Chapter 19 - Agriculture: Economics and policy. This chapter explain why agricultural prices and farm income are unstable, discuss why there has been a huge employment exodus from agriculture to other U.S. industries over the past several decades, relate the rationale for farm subsidies and the economics and politics of price supports (price floors), describe major criticisms of the price-support system in agriculture, list the main elements of existing Federal farm policy.
Trang 1Agriculture:
Economics and Policy
Chapter 19
Trang 2Chapter Objectives
• Unstable agricultural prices and farm income
• Employment exodus from agriculture
• Farm subsidies and price supports
• Criticisms of the price-support
system
• Existing Federal farm policy
Trang 3Agriculture Industry
• Extreme diversity
• Farm products and food products
• Short-run price and income
instability
–Inelastic demand
–Fluctuations in output
–Shifts in the demand curve
• Dependence on world markets
Trang 4Economics of Agriculture
Effects of Changes in Farm Output on
Agricultural Prices and Income
n p
b
Trang 5Economics of Agriculture
The Effects of Changes in Demand on
Agricultural Prices and Income
Shift in demand causes large change in price
Trang 6Agriculture: a Declining Industry
• Supply increased rapidly
–Technological progress
• Demand increased slowly
• Inelastic with respect to income
• Population growth
Trang 7Agriculture: a Declining Industry
• Inflation adjusted prices have
declined through 2005
• Rising prices 2006-2007
–Demand from China
–Ethanol
Trang 8Economics of Agriculture
The Long-Run Decline of Agricultural
Prices and Farm Income
D 2
2
Q 2 c
Trang 9Agriculture: a Declining Industry
–Massive exit of workers
–Farm labor 2% of labor force
Trang 10• Futures markets
• Contracting with processors
• Crop revenue insurance
• Leasing land
• Nonfarm income
Agriculture: a Risky Business
Trang 11Percentage of Labor Force in
Agriculture, Selected Nations 2002-2004
Madagascar
Bangladesh Thailand China Brazil Russia Japan France Germany United States
0 25 50 75 100
Source: World Bank World Development Report, 2008
Labor in Agriculture
Trang 12Economics of Farm Policy
• Subsidized since 1930s
–Support for agricultural prices,
income, and output
–Soil and water conservation
Trang 13Government Subsidies as a Percentage of
Farm Income, Selected Nations, 2006
Norway Switzerland South Korea
Japan European Union
Turkey Canada Mexico United States
Australia
0 20 40 60 80
Source: Organization for Economic Cooperation and Development
Agricultural Subsidies
Trang 14Economics of Farm Policy
• Rationale for farm subsidies
–Necessities of life
–“Family farm” institution
–Extraordinary hazards
–Competitive markets for output
while inputs have significant
market power
Trang 15Economics of Farm Policy
• Agricultural Adjustment Act of
1931 established parity concept
–Particular real output results in
same real income
–Preserve purchasing power
–Rationale for price supports
Parity Ratio = Prices Received by Farmers
Prices Paid by Farmers
Trang 16Economics of Price Supports
• Effective price floor
• Generates surplus output
Trang 18–Corn based ethanol
• The ethanol program
–Higher food prices
–Secondary effects
Trang 19Criticisms and Politics
• Criticisms of parity concept
• Criticisms of price supports
• Symptoms not causes
• Misguided subsidies
• Policy contradictions
Trang 20The Politics of Farm Policy
• Public choice theory revisited
• Changing politics
–Declining political support
–World trade considerations
• Recent farm policy
–Freedom to Farm Act of 1996
–Farm Act of 2008
Trang 21The Sugar Program
• Price supports
• Domestic costs
• Import quotas
• Developing countries
• U.S efficiency loss
• Global resource misallocation
Trang 22• direct payments
• countercyclical payments (CCPs)
• marketing loan program
Trang 23Next Chapter Preview…
Income Inequality
and Poverty