1. Chapter 19 Agriculture: Economics and Policy McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Objectives Unstable agricultural prices and farm income
Employment exodus from agriculture
Farm subsidies and price supports
Criticisms of the price-support system
Existing Federal farm policy
19-2

3. Agriculture Industry Extreme diversity Farm products and food products
Short-run price and income instability
Inelastic demand
Fluctuations in output
Shifts in the demand curve
Dependence on world markets
19-3

4. Economics of Agriculture
Effects of Changes in Farm Output on Agricultural Prices and Income Q P Pp p Pn n
Normal Farm
Income Pb b D Qp Qn Qb
Increases in output reduce farm income
19-4

5. Economics of Agriculture
The Effects of Changes in Demand on Agricultural Prices and Income Q P P1 a P2 b D2 D1 Qn
Shift in demand causes large change in price and farm income
19-5

6. Agriculture: a Declining Industry
Supply increased rapidly
Technological progress
Demand increased slowly
Inelastic with respect to income
Population growth
19-6

7. Agriculture: a Declining Industry
Inflation adjusted prices have declined through 2005
Rising prices
Demand from China
Ethanol
19-7

8. Economics of Agriculture
The Long-Run Decline of Agricultural Prices and Farm Income Q P S1 S2 a P1 c b P2 D1 D2 Q1 Q2
19-8

9. Agriculture: a Declining Industry
Major consequences
Increased minimum efficient scale (MES)
Consolidation
Agribusiness
Massive exit of workers
Farm labor 2% of labor force
19-9

10. Agriculture: a Risky Business
Futures markets
Contracting with processors
Crop revenue insurance
Leasing land
Nonfarm income
19-10

11. Labor in Agriculture
Percentage of Labor Force in Agriculture, Selected Nations
Madagascar
Bangladesh
Thailand
China
Brazil
Russia
Japan
France
Germany
United States
Source: World Bank World Development Report, 2008
19-11

12. Economics of Farm Policy
Subsidized since 1930s
Support for agricultural prices, income, and output
Soil and water conservation
Agricultural research
Farm credit
Crop insurance
Subsidized sale of farm products in world markets
19-12

13. Agricultural Subsidies
Government Subsidies as a Percentage of Farm Income, Selected Nations, 2006
Norway
Switzerland
South Korea
Japan
European Union
Turkey
Canada
Mexico
United States
Australia
Source: Organization for Economic Cooperation and Development
19-13

14. Economics of Farm Policy
Rationale for farm subsidies
Necessities of life
“Family farm” institution
Extraordinary hazards
Competitive markets for output while inputs have significant market power
19-14

15. Economics of Farm Policy
Agricultural Adjustment Act of established parity concept
Particular real output results in same real income
Preserve purchasing power
Rationale for price supports
Parity Ratio =
Prices Received by Farmers
Prices Paid by Farmers
19-15

16. Economics of Price Supports
Effective price floor
Generates surplus output
Gain to farmers
Loss to consumers
Efficiency losses
Other social losses
Environmental costs
International costs
19-16

17. Economics of Price SupportsQ P D S
Surplus Ps a
Tax Burden
Of Surplus Pe b c D S Qc Qe Qs
19-17

18. Reduction of Surpluses
Restricting supply
Acreage allotments
Bolstering demand
Gasohol
Biodiesel
Corn based ethanol
The ethanol program
Higher food prices
Secondary effects
19-18

19. Criticisms and Politics
Criticisms of parity concept
Criticisms of price supports
Symptoms not causes
Misguided subsidies
Policy contradictions
19-19

20. The Politics of Farm Policy
Public choice theory revisited
Changing politics
Declining political support
World trade considerations
Recent farm policy
Freedom to Farm Act of 1996
Farm Act of 2008
19-20

21. The Sugar Program Price supports Domestic costs Import quotas
Developing countries
U.S. efficiency loss
Global resource misallocation
19-21

22. Key Terms farm commodities food products agribusiness parity concept
parity ratio
price supports
acreage allotments
Freedom to Farm Act
Food, Conservation, and Energy Act of 2008
direct payments
countercyclical payments (CCPs)
marketing loan program
19-22

23. Income Inequality and Poverty
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Income Inequality and Poverty
19-23