2. Ch. 12 Reproducible Private Property Resources: Agriculture

3. Introduction n Over 840 million people suffer from chronic hunger & malnutrition; n > ¼ of these are children (215 million) –most live in South Asia & Southern Africa. –Haiti, Tajikistan, & Sierra Leone have over 50% of population is undernourished n Total amount of food available is not problem –World produces 17 % more calories per person today than 30 years ago

4. Introduction n Why has this problem arisen? n 3 common hypothesis: n 1) persistent global scarcity of food. n 2) maldistribution of food. n 3) temporary shortages caused by weather and other natural causes.

5. Formulating Global Scarcity Hypothesis n Two forms of the hypothesis: n 1) Strong form: per capita food production is declining n 2) Weak form: relative price of food is rising due to steep supply curve.

6. Quantity of Food Price of Food Fig. 12.1 The market for Food SaSa Elastic Supply Q0Q0 P0P0 Q 5a P 5a SbSb Inelastic Supply Q 5b P 5b

7. Testing the Hypothesis n Per capita food production has increased in world and developing countries implies that strong form can be rejected. n Food prices have risen more rapidly than inflation in about half of the countries, thus there is some support for weak form of the hypothesis

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-7 TABLE 12.1 Trends in U.S. Agriculture A 20th-Century Time Capsule (1 of 2)

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-8 TABLE 12.1 Trends in U.S. Agriculture A 20th-Century Time Capsule (2 of 2)

10. Outlook for the Future n 1930 to 200 yields per acre increased from 30 to 130 bushels n Milk and dairy production increased from 4,572 pound in 1944 to 10,000 pounds by 1971. By 2000 it was 17,000 pounds per cow. n Huge shift to mechanization on U.S. farms

11. Outlook for the Future n 1) Technological progress: 3 techniques –1)recombinant DNA –2)tissue culture –3) cell fusion n Applications –1)making food crops more resistant to disease/pests –2)hardy crops; drought resistance; poor soil –3)crops make their own fertilizer –4)increasing crop yields

12. Outlook for the Future (cont.) n Five problems –1)allocation of agricultural land »Trend of increasing shift from agric. to urban use can’t continue »Corn for ethanol has caused price to rise –2)energy costs –3)environmental costs: too much fertilizer and pesticide use pollutes water »U.S. nitrogenous fertilizer use  300% in past 25 years »Netherlands  150%;  Denmark  225% »Also soil erosion causes negative externality –4 ) Growth in Organic Foods » organic food sector is growing; 2.8% of U.S. food sales now

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-12 TABLE 12.2 Pesticide Consumption per Hectare of Agricultural Land (Kg/Ha)

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-13 TABLE 12.3 Comparison of EU and U.S. Standards for Organic Certification

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-14 TABLE 12.3 Comparison of EU and U.S. Standards for Organic Certification

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-15 The Role of Agricultural Policies n Four types of agricultural policies have subverted normal functions of price system: –1) subsidies for specific farming inputs including fertilizers and pesticides –2) guaranteed prices for outputs –3) marketing loans based on crop prices –4) trade barriers to protect against competition from imports.

17. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-16 FIGURE 12.2 Farm Program Payments as a Share of Production Value, 2002-2005 Crop Years

18. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-17 A Summing Up n Some countries are beginning to eliminate some of the price supports and subsidies. n Genetically modified foods are a new source of controversy.

19. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-18 Distribution of Food Resources n The second of the three hypotheses used to explain widespread malnourishment. n This hypothesis suggests that it is imperfections in food distribution, particularly in less developed (or poorer countries) that cause the malnourishment problem. Thus, the problem is one of poverty not a lack of food, suggesting different policy prescriptions.

20. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-19 Defining the Problem n Evidence from the United Nations suggests that the problem is one of nonuniform distribution. n Chapter 6 suggested that high poverty levels are generally conducive to high population growth which leads to more income inequality

21. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-20 TABLE 12.4 Food Situation in Developing Countries

22. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-21 Domestic Production in Less Developed Countries n Most developing countries lack foreign exchange with which to buy food imports. n The law of comparative advantage says that nations are better off specializing in those products for which they have a comparative advantage—measured in the opportunity cost of another good. n Price distortions and externalities associated with agriculture have caused most developing countries to have an excessive dependency on imports.

23. Undervaluation Bias n Two government programs undervalue agriculture and destroy incentives: n 1) Marketing boards –holds food prices down –import artificially cheap food from the U.S. n 2) Export Taxes: –source of revenue –makes food products more expensive to sell abroad –reduces farmer incentives to produce food –farmers try to smuggle it out of country

24. Feeding the Poor n Advantages of food stamps n Improve income distribution from agricultural production: –Green revolution: maize hybrids caused productivity to double or triple for small farmers in Central America, East Africa, East Asia, Mexico, India, Pakistan. –Developing countries need sustainable technologies (e.g. solar powered irrigation systems) and financial capital for famer owned local cooperatives

25. Feast and Famine Cycles n 1) Cobweb Model –farm output and prices fluctuate greatly –model presents one explanation for this volatility –assumptions: »farmers forecast next year’s price based on this year’s »if prices are high this year, produce large supply next year, making price fall »low price this year is also next year’s forecast, so produce small supply next year and so on and so on.

26. D S Q0Q0 P0P0 Q1Q1 P1P1 Q3Q3 P3P3 Quantity Price Fig. 12.3 The Cobweb Model

27. Feast and Famine Cycles (cont.) n Price Elasticity and Farm Revenues –demand for most farm products is price inelastic –this implies that farm revenues will fall in “good” weather years and will rise in “bad” weather years

28. Quantity Price P0P0 S0S0 D1D1 S1S1 P1P1 P2P2 D2D2 A B C D Fig. 12.4 Price Elasticity of Demand and the Size of Price Fluctuations