Roles of Gov’t in Agriculture

1. Roles of Gov’t in Agriculture • Supply, price, and income • Food distribution • Data and information reporting • Trade policy and support • Market regulation • Grades and standards

2. Government Market Programs • Level of intervention • Topic of great debate • Alternate between more and less • Policy tools • Implications on food chain

3. Rationale for intervention • “The farm marketing problem” • Inelastic demand • Erratic supply • Cost-price squeeze • Market power relative to processors

4. Rationale for intervention • Uniqueness of food • Adequate, reasonably priced food • Efficiency v. self-sufficiency • Free market v. social choice • Imperfect markets v. imperfect governments

5. Impacts of farm programs • Consumers pay through higher food prices or higher taxes • Debate about the benefit to consumers • Recent programs driven by gov’t cost • “Low” cost stable food supply • Food stamp cost > farm income supplement part of budget

6. Basis tools of farm policy • Price fixing • Income supplements • Supply control • Gov’t purchases & storage • Demand expansion

7. 1920 Policy • Two tier market • Domestic demand inelastic • World demand elastic • Set domestic prices dump on world • Improve distribution • Storage loans to spread marketings

8. 1930s Policy • Great Depression • Net farm income fell 70% 1929 to 1932 • Forerunner of modern policy • 1996 Freedom to Farm was an amendment to 1938 policy

9. 1930s Policy • Storage loans & gov’t purchases • Supply control • Demand side programs • Income supplements

10. 1940-1952 Policy • Resources diverted to support war effort • Marshall Plan • Korean Conflict • Only minor changes to 1930s

11. 1950s-1960s Policy • Expanding production capacity • Adopt technology to reduce cost • Agricultural treadmill • Slower growth in demand • Consumers benefits by lower prices

12. 1950s-1960s Policy • Food for Peace P.L. 480 • Export excess to needing countries • Soil Bank to cut production • 1961 the cost of storing gov’t grain exceeded the origin farm value • By 1972 62 million acres (20%) idle

13. 1970s Policy • Turbulent period • Worldwide demand expanded • USSR and China as buyers • 1973 income highest since WWII • Consumer food cost increased • 47million more acres 1969-78 • By end of 1970s: Supply >Demand • Costs > price

14. 1980s Policy • Two views • Less gov’t intervention • Full production • Produce for the world • More gov’t involvement • Exports introduced farm income instability • Problem of income stability

15. 1980s Policy • Compromise: Food and Ag Acts of 1981 and 1985 • Acreage controls (PIK and CRP) • Reduced price support levels • Increased ag exports (EEP) • Move toward market-oriented ag

16. Parity • Farmers have equality with other sectors of economy • Based on 1909-1914 • Agriculture “hay day” • No provision for modern ag • Dropped in 1985 Farm Bill

17. 1990s Policy • 1996 Federal Agricultural Improvement and Reform Act • Removed linkage between income and prices • Phased in over 7 years 1996-2002 • Declining annual payments • Increase planting flexibility • Added deficiency payments

18. 2002 Farm Bill • More conservation focused • Conservation Security Program • Increased EQIP funding • New areas • COOL • Continued reliance on trade

19. Importance of Trade to US Ag • 24% of US ag production is exported • Agriculture accounts for • 10% of all US exports • 5% of all US imports

20. Trade Policy and Support • Balance producers and consumers • Producer: increase expts, limit impts • Consumer: increase impts, limit expts • Free trade v. Trade protectionism • Export enhancement programs

21. US Export Trends • Exploded during 1970s • Shift to High Value Products away from raw commodities • HVP exceed bulk commodities and are growing faster • Income and job implications

23. Why Nations Trade • Efficient use of resources • Can produce anything domestically • Specialize in what you do best • Trade for goods that are high cost • Greater consumer choice • Encourages domestic efficiency

24. Comparative Advantage • Produce and export what you do relatively more efficiently. • Import what others do relatively more efficiently • Gains must also offset transportation costs • Example: wheat for bananas

25. Comparative Advantage • Typically not all or none • US largest beef exporter and 2nd largest beef importer • Type of beef? • Principle holds for states • Hogs: Iowa and North Carolina • Cattle: Iowa and Texas

26. Free Trade • Generally believed that unrestricted trade among all nations will result in more efficient use of world resources and a higher standard of living for all.

27. Trade Protectionism • Policies to prevent free trade • Typically protect domestic industry • Support internal policy • Easy to implement, hard to reverse • Protection benefits focused and visible • Trade benefits disperse and hard to see • Balance micro and macro effects • How to distribution gains and losses

28. Protectionism Tools • Limit imports • Tariffs • Quotas • Licenses • Nontariff restrictions • Subsidies to domestic industries

29. Trade Agreements • Embargo • Prohibit trade to others (Cuba, Russia) • Most favored nation status • Preference given to one country (China) • Dumping • Selling surplus below cost • Mexico for tomatoes • Canada for cattle in the 1990s and hogs now

30. Trade Agreements • Free trade areas • Freer trade to members • EEC, NAFTA • General Agreement on Tariffs and Trade (GATT) • 1994 included agriculture • Reduce barriers, subsidies, protection • World Trade Organization

31. Role of Exchange Rates • Stronger US $ makes US products more expensive to foreign buyers • US $ relative to export competitors • US $ weaken 1987-mid 1990s now it is strengthening