Agricultural policy objectives The farm problem Economics of Food Markets Lecture 3 Alan Matthews

Extensive government intervention in agri-food markets Most countries adopt an active agricultural policy. Evidence that policy addresses significant and widespread socio-economic issues. High share of EU spending on agriculture High levels of border protection High transfers from consumers and taxpayers to agriculture (OECD PSE estimates)

Rationale for agricultural policy instability of agricultural markets food security lagging farm incomes maintenance of the rural population/rural development environmental and landscape benefits - the multifunctionality of agriculture

Objectives of the Common Agricultural Policy Article 39 objectives –to increase agricultural productivity –to ensure a fair standard of living for the agricultural community –to stabilise markets –to ensure the availability of supplies –to ensure that supplies reach consumers at reasonable prices Generally, income objectives dominate farm policy objectives in developed countries, although rarely defined very explicitly

Sources of price instability P P Q Q

The cobweb model of price instability

Declining terms of trade Demand grows slowly because of slow population growth and Engel’s Law Supply grows more rapidly due to technological change Rising living standards in nonfarm sectors

Why does farm labour market not return to equilibrium? With downward pressure on farm incomes, we expect outmigration from farming to restore relative incomes; why does this not happen? ‘love of farming’ – nonpecuniary considerations Market imperfections – barriers to movement Human capital explanation – markets do work Fixed asset theory – resources trapped in agriculture

Illustration fixed asset theory Acquisition cost Salvage value Demand for labour (MVP) 1 Demand for labour (MVP) 2 P Q3Q3 Q2Q2 Q1Q1 Q

Agricultural adjustment and the farm problem price instability in a supply-demand framework caused by low price elasticities of supply and demand agricultural adjustment in a supply-demand framework: the ‘treadmill’ of technical change together with Engel’s Law drives food prices down and leaves farms unviable technological change and input substitution also encourage farm amalgamation and lower the demand for labour in agriculture low farm incomes result from ‘sticky’ labour supply response –barriers to exit –neoclassical human capital explanation –fixed asset theory

The pattern of agricultural adjustment Changes in resource use – reduction in labour input accompanied by intensifcation in use of land through greater use of variable and capital inputs Increased size of farm business and increased specialisation growing concentration of production and output on larger farms accompanied by the growing marginalisation of small-scale farming, leading to increased differentiation in farming Differences in survival strategies depending on the resource base of the family farm and family circumstances.