ADDED VALUE AS AN INTEGRATED INDICATOR FOR

MEASURING MULTIFUNCTIONAL AGRICULTURE

Gábor Laki

1. The need for a new indicator to measure efficiency of farming

Agricultural policies including the Common Agricultural Policy of the European Union
are based on the general theory of economic development. According to this theory,
agricultural modernization means the increasing use of industrial means of production
and industrial inputs and substitution of them for human and natural resources. The
driving force of this kind of development has been the high subsidies given for
increasing of the quantity of products. Despite of the reforms introduced to the CAP
subsidies coupled with production still play a dominant role in it. Hungarian agricultural
policy followed the same direction and strongly subsidized the increase of production
by mechanization, the use of increasing amount of fertilizers and chemical during the
decades from 1970-1990. This kind of agricultural policy produced spectacular results
in terms of increasing the quantity of production and developing the so called
“industrialized” agriculture. Most of the agricultural experts are still proud of this
development and refer to the above mentioned period as “the golden age” of Hungarian
agriculture.

Unfortunately, overcoming the hesitation, after the change of the political system,
Hungarian agricultural policy decided in favor of increasing subsidies for production.
The argument for this is that we have to complete with the heavily subsidized
agriculture of the European Union Member countries.

The industrialized type of “modernization” of agriculture resulted in higher and higher

yields but this was achieved at the expense of the natural environment and rural areas.
There are a great number of reports analyzing the deterioration of natural resources, the
decline of rural areas. The situation has become more or less the same in both EU
Member states and in CEESs. One has to question: Has it been really development if
agriculture and rural areas have no benefit from it?

To understand the aim of agricultural modernization process we must distinguish the

stages of the agricultural innovation which have had different aim.

The aim of the industrialized agriculture

INDUSTRY AGRICULTURE
→ → RESULTS
Urban regions Rural regions

Aim of the agriculture

 more and more  more  increasing

industrial industrialized product
inputs and technologies and quantities;

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 assets iparszerűbb  (sometimes)
production; technológiák és less quality,
iparszerűbb szervezés;  resources
termékek  resources (input)
 research and intensive animal intensive,
introduction of and vegetal  less added
more and more products value
developed introduction, products;
technologies
and
techniques;

If we have a closer look at the “modernization” process of agriculture during the second
half of the twenty century we can see that in spite of the growth of output the value
added produced from the resources available in rural areas has not increased. What
happened was the transformation of more and more industrial inputs through
agriculture. This can be seem from Figure 1 where revenue, cost and net income figure
of wheat production is shown for the years from 1968 to 1986.
1000 HUF/ha
25

20

15

10

0
1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987

Revenue Total cost of production

Figure 1: Revenues and cost of wheat production during the modernization of Hungarian agriculture,
from 1968 to 1986
.
1000 HUF/ha
100
90
80
70
60
50
40
30
20
10
0
1994 1995 1996 1997 1998 1999 2000

Revenue Total cost of production

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 Figure 2: Revenues and cost of wheat production after the change of regime in Hungary, from 1994 to
2000.
We can demonstrate the negative effects of the industrialized agricultural development
not only by national data but by some economical indices of two big state farms, too.

1000 HUF
10000

8000

6000

4000

2000

0
1960 1965 1970 1975 1980 1985
Gross production value Gross value of fixed assets
Net income

Figure 3: Some economical indices of Bábolna State farm, from 1960 to 1986

1000 HUF
1600
1400
1200
1000
800
600
400
200
0
1962 1965 1968 1971 1974 1977 1980 1983 1986
Gross production value Gross value of fixed assets
Net income
Figure 4: Some economical indices of Komárom Agricultural Combine, from 1962 to 1986

We must highlight that in the revenue and cost analysis the added value can not be
calculated directly from the gross production cost and the revenue, but the trends show
clearly what the result of the modernization process is.

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
organization uses only a few or ideally only a single key-indicator to influence the
behavior of the whole controlled system. A key-indicator should be chosen which can
comprehensively embrace the overall 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.

The value added produced can be the chosen as the key-indicator to measure the
efficiency of farming. Consequently, increasing the amount of value added should serve

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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.
2. The added value as a key-indicator for sustainable agriculture

In the European Union there are some key-indicator to measure the efficiency of the
farm activity. A commercial farm is defined as a farm which is large enough to provide
a main activity for the farmer and a level of income sufficient to support his or her
family. In order to be classified as commercial, a farm must exceed a minimum
economic size. The concept of Standard Gross Margin (SGM) is used to determine the
economic size of farms, which is expressed in terms of European Size Units (ESU).
According to the concept used in Farm Structure Survey, the Standard Gross Margin of
a crop or livestock item is defined as the value of output from on hectare or from one
animal less the cost of variable inputs required to produce that output (Béládi, K. and
Kertész, R. (2001)).

This key-indicator determine only the economic size of European farms, not the real
efficiency of the farm activity. The Hungarian experts use the gross margin (where the
direct and indirect variable costs are deducted) as secondary key-indicator to measure
efficiency because this concept is based upon the economical principles.

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.

The new concept is based upon the given resources base and aim at maximizing of
contribution of the agriculture to the rural development. To introduce this key-indicator
into the agricultural account, we must determine the economical value of the natural
resources because this would be a base for measuring the real added value account.

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.

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

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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 resources (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, labor 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.

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Despite of the methodological problems, the advantages are:
• 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.

REFERENCES

1. Béládi, K. and Kertész, R. (2001): A tesztüzemek főbb ágazatinak költség-

és jövedelemhelyzete 2000-ben, AKII, Budapest, 5. szám.
2. Laki, G., Szakál, F. (2002): Added Value as a key indicator for sustainable
agriculture. A mezőgazdasági termelés és erőforrás-hasznosítás ökonómiája, VIII.
Nemzetközi Agrárökonómiai Tudományos Napok, SZIE Gazdálkodási és Mezőgazdasági
Főiskolai Kar, Gyöngyös, 6 p.
3. Szakál, F. (1999): A fenntartható mezőgazdaság és szerepe a vidéki térségek
fejlődésében, A falu, XIV. évf. 2.sz. 23-37 p.
4. Szakál, F. – Laki, G. (2001): A mezőgazdaság és a vidéki térségek
kapcsolatának rendszerszemléletű megközelítése. XLIII. Georgikon Napok, I. Kötet.
159-164 p.