agriculture: economics and policy chapter 20 copyright 2015 mcgraw-hill education. all rights...

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

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

20-4

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

20-5

The Long Run: A Declining Industry

• Supply increased rapidly• Technological progress

• Demand increased slowly• Inelastic with respect to income• Population growth

LO2O2

20-6

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

20-7

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

20-8

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

LO3LO3

20-9

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 FarmersPrices Paid by Farmers

LO3

20-10

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 costs

LO3

20-11

Economics of Farm Policy

• Reduction of surpluses• Restricting supply

• Acreage allotments• Bolstering demand

• Gasohol• Biodiesel• Corn-based ethanol

• The ethanol program• Higher food prices• Secondary effects

LO3

20-12

Criticisms and Politics

• Criticisms of parity concept

• Criticisms of price supports

•Symptoms not causes

•Misguided subsidies

•Policy contradictions

LO4

20-13

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• Food, Conservation, and Energy Act of 2008

• Direct payments• Countercyclical payments (CCPs)• Marketing loans

LO5

20-14

The Sugar Program

• Price supports • Domestic costs• Import quotas• Developing countries• U.S. efficiency loss• Global resource misallocation