roles of gov’t in agriculture
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Roles of Gov’t in AgricultureSupply, price, and income
Food distributionData and information reporting
Trade policy and supportMarket regulationGrades and standards
Government Market ProgramsLevel of intervention– Topic of great debate–Alternate between more and
less
Policy toolsImplications on food chain
Rationale for intervention
“The farm marketing problem”– Inelastic demand–Erratic supply–Cost-price squeeze–Market power relative to
processors
Rationale for interventionUniqueness of food–Adequate, reasonably priced
food–Efficiency v. self-sufficiency–Free market v. social choice– Imperfect markets v.
imperfect governments
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
Basis tools of farm policyPrice fixingIncome supplementsSupply controlGov’t purchases & storage
Demand expansion
1920 PolicyTwo tier market–Domestic demand inelastic–World demand elastic–Set domestic prices dump on
world
Improve distribution–Storage loans to spread
marketings
1930s PolicyGreat Depression–Net farm income fell 70% 1929 to
1932
Forerunner of modern policy1996 Freedom to Farm was an amendment to 1938 policy
1930s Policy
Storage loans & gov’t purchases
Supply controlDemand side programsIncome supplements
1940-1952 Policy
Resources diverted to support war effort
Marshall PlanKorean ConflictOnly minor changes to 1930s
1950s-1960s PolicyExpanding production capacity–Adopt technology to reduce
cost–Agricultural treadmill–Slower growth in demand–Consumers benefits by lower
prices
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
1970s PolicyTurbulent 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
1980s PolicyTwo viewsLess gov’t intervention– Full production–Produce for the world
More gov’t involvement– Exports introduced farm income
instability–Problem of income stability
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
Parity
Farmers have equality with other sectors of economy
Based on 1909-1914–Agriculture “hay day”
No provision for modern agDropped in 1985 Farm Bill
1990s Policy1996 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
2002 Farm Bill
More conservation focused–Conservation Security Program– Increased EQIP funding
New areas–COOL
Continued reliance on trade
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
Trade Policy and Support
Balance producers and consumers–Producer: increase expts, limit impts–Consumer: increase impts, limit expts
Free trade v. Trade protectionismExport enhancement programs
US Export TrendsExploded during 1970sShift to High Value Products away from raw commodities–HVP exceed bulk commodities
and are growing faster – Income and job implications
U.S. Agricultural Trade
0
10
20
30
40
50
60
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
Bill
ion
Dol
lars
Imports
Trade SurplusExports
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
Comparative AdvantageProduce 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
Comparative AdvantageTypically 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
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.
Trade ProtectionismPolicies 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
Protectionism Tools
Limit imports– Tariffs–Quotas– Licenses–Nontariff restrictions
Subsidies to domestic industries
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
Trade AgreementsFree 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
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
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