Government Intervention in Agriculture

1. Government Intervention in Agriculture Chapter 11

2. Topics of Discussion • Defining the “Farm Problem” • Government intervention • Consumer issues • Price and income support • Domestic demand expansion • Importance of export demand

3. Price and Income SupportA Historical Perspective • Loan rate mechanism • Set-aside mechanism • Target price mechanism • Conservation reserve mechanism • Commodities covered by government programs

6. The “Farm Problem” • Inelastic demand and bumper crop • Lack of market power • Interest sensitivity • Trade sensitivity • Asset fixity and excess capacity

7. An increase in supply causes price to fall sharply. Page 240

8. 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. Page 199

16. Recent Approachesto SupportingFarm Prices and Income

17. Market Level Effects of Loan Rates Free market equilibrium occurs at point E. Let’s assume that PF is below a politically acceptable price, and that the price desired by policymakers is PG. Page 205

18. Market Level Effects of Loan Rates The Commodity Credit Corporation of the USDA began in the Thirties to acquire excess supply at the desired 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 demand actually fell from QF to QD. Page 205

20. Market Level Effects of Loan Rates The CCC often stored the surplus QD-QG in metal bins at great expense to taxpayers. This approach has the un- wanted effects of increasing supply from (QF to QG) in a sector already plagued by over production. Page 205

21. Market Level Effects of Loan Rates Consumer surplus would decline from area 3+4+6 to just area 6. Thus, they are economically worse-off as a result of this approach. Producer surplus would increase from area 1+2 to area 1+2+3+4+5, a gain of area 3+4+5. Page 205

22. Firm Level Effects of Loan Rates The individual firm under free market conditions will produce quantity qF if it expected the free market price PF, and earn profit Equal to area 1. Page 206

23. Firm Level Effects of Loan Rates The increase in CCC acquired stocks pulling the price up to PG will cause participating farmers to increase its production from quantity qF to qG, increasing its profits by area 2. Page 206

24. Market Level Effects of Set-Aside Requirements Free market equilibrium occurs at point E1. Let’s assume that PF is below a politically acceptable price, and that the price desired by policymakers again is PG. Page 207

25. Market Level Effects of Set-Aside Requirements Shifting the market supply curve from SMKT to SMKT* through set-aside require- ments reduces production from QF to QG. The market equilibrium moves from E1 to E2. Page 207

26. Market Level Effects of Set-Aside Requirements Consumer surplus would fall from area 4+5+6+7 to just area 7. Thus, consumers are worse-off economically. Producer surplus would increase from area 1+2+3 to area 1+6. As long as area 6 is greater that area 2+3, producers are better-off. Page 207

27. Market Level Effects of Set-Aside Requirements Importantly, the set-aside approach does not encourage production of quantity QS as the CCC loan rate approach did. Page 207

28. Firm Level Effects of Set-Aside Requirements The individual producer under this approach would supply qG rather than qF or qS. Profit would increase over free market levels as long as area 4 was greater than area 2+3. Page 208

30. Deficiency 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. Page 209

31. Deficiency Payment Mechanism To receive this payment, the farmer had to participant in the Acreage Reduction Program (ARP) which implemented the set-aside requirements. The Findley amendment reduced this payment by 15%. Page 209

35. Commodities Covered by Government Programs Page 211

36. Page 212

37. 1996 Farm Bill Federal Agricultural Improvement and Reform Act (FAIR Act) represented a transition to a market-driven agriculture. The FAIR Act replaced target prices and deficiency payment with annual fixed transition on flexibility contract payments. The FAIR Act was termed “Freedom to Farm” because farmers were no longer restrained in their planting decisions. They now had the flexibility to plant virtually whatever they wanted on their base acreage (referred to now as contract acres). The concept of a safety net was added back under the 2002 and 2008 Farm Bill.

38. Current Farm Policy See www.ers.usda.gov/briefing/farmpolicy/malp.htm

39. New Legislation Since the 1996 FAIR Act • 2002 Farm Security Act • 2008 Farm Bill • Policymakers searching for a “countercyclical” approach that retains many of the “freedom” features of the 1996 FAIR Act • Added back the concept of a safety net • Added back target prices

40. Demand Side Options

44. Importance of Export Demand Movement Toward Free Trade General Agreement on Tariff and Trade or GATT NAFTA – U.S., Canada, and Mexico Successor to GATT = WTO (World Trade Organization) Adequacy of World Food Supply Thomas Malthus (late 1700s) argued that the world would eventually suffer food shortages because population growth would exceed growth in the food supply. “Food supply grows at an arithmetic rate while population grows at a geometric rate” –Malthus quote

47. Consumer Issues • Adequate and cheap food supply, food access • Food Subsidies • Food stamp program • National school lunch program • WIC • Food Safety • Nutrition and Health • Obesity issue • Nutritional Labeling and Education Act (NLEA)

48. U.S. Nutrition Labeling and Education Act of 1990: A Model for the Rest of the World • update list of nutrient, ingredients • standardize serving sizes • define nutrient content claims • define health claims