government intervention in agriculture
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Government Intervention in Agriculture. Chapter 11. Topics of Discussion. Defining the “Farm Problem” Government intervention Consumer issues Price and income support Domestic demand expansion Importance of export demand. Price and Income Support A Historical Perspective. - PowerPoint PPT PresentationTRANSCRIPT
Government Intervention in
Agriculture
Chapter 11
Topics of DiscussionDefining the “Farm Problem”Government interventionConsumer issues Price and income supportDomestic demand expansionImportance of export demand
Price and Income SupportA Historical Perspective
Loan rate mechanismSet-aside mechanismTarget price mechanismConservation reserve mechanismCommodities covered by government
programs
The “Farm Problem”Inelastic demand and bumper cropLack of market powerInterest sensitivityTrade sensitivityAsset fixity and excess capacity
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An increase in supply causes price to fall sharply.
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If the demand curve is more elastic (D2), the price will only fall to price P2 rather than P3 for a given increase in supply.
Recent Approachesto Supporting
Farm Prices and Income
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Market Level Effects of Loan Rates
Free market equilibriumoccurs at point E. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersis PG.
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Market Level Effects of Loan Rates
The Commodity CreditCorporation of the USDAbegan in the Thirties to acquire excess supply at thedesired price its through non-recourse loan provisions.
The goal was to shift demand from D to D+CCCACQ, pulling up the price from PF to PG. Note that consumer demandactually fell from QF to QD.
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Market Level Effects of Loan Rates
The CCC often stored the surplus QD-QG in metal bins atgreat expense to taxpayers.
This approach has the un-wanted effects of increasingsupply from (QF to QG) in a sector already plagued by over production.
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Market Level Effects of Loan Rates
Consumer surplus woulddecline from area 3+4+6 tojust area 6. Thus, they areeconomically worse-off as aresult of this approach.
Producer surplus wouldincrease from area 1+2 toarea 1+2+3+4+5, a gainof area 3+4+5.
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Firm Level Effects of Loan Rates
The individual firm underfree market conditions willproduce quantity qF if itexpected the free market price PF, and earn profitEqual to area 1.
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Firm Level Effects of Loan Rates
The increase in CCCacquired stocks pullingthe price up to PG willcause participating farmers to increase itsproduction from quantityqF to qG, increasing itsprofits by area 2.
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Market Level Effects of Set-Aside Requirements
Free market equilibriumoccurs at point E1. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersagain is PG.
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Market Level Effects of Set-Aside Requirements
Shifting the market supplycurve from SMKT to SMKT*through set-aside require-ments reduces productionfrom QF to QG. The market equilibrium moves from E1
to E2.
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Market Level Effects of Set-Aside Requirements
Consumer surplus would fall from area 4+5+6+7 tojust area 7. Thus, consumersare worse-off economically.
Producer surplus wouldincrease from area 1+2+3 toarea 1+6. As long as area 6is greater that area 2+3, producers are better-off.
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Market Level Effects of Set-Aside Requirements
Importantly, the set-asideapproach does not encourageproduction of quantity QS asthe CCC loan rate approachdid.
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Firm Level Effects of Set-Aside Requirements
The individual producerunder this approach wouldsupply qG rather than qF or qS.
Profit would increaseover free market levels aslong as area 4 was greaterthan area 2+3.
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Deficiency Payment Mechanism
The deficiency payment was equal to quantity QM multiplied by the difference between the announced target price and either the loan rate or market price (blue shaded area above), which ever was higher.
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Deficiency Payment Mechanism
To receive this payment, the farmer had to participant in the Acreage Reduction Program (ARP) which implemented the set-aside requirements. The Findley amendment reduced this payment by 15%.
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Importance of Government PaymentsTo Net Farm Income
With payments
Withoutpayments
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Importance of Government PaymentsTo Net Farm Income
Pre FAIR Act FAIR Act
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Importance of Government PaymentsTo Net Farm Income
Pre FAIR Act FAIR Act
Lowered safety netunder FAIR Act…
Current Farm Bill New legislation signed into
law May 13, 2002 2002 Farm Security Act Policymakers searching for a
“countercyclical” approach that retains many of the “freedom” features of the 1996 FAIR Act
Enhancing risk manage-ment tools by rethinking insurance
Demand Side Options
Consumer Issues
• Adequate and cheap food supply, food access• Food Subsidies
– Food stamp program– National school lunch program– WIC
• Food Safety• Nutrition and Health
– Obesity issue– Nutritional Labeling and Education Act (NLEA)
U.S. Nutrition Labeling and Education Act of 1990: A Model for the Rest of the World
• update list of nutrient, ingredients• standardize serving sizes• define nutrient content claims• define health claims
Aims of NLEA
• promote consumer nutritional education
• enable consumers to make more healthful food choices
• provide incentive to food industry to create innovative and healthier new products for consumers