have expanded in some of the reviewed countries (Table A B.3). Even in countries with overall abundant natural resources, like Argentina, Brazil or Canada, there is scope for improving the use of resources from agriculture and food activities, and challenges often remain at the local level. Turkey continues to face issues related to water variability and soil erosion. Within-country differences often exceed differences across countries. For instance, observed differences in water availability and use within Brazil, China and the United States exceed that across most reviewed countries, resulting in widely different resource constraints for agriculture. Even within small countries, like the Netherlands, the overall abundance of water resource does not exempt pockets of dry areas.

The environmental performance of agriculture is mixed among reviewed countries (Figure 2.2, Table A B.3). While progress in some indicators is observed in some countries, some are more advanced than others, and some countries have increased their environmental pressure. Countries with limited arable land, like Korea or the Netherlands, have more intensive agriculture systems resulting in relatively higher level of nutrient balance, water and air pollution, and pressure on water, soils or biodiversity (OECD, 2018d). Health and environmental risks from pesticides have decreased in Sweden. Fertiliser and pesticide use have increased significantly in parts of Brazil and Argentina. Chinese agriculture has developed rapidly without paying attention to its environmental impacts. China’s use of agricultural inputs contributed to a rapid deterioration of agriculture-related ecosystems especially in certain regions. Agriculture has maintained or reduced total greenhouse gas (GHG) emissions in most reviewed countries, but the challenge remains significant especially for countries with strong animal production, like Australia, Brazil, Korea or the Netherlands for which agriculture accounts for a relatively larger share of total emissions compared to the OECD average.

Figure 2.2. Evolution of nutrient balances per area, 1990-92 and 2012-14

Note: The nutrient balances were estimated for Latvia; are not available for Estonia (1990-92), China and Colombia.

Source: OECD (2018a), OECD Agri-environmental Indicators (database), www.oecd.org/tad/sustainable-agriculture/agri-environmentalindicators.htm (accessed in April 2018).

 StatLink https://doi.org/10.1787/888933998519

At the same time, for several environmental dimensions the agriculture sector’s sustainability performance has been increasingly decoupled with agriculture productivity in many of the reviewed countries; that is, countries are increasingly able to sustain or even improve agricultural productivity growth without commensurately increasing agriculture’s impact on the environment (Table 2.2). However, such decoupling varies significantly by environmental and resource pressure and countries; in a few cases, countries’ environmental deterioration has increased at a faster rate than agricultural productivity.

The sector also needs to prepare for changes associated with climate change, including higher levels of climatic uncertainties in most cases, but also increasing constraints on natural resource availability in some countries. Temperature increases are projected to reduce crop yields growth in already warm agro-climates, as in much of the United States (Schlenker and Roberts, 2009; Schauberger et al., 2017). Precipitation variability and the increased frequency of weather-related events is expected to have effects on most agriculture regions, imposing severe constraints on water availability in regions already subject to drought, such as in Turkey, Brazil or the United States. Northern countries, like Estonia, Sweden, and Canada, might increase their cropping season and benefit from better agro-climatic conditions on average, which may lead to the opportunity to adopt new crops. However, some of their regions may also face increased frequency and intensity of floods and the impacts from an expansion of pests and diseases.

Table 2.2. Decoupling agriculture productivity from resource and environmental pressure: Observed trends
Based on average annual change between 1998-2000 and 2010-121
	Resource	Environment
Absolute decoupling2	Water use: Australia, Estonia, Korea, Netherlands Land use: Korea, Netherlands	Nitrogen and Phosphorous balance: Estonia, Sweden, Turkey, United States Ammonia: Netherlands, Sweden, United States Greenhouse gas (GHG) emissions: Netherlands, Turkey Pesticide sales: Netherlands, Korea, United States; Pesticide risk: Sweden
Relative decoupling3	Water use: China, Turkey, United States Energy use: Estonia, United States	GHG emissions: Estonia, United States
Deterioration	Energy use: Turkey	Pesticide sales: Turkey GHG emissions: Korea
1. Time periods are not identical for each country, more recent date on agri-environmental indicators might alter this assessment. 2. Absolute decoupling refers to a situation in which resource impacts decline in absolute terms. 3. Relative decoupling refers to a decline in the ecological intensity per unit of economic output.
Source: Adapted from country reviews.

Main knowledge gaps

Despite on-going efforts to improve measurement of productivity and sustainability on a comparable basis across countries,2 information on total factor productivity and sustainability performance is often limited both at the sectoral and farm level, and difficult to compare across countries. Moreover, uncertainties remain on the impact of climate change and more knowledge is needed on smaller-scale impacts or climate change as well as adaptation options.

International TFP comparison is hampered by data limitations. The only source of internationally comparable TFP growth estimates for agriculture is the USDA database, which produces TFP growth estimates for all countries on a comparable basis (USDA, 2018). However, some important inputs are crudely accounted for in these estimates, and efforts to improve estimations continue. Whenever possible, national and farm-level estimates complemented international estimates in the reviews. In most cases, inputs and outputs considered in TFP calculations are those with a market value, but efforts are ongoing in OECD to develop environmentally adjusted TFP measures that include environmental effects of agricultural activities.3

The OECD agri-environmental indicators database contains valuable information, but not for all non-OECD reviewed countries and only at the national level. It would be useful to develop indicators at a more regional level to identify hot spots, in particular in large countries. Digital technologies could help the collection of disaggregated data at a lower cost.

While there is information on productivity and innovation in food processing firms in international databases,4 most country reviews did not explore it fully. Moreover, it remains difficult to assess the economic and environmental performance of the food chain in general.

References

Kimura, S. and J. Sauer (2015), “Dynamics of dairy farm productivity growth: Cross-country comparison”, OECD Food, Agriculture and Fisheries Papers, No. 87, OECD Publishing, Paris, https://dx.doi.org/10.1787/5jrw8ffbzf7l-en.

OECD (2018a), OECD Agri-environmental Indicators (database), www.oecd.org/tad/sustainable-agriculture/agri-environmentalindicators.htm (accessed April 2018).

OECD (2018b), Innovation, Agricultural Productivity and Sustainability in Sweden, OECD Food and Agricultural Reviews, OECD Publishing, Paris, https://dx.doi.org/9789264085268-en.

OECD (2018c), Innovation, Agricultural Productivity and Sustainability in Korea, OECD Food and Agricultural Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9789264307773-en.

OECD (2018d), “Agri-environmental indicators: Nutrient balances”, OECD Publishing, Paris. https://one.oecd.org/document/COM/TAD/CA/ENV/EPOC(2018)5/FINAL/en/pdf.

Schauberger, B. et al. (2017), “Consistent negative response of US crops to high temperatures in observations and crop models”, Nature Communications, Vol. 8, No. 13931, https://doi.org/10.1038/ncomms13931.

Schlenker, W. and M.J. Roberts (2009), “Nonlinear temperature effects indicate severe damages to U.S. crop yields under climate change”, Proceedings of the National Academy of Sciences of the United States of America (PNAS), Vol. 106, No. 37, pp. 15594-15598. https://doi.org/10.1073/pnas.0906865106

USDA (2018), Economic Research Service, International Agricultural Productivity, www.ers.usda.gov/data-products/international-agricultural-productivity.aspx (accessed January 2018).

Notes

← 1. EU estimates provide a slightly more optimistic picture of Swedish TFP growth of about 1.4% per year between 2005 and 2016.

← 2. For example, agri-environmental indicators, agricultural total factor productivity, farm-level productivity and activities of the OECD Farm Level Analysis Network, and of the Agriculture Total Factor Productivity Network and the Environment.

← 3. Cf. meeting of the OECD TFP and the environment network www.oecd.org/agriculture/topics/network-agricultural-productivity-and-environment/.

← 4. See for example Day-Rubenstein and Fuglie (2011) (Chapter 9 in Fuglie et al., 2011) for information on research intensity in the food manufacturing industry, based on OECD data on Business Expenditure on R&D (BERD), and a comparison of productivity growth in the food manufacturing sector in the United States, the Eurozone, Japan and the United Kingdom, using the EU KLEMS database (www.euklems.net/index.html).

Chapter 2. Productivity and sustainability challenges for food and agriculture