Agricultural policy objectives The farm problem

1. Agricultural policy objectivesThe farm problem Economics of Food Markets Lecture 3 Alan Matthews

4. Extensive government intervention in agri-food markets • Most countries adopt an active agricultural policy. Evidence that policy addresses significant and widespread socio-economic issues. • High share of EU spending on agriculture • High levels of border protection • High transfers from consumers and taxpayers to agriculture (OECD PSE estimates)

5. Rationale for agricultural policy • instability of agricultural markets • food security • lagging farm incomes • maintenance of the rural population/rural development • environmental and landscape benefits - the multifunctionality of agriculture

6. Objectives of the Common Agricultural Policy • Article 39 objectives • to increase agricultural productivity • to ensure a fair standard of living for the agricultural community • to stabilise markets • to ensure the availability of supplies • to ensure that supplies reach consumers at reasonable prices • Generally, income objectives dominate farm policy objectives in developed countries, although rarely defined very explicitly

7. Sources of price instability P P Q Q

8. The cobweb model of price instability

9. Declining terms of trade • Demand grows slowly because of slow population growth and Engel’s Law • Supply grows more rapidly due to technological change • Rising living standards in nonfarm sectors

10. Why does farm labour market not return to equilibrium? • With downward pressure on farm incomes, we expect outmigration from farming to restore relative incomes; why does this not happen? • ‘love of farming’ – nonpecuniary considerations • Market imperfections – barriers to movement • Human capital explanation – markets do work • Fixed asset theory – resources trapped in agriculture

11. Illustration fixed asset theory P Acquisition cost Demand for labour (MVP)1 Demand for labour (MVP)2 Salvage value Q3 Q2 Q1 Q

12. Agricultural adjustment and the farm problem • price instability in a supply-demand framework caused by low price elasticities of supply and demand • agricultural adjustment in a supply-demand framework: the ‘treadmill’ of technical change together with Engel’s Law drives food prices down and leaves farms unviable • technological change and input substitution also encourage farm amalgamation and lower the demand for labour in agriculture • low farm incomes result from ‘sticky’ labour supply response • barriers to exit • neoclassical human capital explanation • fixed asset theory

13. The pattern of agricultural adjustment • Changes in resource use – reduction in labour input accompanied by intensifcation in use of land through greater use of variable and capital inputs • Increased size of farm business and increased specialisation • growing concentration of production and output on larger farms accompanied by the growing marginalisation of small-scale farming, leading to increased differentiation in farming • Differences in survival strategies depending on the resource base of the family farm and family circumstances.