After reading this chapter, you should be able to: 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.
19 Agriculture:EconomicsandPolicy McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved EconomicsofAgriculture 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 19-2 Economics of Agriculture • Effects of changes in farm output on agricultural prices and income P p Pp n Pn Pb Normal Farm Income b D Qp Qn Qb Q Increases in output reduce farm income LO1 19-3 Economics of Agriculture • The effects of a demand shift on agricultural prices and income P a P1 P2 b Qn D2D1 Q Shift in demand causes a large change in price and farm income LO1 19-4 The Long Run: A Declining Industry • Supply increased rapidly • Technological progress • Demand increased slowly • Inelastic with respect to income • Population growth LO2 19-5 The Long Run: A Declining Industry • Long-run decline of agricultural prices and farm income P P1 P2 S1 S2 a c b D1 D2 LO2 Q1 Q2 Q 19-6 The Long Run: A Declining Industry • Major consequences • Increased minimum efficient scale (MES) • Consolidation • Agribusiness • Massive exit of workers • Farm labor 2% of labor force • Farm-household income LO2 19-7 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 19-8 Economics of Farm Policy LO3 19-9 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 LO3 19-10 Economics 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 Prices Received by Farmers Parity Ratio = Prices Paid by Farmers LO3 19-11 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 19-12 Economics of Farm Policy P D S Surplus Ps a Tax Burden Of Surplus Pe b c D S LO3 Qc Qe Qs Q 19-13 Economics of Farm Policy • LO3 Reduction of surpluses • Restricting supply • Acreage allotments • Bolstering demand • Gasohol • Biodiesel • Corn-based ethanol • The ethanol program • Higher food prices • Secondary effects 19-14 Criticisms and Politics • Criticisms of parity concept • Criticisms of price supports • Symptoms not causes • Misguided subsidies • Policy contradictions LO4 19-15 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 LO5 19-16 ... LO1 1 9-3 Economics of Agriculture • The effects of a demand shift on agricultural prices and income P a P1 P2 b Qn D2D1 Q Shift in demand causes a large change in price and farm income LO1 1 9-4 .. .Economics of Agriculture • Extreme diversity • Farm products and food products • Short-run price and income instability • Inelastic demand • Fluctuations in output • Fluctuation in demand... labor 2% of labor force • Farm-household income LO2 1 9-7 Economics of Farm Policy • Subsidized since 1930s • Support for agricultural prices, income, and output • Soil and water conservation • Agricultural