Agriculture: Economics and Policy Chapter 20 Copyright 2015 McGraw-Hill Education. All rights...
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Transcript of Agriculture: Economics and Policy Chapter 20 Copyright 2015 McGraw-Hill Education. All rights...
Agriculture: Economics and Policy
Chapter 20
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
20-2
Economics of Agriculture
• Extreme diversity• Farm products and food products• Short-run price and income instability
• Inelastic demand • Fluctuations in output• Fluctuation in demand
• Dependence on world markets
LO1
20-3
Economics of Agriculture
LO LO1 1
Source: 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.gov
20-4
Economics of Agriculture
LO1
Source: 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.gov
20-5
The Long Run: A Declining Industry
• Supply increased rapidly• Technological progress
• Demand increased slowly• Inelastic with respect to income• Population growth
LO2O2
20-6
The Long Run: A Declining Industry
• Major consequences• Increased minimum efficient scale (MES)• Consolidation• Agribusiness• Massive exit of workers• Farm labor 1.1% of labor force• Farm-Household Income
LO2
20-7
Economics of Farm Policy
• Subsidized since 1930s• Support for agricultural prices, income, and
output• Soil and water conservation• Agricultural research• Farm credit• Crop insurance• Subsidized sale of farm products in world
markets
LO3
20-8
Economics 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
LO3LO3
20-9
Economics of Farm Policy
• Agricultural Adjustment Act of 1933 established parity concept• Particular real output results in same real
income• Preserve purchasing power• Rationale for price supports
Parity Ratio =Prices Received by FarmersPrices Paid by Farmers
LO3
20-10
Economics of Farm Policy
• Economics of price supports• Effective price floor• Generates surplus output• Gain to farmers• Loss to consumers• Efficiency losses• Other social losses• Environmental costs• International costs
LO3
20-11
Economics of Farm Policy
• Reduction of surpluses• Restricting supply
• Acreage allotments• Bolstering demand
• Gasohol• Biodiesel• Corn-based ethanol
• The ethanol program• Higher food prices• Secondary effects
LO3
20-12
Criticisms and Politics
• Criticisms of parity concept
• Criticisms of price supports
•Symptoms not causes
•Misguided subsidies
•Policy contradictions
LO4
20-13
The 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• Food, Conservation, and Energy Act of 2008
• Direct payments• Countercyclical payments (CCPs)• Marketing loans
LO5
20-14
The Sugar Program
• Price supports • Domestic costs• Import quotas• Developing countries• U.S. efficiency loss• Global resource misallocation