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1 9 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

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Page 1: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

19

Agriculture: Economics and Policy

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Agriculture

• Extreme diversity• Farm products and food products• Short-run price and income instability

• Inelastic demand • Fluctuations in output• Fluctuation in demand

• Dependence on world markets

LO1 19-2

Page 3: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Agriculture

• Effects of changes in farm output on agricultural prices and income

D

Qp

Pp

Q0

P

Pn

Pb

QnQb

Normal FarmIncome

n

p

b

Increases in output reduce farm incomeLO1 19-3

Page 4: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Agriculture

• The effects of a demand shift on agricultural prices and income

D1

P1

Q0

P

P2

Qn

b

a

D2

Shift in demand causes large change in price and farm income

LO1 19-4

Page 5: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Agriculture

LO1

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

19-5

Page 6: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Agriculture

LO1

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

19-6

Page 7: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Long Run: A Declining Industry

• Supply increased rapidly

• Technological progress

• Demand increased slowly

• Inelastic with respect to income

• Population growth

LO2 19-7

Page 8: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Long Run: A Declining Industry

• Long-run decline of agricultural prices and farm income

D1

P1

Q0

P

P2

Q1

b

a

D2

S1 S2

Q2

c

LO2 19-8

Page 9: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Long Run: A Declining Industry

• Major consequences

• Increased minimum efficient scale (MES)

• Consolidation

• Agribusiness

• Massive exit of workers

• Farm labor 2% of labor force

• Farm-Household Income

LO2 19-9

Page 10: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Long Run: A Declining Industry

LO2

YearIn MillionsOf People

As PercentageOf Total

Employment

NumberOf Farms,

Thousands

1950 9.3 15.8 5388

1960 6.2 9.4 3962

1970 4.0 5.0 2954

1980 3.5 3.5 2440

1990 2.5 2.1 2146

2000 2.2 1.6 2172

2008 1.8 1.2 2200

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.gov

Farm Employment*

*Includes self-employed farmers, unpaid farmworkers, and hired farmworkers

19-10

Page 11: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Long Run: A Declining Industry

LO2 19-11

Page 12: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

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

LO3 19-12

Page 13: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Farm Policy

LO3 19-13

Page 14: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

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

LO3 19-14

Page 15: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Farm Policy

• Agricultural Adjustment Act of 1931 established parity concept• Particular real output results in

same real income• Preserve purchasing power• Rationale for price supports

Parity Ratio =Prices Received by Farmers

Prices Paid by Farmers

LO3 19-15

Page 16: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Farm Policy

• Economics of price supports• Effective price floor

• Generates surplus output

• Gain to farmers

• Loss to consumers

• Efficiency losses

• Other social losses

• Environmental costs

• International costsLO3 19-16

Page 17: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Q0

P

b

a

S

S

D

D

Pe

Qe

Ps

Tax BurdenOf Surplus

Qc Qs

LO3

Economics of Farm Policy

Surplus

c

19-17

Page 18: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Farm Policy• Reduction of surpluses

• Restricting supply

• Acreage allotments

• Bolstering demand

•Gasohol

•Biodiesel

•Corn-based ethanol

• The ethanol program

•Higher food prices

•Secondary effectsLO3 19-18

Page 19: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Criticisms and Politics

• Criticisms of parity concept

• Criticisms of price supports

•Symptoms not causes

•Misguided subsidies

•Policy contradictions

LO4 19-19

Page 20: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Politics of Farm Policy

• Public choice theory revisited

• Changing politics

• Declining political support

• World trade considerations

• Recent farm policy

• Freedom to Farm Act of 1996

• Food, Conservation, and Energy Act of 2008

LO5 19-20

Page 21: 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Sugar Program

• Price supports

• Domestic costs

• Import quotas

• Developing countries

• U.S. efficiency loss

• Global resource misallocation

LO5 19-21


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