Agriculture: Economics and Policy Chapter 20 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Agriculture: Economics and Policy
Chapter 20
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
20-2
Economics of Agriculture
• Extreme diversity• Farm products and food products• Short-run price and income instability
• Inelastic demand • Fluctuations in output• Fluctuation in demand
• Dependence on world markets
LO1
20-3
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 incomeLO LO1 1
20-4
Economics of Agriculture
D1
P1
Q0
P
P2
Qn
b
a
D2
Shift in demand causes large change in price and farm income
LO1
• The effects of a demand shift on agricultural prices and income
20-5
Economics of Agriculture
LO LO1 1
Source: Derived from the authors from Foreign Agricultural Trade of the United States, www.ers.usda.gov/Data/FATUS; and Bureau of Economic Analysis, www.bea.gov
20-6
Economics of Agriculture
LO1
Source: Author calculations using nominal values from Global Financial Data, globalfinancialdata.com, adjusted for inflation with the GDP deflator published by the Bureau of Economic Analysis, bea.gov
20-7
The Long Run: A Declining Industry
• Supply increased rapidly
• Technological progress
• Demand increased slowly
• Inelastic with respect to income
• Population growth
LO2O2
20-8
The Long Run: A Declining Industry
• Long-run decline of agricultural prices and farm income
D1
P1
Q0
P
P2
Q1
b
a
D2
S1 S2
Q2
c
LO2
20-9
The Long Run: A Declining Industry
• Major consequences
• Increased minimum efficient scale (MES)
• Consolidation
• Agribusiness• Massive exit of workers
• Farm labor 1.1% of labor force
• Farm-Household Income
LO2
20-10
The Long Run: A Declining Industry
LO2
YearIn MillionsOf People
As PercentageOf Total
Employment
NumberOf Farms,
Thousands
1950 9.3 15.8 5388
1960 6.2 9.4 3962
1970 4.0 5.0 2954
1980 3.5 3.5 2440
1990 2.5 2.1 2146
2000 2.2 1.6 2172
2009 1.8 1.1 2200
Source: derived by the authors from Economic Report of the President, 2012, Table B-100; U.S. Bureau of Labor Statistics, www.bls.gov, and Department of Agriculture, Economic Research Services, www.ers.usda.gov
Farm Employment*
*Includes self-employed farmers, unpaid farmworkers, and hired farmworkers
20-11
Global Perspective
LO2
20-12
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
markets
LO3
20-13
Global Perspective
LO3
20-14
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
LO3
20-15
Economics of Farm Policy
• Agricultural Adjustment Act of 1933 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 Farmers
LO3
20-16
Economics of Farm Policy
• Economics of price supports
• Effective price floor
• Generates surplus output
• Gain to farmers
• Loss to consumers
• Efficiency losses
• Other social losses
• Environmental costs
• International costsLO3
20-17
Q0
P
b
a
S
S
D
D
Pe
Qe
PsTax BurdenOf Surplus
Qc Qs
LO3
Economics of Farm Policy
Surplus
c
20-18
Economics of Farm Policy
• Reduction of surpluses
• Restricting supply
• Acreage allotments
• Bolstering demand
• Gasohol
• Bio-diesel
• Corn-based ethanol
• The ethanol program
• Higher food prices
• Secondary effectsLO3
20-19
Criticisms and Polit ics
• Criticisms of parity concept
• Criticisms of price supports
•Symptoms not causes
•Misguided subsidies
•Policy contradictions
LO4
20-20
The Polit ics of Farm Policy
• Public choice theory revisited
• Changing politics
• Declining political support
• World trade considerations
• Recent farm policy
• Freedom to Farm Act of 1996
• Food, Conservation, and Energy Act of 2008
• Direct payments
• Countercyclical payments (CCPs)
•Marketing loansLO5
20-21
The Sugar Program
• Price supports
• Domestic costs
• Import quotas
• Developing countries
• U.S. efficiency loss
• Global resource misallocation
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