Alternatives to the subsidy allocation in the agri-food sector : the case of vegetable processing in Manitoba

Abstract

The main purpose of this study is to investigate the impact of subsidy allocations on the Fruit and Vegetable Processing Industry (FVPI), and particularly potato processing, in comparison to direct subsidies distributed to farmers in Manitoba. The impact of subsidy funds on growth and development is evaluated using a well defined theoretical model. The dynamic model for the FVPI is based on optimal control theory and the adjustment cost hypothesis, utilizing the duality approach. Further analyses and comparisons of different subsidy scenarios are based on an estimated investment/production model, rural consumption patterns, and regional Input-Output (I-O) model. Based on the estimated results, when a subsidy is allocated to farmers less than 26 cents of each dollar will remain in the rural community. The total increase in value added will be approximately 40 cents for each dollar transferred to the farmers. Furthermore, each $130,000 direct subsidy will likely create one domestic job. However, when a subsidy is allocated based on production efficiency to the FVPI, one dollar spent has the potential of raising the domestic output by 80 cents, and each $58,000 subsidy creates roughly one domestic job. Conversely, if a subsidy is not allocated efficiently to the processors, the change in the value added and employment will be marginal and substantially lower than the direct subsidy to the farmers. The main conclusions obtained from the study are: (a) Generally, a more detailed analysis of the production/investment and consumption relationship, prior to the allocation of subsidies, is needed for capturing the greatest economic benefit. (b) The FVPI in Manitoba is over-captialized after the mid-1970s. (c) Capital expenditure in the FVPI is not sensitive to the cost of capital, due to different regional incentive programs. (d) The establishment of a price enhancing program for raw material, such as a supply management board, may substantially reduce the level of capital expenditure in the long-run. (e) Policies geared towards trained and improving the productivity of human resources have a greater impact on enhancing rural growth and development.