Chapter 20 The Effects of

Government Farm ProgramsPresented by:

Josh Morgan and

Kristin Mackie

Overview The objective of this chapter is to describe

the major effects of government programs in agriculture as a whole

Farm Programs and related expenditures are classified into several broad categories and the major winners and losers in each category are identified.

Programs That Increase Product Prices To Farmers

Product prices may be increased by decreasing supply or by increasing demand. (graph 20.1 pg.305)

Programs may reduce supply in a number of ways, depending on the specific nature of the particular program.

Production controls reduce the supply of farm products, thereby increasing prices to farmers.

Various domestic and foreign food assistance and nutrition programs increase the demand for farm products through government purchases, food subsidies, and export subsidies, thereby increasing product prices.

Farm Bills The 1996 farm bill eliminated production controls for wheat,

rice, cotton, feed grains, and sugar The 2002 farm bill dismantled the system of peanut

marketing quotas, and in October 2004 the tobacco program was eliminated.

The supply of farm products is also reduced by restrictions on imports of price-supported products, which were imposed to prevent consumers from consuming lower-priced imported products

The results is to reduce supply and to increase product prices to farmers. Government purchases of farm products increase demand and product prices (graph 20.2 pg. 306)

Food Assistance and Nutrition Programs

Various food assistance and nutrition programs increase the demand for farm products through government purchases, food subsidies, and export subsidies which increases product prices.

Price supports of milk are are implemented through government purchases of manufactured milk products.

Food stamps, school lunches, and other assistance programs increase the demand for farm products by subsidizing food purchases.

A wide range of domestic and foreign aid programs continue to be important in maintaining the demand for U.S agricultural products.

International Agreements International grain agreements for five and four

year periods (made with China and Russia) were designed to stabilize prices and to increase overall demand for U.S grain.

The agreements specified a range of grain exports to these nations each year at market prices.

The agreements may, increase the demand for U.S. farm products to some extent.

Programs that reduce prices Government subsidies for agricultural credit and electric

power, conservation of land and water resources (including flood control, irrigation, and land reclamation),and research and extension services reduce farm production costs, increase output, and decrease produce prices. (graph 20.3 pg. 307)

Subsidized credit provided by FSA (Farm Service Agency), for example adds to total resources in agriculture by providing more credit than would be available at competitive market rates and terms

Research and extension activities reduce per unit costs and increase total farm output.

NRCS Natural Resource Conservation Services

provides cost to farmers to carry out conservation and environmental practices and is also involved in the development of soil and water conservation programs.

Subsidized soil conservation and research activities tend to increase production in the long run, whereas irrigation and floodwater control provide immediate increases in output.

Department of Interior Water and Power Subsidies in the West

Irrigation is highly important to agricultural production in the West, and water is frequently priced to farmers below its value in nonagricultural uses.

The farmers in the west receive a majority of their water supply through the Bureau of Reclamation.

Irrigation systems also use artificially low-priced electricity produced by federally funded dams to pump groundwater for irrigation. Approximately 150,000 farms benefit from federal water projects The value of irrigation for a 160 acre farm in CA, my be in excess of $100, 000

Agricultural Production in the West

Production in the west has been significantly increased through power and water subsidies.

Without irrigated water CA would be relatively unimportant in agricultural production.

CA is the leading agricultural state in the United States.

The water and power subsidies in the west not only distort the geographical pattern of agricultural production within the U.S., but it also increases the scarcity of water for recreation and urban uses in the west.

Net Effects: Who Wins? Who Loses?

Because some programs increase product prices received by farmers at the same time that other programs decrease prices, some of the expenditures are offsetting.

Although $38 billion was spent on farm programs that increased farm product prices almost one-third as much was spent on programs that decreased farm product prices.

Consumers and Taxpayers Because of farm programs (many

comparable to the New Deal) prices of sugar, milk, fresh oranges, and a number of other products are higher then they would be without the programs.

U.S. consumers pay for, and support these programs through higher prices on goods and through higher taxes.

Owners of Specialized Resources Within the agricultural sector, owners of land,

allotments, and other specialized resources are the biggest gainers from farm programs.

In the case of the tobacco price support program, for example, the market value of the right to produce often exceeds $1,000 per acre, per year.

Some gains are achieved through political efforts which consists of lobbying and political contributions.

Normally the owners of land and producion rights at any given time are not the same people who received the windfalls when the programs were initiated

Farmers as Producers vs. Farmers as Asset Owners

The distribution of gains between producers and asset owners depends on how quickly the expected benefits or costs of program changes are incorporated into asset values.

Many owners of land and other farm assets are not farmers.

Labor vs. Other Specialized Resources

Farmers as owners of specialized skills benefit from programs to assist agriculture.

The gains from government programs that reduce input prices or increase product prices are incorporated into higher market prices of land and other assets if property rights are well defined and assets can be bought and sold. In such cases the farmers wealth increases as a result of the increases in asset values.

Asset value is based on the expected contribution during the contracted time period. The asset owner receives an increased return each year as long as product price remains higher.

Farm Operators and Farm Labor Price supports and subsidized inputs provide

incentives for increased agricultural production, but competition for labor and entrepreneurial skills in other sectors tends to equate returns throughout the labor market.

The supply of labor in agriculture is highly responsive to changes in wage rates

Changes in product prices and the demand for labor result mainly in changes in farm employment rather than in changes in returns to farm labor. (figure 20-4 pg. 311)

The effects of price support programs on the market for farm labor

Some farm programs increase the demand for labor whereas others decrease the demand for labor.

An increase in product price, all other things remaining constant, will increase the quantity of output supplied, which will (typically)increase the demand for labor.

Subsidized credit and tax preferences in agriculture reduce the cost of capital relative to labor to labor and increase the rate of substitution of capital for labor, thereby reducing the demand for farm labor.

Price Support Programs The effects of subsidized credit,

conservation, research, and education programs that reduce cost and increase supply vary widely between farm operators.

Programs that increase technology, innovators gain in the short run, whereas those who adopt the technology later benefit little because of the increases in output and reduction in product prices.

Government Employees Government employees gain from farm

programs the # of USDA employees increased more than four times from 1929 to 1999 even as the # of farms and farmers decreased at a dramatic rate.

USDA activities expanded into rural development, rural recreation, nutrition, and other areas

Resource Allocation Resources are allocated to various uses on the

basis of market prices Land when allocated by market forces, is based

on the expected returns. Land has the highest expected use in agriculture because it is used for farming and housing

Prior to the 1996 farm bill production control programs in agriculture diverted some of the world’s most productive farmland into nonproductive uses through various programs

Policy Implications The largest 8% of farms received 47% of

payments to farmers in government farm programs.

Farm programs are necessary to stabilize agricultural markets, stabilization for farm programs is weak, much of the instability in the U.S. agriculture since WWII has been caused by government policies including fiscal policies, subsidized credit, and trade restrictions.

Protectionism and the Deregulation of U.S. Agriculture

Programs like NAFTA and WTO were created to reduce and eliminate import restrictions.

The FAIR act provided farmers with greater flexibility in making planting decisions than under previous farm bills.

The 1996 and 2002 farm bills continue the long standing practices of transferring income from the non farm sector to the farm sector or the U.S. economy

THE END