Chapter 20. Agriculture: Economics and Policy

Agriculture: Economics and PolicyChapter 20Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Economics of AgricultureExtreme diversityFarm products and food productsShort-run price and income instabilityInelastic demand Fluctuations in outputFluctuation in demandDependence on world marketsLO1Economics of AgricultureLO LO1 1Source: Derived from the authors from Foreign Agricultural Trade of the United States, www.ers.usda.gov/Data/FATUS; and Bureau of Economic Analysis, www.bea.govEconomics of AgricultureLO1Source: Author calculations using nominal values from Global Financial Data, globalfinancialdata.com, adjusted for inflation with the GDP deflator published by the Bureau of Economic Analysis, bea.govThe Long Run: A Declining IndustrySupply increased rapidlyTechnological progressDemand increased slowlyInelastic with respect to incomePopulation growthLO2O2The Long Run: A Declining IndustryMajor consequencesIncreased minimum efficient scale (MES)ConsolidationAgribusinessMassive exit of workersFarm labor 1.1% of labor forceFarm-Household IncomeLO2Economics of Farm PolicySubsidized since 1930sSupport for agricultural prices, income, and outputSoil and water conservationAgricultural researchFarm creditCrop insuranceSubsidized sale of farm products in world marketsLO3Economics of Farm PolicyRationale for farm subsidiesNecessities of life“Family farm” institutionExtraordinary hazardsCompetitive markets for output while inputs have significant market powerLO3LO3Economics of Farm PolicyAgricultural Adjustment Act of 1933 established parity conceptParticular real output results in same real incomePreserve purchasing powerRationale for price supportsParity Ratio =Prices Received by FarmersPrices Paid by FarmersLO3Economics of Farm PolicyEconomics of price supportsEffective price floorGenerates surplus outputGain to farmersLoss to consumersEfficiency lossesOther social lossesEnvironmental costsInternational costsLO3Economics of Farm PolicyReduction of surplusesRestricting supply Acreage allotmentsBolstering demandGasoholBiodieselCorn-based ethanolThe ethanol programHigher food pricesSecondary effectsLO3Criticisms and PoliticsCriticisms of parity conceptCriticisms of price supportsSymptoms not causesMisguided subsidiesPolicy contradictionsLO4The Politics of Farm PolicyPublic choice theory revisitedChanging politicsDeclining political supportWorld trade considerationsRecent farm policyFreedom to Farm Act of 1996Food, Conservation, and Energy Act of 2008Direct paymentsCountercyclical payments (CCPs)Marketing loansLO5The Sugar ProgramPrice supports Domestic costsImport quotasDeveloping countriesU.S. efficiency lossGlobal resource misallocation