Chapter 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Unstable agricultural prices and farm income Employment exodus from agriculture Farm subsidies and price supports Criticisms of the price-support system Existing Federal farm policy 19-2

Agriculture Industry Extreme diversity Farm products and food products Short-run price and income instability Inelastic demand Fluctuations in output Shifts in the demand curve Dependence on world markets 19-3

Economics of Agriculture Effects of Changes in Farm Output on Agricultural Prices and Income Q P Pp p Pn n Normal Farm Income Pb b D Qp Qn Qb Increases in output reduce farm income 19-4

Economics of Agriculture The Effects of Changes in Demand on Agricultural Prices and Income Q P P1 a P2 b D2 D1 Qn Shift in demand causes large change in price and farm income 19-5

Agriculture: a Declining Industry Supply increased rapidly Technological progress Demand increased slowly Inelastic with respect to income Population growth 19-6

Agriculture: a Declining Industry Inflation adjusted prices have declined through 2005 Rising prices 2006-2007 Demand from China Ethanol 19-7

Economics of Agriculture The Long-Run Decline of Agricultural Prices and Farm Income Q P S1 S2 a P1 c b P2 D1 D2 Q1 Q2 19-8

Agriculture: a Declining Industry Major consequences Increased minimum efficient scale (MES) Consolidation Agribusiness Massive exit of workers Farm labor 2% of labor force 19-9

Agriculture: a Risky Business Futures markets Contracting with processors Crop revenue insurance Leasing land Nonfarm income 19-10

Labor in Agriculture Percentage of Labor Force in Agriculture, Selected Nations 2002-2004 0 25 50 75 100 Madagascar Bangladesh Thailand China Brazil Russia Japan France Germany United States Source: World Bank World Development Report, 2008 19-11

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 19-12

Agricultural Subsidies Government Subsidies as a Percentage of Farm Income, Selected Nations, 2006 0 20 40 60 80 Norway Switzerland South Korea Japan European Union Turkey Canada Mexico United States Australia Source: Organization for Economic Cooperation and Development 19-13

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 19-14

Economics of Farm Policy Agricultural Adjustment Act of 1931 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 19-15

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 19-16

Economics of Price Supports Q P D S Surplus Ps a Tax Burden Of Surplus Pe b c D S Qc Qe Qs 19-17

Reduction of Surpluses Restricting supply Acreage allotments Bolstering demand Gasohol Biodiesel Corn based ethanol The ethanol program Higher food prices Secondary effects 19-18

Criticisms and Politics Criticisms of parity concept Criticisms of price supports Symptoms not causes Misguided subsidies Policy contradictions 19-19

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 Farm Act of 2008 19-20

The Sugar Program Price supports Domestic costs Import quotas Developing countries U.S. efficiency loss Global resource misallocation 19-21

Key Terms farm commodities food products agribusiness parity concept parity ratio price supports acreage allotments Freedom to Farm Act Food, Conservation, and Energy Act of 2008 direct payments countercyclical payments (CCPs) marketing loan program 19-22

Income Inequality and Poverty Next Chapter Preview… Income Inequality and Poverty 19-23