government intervention in agriculture

Government Intervention in Agriculture

Chapter 11

Topics of DiscussionDefining the “Farm Problem”Government interventionConsumer issues Price and income supportDomestic demand expansionImportance of export demand

Price and Income SupportA Historical Perspective

Loan rate mechanismSet-aside mechanismTarget price mechanismConservation reserve mechanismCommodities covered by

government programs

The “Farm Problem”Inelastic demand and bumper cropLack of market powerInterest sensitivityTrade sensitivityAsset fixity and excess capacity

An increase in supply causes price to fall sharply.

If the demand curve is more elastic (D2), the price will only fall to price P2 rather than P3 for a given increase in supply.

Recent Approachesto Supporting

Farm Prices and Income

Market Level Effects of Loan Rates

Free market equilibriumoccurs at point E. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersis PG.


The Commodity CreditCorporation of the USDAbegan in the Thirties to acquire excess supply at thedesired price its through non-recourse loan provisions.

The goal was to shift demand from D to D+CCCACQ, pulling up the price from PF to PG. Note that consumer demandactually fell from QF to QD.

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The CCC often stored the surplus QD-QG in metal bins atgreat expense to taxpayers.

This approach has the un-wanted effects of increasingsupply from (QF to QG) in a sector already plagued by over production.


Consumer surplus woulddecline from area 3+4+6 tojust area 6. Thus, they areeconomically worse-off as aresult of this approach.

Producer surplus wouldincrease from area 1+2 toarea 1+2+3+4+5, a gainof area 3+4+5.

Firm Level Effects of Loan Rates

The individual firm underfree market conditions willproduce quantity qF if itexpected the free market price PF, and earn profitEqual to area 1.

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Firm Level Effects of Loan Rates

The increase in CCCacquired stocks pullingthe price up to PG willcause participating farmers to increase itsproduction from quantityqF to qG, increasing itsprofits by area 2.

Market Level Effects of Set-Aside Requirements

Free market equilibriumoccurs at point E1. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersagain is PG.


Shifting the market supplycurve from SMKT to SMKT*through set-aside require-ments reduces productionfrom QF to QG. The market equilibrium moves from E1

to E2.


Consumer surplus would fall from area 4+5+6+7 tojust area 7. Thus, consumersare worse-off economically.

Producer surplus wouldincrease from area 1+2+3 toarea 1+6. As long as area 6is greater that area 2+3, producers are better-off.


Importantly, the set-asideapproach does not encourageproduction of quantity QS asthe CCC loan rate approachdid.

Firm Level Effects of Set-Aside Requirements

The individual producerunder this approach wouldsupply qG rather than qF or qS.

Profit would increaseover free market levels aslong as area 4 was greaterthan area 2+3.

Deficiency Payment Mechanism

The deficiency payment was equal to quantity 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%.

Current Farm PolicyCrop Loan Rates Target Prices

Wheat $2.94 ($/bu) $4.17 ($/bu)

Corn $1.95 ($/bu) $2.63 ($/bu)

Rice $6.50 ($/cwt) $10.50 ($/cwt)

Sorghum $1.95 ($/bu) $2.63 ($/bu)

Barley $1.95 ($/bu) $2.63 ($/bu)

Oats $1.39 ($/bu) $1.79 ($/bu)

Cotton $0.52 ($/lb) $0.7125 ($/lb)

Soybeans $5.00 ($/bu) $6.00 ($/bu)

See www.ers.usda.gov/briefing/farmpolicy/malp.htm

1996 Farm BillFederal Agricultural Improvement and Reform Act (FAIR Act) represented a transition to a market-driven agriculture. The FAIR Act replaced target prices and deficiency payment with annual fixed transition on flexibility contract payments. The FAIR Act was termed “Freedom to Farm” because farmers were no longer restrained in their planting decisions. They now had the flexibility to plant virtually whatever they wanted on their base acreage (referred to now as contract acres). The concept of a safety net was added back under the 2002 and 2008 Farm Bill.

New Legislation Since the 1996 FAIR Act

2002 Farm Security Act 2008 Farm Bill Policymakers searching for a “countercyclical”

approach that retains many of the “freedom” features of the 1996 FAIR Act

Added back the concept of a safety net Added back target prices

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Demand Side Options

Importance of Export Demand• Movement Toward Free Trade• General Agreement on Tariff and Trade or GATT• NAFTA – U.S., Canada, and Mexico• Successor to GATT = WTO (World Trade Organization)• Adequacy of World Food Supply• Thomas Malthus (late 1700s) argued that the world would

eventually suffer food shortages because population growth would exceed growth in the food supply.

• “Food supply grows at an arithmetic rate while population grows at a geometric rate” –Malthus quote

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

government intervention in agriculture

Documents

market supplycurve

market equilibrium

free market price pf

income16 page

gainof area

excess capacity6 page

thedesired price

price p2