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Government Intervention in Agriculture. Chapter 11. Topics of Discussion. Defining the “Farm Problem” Government intervention Consumer issues Price and income support Domestic demand expansion Importance of export demand. Price and Income Support A Historical Perspective.

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Presentation Transcript
topics of discussion
Topics of Discussion
  • Defining the “Farm Problem”
  • Government intervention
  • Consumer issues
  • Price and income support
  • Domestic demand expansion
  • Importance of export demand
price and income support a historical perspective
Price and Income SupportA Historical Perspective
  • Loan rate mechanism
  • Set-aside mechanism
  • Target price mechanism
  • Conservation reserve mechanism
  • Commodities covered by government programs
the farm problem
The “Farm Problem”
  • Inelastic demand and bumper crop
  • Lack of market power
  • Interest sensitivity
  • Trade sensitivity
  • Asset fixity and excess capacity
slide8

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.

Page 199

slide17

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.

Page 205

slide18

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.

Page 205

slide20

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.

Page 205

slide21

Market Level Effects of Loan Rates

Consumer surplus would

decline from area 3+4+6 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 1+2+3+4+5, a gain

of area 3+4+5.

Page 205

slide22

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.

Page 206

slide23

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.

Page 206

slide24

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.

Page 207

slide25

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.

Page 207

slide26

Market Level Effects of Set-Aside Requirements

Consumer surplus would

fall from area 4+5+6+7 to

just area 7. Thus, consumers

are worse-off economically.

Producer surplus would

increase from area 1+2+3 to

area 1+6. As long as area 6

is greater that area 2+3,

producers are better-off.

Page 207

slide27

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.

Page 207

slide28

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.

Page 208

slide30

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.

Page 209

slide31

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%.

Page 209

current farm policy
Current Farm Policy

See www.ers.usda.gov/briefing/farmpolicy/malp.htm

1996 farm bill
1996 Farm Bill

Federal Agricultural Improvement and Reform Act (FAIR Act) represented a transition to a market-driven agriculture. The FAIR Act replaced target prices and deficiency payment with annual fixed transition on flexibility contract payments. The FAIR Act was termed “Freedom to Farm” because farmers were no longer restrained in their planting decisions. They now had the flexibility to plant virtually whatever they wanted on their base acreage (referred to now as contract acres). The concept of a safety net was added back under the 2002 and 2008 Farm Bill.

new legislation since the 1996 fair act
New Legislation Since the 1996 FAIR Act
  • 2002 Farm Security Act
  • 2008 Farm Bill
  • Policymakers searching for a “countercyclical” approach that retains many of the “freedom” features of the 1996 FAIR Act
  • Added back the concept of a safety net
  • Added back target prices
importance of export demand
Importance of Export Demand
  • Movement Toward Free Trade
  • General Agreement on Tariff and Trade or GATT
  • NAFTA – U.S., Canada, and Mexico
  • Successor to GATT = WTO (World Trade Organization)
  • Adequacy of World Food Supply
  • Thomas Malthus (late 1700s) argued that the world would eventually suffer food shortages because population growth would exceed growth in the food supply.
  • “Food supply grows at an arithmetic rate while population grows at a geometric rate” –Malthus quote
consumer issues
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)
u s nutrition labeling and education act of 1990 a model for the rest of the world
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
aims of nlea
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