Ag Policy, Lecture 3 Knutson, Chapter 1

1. Ag Policy, Lecture 3 Knutson, Chapter 1 Today • U.S. Agriculture • Government Spending • Policy • Forces of Change

2. Setting the Stage • How much does agriculture matter to the U.S. economy? • How big a player is U.S. agriculture in the world? • How much money does the U.S. spend on agriculture?

3. How Big a Player is U.S. Agriculture in the World? • #1 exporter of ag products in the world • Over 30% of crop acreage basically for export • What does this mean for policy?

4. How much does Agriculture Matter to the U.S. economy? • Depends • Farming accounts for 1% of workforce and less than 1% of GDP • Entire food and fiber system accounts for 17% of workforce and 13% of GDP

5. How Much Money Does the U.S. Spend on Agriculture? • What do you call agriculture? • Do you define it by what Ag committees have responsibility for?

6. Allocation of U.S. Budget Outlays by Function, FY 2001 Human Resources includes: health, medicare, social security, etc. Physical Resources includes: transportation, community and regional development, etc. Source: Budget of the U.S. Government www.whitehouse.gov/omb/budget/fy2003/pdf/hist.pdf

7. Share of Mandatory Program Spending by Farm Bill Title Budget Authority, FY 2002-2011. $782 Billion Total Does not include funding for discretionary programs which is provided through annual appropriations. Based on CBO’s March 2002 Baseline.

8. Policy • Definition: Guiding principle leading to course of action or specific program pursued by governments • Programs implement policy • Example: • Policy -- Pursuit of freer trade • Programs – NAFTA, FTAA

9. Agricultural and Food Policy • Principles that guide government programs that influence: • Production • Resources used • Domestic and international markets • Food consumption • Conditions under whichrural people live

10. Ag & Food Policy is broader than the programs that support farm prices and/or incomes • Retirement of fragile land from production (CRP) • Negotiation to reduce barriers to trade (WTO) • Water allocation, development and pricing • Food safety and terrorism • Child nutrition (WIC)

11. Policies and programs are constantly changing – Forces of Change • Instability of agriculture • Globalization • Technology • Food safety • Environment • Industrialization • Politics • Unforeseen events

12. Instability of Agriculture • Inelastic demand and supply • 1 percent change in quantity supplied causes more than 1% change in price • Supply unstable due to • Weather and insects affect yields • Response to inputs is uncertain • Lag in production response • Demand is also unstable due to production in the rest of the world • Export demand changes from year to year causing total demand to shift in and out $ S0 S1 D Q/Yr

13. Globalization of Markets • Increased interdependence of markets, cultures, economies, and political systems • US Ag. depends on exports to support its investments in land and machinery • US Ag. exports depend on market access • Trade must flow both ways

14. Technology • Technology is provided to agriculture by business and Ag. Universities • Technology introduced in lumps • Farmers must adopt new technology or fall behind • Tread mill effect holds that technology drives down prices, farmers must adopt next tech. which drives down prices • Who benefits from technology?

15. Food Safety • Concerns about E. coli in hamburger, Salmonella in poultry, Listeria in dairy products, and now BSE in beef • Pesticide bans if carcinogenic in test animals • Terrorist threats on food supply • Food safety extends to environmental safety issues for soil, air, and water • Hormones in beef and GMOs are food safety issues in Europe and affects US exports

16. Environment • Food Safety • Biotechnology • Imports • Water/Air Quality • Confined Animal Operations • Chemical Use • Conservation • Land, Water, Endangered Species • Environmental Issues & Trade Policy

17. Industrialization • Modern agriculture depends on purchased inputs – seed, herbicides, insecticides, fertilizer, labor, fuel, equipment, etc. • Structure of farming has changed – small to large farms • More importance placed on the entire supply chain • Affects on rural communities

18. Politics • Political process makes farm policy and passes the farm programs • A myth is that the declining rural population has led to less political influence by farmers • Operating as a minority has led to different approaches • Coalition building on particular issues • Agriculture has political diversity, able to function with a different party in power

19. Unforeseen Events • Terrorism • BSE

20. Rational for Government Involvement in Agriculture • Farm Financial Health • Price and Income Support • Price and Income Instability • Abundant/Cheap Food Supply • Food Security • Food Safety • Poverty • Market Externalities • Environment • Other Public Concerns

21. Constraints on Government Involvement in Agriculture • Economic Freedom • Political Conservatism • Government Costs • Capitalization • Globalization • Common Sense

22. Lecture 3, Wrap up • U.S. Agriculture (How important is Agriculture?) • Government Spending (What is spent on Agriculture?) • Policy • You should be able to define and discuss the differences between policies and programs, and provide an example • Forces of Change • You should be able to discuss intelligently any of the 8 categories of forces Government Involvement • Rationale • Constraints • Next Class, Policy Process Chapter 3