Post on 23-Dec-2015
Agriculture: Economics and Policy
Chapter 19
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Unstable agricultural prices and farm income
• Employment exodus from agriculture • Farm subsidies and price supports • Criticisms of the price-support
system• Existing Federal farm policy
19-2
Agriculture Industry
• Extreme diversity• Farm products and food products• Short-run price and income
instability–Inelastic demand –Fluctuations in output–Shifts in the demand curve
• Dependence on world markets19-3
Economics of Agriculture
Effects of Changes in Farm Output on Agricultural Prices and Income
D
Qp
Pp
Q0
P
Pn
Pb
Qn Qb
Normal FarmIncome
n
p
b
Increases in output reduce farm income 19-4
Economics of Agriculture
The Effects of Changes in Demand on Agricultural Prices and Income
D1
P1
Q0
P
P2
Qn
b
a
D2
Shift in demand causes large change in price and farm income 19-5
Agriculture: a Declining Industry
• Supply increased rapidly–Technological progress
• Demand increased slowly• Inelastic with respect to income• Population growth
19-6
Agriculture: a Declining Industry
• Inflation adjusted prices have declined through 2005
• Rising prices 2006-2007–Demand from China
–Ethanol
19-7
Economics of Agriculture
The Long-Run Decline of Agricultural Prices and Farm Income
D1
P1
Q0
P
P2
Q1
b
a
D2
S1 S2
Q2
c
19-8
Agriculture: a Declining Industry
• Major consequences–Increased minimum efficient scale
(MES)
–Consolidation
–Agribusiness
–Massive exit of workers
–Farm labor 2% of labor force
19-9
• Futures markets
• Contracting with processors
• Crop revenue insurance
• Leasing land
• Nonfarm income
Agriculture: a Risky Business
19-10
Percentage of Labor Force in Agriculture, Selected Nations 2002-2004
MadagascarBangladesh
ThailandChinaBrazil
RussiaJapan
FranceGermany
United States
0 25 50 75 100
Source: World Bank World Development Report, 2008
Labor in Agriculture
19-11
Economics of Farm Policy
• Subsidized since 1930s–Support for agricultural prices,
income, and output–Soil and water conservation–Agricultural research–Farm credit–Crop insurance–Subsidized sale of farm products in
world markets19-12
Government Subsidies as a Percentage of Farm Income, Selected Nations, 2006
NorwaySwitzerland
South KoreaJapan
European UnionTurkey
CanadaMexico
United StatesAustralia
0 20 40 60 80
Source: Organization for Economic Cooperation and Development
Agricultural Subsidies
19-13
Economics of Farm Policy
• Rationale for farm subsidies–Necessities of life
–“Family farm” institution
–Extraordinary hazards
–Competitive markets for output while inputs have significant market power
19-14
Economics of Farm Policy
• Agricultural Adjustment Act of 1931 established parity concept–Particular real output results in
same real income–Preserve purchasing power–Rationale for price supports
Parity Ratio =Prices Received by Farmers
Prices Paid by Farmers19-15
Economics of Price Supports
• Effective price floor• Generates surplus output• Gain to farmers• Loss to consumers• Efficiency losses• Other social losses• Environmental costs• International costs
19-16
Q0
P
b
c
a
S D
S
Surplus
D
Pe
Qe
Ps
Tax BurdenOf Surplus
Qc Qs
Economics of Price Supports
19-17
Reduction of Surpluses
• Restricting supply–Acreage allotments
• Bolstering demand–Gasohol–Biodiesel–Corn based ethanol
• The ethanol program–Higher food prices–Secondary effects
19-18
Criticisms and Politics
• Criticisms of parity concept• Criticisms of price supports
• Symptoms not causes• Misguided subsidies
• Policy contradictions
19-19
The Politics of Farm Policy
• Public choice theory revisited• Changing politics
–Declining political support–World trade considerations
• Recent farm policy–Freedom to Farm Act of 1996–Farm Act of 2008
19-20
The Sugar Program
• Price supports • Domestic costs• Import quotas• Developing countries• U.S. efficiency loss• Global resource misallocation
19-21
Key Terms
• farm commodities• food products• agribusiness• parity concept• parity ratio• price supports• acreage allotments• Freedom to Farm
Act
• Food, Conservation, and Energy Act of 2008
• direct payments• countercyclical
payments (CCPs)• marketing loan
program
19-22
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Income Inequality and Poverty
19-23