1. Government Intervention in Agriculture
Chapter 11

2. Topics of Discussion Defining the “Farm Problem”
Government intervention
Consumer issues
Price and income support
Domestic demand expansion
Importance of export demand

3. Price and Income Support A Historical Perspective
Loan rate mechanism
Set-aside mechanism
Target price mechanism
Conservation reserve mechanism
Commodities covered by government programs

6. The “Farm Problem” Inelastic demand and bumper crop
Lack of market power
Interest sensitivity
Trade sensitivity
Asset fixity and excess capacity

7. An increase in supply causes price to fall sharply.
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8. 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.
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16. Recent Approaches to Supporting Farm Prices and Income

17. Market Level Effects of Loan Rates
Free market equilibrium
occurs at point E. Let’s
assume that PF is below
a politically acceptable
price, and that the price
desired by policymakers
is PG.
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18. Market Level Effects of Loan Rates
The Commodity Credit
Corporation of the USDA
began in the Thirties to
acquire excess supply at the
desired 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 demand
actually fell from QF to QD.
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20. Market Level Effects of Loan Rates
The CCC often stored the
surplus QD-QG in metal bins at
great expense to taxpayers.
This approach has the un-
wanted effects of increasing
supply from (QF to QG) in a
sector already plagued by
over production.
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21. Market Level Effects of Loan Rates
Consumer surplus would
decline from area to
just area 6. Thus, they are
economically worse-off as a
result of this approach.
Producer surplus would
increase from area 1+2 to
area , a gain
of area
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22. Firm Level Effects of Loan Rates
The individual firm under
free market conditions will
produce quantity qF if it
expected the free market
price PF, and earn profit
Equal to area 1.
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23. Firm Level Effects of Loan Rates
The increase in CCC
acquired stocks pulling
the price up to PG will
cause participating
farmers to increase its
production from quantity
qF to qG, increasing its
profits by area 2.
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24. Market Level Effects of Set-Aside Requirements
Free market equilibrium
occurs at point E1. Let’s
assume that PF is below
a politically acceptable
price, and that the price
desired by policymakers
again is PG.
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25. Market Level Effects of Set-Aside Requirements
Shifting the market supply
curve from SMKT to SMKT*
through set-aside require-
ments reduces production
from QF to QG. The market
equilibrium moves from E1
to E2.
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26. Market Level Effects of Set-Aside Requirements
Consumer surplus would
fall from area to
just area 7. Thus, consumers
are worse-off economically.
Producer surplus would
increase from area to
area As long as area 6
is greater that area 2+3,
producers are better-off.
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27. Market Level Effects of Set-Aside Requirements
Importantly, the set-aside
approach does not encourage
production of quantity QS as
the CCC loan rate approach
did.
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28. Firm Level Effects of Set-Aside Requirements
The individual producer
under this approach would
supply qG rather than qF
or qS.
Profit would increase
over free market levels as
long as area 4 was greater
than area 2+3.
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30. 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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31. 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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35. Importance of Government Payments
To Net Farm Income
With payments
Without
payments
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36. Importance of Government Payments
To Net Farm Income
Pre FAIR Act
FAIR Act
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37. Importance of Government Payments
To Net Farm Income
Pre FAIR Act
FAIR Act
Lowered safety net
under FAIR Act…
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38. 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

39. Demand Side Options

45. 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)

46. 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

49. 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