Transcript Chapter 1
Government Intervention in Agriculture
Chapter 11
Topics of Discussion
Defining the “Farm Problem”
Government intervention
Consumer issues
Price and income support
Domestic demand expansion
Importance of export demand
Price and Income Support A Historical Perspective
Loan rate mechanism
Set-aside mechanism
Target price mechanism
Conservation reserve mechanism
Commodities covered by government programs
The “Farm Problem”
Inelastic demand and bumper crop
Lack of market power
Interest sensitivity
Trade sensitivity
Asset fixity and excess capacity
An increase in supply causes price to fall sharply.
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If the demand curve is more elastic (D 2 ), the price will only fall to price P 2 rather than P 3 for a given increase in supply.
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Recent Approaches to Supporting Farm Prices and Income
Market Level Effects of Loan Rates Free market equilibrium occurs at point E. Let’s assume that P F is below a politically acceptable price, and that the price desired by policymakers is P G .
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Market Level Effects of Loan Rates The Commodity Credit Corporation of the USDA began in the Thirties to acquire excess supply at the desired price its through non recourse loan provisions. The goal was to shift demand from D to D+CCC ACQ , pulling up the price from P F to P G . Note that consumer demand actually fell from Q F to Q D .
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Market Level Effects of Loan Rates The CCC often stored the surplus Q D -Q G in metal bins at great expense to taxpayers.
This approach has the un wanted effects of increasing supply from (Q F to Q G ) in a sector already plagued by over production.
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Market Level Effects of Loan Rates Consumer surplus would decline from area 3+4+6 to just area 6. Thus, they are economically worse-off as a result of this approach.
Producer surplus would increase from area 1+2 to area 1+2+3+4+5, a gain of area 3+4+5.
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Firm Level Effects of Loan Rates The individual firm under free market conditions will produce quantity q F if it expected the free market price P F , and earn profit Equal to area 1.
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Firm Level Effects of Loan Rates The increase in CCC acquired stocks pulling the price up to P G will cause participating farmers to increase its production from quantity q F to q G , increasing its profits by area 2.
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Market Level Effects of Set-Aside Requirements Free market equilibrium occurs at point E 1 . Let’s assume that P F is below a politically acceptable price, and that the price desired by policymakers again is P G .
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Market Level Effects of Set-Aside Requirements Shifting the market supply curve from S MKT to S MKT * through set-aside require ments reduces production from Q F to Q G . The market equilibrium moves from E 1 to E 2 .
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Market Level Effects of Set-Aside Requirements Consumer surplus would fall from area 4+5+6+7 to just area 7. Thus, consumers are worse-off economically.
Producer surplus would increase from area 1+2+3 to area 1+6. As long as area 6 is greater that area 2+3, producers are better-off.
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Market Level Effects of Set-Aside Requirements Importantly, the set-aside approach does not encourage production of quantity Q S as the CCC loan rate approach did.
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Firm Level Effects of Set-Aside Requirements The individual producer under this approach would supply q G or q S . rather than q F Profit would increase over free market levels as long as area 4 was greater than area 2+3.
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Deficiency Payment Mechanism The deficiency payment was equal to quantity Q M multiplied by the difference between the announced target price and either the loan rate or market price (blue shaded area above), which ever was higher. Page 253
Deficiency Payment Mechanism To receive this payment, the farmer had to participant in the Acreage Reduction Program (ARP) which implemented the set-aside requirements. The Findley amendment reduced this payment by 15%.
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Importance of Government Payments To Net Farm Income With payments Without payments Page 257
Importance of Government Payments To Net Farm Income Pre FAIR Act FAIR Act Page 257
Importance of Government Payments To Net Farm Income Pre FAIR Act FAIR Act Lowered safety net under FAIR Act… Page 257
Current Farm Bill
New legislation signed into law May 13, 2002
2002 Farm Security Act Policymakers searching for a “countercyclical” approach that retains many of the “freedom” features of the 1996 FAIR Act
Enhancing risk manage ment tools by rethinking insurance
Demand Side Options
Consumer Issues • Adequate and cheap food supply, food access • Food Subsidies – Food stamp program – National school lunch program – WIC • Food Safety • Nutrition and Health – Obesity issue – Nutritional Labeling and Education Act (NLEA)
U.S. Nutrition Labeling and Education Act of 1990: A Model for the Rest of the World • update list of nutrient, ingredients • standardize serving sizes • define nutrient content claims • define health claims
Aims of NLEA
• promote consumer nutritional education • enable consumers to make more healthful food choices • provide incentive to food industry to create innovative and healthier new products for consumers