Policies aimed at lowering the price of food

by increasing the food supply

Text extracted from

The World Food Problem

Leathers & Foster, 2004

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How to increase food supply

• An outward shift in the food supply curve– Reduces the equilibrium price

• Farmers would need to– Produce more at the same price, or

– Produce the same amount at a lower price

• What would motivate farmers to increase food supply?– Reduction in cost of production

How to reduce the cost of production

• Reduce input prices • Encourage investment• New technologies

– increase productivity

Soy harvest, Brazil

http://www.brazil.studyintl.com/programs/ag/images_ag/soy_harvest.jpg

Subsidized inputs

• Irrigation– Dam building

• Abundant, inexpensive water

• Benefits poor and wealthy farmers

http://www.unesco.org/water/wwap/case_studies/ruhuna_basins/index.shtml

Sri Lanka Irrigation

Subsidized inputs

• Fertilizer– Benefits of subsidies

• Encourages learning by doing

• Helps overcome– risk aversion– credit restraints

• Helps poor farmers• Offsets tax and pricing

policies – that hurt farmers

• Maintains soil fertility

http://www.thaitradesource.com/directories/fertilizer/fer2.jpg

Fertilizer, Thailand

Subsidized inputs

• Fertilizer– Problems with subsidies

• Knowledge of fertilizer use is widespread now

• Subsidies help large farmers more

• Best way to help small farmers is by eliminating urban bias

• Reduces incentive to use natural organic fertilizers

– That hold water better

http://sweetchillisauce.com/Letters/Manurepic.html

Subsidized inputs

• Fertilizer in Africa– Subsidies removed

• 1970s and 1980s

– Fertilizer use dropped• Less profitable to use

– Free Market has not responded to removal of subsidy

• Risk aversion by farmers• Seasonal demand• High transport costs• Undeveloped financial services• Farmers lack cash

– Some role of government neededhttp://www.new-agri.co.uk/image/046/dev01.jpg

Subsidized inputs

• Pesticide Subsidies– Encourage farmers to use

more• Environmentally destructive

– Undermine efforts to promote IPM

• Integrated Pest Management– Biological control

– Minimal chemical use

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Mechanization• Farm machinery subsidies

– Tax breaks– Tariff protection– Subsidized credit– Inflated official exchange rates

• Can import machinery cheaply

• Problems with subsidies– Benefits primarily to large farmers

• Out-compete small farmers• Buy out small farms• Greater inequity

– Yields not necessarily increased– Employment reduction– If profitable, free market will works

• Poor farmers can rent machineryhttp://www.technoserve.org/involve-donate.html

Tractor, Kenya

Credit Subsidies

• Is assumed that small farmers have trouble getting loans– No collateral– High risk

• Government subsidies:– Direct Government loans

• at low interest rate

– Require banks to lend • at low interest rates

State Bank of India

http://www.hindu.com/thehindu/mp/2005/07/11/stories/2005071100210500.htm

Credit Subsidies

• Problems– Benefits rural wealthy

• Discriminates against poor

– High cost leads to• Deficit financing• inflation

– Discourages savings

– Better uses of money?• Agricultural research• Better rural roads• Improved educationhttp://www.rdiland.org/OURWORK/OurWork_Accomplishments.html

Alternatives to subsidized credit

• Increase local savings institutions– Must be convenient, secure– Good interest rate

• Promotes saving• Availability of money lowers lending

interest rates• Benefits poor

• Microcredit– Small loans to poor families, women– Administered locally

• Know reputation of borrower personally• Understand likelihood of business success• Status in community falls if loan not

repaidhttp://www.globalenvision.org/_image/microcreditmicro.jpg

Microcredit recipients, India

Microcredit

• Case study, Philippines– Farmer borrowed $52

• To buy two piglets

– Planned to feed piglets table scraps

• Low cost

– Had reputation for honesty, hard work

– Repaid $2.30/week• 26 weeks• Total of $60

– Sold fattened pigs for $200

http://community.webshots.com/photo/3884771/1003884830010768271iWotCapauD

Improving Roads

• Raises prices farmers receive– Reduces cost of

• Cost of transport• Cost of inputs• Price fluctuations

– Increases• Production• Exports, imports• Wages• Farm labor employment• Agricultural specialization

– Fruits and vegetables can be marketed further away

http://he.wikipedia.org/wiki/%D7%99%D7%A8%D7%A7%D7%95%D7%AA

Improving Roads

• Case study: Bangladesh– Villages with good

infrastructure• Hard-surface Roads

– Used 92% more fertilizer

– Used 4% more labor/hectare

– Paid Ag workers 12% more per day

– Compared to villages with poor infrastructure

http://www.dfid.gov.uk/images/countries/asia/bangladesh_bicycle.jpg

Bangladesh Road

Improving Rural Infrastructure

• Rural electrification– Electrical farm machines– Irrigation pumps– Telephones

• Marketing systems– Transmits supply, demand needs– Improves choice through

competition

• Radio, newspapers– Market price news

• Terminal markets– Buyers, sellers in one place– Improves production, nutrition

Central Market, Mexico City

Price Stabilization

• When prices are unstable– Farmers less likely to invest in production

• Risk averse

• Governments stabilize prices– Buy commodity at set price

• Encourages Black Markets

– Buffer Supplies• Buy when prices cheap• Store for sale when supplies drop

– Buffer Funds• Raise commodity taxes when prices high

– Encourage Futures Markets• Farmers pick price at beginning of season

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Subsidizing Agricultural Research

• Important areas for Ag technology research:– Yield response to fertilizers and

pesticides– Drought tolerance– Disease and pest resistance– Food quality– Food handling and storage– Labor for production and food

processing– Compatibility with social,

cultural and economic norms

http://maizeandgenetics.tamu.edu/drought.htm

Return on Research

• Case study: hybrid corn– For every $1 invested in hybrid

corn in the U.S.• Until 1955

– Was $0.35 return per year • Since 1955

• Due to reduced price

• Case study: Cassava mealybug– Research cost $27 million

– Benefits exceeded $4 billion

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Why don’t farmers invest in research?

• Operation too small– To sponsor research

– To benefit from research

• Majority of ag tech benefit goes to consumers– Farmers lose revenue when

new tech is introduced

– Farm prices fall faster than production can increase

http://www.donau-uni.ac.at/imperia/md/images/donau_uni_allgemein/presse/bilder2005/labor_w_236x157.jpg

Why doesn’t industry invest more in Ag research?

• Require patents to make research profitable– Machinery can be patented– Most biological innovations

cannot be patented• Animal breeding• Animal nutrition• Plant breeding• Plant pathology• Entomology• Agronomy• Soil science

– This research must be Government sponsored

Walt Fehr, ISU Soy breeder

http://www.plantbreeding.iastate.edu/news.html

CGIAR

• Consultative Group on International Agriculture– International Rice

Research Institute (IRRI)– International Maize and

Wheat Improvement Center (CIMMYT)

– 13 other International research centers

• Helps fill research gap in small countries

Challenge of ag research in Africa

• 90 percent of ag is mixed cropping– More than one crop in a field

• Intercropping– 2 crops at same time

• Relay Cropping– Not all crops planted at same time

• Sequential cropping– Second crop planted after first harvested

• Challenge: – improve productivity – While maintaining sustainability

• Agroforestry– Alternate trees and crops

• Conserves water, soil, organic matter

http://www.afrol.com/images/agriculture/kenya_trees.gif

Agroforestry, Kenya

Extension

• Government subsidizes– Education and advice to

farmers

• Case Study: Iowa– weed killer 2,4-D

– Took only 11 years• From time first farmers

heard about it

• To when most were using it (1955)

http://www.extension.iastate.edu/Connection/2002AR/farmbill.html

ISU extension

Sustainable Farming

• Role for government to promote – environmentally

appropriate practices

– Extension to teach farmers

• Will prevent future declines in productivityhttp://www.sendacow.org.uk/printed.asp?active_page_id=113