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Farm Prices and Government Intervention

Explore the history of farm prices since 1950, the justification for government intervention based on price variation, analysis of price floors, and the impacts of price support mechanisms. Discover the effects of price floors on consumer and producer surplus, as well as the government's role in purchasing excess goods.

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Farm Prices and Government Intervention

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  1. Chapter 30Farm Policy

  2. Chapter Outline • Farm Prices Since 1950 • Price Variation As A Justification For Government Intervention • Consumer And Producer Surplus Analysis Of Price Floors • Price Support Mechanisms And Their History • Kick It Up a Notch

  3. Farm Prices Since 1950 • Raw food commodity prices have increased much more slowly than overall inflation. • From 1982 to 2008 overall inflation was 101%. • Most food commodities cost less in 2008 than in 1982 in nominal terms (50% less in real terms.) • Hog prices in 2000 yielded less than 45% of their 1982 levels.

  4. Farm Price Indexes

  5. Corn and Gasoline • Corn is the main ingredient in ethanol. • E85 (available mostly in the Midwest) is a substitute for gasoline. • Recent spikes in gasoline prices have motivated increased corn planting.

  6. Corn and Gasoline PricesRelative to their 2000 level

  7. Price Variability as the Justification for Government Intervention • Argument for intervention on this ground • Highly variable prices create an unstable income for farmers reducing their interest in farming. • Argument against intervention on this ground • Using options markets and crop insurance farmers can dampen the impact of this variability.

  8. Price Floors • A Price Floor (a price below which a commodity may not sell) is set to protect farmers from prices that go “too low.”

  9. Farm Markets Without Subsidies • Value to the Consumer: • 0ACQ* • Consumers Pay Producers: • 0P*CQ* • The Variable Cost to Producers: • 0HCQ* • Consumer Surplus: • P*AC • Producer Surplus: • HP*C P A S P* C H D 0 Q* Q/t

  10. B Pfloor Price Floor G QD Price Floors • Value to the Consumer: • 0ABQD • Consumers Pay • Producers: • 0PfloorBQD • The Variable Cost to • Producers: • 0HGQD • Consumer Surplus: • PfloorAB • Producer Surplus: • HPfloorBG • DWL • BCG P S A P* C H D 0 Q* Q/t

  11. Government Purchase of Excess Goods • Value to the Consumer: • 0ABQD • Consumers Pay Producers: • 0PfloorBQD • Government Pays Producers: • QDBEQs • The Variable Cost to • Producers: • 0HEQS • Consumer Surplus: • PfloorAB • Producer Surplus: • HPfloorE • DWL • ECF P S A B E Pfloor Price Floor I P* C G H F J D 0 Q* QS Q/t QD

  12. Government Lowers the Price to Consumers • Value to the Consumer: • 0AFQS • Consumers Pay Producers: • 0JFQS • Government Pays Producers: • JPfloorEF • The Variable Cost to • Producers: • 0HEQS • Consumer Surplus: • JAF • Producer Surplus: • HPfloorE • DWL • ECF P S A B E Pfloor Price Floor I P* C G H F J D Q/t Q* QS QD 0

  13. Variable Floors • The Eau Claire Rule: the wholesale price floor on milk is set as a function of the distance between a given community and Eau Claire, Wisconsin. • This subsidizes milk production on the coasts of the United States.

  14. What Would Happen Without Price Floors • Prices would fall. • Production would fall. • Farmers would leave the industry until the price of commodities reached a level consistent with zero economic profit (normal profit).

  15. History of Price Supports: Buying Programs • Began in the 1930s. • Reached a peak in the 1980s. • The federal government purchased vast quantities of corn, soybeans, milk to be stored. The milk was powdered or turned into blocks of American Cheese. • The cheese given away to the poor in the 1982 recession (which was the origin of the phrase “government cheese”.)

  16. History of Price Supports: Output Restrictions • The buying programs were ended in the 1980s and were replaced with programs where the government offered higher prices for limited production. • The programs • purchased dairy herds and slaughtered them. • Ordered grain farmers to set aside plots if they wanted the subsidized price.

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