Effects of Agricultural Commodity Programs Kristin Mackie & Lane Mayberry

Overview This chapter summarizes the direct and indirect effects of various commodity programs, and shows the benefits that tend to be dissipated over time. It also describes the major beneficiaries of these programs.

Prices Farm commodity prices for various goods has been supported through a number of different programs since the 1930’s. Prices also have been supported through direct purchases of products and through the use of non recourse loans, target prices, trade restrictions.

Short run beneficiaries Several different groups receive short run benefits from farm price-support programs, but the amount of the benefit varies widely. For ADM, a large agri-business firm manufactures corn based sweeteners and reaps huge benefits from the sugar program, the peanut program in contrast raises the cost to manufacturers of peanut candy.

Owners of specialized resources Owners of land, allotments, and other specialized resources are the major gainers from the farm programs that increase product price. The first generation of owners receive most of the benefits.

Procedures and Direct Payments Producers who have more to sell stand to gain more from farm price supports. In contrast, small farmers are affected relatively little when product prices are increased because the benefits are tied to the volume of sales. Recent farm bills have included limits on the amount of government payments receive per person but legal loopholes limited their effectiveness farm bill was also exempt from payment ceilings, and 112 dairy producers in CA, FL, ID,TX, and AZ received payments of more than one million each under the program. One third of U.S. farms produce app. 90% of total agricultural output the output determines the effectivenes

Loans and payments Price supports and supply controls were eliminated for most farm commodities under the 1996 farm bill Under the 2002, farm bill, there is a $40,000 per person annual limit for direct payments. In some cases individual farmers can receive up to $80,000 per year on separate farming operations.

Mandatory supply control programs They are alternatives to voluntary price support programs. After the mandatory supply control program is approved in the required producer referendum, the individual producer has no choice as to whether or not to participate. Tobacco was the only remaining example of a mandatory supply control program in effect in the U.S. prior to its elimination in 2004.

Farmers as producers Farmers as producers gain little from farm programs The benefits from price supports, subsidized inputs, tax preferences, and so on are largely offset by increased costs of specialized inputs. The conclusion is that higher product prices and lower input prices generally have little or no effect on farmers as producers except for these short run transitional gains. Farm programs have little effect on the returns of farm labor because labor resources in general are not very specialized in agriculture

Labor vs. other specialized resources Agricultural farm labor is not highly specialized. An example of specialized resources would be corn prices increasing and land prices directly increasing to reflect the increase future returns to land, only if there is a market in which land prices are determined by expected future supply and demand conditions.

Farm operators and farm labor Farm programs have little effect on the long-term profitability of agriculture. When labor can flow readily between agriculture and the rest of the economy, the long-run return to labor and management in agriculture is determined mainly by opportunity cost. (By the alternatives that farm laborers have for nonagricultural uses of their resources.)

Political Bureaucracy Politicians and the political bureaucracy also benefit from price support programs Farm state legislators use farm programs to obtain and maintain political support Farm programs are also important to the bureaucracies that administer and evaluate the effects of these programs.

The Direct and Indirect effects of price support programs The direct effect of price-support programs is to increase producer prices of farm products. An important indirect effect previously discussed is the increase in production costs as the higher product prices are capitalized into input prices.

Effects on market process Farm price support programs delay economic adjustments. Market forces constantly tend to cause resources to be deployed from less productive to more productive firms. Market prices provide correct signals to producers and consumers only when prices are free to change in response to changing economic conditions The higher prices resulting from price support programs make it more difficult for consumers, especially those in lower income groups, to buy food.

Effect on market stability Price supports and marketing orders are often justified as measures to stabilize markets. The governments manipulates short run policies hoping to benefit themselves or their political party. Every four years or so, Congress enacts a new farm bill. The periodic swings from relatively high to relatively low price supports tend to create instability in U.S. agriculture. The price support programs in general is to increase farm incomes rather than to stabilize markets.

Short Run and Long Run effects In the short run, an effective price support program provides windfall gains, primarily to owners of land and other specialized resources at the time the program is instituted. Competition causes prices of these inputs to increase until expected rates of return in agriculture are no higher than those in other sectors. Farm labor incomes with or without price supports are determined largely by general economic conditions and non-farm employment opportunities. The longer the length of the run, moreover, the greater this effect is likely to be.

Substitution in Consumption and Production Supply and demand become more elastic the longer the adjustment period. The longer a price support program remains in effect, the greater the pressures from competing products. The cotton price support program of the 1930’s provided a raise for the development of substitutes because of the raised prices of cotton.

Restrictions on Competition Restrictions on competition are at the heart of price support programs because all price support programs are inconsistent with the competitive market process. Individual producers and consumers no longer have the right to engage in mutually beneficial exchange as in a free market. Price support programs in agriculture invariably block the free flow of price information and restrict consumers options to buy domestically produced or imported products at the lowest prices

Continues…… Thus, consumers as tax payers are hit twice by price support programs: they must pay higher prices for the products, but must also pay higher taxes to finance the price support programs.