Transcript Agricultural Economics Lecture 3: Government Intervention in Agriculture

Agricultural Economics
Lecture 3: Government Intervention in
Agriculture
Powerpoint tranparencies from Penson, et. al. 3rd. Ed.
Normal Rationale for
Government Intervention





Support/protect an infant industry
Curb market powers of imperfect
competitors to promote social good
Provide for food security
Provide for consumer health and safety
Provide for environmental quality
Seeds of Farm Income Problem





Inelastic demand for raw agricultural
products
Increasing productivity leads to commodity
surpluses and low prices
Low income elasticity mutes any help from a
strong general economy
Strong dollar weakens export demand for
farm products
High asset fixity and interest sensitivity
Let’s assume that the
market equilibrium
occurs at point E1,
which corresponds to
a price of P1 and a
quantity of Q1.
Increasing supply causing
movement along demand
curve from E1 to E2 will
cause prices to fall more
than the increase quantity,
or %P > %Q.
Stated another way, area
0P2E2Q2 is less than area
0P1E1Q1.
E1
Let’s start with an
inelastic demand curve
D1 and equilibrium
price P1.
E1
Movement along an
inelastic demand
curve translates into
a sharply lower price
P3 at equilibrium E3.
Page 273
A more elastic demand
curve means equilibrium
would occur at E2 rather
than E3. This prevents
a sharper drop in total
farm revenue given by
demand curve D1.
Page 273
Forms of Government Intervention
Adjusting production to market
demand
 Price and income support payments
 Foreign trade enhancements
 Crop insurance
 Subsidized credit
 Other forms

Consumer Issues
Adequate and cheap food supply
 Nutrition and health issues
 Food subsidy issues
 Rural community issues

Resource Issues
Soil erosion and land use issues
 Adequacy of water supply issues
 Hired farm labor issues
 Energy issues

International Issues

Adequacy of world food supply
Note major differences between
low, middle and high income
countries….
International Issues
Adequacy of world food supply
 Movement towards free trade

Price and Income Support
A Historical perspective




Commodity acquisition-loan rate
mechanism
Set-aside mechanism
Target price mechanism
Commodities covered by government
programs
The Loan Rate
Approach to Supporting
Farm Prices and Income
Market Level Effects of Loan Rates
Free market equilibrium
occurs at point E. Let’s
assume that PF is below
a politically acceptable
price, and that the price
desired by policymakers
is PG.
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 nonrecourse loan provisions.
The goal was to shift demand
from D to D+CCCACQ, pulling
up the price from PF to PG.
Note that consumer demand
actually fell from QF to QD.
Market Level Effects of Loan Rates
The CCC stored the surplus
QD-QG in metal bins at
great expense to taxpayers.
This approach had the unwanted effects of increasing
supply from (QF to QG) in a
sector already plagued by
over production.
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.
Firm Level Effects of Loan Rates
The individual firm under
free market conditions will
produce quantity qF if it
expected the free market
price PF, and earn profit
equal to area 1.
Firm Level Effects of Loan Rates
The increase in CCC
acquired stocks pulling
the price up to PG will
cause participating
farmers to increase its
production from quantity
qF to qG, increasing its
profits by area 2.
The Set-Aside
Approach to Supporting
Farm Prices and Income
Market Level Effects of Set-Aside Requirements
Free market equilibrium
occurs at point E1. Let’s
assume that PF is below
a politically acceptable
price, and that the price
desired by policymakers
again is PG.
Market Level Effects of Set-Aside Requirements
Shifting the market supply
curve from SMKT to SMKT*
through set-aside requirements reduces production
from QF to QG. The market
equilibrium moves from E1
to E2.
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.
Market Level Effects of Set-Aside Requirements
Importantly, the set-aside
approach does not encourage
production of quantity QS as
the CCC loan rate approach
did.
Firm Level Effects of Set-Aside Requirements
The individual producer
under this approach would
supply qG rather than qF
or qS.
Profit would increase
over free market levels as
long as area 4 was greater
than area 2+3.
Deficiency Payment Mechanism
The deficiency payment was equal to qnantity QM
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.
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%.
The Current
Approach to Supporting
Farm Prices and Income
Some Demand Side
Options
Domestic Demand Expansion: Value Added Products
Let’s assume that the free
market conditions result in
a price of PF and quantity
QF.
Market equilibrium occurs
at E1.
Domestic Demand Expansion: Value Added Products
Policies designed to promote
research that would enhance
value added demand for
farm products would shift
the demand curve out to the
right.
This would increase price to
PG and quantity to QG.
Domestic Demand Expansion: Value Added Products
Consumer surplus in this
market would go from
area 2+5 to area 4+5. If
area 4 exceeds area 2,
consumers are better-off.
Producers would be better
off by area 2+3 as we move
from E1 to E2.
Export Demand Expansion: Enhancements
Let’s assume the original
Demand curve is DD, giving
us a market clearing price
of PDD and corresponding
quantity of QMM at market
equilibrium E1.
Export Demand Expansion: Enhancements
Consumer surplus would
be area 2+5 while producer
surplus would be area 1.
Export Demand Expansion: Enhancements
By enhancing export demand
through subsidies to client
nations, the government can
shift the demand curve out
to TD beginning at E0.
Domestic consumer surplus
would decline by area 2 but
producer surplus would
increase by area 2+3. At
equilibrium E2, foreign
consumer surplus would be
area 4.
Agricultural Support Policies in Turkey
Price Supports



Commodity loans for wheat
Commodity loans for tobacco
Commodity loans for sugar
Input Support







Fertilizer
Seed
Feed
Animail
Pesticides
Irrigation and electricity
Credit (TSK, TCZB)
Direct Income Payments

Price premium


Direct payment




Meat, milk
Tea
Quata in tobacco
Hazelnut
Deficiency payment




Cotton
Silk
Olive oil
Sunflower, soybean..