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AGRICULTURAL ECONOMICS
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Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
GovernmentIntervention in
Agriculture
Chapter 11
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Topics of Discussion
Defining the “Farm Problem”Forms of government interventionConsumer issues Price and income support mechanisms Phasing out of supply managementDomestic demand expansionImportance of export demand
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
The “Farm Problem”
Inelastic demand and a bumper cropLack of market powerInterest sensitivityTrade sensitivityAsset fixity and excess capacity
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 199
An increase in supply causes price to fall more sharply than the quantity clearing the market.
An increase in supply causes price to fall more sharply than the quantity clearing the market.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 199
If the demand curve is more elastic (D2), the price will only fall to price P2 rather than P3 for a given increase in supply.
If the demand curve is more elastic (D2), the price will only fall to price P2 rather than P3 for a given increase in supply.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Price and Income Support:A Historical perspective
Commodity acquisition-loan rate mechanism
Set-aside mechanismTarget price mechanismCommodities covered by government
programs
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
The CCC’s Loan RateApproach to SupportingFarm Prices and Income
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 205
Market Level Effects of Loan RatesMarket Level Effects of Loan Rates
Free market equilibriumoccurs at point E. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersis PG.
Free market equilibriumoccurs at point E. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersis PG.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 205
Market Level Effects of Loan RatesMarket Level Effects of Loan Rates
The Commodity CreditCorporation of the USDAbegan in the Thirties to acquire excess supply at thedesired price its through non-recourse loan provisions.
The goal was to shift demand from D to D+CCCACQ, pulling up the price from PF to PG. Note that consumer demandactually fell from QF to QD.
The Commodity CreditCorporation of the USDAbegan in the Thirties to acquire excess supply at thedesired price its through non-recourse loan provisions.
The goal was to shift demand from D to D+CCCACQ, pulling up the price from PF to PG. Note that consumer demandactually fell from QF to QD.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 205
Market Level Effects of Loan RatesMarket Level Effects of Loan Rates
The CCC stored the surplus QD-QG in metal bins atgreat expense to taxpayers.
This approach had the un-wanted effects of increasingsupply from (QF to QG) in a sector already plagued by surplus production.
The CCC stored the surplus QD-QG in metal bins atgreat expense to taxpayers.
This approach had the un-wanted effects of increasingsupply from (QF to QG) in a sector already plagued by surplus production.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 205
Market Level Effects of Loan RatesMarket Level Effects of Loan Rates
Consumer surplus woulddecline from area 3+4+6 tojust area 6. Thus, they areeconomically worse-off as aresult of this approach.
Producer surplus wouldincrease from area 1+2 toarea 1+2+3+4+5, a gainof area 3+4+5.
Consumer surplus woulddecline from area 3+4+6 tojust area 6. Thus, they areeconomically worse-off as aresult of this approach.
Producer surplus wouldincrease from area 1+2 toarea 1+2+3+4+5, a gainof area 3+4+5.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 206
Firm Level Effects of Loan RatesFirm Level Effects of Loan Rates
The individual firm underfree market conditions willproduce quantity qF if itexpected the free market price PF, and earn profitequal to area 1.
The individual firm underfree market conditions willproduce quantity qF if itexpected the free market price PF, and earn profitequal to area 1.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 206
Firm Level Effects of Loan RatesFirm Level Effects of Loan Rates
The increase in CCCacquired stocks pullingthe price up to PG willcause participating farmers to increase itsproduction from quantityqF to qG, increasing itsprofits by area 2.
The increase in CCCacquired stocks pullingthe price up to PG willcause participating farmers to increase itsproduction from quantityqF to qG, increasing itsprofits by area 2.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
The Set-AsideApproach to SupportingFarm Prices and Income
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 207
Market Level Effects of Set-Aside RequirementsMarket Level Effects of Set-Aside Requirements
Free market equilibriumoccurs at point E1. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersagain is PG.
Free market equilibriumoccurs at point E1. Let’sassume that PF is belowa politically acceptableprice, and that the pricedesired by policymakersagain is PG.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 207
Market Level Effects of Set-Aside RequirementsMarket Level Effects of Set-Aside Requirements
Shifting the market supplycurve from SMKT to SMKT*through set-aside require-ments reduces productionfrom QF to QG. The market equilibrium moves from E1
to E2.
Shifting the market supplycurve from SMKT to SMKT*through set-aside require-ments reduces productionfrom QF to QG. The market equilibrium moves from E1
to E2.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 207
Market Level Effects of Set-Aside RequirementsMarket Level Effects of Set-Aside Requirements
Consumer surplus would fall from area 4+5+6+7 tojust area 7. Thus, consumersare worse-off economically.
Producer surplus wouldincrease from area 1+2+3 toarea 1+6. As long as area 6is greater that area 2+3, producers are better-off.
Consumer surplus would fall from area 4+5+6+7 tojust area 7. Thus, consumersare worse-off economically.
Producer surplus wouldincrease from area 1+2+3 toarea 1+6. As long as area 6is greater that area 2+3, producers are better-off.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 207
Market Level Effects of Set-Aside RequirementsMarket Level Effects of Set-Aside Requirements
Importantly, the set-asideapproach does not encourageproduction of quantity QS asthe CCC loan rate approachdid.
Importantly, the set-asideapproach does not encourageproduction of quantity QS asthe CCC loan rate approachdid.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
PF
PG
SFIRM*
SFIRM
qG qF qS
Firm Level Effects of Set-Aside RequirementsFirm Level Effects of Set-Aside Requirements
12
3
4
Page 208
Producer surplusBefore policy = 1+2+3After policy = 1+4Gain = 4 – 2 – 3
Producer surplusBefore policy = 1+2+3After policy = 1+4Gain = 4 – 2 – 3
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 209
Deficiency Payment MechanismDeficiency Payment Mechanism
The deficiency payment was equal to quantity QM multiplied by the difference between the announced target price and either the loan rate or market price (blue shaded area above), which ever was higher.
The deficiency payment was equal to quantity QM multiplied by the difference between the announced target price and either the loan rate or market price (blue shaded area above), which ever was higher.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Recent Approachesto Supporting
Farm Prices and Income
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
1996-2002 PolicyThe FAIR Act signed into law in 1996 eliminated many
of these mechanisms.The loan rate mechanism remained, but the set-aside
and deficiency mechanisms were deleted.Participating farmers receive fixed contract payments
that were phased out over time.Farmers were “free” to plant whatever crops they
desire and still receive contract payments.No longer had a variable safety net should crop prices
drop due to weak export demand. Pages 212-214
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
The 2002 Farm BillBegan in 2002 and expired in 2007Retained loan rate mechanism Retained a fixed payment mechanism
introduced under FAIR Act in 1996Added a new counter-cyclical mechanism Updating base acres and program yieldsRisk management tools such as enhanced crop
insurance coverage
Pages 212-213
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Countercyclical PaymentsD S
LR
PF
TP
1
2
34
Q
Payment acres cannot exceed planted acres. The maximum countercyclical payment here is equal to areas 3+4
Payment acres cannot exceed planted acres. The maximum countercyclical payment here is equal to areas 3+4
Page 210
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Importance of Government Payments at Sector
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Importance of Government PaymentsTo Net Farm Income
Importance of Government PaymentsTo Net Farm Income
Page 212
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Importance of Government PaymentsTo Net Farm Income
Importance of Government PaymentsTo Net Farm Income
Page 212
Pre FAIR ActPre FAIR Act FAIR ActFAIR Act
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Importance of Government PaymentsTo Net Farm Income
Importance of Government PaymentsTo Net Farm Income
Page 212
Pre FAIR ActPre FAIR Act FAIR ActFAIR Act
Lowered safety netunder FAIR Act…
Lowered safety netunder FAIR Act…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Importance of Government PaymentsTo Net Farm Income
Importance of Government PaymentsTo Net Farm Income
Page 212
Pre FAIR ActPre FAIR Act FAIR ActFAIR Act
Lowered safety netunder FAIR Act…
Lowered safety netunder FAIR Act…
2002Bill
2002Bill
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
The 2008 Farm BillBegan in 2002 and expired in 2007Retained loan rate mechanism Retained a fixed payment mechanism
introduced under FAIR Act in 1996Added a new counter-cyclical mechanism Updating base acres and program yieldsRisk management tools such as enhanced crop
insurance coverage
Page 211-213
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Some Demand Side Options
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 213
Domestic Demand Expansion: Value Added ProductsDomestic Demand Expansion: Value Added Products
Let’s assume that the freemarket conditions result ina price of PF and quantityQF.
Market equilibrium occursat E1.
Let’s assume that the freemarket conditions result ina price of PF and quantityQF.
Market equilibrium occursat E1.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 213
Domestic Demand Expansion: Value Added ProductsDomestic Demand Expansion: Value Added Products
Policies designed to promoteresearch that would enhancevalue added demand forfarm products would shiftthe demand curve out to theright.
This would increase price toPG and quantity to QG.
Policies designed to promoteresearch that would enhancevalue added demand forfarm products would shiftthe demand curve out to theright.
This would increase price toPG and quantity to QG.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 213
Domestic Demand Expansion: Value Added ProductsDomestic Demand Expansion: Value Added Products
Consumer surplus in thismarket would go fromarea 2+5 to area 4+5. Ifarea 4 exceeds area 2, consumers are better-off.
Producers would be betteroff by area 2+3 as we movefrom E1 to E2.
Consumer surplus in thismarket would go fromarea 2+5 to area 4+5. Ifarea 4 exceeds area 2, consumers are better-off.
Producers would be betteroff by area 2+3 as we movefrom E1 to E2.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 215
Export Demand Expansion: EnhancementsExport Demand Expansion: Enhancements
Let’s assume the originalDemand curve is DD, givingus a market clearing priceof PDD and correspondingquantity of QMM at marketequilibrium E1.
Let’s assume the originalDemand curve is DD, givingus a market clearing priceof PDD and correspondingquantity of QMM at marketequilibrium E1.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 215
Export Demand Expansion: EnhancementsExport Demand Expansion: Enhancements
Consumer surplus wouldbe area 2+5 while producersurplus would be area 1.
Consumer surplus wouldbe area 2+5 while producersurplus would be area 1.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 215
Export Demand Expansion: EnhancementsExport Demand Expansion: Enhancements
By enhancing export demandthrough subsidies to clientnations, the government canshift the demand curve outto TD beginning at E0.
Domestic consumer surpluswould decline by area 2 butproducer surplus wouldincrease by area 2+3. Atequilibrium E2, foreignconsumer surplus would be area 4.
By enhancing export demandthrough subsidies to clientnations, the government canshift the demand curve outto TD beginning at E0.
Domestic consumer surpluswould decline by area 2 butproducer surplus wouldincrease by area 2+3. Atequilibrium E2, foreignconsumer surplus would be area 4.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Summary USDA has tried to support prices and incomes by
acquiring/storing excess supply at desired support price.
USDA supply side approaches to supporting farm prices and incomes included set-aside rates and deficiency payments.
FAIR Act decoupled supports from planting decisions; resulted in large supplemental payments during 1999-2001 period. New bill restored the safety net with counter-cyclical payments.
Demand side approaches designed to promote domestic and/or export demand.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Chapter 12 focuses on general economic conditions ….