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Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

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Page 1: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Agriculture: Economics and Policy

Chapter 19

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter Objectives

• Unstable agricultural prices and farm income

• Employment exodus from agriculture • Farm subsidies and price supports • Criticisms of the price-support

system• Existing Federal farm policy

19-2

Page 3: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Agriculture Industry

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

instability–Inelastic demand –Fluctuations in output–Shifts in the demand curve

• Dependence on world markets19-3

Page 4: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 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

Qn Qb

Normal FarmIncome

n

p

b

Increases in output reduce farm income 19-4

Page 5: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Agriculture

The Effects of Changes in Demand 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 19-5

Page 6: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Agriculture: a Declining Industry

• Supply increased rapidly–Technological progress

• Demand increased slowly• Inelastic with respect to income• Population growth

19-6

Page 7: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Agriculture: a Declining Industry

• Inflation adjusted prices have declined through 2005

• Rising prices 2006-2007–Demand from China

–Ethanol

19-7

Page 8: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Agriculture

The Long-Run Decline of Agricultural Prices and Farm Income

D1

P1

Q0

P

P2

Q1

b

a

D2

S1 S2

Q2

c

19-8

Page 9: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Agriculture: a Declining Industry

• Major consequences–Increased minimum efficient scale

(MES)

–Consolidation

–Agribusiness

–Massive exit of workers

–Farm labor 2% of labor force

19-9

Page 10: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

• Futures markets

• Contracting with processors

• Crop revenue insurance

• Leasing land

• Nonfarm income

Agriculture: a Risky Business

19-10

Page 11: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Percentage of Labor Force in Agriculture, Selected Nations 2002-2004

MadagascarBangladesh

ThailandChinaBrazil

RussiaJapan

FranceGermany

United States

0 25 50 75 100

Source: World Bank World Development Report, 2008

Labor in Agriculture

19-11

Page 12: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 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 markets19-12

Page 13: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Government Subsidies as a Percentage of Farm Income, Selected Nations, 2006

NorwaySwitzerland

South KoreaJapan

European UnionTurkey

CanadaMexico

United StatesAustralia

0 20 40 60 80

Source: Organization for Economic Cooperation and Development

Agricultural Subsidies

19-13

Page 14: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 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

19-14

Page 15: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 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 Farmers19-15

Page 16: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Economics of Price Supports

• Effective price floor• Generates surplus output• Gain to farmers• Loss to consumers• Efficiency losses• Other social losses• Environmental costs• International costs

19-16

Page 17: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Q0

P

b

c

a

S D

S

Surplus

D

Pe

Qe

Ps

Tax BurdenOf Surplus

Qc Qs

Economics of Price Supports

19-17

Page 18: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Reduction of Surpluses

• Restricting supply–Acreage allotments

• Bolstering demand–Gasohol–Biodiesel–Corn based ethanol

• The ethanol program–Higher food prices–Secondary effects

19-18

Page 19: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 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

19-19

Page 20: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 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–Farm Act of 2008

19-20

Page 21: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 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

19-21

Page 22: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Key Terms

• farm commodities• food products• agribusiness• parity concept• parity ratio• price supports• acreage allotments• Freedom to Farm

Act

• Food, Conservation, and Energy Act of 2008

• direct payments• countercyclical

payments (CCPs)• marketing loan

program

19-22

Page 23: Agriculture: Economics and Policy Chapter 19 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Next Chapter Preview…

Income Inequality and Poverty

19-23


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