Roles of Gov’t in Agriculture l Supply, price, and income l Food distribution l Data and information reporting l Trade policy and support l Market regulation l Grades and standards

Government Market Programs l Level of intervention – Topic of great debate – Alternate between more and less l Policy tools l Implications on food chain

Rationale for intervention l “The farm marketing problem” – Inelastic demand – Erratic supply – Cost-price squeeze – Market power relative to processors

Rationale for intervention l Uniqueness of food – Adequate, reasonably priced food – Efficiency v. self-sufficiency – Free market v. social choice – Imperfect markets v. imperfect governments

Impacts of farm programs l 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 policy l Price fixing l Income supplements l Supply control l Gov’t purchases & storage l Demand expansion

1920 Policy l Two tier market – Domestic demand inelastic – World demand elastic – Set domestic prices dump on world l Improve distribution – Storage loans to spread marketings

1930s Policy l Great Depression – Net farm income fell 70% 1929 to 1932 l Forerunner of modern policy l 1996 Freedom to Farm was an amendment to 1938 policy

1930s Policy l Storage loans & gov’t purchases l Supply control l Demand side programs l Income supplements

Policy l Resources diverted to support war effort l Marshall Plan l Korean Conflict l Only minor changes to 1930s

1950s-1960s Policy l Expanding production capacity – Adopt technology to reduce cost – Agricultural treadmill – Slower growth in demand – Consumers benefits by lower prices

1950s-1960s Policy l Food for Peace P.L. 480 – Export excess to needing countries l Soil Bank to cut production l 1961 the cost of storing gov’t grain exceeded the origin farm value l By million acres (20%) idle

1970s Policy l Turbulent period – Worldwide demand expanded – USSR and China as buyers – 1973 income highest since WWII – Consumer food cost increased – 47million more acres – By end of 1970s: Supply >Demand – Costs > price

1980s Policy l Two views l Less gov’t intervention – Full production – Produce for the world l More gov’t involvement – Exports introduced farm income instability – Problem of income stability

1980s Policy l Compromise: Food and Ag Acts of 1981 and 1985 – Acreage controls (PIK and CRP) – Reduced price support levels – Increased ag exports (EEP) l Move toward market-oriented ag

Parity l Farmers have equality with other sectors of economy l Based on – Agriculture “hay day” l No provision for modern ag l Dropped in 1985 Farm Bill

1990s Policy l 1996 Federal Agricultural Improvement and Reform Act – Removed linkage between income and prices – Phased in over 7 years – Declining annual payments – Increase planting flexibility – Added deficiency payments

2002 Farm Bill l More conservation focused – Conservation Security Program – Increased EQIP funding l New areas – COOL l Continued reliance on trade

Importance of Trade to US Ag l 24% of US ag production is exported l Agriculture accounts for – 10% of all US exports – 5% of all US imports

Trade Policy and Support l Balance producers and consumers – Producer: increase expts, limit impts – Consumer: increase impts, limit expts l Free trade v. Trade protectionism l Export enhancement programs

US Export Trends l Exploded during 1970s l Shift to High Value Products away from raw commodities – HVP exceed bulk commodities and are growing faster – Income and job implications

Why Nations Trade l Efficient use of resources – Can produce anything domestically – Specialize in what you do best – Trade for goods that are high cost l Greater consumer choice – Encourages domestic efficiency

Comparative Advantage l Produce and export what you do relatively more efficiently. l Import what others do relatively more efficiently l Gains must also offset transportation costs l Example: wheat for bananas

Comparative Advantage l Typically not all or none – US largest beef exporter and 2nd largest beef importer – Type of beef? l Principle holds for states – Hogs: Iowa and North Carolina – Cattle: Iowa and Texas

Free Trade l 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 Protectionism l Policies to prevent free trade – Typically protect domestic industry – Support internal policy l 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 l Limit imports – Tariffs – Quotas – Licenses – Nontariff restrictions l Subsidies to domestic industries

Trade Agreements l Embargo – Prohibit trade to others (Cuba, Russia) l Most favored nation status – Preference given to one country (China) l Dumping – Selling surplus below cost » Mexico for tomatoes » Canada for cattle in the 1990s and hogs now

Trade Agreements l Free trade areas – Freer trade to members – EEC, NAFTA l General Agreement on Tariffs and Trade (GATT) – 1994 included agriculture – Reduce barriers, subsidies, protection l World Trade Organization

Role of Exchange Rates l Stronger US $ makes US products more expensive to foreign buyers l US $ relative to export competitors l US $ weaken 1987-mid 1990s now it is strengthening