The agricultural sector is facing competition both from agriculture in other countries and from other sectors within the country. Competition from other countries results in a downward pressure on product prices, while competition from other sectors results in an upward pressure on input prices. Given these conditions, improved productivity and reduced production costs are essential for the agricultural sector’s ability to compete in the international market.
Production costs in Swedish agriculture are high, as in other Western European countries. However, in many cases Swedish production costs are even higher than in countries like Denmark, Germany and the Netherlands.
There are several reasons for the high cost level. The Swedish climate is rather cold and the growing season is short. Swedish farmers seem to invest in more expensive buildings for livestock production than farmers in countries with similar conditions. Compared with non-EU countries, there are strict production regulations. Agricultural policy has, at least historically, allowed for production in regions and on farms with higher production costs. Wages are high, because other domestic industries are successful in the international market. Indirectly, high wages also imply higher costs for many input goods and services.
To some extent Swedish and other Western European farmers compensate for their cost disadvantages by labour saving technologies, high efficiency and high product quality. In addition, low cost producers in other parts of the world have a disadvantage on the European market because of higher transportation and transaction costs. These higher costs often amount to some twenty or thirty percent of the final product price. Producers in remote countries also have a disadvantage on the market for perishable products.
It is evident that Western European agriculture has some difficulties competing in the international market, even though there are factors which can compensate for some of the cost disadvantages. EU-15’s share of world exports of agricultural products has a tendency to diminish over time and Sweden is becoming an even larger net importer of agricultural products.
Production has increased in many low cost countries over the last ten years. So far, an increased demand for food has absorbed most of this production increase. The increase has not resulted in widespread elimination of production in high cost countries. It should be noted that the ability of low cost countries to expand the production is limited. At least cereal and grazing livestock production requires an access to land of a suitable quality in a suitable climate. The supply of such land is limited. Due to the limited ability of individual countries to expand the production, the world market price for a certain product will not fall down to the cost level in the country with the lowest production cost. Therefore, also countries with a somewhat higher cost level will be able to compete.
High production costs pose the biggest problem for Swedish agriculture. How, then, can production costs be reduced? A structural development, where some farmers expand their businesses and unprofitable farmers shut the production down, is important for reducing costs. Economies of scale are the reason why this ongoing development towards larger farms leads to lower costs. Young farmers have a key role in the structural development since they are the farmers who invest most in expanding production. Another ongoing development is that livestock production becomes more concentrated to certain regions. This development also contributes to an improved international competitiveness.
Improvements of technology and knowledge are essential for increasing productivity and reducing production costs. Improvements of technology and knowledge are the most important means for Western European agriculture to cope with competition from low cost countries. New or improved technology can compensate for e.g. high labour costs or a less favourable climate. When it comes to improving knowledge in the agricultural sector, dissemination of existing knowledge is at least as important as producing new knowledge. Further, in the perspective of technology and knowledge, it should be noticed that Sweden as a country has very favourable conditions for a capital intensive and particularly a knowledge intensive production.
Governments have an important role in technology and knowledge development, by financing research and development, education and the diffusion of knowledge. Preventing an exercise of market power, in all parts of the agricultural and food sector, and providing good conditions for the industry in general are other important roles for the government. Finally, considering the extensive government regulations influencing Western European agriculture, it is important that the costs and benefits of proposed new regulations are evaluated.