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Agriculture: Economics and Policy

19. Agriculture: Economics and Policy. Chapter Objectives. Why Agricultural Prices and Farm Income are Unstable Why Huge Numbers of Labor Resources Have Exited U.S. Agriculture During the Past Several Decades

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Agriculture: Economics and Policy

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  1. 19 Agriculture: Economics and Policy

  2. Chapter Objectives • Why Agricultural Prices and Farm Income are Unstable • Why Huge Numbers of Labor Resources Have Exited U.S. Agriculture During the Past Several Decades • The Rationale for Farm Subsidies and the Economics and Politics of Price Supports (Price Floors) • Major Criticisms of the Price-Support System in Agriculture • The Main Elements of Existing Federal Farm Policy

  3. Economics of Agriculture • Extreme Diversity • Farm Products or Farm Commodities • Food Products • Short-Run: Price and Income Instability • Inelastic Demand for Agricultural Products • Fluctuations in Farm Output • Shifts in the Demand Curve for Farm Products

  4. P 0 Q Economics of Agriculture The Effects of Changes in Farm Output on Agricultural Prices and Income p Pp n Pn Normal Farm Income b Pb D Qb Qn Qp

  5. P 0 Q Economics of Agriculture The Effects of Changes in Farm Output on Agricultural Prices and Income a P1 P2 b D2 D1 Qn

  6. Economics of Agriculture • Long-Run: A Declining Industry • Supply Has Increased Rapidly Due to Technological Progress • Demand Has Increased Slowly • Inelastic With Respect to Income

  7. Economics of Agriculture • Risk Management Techniques • Futures Markets • Contracting with Processors • Crop Revenue Insurance • Leasing Land • Nonfarm Income

  8. Economics of Agriculture • Technology and Supply Increases • Lagging Demand • Income Beyond Subsistence • Population Growth Not as Rapid as Supply Graphically…

  9. P 0 Q Economics of Agriculture The Long-Run Decline of Agricultural Prices and Farm Income S1 S2 a P1 c b P2 D2 D1 Q1 Q2

  10. Economics of Agriculture • Consequences • Increased M.E.S. • Agribusiness • Subsidies Boost Farm-Household Income U.S. Farm Employment and Number of Farms 1950-2004 Farm Employment As a Percentage Of Total Employment Number Of Farms, Thousands In Millions Of People Year 1950 1960 1970 1980 1990 2000 2004 9.9 7.1 4.5 3.7 2.9 3.0 3.1 17 11 6 4 2 2 2 5388 3962 2954 2440 2146 2172 2113 Source: USDA, Economic Research Service, Commerce Dept.

  11. GLOBAL PERSPECTIVE Economics of Agriculture Percentage of the Labor Force in Agriculture, Selected Nations 0 25 50 75 100 Ethiopia Mozambique China India Brazil Russia Japan France United States Germany 82.0 80.3 66.0 59.2 16.1 10.2 3.8 3.2 2.0 2.4 Source: World Resources Institute, Latest Data

  12. Economics of Farm Policy • 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

  13. GLOBAL PERSPECTIVE Economics of Farm Policy Agricultural Subsidies, Selected Nations 0 20 40 60 80 Switzerland Norway North Korea Japan European Union Turkey Canada United States Mexico Australia 68 68 63 56 33 27 21 18 17 4 Source: Organization for Economic Cooperation and Development

  14. Economics of Farm Policy • Rationale for Farm Subsidies • Necessities of Life • “Family Farm” Institution • Extraordinary Hazards • Competitive Markets for Output While Inputs Have Significant Market Power

  15. Prices Received by Farmers Parity Ratio = Prices Paid by Farmers Economics of Farm Policy • Agricultural Adjustment Act of 1931 • The Parity Concept • Parity Ratio

  16. Economics of Price Supports • Price Supports • Surplus Output • Gain to Farmers • Loss to Consumers • Efficiency Losses • Other Social Losses • Environmental Costs • International Costs

  17. P 0 Q Economics of Price Supports D S Surplus Ps a Tax Burden Of Surplus Pe b c D S Qc Qe Qs

  18. Reduction of Surpluses • Restricting Supply • Acreage Allotments • Bolstering Demand • Gasohol • Criticisms and Politics • Criticisms of Parity Concept • Criticisms of Price Supports • Symptoms Not Causes • Misguided Subsidies • Policy Contradictions

  19. The Politics of Farm Policy • Public Choice Theory Revisited • Changing Politics • Declining Political Support • World Trade Considerations • Recent Reform • Freedom to Farm Act of 1996 • Farm Act of 2002 • Direct Payments • Countercyclical Payments (CCP) • Marketing Loan Program

  20. The Sugar Program Last Word …A Sweet Deal • Price Supports and Import Quotas to Guarantee Minimum Price of Sugar to Domestic Producers • Domestic Costs • Import Quotas • Developing Countries • U.S. Efficiency Loss • Global Resource Misallocation

  21. farm commodities food products agribusiness parity concept parity ratio price supports acreage allotments Freedom to Farm Act Farm Act of 2002 direct payments countercyclical payments (CCPs) marketing loan program Key Terms

  22. Next Chapter Preview… Income Inequality and Poverty Chapter 20

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