1. 1 of 17 Principles of Microeconomics: Econ102

2. Price & Income instability results from:  An inelastic demand for agricultural products  Very low price elasticity of demand  Biological factors  Rapidly diminishing marginal utility  Very large price cuts are needed to induce small increases in food consumption  Fluctuations in farm output  Natural events are beyond farmers’ control  Small changes in output result in relatively larger changes in prices & incomes  Shifts of the demand curve for farm products  Dependence on world markets  Weather & crop production abroad  Cyclical fluctuations  International politics, foreign exchange, etc. 19-2 2 of 17

3. Source: Derived from the authors from Foreign Agricultural Trade of the United States, http://www.ers.usda.gov/Data/FATUS; and Bureau of Economic Analysis, http://www.bea.gov http://www.ers.usda.gov/Data/FATUShttp://www.bea.gov 19-3 3 of 17

4. Source: Author calculations using nominal values from Global Financial Data, globalfinancialdata.com, adjusted for inflation with the GDP deflator published by the Bureau of Economic Analysis, bea.gov 19-4 4 of 17

5.  Technological Progress  Significantly increased the supply of agricultural products  Amount of capital increased 15 times between 1930 and 1980, permitting a fivefold increase in land cultivated per farmer  One unit of farm labor / units of farm output  1950: 14; 1970: 43; 1980: 60; 1990: 91; 2000: 128; 2008: 154  Productivity in agriculture has advanced 2x as fast as in the nonfarm economy  Lagging Demand  Income-Inelastic  Increases in consumer incomes produce less-than- proportionate increases in spending on farm products  Population Growth 19-5 5 of 17

6. Long-run decline of agricultural prices and farm income D1D1 P1P1 Q 0 P P2P2 Q1Q1 b a D2D2 S1S1 S2S2 Q2Q2 c 19-6 6 of 17

7.  Major consequences  Increased minimum efficient scale (MES)  Consolidation  Agribusiness  Massive exit of workers  Farm labor 2% of labor force  Farm-Household Income 19-7 Year In Millions Of People As % Of Total Employm ent # Of Farms, (000) 19509.315.85388 19606.29.43962 19704.05.02954 19803.5 2440 19902.52.12146 20002.21.62172 20081.81.22200 *Includes self-employed farmers, unpaid farmworkers, and hired farmworkers Source: derived by the authors from Economic Report of the President, 2010, Table B-100; U.S. Bureau of Labor Statistics, http://www.bls.gov, and Department of Agriculture, Economic Research Services, http://www.ers.usda.govhttp://www.bls.govhttp://www.ers.usda.gov 7 of 17

8. 19-8 8 of 17

9.  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 19-9 9 of 17

10. 19-10 10 of 17

11.  Necessities of life  Many farmers have relatively low incomes so they should receive higher prices & incomes through public help.  “Family farm” institution  It is a fundamental U.S. institution and should be nurtured as a way of life.  Extraordinary hazards  Droughts, floods, insects and other disasters not faced by other industries  Competitive markets for output while inputs have significant market power  The Parity Concept: Rationale for price supports 19-11 11 of 17

12.  Effective price floor  Generates surplus output  Gain to farmers  Loss to consumers  Higher burden on the poor  Efficiency losses  Over-allocation of resources  Other social losses  Environmental costs  International costs 19-12 Q 0 P b a S S D D PePe QeQe PsPs Tax Burden Of Surplus QcQc QsQs Surplus c 12 of 17

13.  Restricting supply  Acreage allotments  Bolstering demand  Gasohol  Biodiesel  Corn-based ethanol  The ethanol program  Higher food prices  Secondary effects 19-13 13 of 17

14.  Criticisms of parity concept  Criticisms of price supports  Symptoms not causes  Misallocation of resources between agriculture and the rest of the economy  Too many farmers……low prices……..low incomes  Supports encourage much of the same  Misguided subsidies  Policy contradictions  Free-trade policies  Wildlife habitats  Health problems 19-14 14 of 17

15.  Public choice theory revisited  Rent-seeking behavior  Special-interest effect  Political logrolling  Changing politics  Declining political support  World trade considerations 19-15 15 of 17

16.  Recent farm policy  Freedom to Farm Act of 1996  Ended price supports and acreage allotments  “Freedom to Plant” approach; Markets……...not government  Transition payments  Declining annual payments through 2002  Based on a farmer’s previous production levels  No regard to current prices or output  In 1999, reduced export demand & strong crop production  Resulted in larger subsidies than before Act  Food, Conservation, and Energy Act of 2008  Direct payments (do not decline year to year; permanent transfers  Countercyclical payments  Marketing loans 19-16 16 of 17

17.  Price supports  Import Quotas  Domestic Costs  32 percent above world price  Developing countries  Exclusion  Increased world supply  U.S. ….from a sugar-importing nation to a sugar-exporting nation  U.S. efficiency loss  Global resource misallocation 19-17 17 of 17