Role of Government in Agricultural Markets
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Transcript of Role of Government in Agricultural Markets
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Role of Government in Agricultural Markets
• Food safety and consumer protection• Trade regulation and producer protection• Research and education • Market efficiency
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Consumer Health and Safety• Food and Drug Act
– 1906, 1938– 1958 Delaney Clause
• Food Quality Protection Act– 1996 replaced the Delaney Clause– Initiated HACCP
• Wheeler-Lea Act 1935– Truth in advertising– Labeling laws, 1973, 1990
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Labeling Claims• Trend to product differentiation
– Evaluate label claims– Production claims
• Organic standards established• Not all terms have standard definition
– “Natural” “Nebraska Corn-Fed Beef”– USDA-AMS is establishing standards for
• Naturally raised• Grass-fed• Other claims
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Regulations on Food Prices
• Price control or freezes– Typically war time and/or rapid inflation– Retail price freeze -> farm price impact– WWI 1917-18– WWII 1941-1946 also rationing– Korean conflict 1950-1953– 1971-1973 inflation
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Economic and Social Progress • 1862 Department of Agriculture• 1862 Morrill Land Grant Act• 1887 Hatch Act, experiment station• 1914 Smith-Lever Act, extension• Currently over 10,000 agricultural
researchers employed by gov’t
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Regulate Competition
• US founded on private enterprise• Concerns about market power
– 1890 Sherman Anti-trust Act – 1914 Clayton and FTC Acts set rules– 1936 Robinson-Patman Act
• Price discrimination illegal unless economically justified
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Regulations of Monopolies• Recognized natural monopolies and
dealing with monopolies• Capper-Volsted Act 1922
– Right of farmers to collectively bargain• Agricultural Marketing Act 1937
– Established marketing orders for dairy and fruit and vegetables
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Facilitate Trade and Service
• PSA 1921– Set standards for trade– Assured prompt payment– Changed to GIPSA in 1990s
• Grades, weights, & standards• Promotion and research 1980s
– Checkoff activity
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Data and Price Reporting• Competitive markets require equal access
to information for buyers and sellers• USDA-NASS
– Acreage, yield, inventory, etc– Farm number and demographics
• USDA-AMS– Price reporting– Slaughter and production– State and Federal partnership
• Auctions and grain prices
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Mandatory Price Reporting• Federal law passed congress in 1999
– Started with 7 Midwest states initiating new price reporting regulations
– Industry and government found it “better” to have a single federal regulation
– Slaughter cattle, hogs, lambs and wholesale beef, lamb but not wholesale pork
• Currently– AMS collects, reports summary, doesn’t keep individual
company prices– GIPSA can demand all records from companies to do
an investigation if they have just cause
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Standardization and Grading
• Reduces marketing costs– Improves communication– Possible to trade on description rather than
inspection– Grading sorts commodities by defined quality
standards– Quality grades typically optional
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Criteria for Grades and Standards
• Based on characteristics that – Are important to users– Are easily recognizable– Can be measured and interpreted by graders to
reduce variation within a grade– Have common terminology– Represent the distribution of production– Make it cost effective to operate
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Public or Private Grades• Use differs by industry
– Cattle use USDA grades • Grading done by USDA employee
– Hogs use private grading• Grading done by employee of buyer
– Grain use USDA standards but grading by the buyer
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Examples of Grades: Beef• Quality grade uses marbling as a measure of
eating experience (taste, texture, juiciness)• Yield grade is measure of retail meat yield in
the carcassQuality Grades Yield Grades
Prime 3-4% 1 11-12%Choice 60-65% 2 48-50%Select 30-35% 3 33-40%Standard --- 4
1-2%5 <1%
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Examples of Grades: Hogs• Historically used USDA grades (US 1-2)• Moved to objective measures of the
carcass• Measurement systems
– Carcass weight ranges– Carcass Leanness
• Backfat measure at 10th or last rib• Fat-O-Meter measure fat thickness and loin depth
to estimate percent lean in the carcass• Ultrasound to estimate percent lean in carcass
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Examples of Grades: Grain
Class: #2 Yellow Corn1. BCFM (Max)1/ 3.0%2. Damaged Kernels (Max)2/ 5.0%3. Moisture (Max) 14.5%4. Test weight (Min) lbs./bu 54.011/ Broken corn and foreign material2/ Includes heat damaged kernels (0.2% max)
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Examples of Grades: Grain
• Class #2 Yellow soybeans• Foreign Material (Max.) 2.0% • Damaged Kernels (Max.)1/ 3.0% • Splits (Max.) 20.0% • Moisture (Max.) 14.0% • Test Weight (Min.) lbs./bu. 54.0 • 1/Includes heat damage kernels (0.5% max)
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Examples of Grades: Grain• Class: #2 Soft White Wheat• Protein: Ordinary• Moisture (Max): 13.5%• Dockage (Max): 0.6%• Test weight lbs/bu (Min.): 58.0• Falling Number (Min.): 300• Wheat of Other Classes (Max): 3.0%• Total Defects (Max):1/ 3.5%• 1/ Includes damaged kernels, foreign material, shrunken & broken
kernels
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Mandatory v. Optional Grades
• Few precedents for compulsory• Cost may increase if mandatory• Industry may already have grades• Grades may inhibit innovation
– Produce to the minimum to make a grade– May not match convey value trait as well as
another measure, i.e., tenderness
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Problems of Grades and Standards
• Subjective nature of “quality”• Made for industry not consumers• Designing grades and grading methods
– Accurate, fast, cheap, meaningful– Number of grades
• Implementing grades
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Farmers and Grades
• Not always used – May not trust of grades or grader– Risk – reward
• Large discounts on small percentage• Small premiums on small percentage
– Direct measurement possible with new technology
• Percent lean• Protein percent
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Marketing Agencies & Grades
• May add value to commodity• Role of private brands• Larger firms may develop own grades• Specification contracts with more detail
may replace grades
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Consumers and Food Grades
• Grades often confusing and offer little differentiation
• Consumers often do not understand grades
• Brand loyalty may replace uniform grades
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FARM POLICY• Historically, agriculture has been
highly protected in many countries, including U.S.
• Main reasons advanced for supporting domestic farmers:1. Risk reduction
Shield farmers from weather and world price volatility
2. Food security Ensure country’s food supply
3. Rural society Stimulate rural economy Promote rural development
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FARM POLICY
Policies to Support
Farm Income
Food and Nutrition
Rural Development
Natural Resources
Trade
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FARM POLICY• Evolution of U.S. farm and rural sector
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Evolution of U.S. farm policy• 1920s:
– Emphasis on “orderly marketing”• Encouraged storage and marketing throughout the year• Provided loan-storage programs
• 1930s:– Forerunners of current farm programs– Favored supply control to achieve “fair” prices
• Acreage controls, import and marketing quotas, soil conservation programs
• 1940-52: – Large increase in U.S. farm prices and incomes
• Consumers faced wartime food rationing and price controls• Farm programs established in 1933-38 continued with minor
modifications
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Evolution of U.S. farm policy• 1950s and 1960s
– Great expansion in productive capacity due to science and technology
– Downward pressure on prices due to enhanced productive capacity
– Previous farm programs continued and worked on supply and demand policies
• “Food for peace program” 1954• Soil Bank program of 1956• Food Stamp Act of 1964
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Evolution of U.S. farm policy• 1970s
– Prices and farm income increased due to large expansion in worldwide demand
• Increased world population and incomes, and devaluation of U.S. dollar relative to other currencies
– Enhanced outlook triggered a large supply response
• Planted acres increased by 47 million between 1969 and 1978, took land out of Soil Bank
• Increase in quantity supplied led to depressed prices and farm incomes by the end of the decade
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Evolution of U.S. farm policy• 1980s
– Compromise between two views• More market orientation: Flexible price supports,
less government purchase and storage, greater reliance on direct subsidies to farmers
• Government intervention to improve balance between supply and demand: Acreage controls, selective reductions in support prices, export subsidies
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Evolution of U.S. farm policy• 1990s
– FAIR Act of 1996• “Decoupled Payments”
– Removed linkage between farm income support payments and farm prices
– Declining support payments over 1996-2002 period• Ended supply controls, giving farmers flexibility
regarding crop choices• Loan Deficiency Payments (LDP) replaced non-
recourse commodity loans• Promotion of export market development,
especially for higher value-added products• More emphasis on conservation
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Evolution of U.S. farm policy• 2000s
– Emphasis on risk management with subsidized crop insurance and new insurance products
– Farm Security and Rural Investment Act of 2002• Extends market-oriented reforms of 1996 FAIR Act• Introduces Countercyclical Payments
– Triggered when current prices fall below target level, but amount paid based on historical production
• Three types of farm income support programs– Decoupled Payments– Countercyclical Payments– Marketing loans
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Evolution of U.S. farm policy• 2000s
– Emphasis on risk management – Farm Security and Rural Investment Act of 2002
• Extends market-oriented reforms of 1996 FAIR Act• Introduces Countercyclical Payments• Three types of farm income support programs• Conservation programs
– All programs are expanded– New working-lands conservation payments through
Conservation Security Program• Rural development
– New programs and increased funding for rural areas• Trade
– Expanded support to promote export market development, especially for higher value-added products
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Farm Policy
• A function of their time– Farm income and society– Current thinking and innovation
• A function of government budgets• Slow to change • Often see response quickly• Devil is in the details
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Summary
• Policy• Protection• Infrastructure• Market efficiency