Roles of Gov’t in AgricultureSupply, price, and income

Food distributionData and information reporting

Trade policy and supportMarket regulationGrades and standards

Government Market ProgramsLevel of intervention– Topic of great debate–Alternate between more and

less

Policy toolsImplications on food chain

Rationale for intervention

“The farm marketing problem”– Inelastic demand–Erratic supply–Cost-price squeeze–Market power relative to

processors

Rationale for interventionUniqueness of food–Adequate, reasonably priced

food–Efficiency v. self-sufficiency–Free market v. social choice– Imperfect markets v.

imperfect governments

Impacts of farm programs

Consumers pay through higher food prices or higher taxes–Debate about the benefit to consumers–Recent programs driven by gov’t cost– “Low” cost stable food supply–Food stamp cost > farm income

supplement part of budget

Basis tools of farm policyPrice fixingIncome supplementsSupply controlGov’t purchases & storage

Demand expansion

1920 PolicyTwo tier market–Domestic demand inelastic–World demand elastic–Set domestic prices dump on

world

Improve distribution–Storage loans to spread

marketings

1930s PolicyGreat Depression–Net farm income fell 70% 1929 to

1932

Forerunner of modern policy1996 Freedom to Farm was an amendment to 1938 policy

1930s Policy

Storage loans & gov’t purchases

Supply controlDemand side programsIncome supplements

1940-1952 Policy

Resources diverted to support war effort

Marshall PlanKorean ConflictOnly minor changes to 1930s

1950s-1960s PolicyExpanding production capacity–Adopt technology to reduce

cost–Agricultural treadmill–Slower growth in demand–Consumers benefits by lower

prices

1950s-1960s Policy Food for Peace P.L. 480

– Export excess to needing countries

Soil Bank to cut production 1961 the cost of storing gov’t

grain exceeded the origin farm value

By 1972 62 million acres (20%) idle

1970s PolicyTurbulent period–Worldwide demand expanded–USSR and China as buyers–1973 income highest since WWII–Consumer food cost increased– 47million more acres 1969-78–By end of 1970s: Supply

>Demand–Costs > price

1980s PolicyTwo viewsLess gov’t intervention– Full production–Produce for the world

More gov’t involvement– Exports introduced farm income

instability–Problem of income stability

1980s Policy

Compromise: Food and Ag Acts of 1981 and 1985–Acreage controls (PIK and CRP)–Reduced price support levels– Increased ag exports (EEP)

Move toward market-oriented ag

Parity

Farmers have equality with other sectors of economy

Based on 1909-1914–Agriculture “hay day”

No provision for modern agDropped in 1985 Farm Bill

1990s Policy1996 Federal Agricultural Improvement and Reform Act–Removed linkage between income

and prices–Phased in over 7 years 1996-2002–Declining annual payments– Increase planting flexibility–Added deficiency payments

2002 Farm Bill

More conservation focused–Conservation Security Program– Increased EQIP funding

New areas–COOL

Continued reliance on trade

Importance of Trade to US Ag

24% of US ag production is exported

Agriculture accounts for–10% of all US exports–5% of all US imports

Trade Policy and Support

Balance producers and consumers–Producer: increase expts, limit impts–Consumer: increase impts, limit expts

Free trade v. Trade protectionismExport enhancement programs

US Export TrendsExploded during 1970sShift to High Value Products away from raw commodities–HVP exceed bulk commodities

and are growing faster – Income and job implications

U.S. Agricultural Trade

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Imports

Trade SurplusExports

Why Nations Trade

Efficient use of resources–Can produce anything

domestically–Specialize in what you do best– Trade for goods that are high

cost

Greater consumer choice– Encourages domestic efficiency

Comparative AdvantageProduce and export what you do relatively more efficiently.

Import what others do relatively more efficiently

Gains must also offset transportation costs

Example: wheat for bananas

Comparative AdvantageTypically not all or none–US largest beef exporter and

2nd largest beef importer– Type of beef?

Principle holds for states–Hogs: Iowa and North Carolina–Cattle: Iowa and Texas

Free Trade

Generally believed that unrestricted trade among all nations will result in more efficient use of world resources and a higher standard of living for all.

Trade ProtectionismPolicies to prevent free trade– Typically protect domestic industry–Support internal policy

Easy to implement, hard to reverse–Protection benefits focused and visible– Trade benefits disperse and hard to see–Balance micro and macro effects–How to distribution gains and losses

Protectionism Tools

Limit imports– Tariffs–Quotas– Licenses–Nontariff restrictions

Subsidies to domestic industries

Trade Agreements Embargo

– Prohibit trade to others (Cuba, Russia)

Most favored nation status– Preference given to one country (China)

Dumping– Selling surplus below cost

»Mexico for tomatoes»Canada for cattle in the 1990s and hogs now

Trade AgreementsFree trade areas– Freer trade to members– EEC, NAFTA

General Agreement on Tariffs and Trade (GATT)– 1994 included agriculture–Reduce barriers, subsidies, protection

World Trade Organization

Role of Exchange Rates

Stronger US $ makes US products more expensive to foreign buyers

US $ relative to export competitors

US $ weaken 1987-mid 1990s now it is strengthening