The main reason of the slow progress in reforming agricultural policies and farming practices towards more sustainable agricultural and rural development is that the subsidy system is still based on increasing production. The profit or gross margin figures used as indicators of the efficiency of farming activities give wrong signals for farmers.
From the aspect of sustainable and multifunctional agriculture, a value added calculating model radically differs from the traditional accounting approach which is unable to make difference between the origin of inputs and services used up in the production process.
The substance of the value added calculating approach lies in that the actual agricultural supporting system must be changed to be conforming to the multifunctional agriculture’s requirements. Those components of the ongoing supporting system (e.g. products or production methods) which are not multifunctional-conform, must be eliminated from the system. Therefore, not only the supporting system must be modified but the Hungarian agricultural policy’s priorities and the accounting guidelines as well. In a supporting system based on value added analysis, inputs of the farm’s production process are accounted as positive value whereas inputs and services originated from cities and urban regions are accounted as negative value.
For sustainable agriculture the added value produced by farms is suggested as such key-indicator. For the application of this new approach agricultural policies have to be changed accordingly and a number of methodological problems have to be solved.
1. The need for more efficient measures to accelerate the reforms of the European agricultural policies and farming practices: the multifunctional agriculture’s concept
There is a vast literature on sustainable and multifunctional agriculture, a great number of different definitions for it but still no generally accepted definition exists and suggestions for the practical realization of the sustainability concept in agriculture is very scarce. At the same time some experts and responsible politicians express their dissatisfaction at the delay in reforming agricultural policies including the CAP of the European Union. They call for more radical reforms to remove most or all the subsidies coupled with production. This is considered necessary in order to put into practice the “European Model of Agriculture” which is meant to be multifunctional and sustainable agriculture.
To realize sustainable agriculture in practice would need a radical reform of existing agricultural policies both in individual countries and in the European Union at the level of the CAP. To introduce the required radical reform is extremely difficult because it seems to be in contrast with the interests of farmers, but even more with the interest of other groups within the agribusiness sector.
The agricultural policies influence the relationships in the agricultural sector and the environment and determine the direction of agricultural development towards sustainability. Nowadays, to solve the ongoing problems and to create the basis of the multifunctional agriculture, in the European Union and in Hungary, too, there is a need for integrating different, sometimes contradicory policies because on European level the agricultural production supporting system exists parallel with agri-environmental policy, rural development policy and environmental policy. The need for integrating different policies and the reform is well recognized.
On the European Union level, there are a lot of efforts to accelerate the reform process which are much highlighted in the reports, speeches and the official documents, and this reform process parallel with the reform of the CAP can lay down the basic of the rural development and the environmental protection, too.
2. Multifunctional agricultural and rural development
To result the contradictions between the multifunctional agriculture’s priorities, the market orientation and the socials problems of the rural development first of all, we have to define rural areas as the overall systems which has to be sustained and developed. This means that the agricultural sector is just a sub-system of rural areas, which by itself is also a very complex adaptive system having a set of versatile relations with the natural environment and with other sub-systems of the rural area in which it operates. We have to break away from defining the objective of agriculture in particular part objectives which usually are in contradiction with each other (i. e. increasing production, improving the technical level, enhancing the natural environment, increasing rural employment, etc.). We can declare that the overall objective of agriculture is to maximise the welfare of rural people and to contribute to the development of the rural areas. How to make it?
According to systems theory approach, the best solution of the problem is the application of the concept of heuristic self-management in which the controlling organisation uses only a few or ideally only a single key-indicator to influence the behaviour of the whole controlled system. A key-indicator should be chosen which can comprehensively embrace the oveall objective of the agriculture and which has a decisive relationship with all the basic elements of the agriculture. This means, that any change in the level of such a key parameter would result in the change of the whole agriculture accordingly.
We suggest that the produced value added can be the chosen as the key-indicator to measure the efficiency of farming. Consequently, increasing the amount of value added should serve as the priority basis for giving any subsidies to farmers. While value added is not an exact indicator of welfare but there is a deterministic correlation between the increase of value added and the increase of welfare.
3. The added value as a key-indicator for sustainable agriculture
It can be stressed again that without any doubt the increase of value-added results in the increase of welfare for the people concerned, but it still needs some explanation how it can help development towards sustainability of agriculture. First, we have to define the meaning of value added as the concept is used here. For an individual farm value added has to be calculated in the following way:
The total amount of revenues got from the sale of products and services, from subsidies or direct payment got for environmental services, for the maintenance of natural resources and landscape features have to be taken into account. Then, material inputs bought from outside of the farm, depreciation of durable assets which were not built or produced from own resources and the costs of capital borrowed from commercial banks have to be summed up and deducted from the total amount of revenues.
From the aspect of sustainable and multifunctional agriculture, it’s indispensable to set up a value added calculating model which radically differs from the traditional accounting approach. This approach is unable to make difference between the origin of inputs and services used up in the production process.
According to the author, the substance of the value added calculating approach lies in that the actual agricultural supporting system must be changed to be conforming to the multifunctional agriculture’s requirements. Those components of the ongoing supporting system (e.g. products or production methods) which are not multifunctional-conform, must be eliminated from the system. Therefore, not only the supporting system must be modified but the Hungarian agricultural policy’s priorities and the accounting guidelines as well.
In a supporting system based on value added analysis, inputs of the farm’s production process are accounted as positive value whereas inputs and services originated from cities and urban regions are accounted as negative value.
Value added calculated in this way can be increased only by taking one or more of the following possibilities:
- improving the quality of products and services so that higher prices can be achieved for them
- using more environmental friendly production practices (which in turn improves product quality as well)
- rendering more environmental, nature protection, landscape maintenance, cultural and social services for the society which are compensated through direct payments
- using more internal inputs produced from own farm resouces (i.e. farm yard manure instead of artificial fertilizers, own produced fodder instead of industrially produced feed mixes, biogas instead of electricity, etc.) Remember that the costs of such inputs are not deducted when calculating value added.
- diversification of the production structure into existing or new products of higher value added producing capacity.
By choosing any of the above listed alternatives farms clearly would move towards sustainability from the traditional non-sustainable industrialized agriculture and at the same time agriculture would increase its contribution to rural employment and to rural development in general. However, this holds true only if agricultural policy would change accordingly.
The setting up the model contains some methodological problems. The value added as defined above is not easy to calculate from usual input and cost records applied in the present recording and accounting systems. These systems are oriented to record data according to the character of the input or cost items (i.e. materials, labour and depreciation) and not according to their sources or origin. Sometimes it is very difficult to separate the inputs which are produced from own farm sources and which are from outside sources. This means in practice, e.g. how to account in data recording process those inputs such a seeds or a fodder-plants which are made produced by an improving firm.
In addition, some inputs are produced within the farm but as a result of a few or in special cases of several vertically built up part-processes each using the output of a previous part-process as an input. (E.g., home produced feed mix can contain grain from own production which again was produced both from own and from outside resources.)
Additional problems arise also in calculating objective function coefficients when linear programming models are used to optimalize the product mix of farms.
Despite of the methodological problems, the advantage of this calculating method is:
- improving the efficiency of the agricultural supporting system by giving only support or subsidies to the products and services which are complying to the multifunctional agriculture’s requirement,
- reducing the number or quantities of those products which are not marketable without any subsidy,
- developing the number of complementary products which have got comparable advantage over supported products, and can use the fundamentals of the rural region and the local inputs without compelling the farmers to produce non-marketable products or services,
- improving the efficiency of the agri-environmental and rural development measures without reducing parallel the social welfare of the rural areas.