Reducing and/or removing risk is of key importance for business success. Uncertainty about high levels of risk result in reduced rates of investment. If business owners or investors are uncertain about the viability of a potential investment or the ability to generate an expected return on investment, then these investments will most likely not be made. If the level of risk is not lowered, then the risk uncertainty contributes to reduced investments, lower rates of innovation, and higher consumer costs.
Importance of R&D Investments
Agriculture is consistently threatened by a range of non-market and market risks. Non-market risks include things like animal and crop diseases, weather, and climatic events, with market risks being changes in consumer tastes and preferences and competitive trade policy. Both aspects can destabilize business operations. Research and market development (R&D) both work to manage these risks. Research into specific threats and opportunities contributes to addressing problems when they arise and to provide better agronomic opportunities that stabilize incomes and reduces losses.
Investments in the development of new crop varieties contribute to the development of varieties that are more resistant to diseases that contribute to increasing yields and/or quality. Similarly in livestock research, the improvement in resistance to disease contributes to reduced rates of loss. Higher yields reduce the risks to farmers, allowing consumers to benefit through lower food prices.
At a more fundamental level, research helps to secure the long-term future of an industry. As an economy grows, higher productivity sectors draw land, labour, and capital from industries with lower productivity. This secures the inputs necessary for industrial change, investment, and research to be able to offer competitive returns, especially for capital and labour which are the most mobile.
The Challenge of Long Development Timeframes
Some industrial sectors rely on consistent new breakthrough technologies and creating new markets, as is witnessed in electronic and tele-communication sectors. Agriculture is forced to rely on the ‘slow magic’ of research, development, and adoption of new seeds, livestock pedigrees, production methods, machinery, equipment, and business models that provide small but cumulative gains that secure the future of the industry. As an example, between 1995 and 2019, crop productivity in Saskatchewan increased by 28%, a rate of just over 1% per year. Moreover, returns to agri-food research are enduring, with peak returns realized approximately 24 years after the research phase.
The consistent commercialization of agricultural products, whether crops or livestock, with improved traits, contributes to risk mitigation as if disease breaks out, then the percentage of susceptible populations will hopefully be low. Economic benefits are created when farmers see that the adoption of a new technology will reduce their risk of loss should disease occur. The ability of a crop or livestock herd to have greater resistance to disease lowers production risks, thereby helping to lower their overall business risk.
The lengthy time required to achieve peak adoption results in higher-than-necessary losses when adverse events occur, whether it be disease or weather related. With peak adoption taking over 20 years, economic losses are considerably higher than if the peak adoption period was shortened to just 10 years. A challenge for the agricultural sector is to better understand the reasons for the lengthy adoption periods and strategize options for reducing them.
Impacts of Reduced R&D Investments
Businesses invest in innovation as these investments ultimately increase profitability. Society benefits from the innovations through more efficient products and technologies that can contribute to lowering the price of the product or reducing the environmental footprint of the product. Ideally, a new product will be able to achieve both.
A significant challenge facing the agricultural sector is declining R&D investments. In 2013, Canadian agricultural R&D spending was $860 million. Just nine years later in 2022, this had dropped to $680 million, a decrease of 21%. This consistent decline in R&D investments threatens to increase the risk of farming and food production in Canada.
As R&D investments decline, there will be fewer new products reaching the market, which in turn has the potential to even further lengthen the peak adoption period, rather than contributing to shortening it. With slower innovation rates, there will be fewer new products with increased resistance to adverse production factors like disease and weather. With fewer new products reaching the market, when there is a disease outbreak or unfavourable weather, there is a higher probability of increased losses. This raises the risk for farmers as yield stability is reduced, which also impacts consumers through higher food prices. As it stands, risks associated with food production in Canada are increasing.
