1. 19 Agriculture: Economics and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Economics of Agriculture Extreme diversity Farm products and food products Short-run price and income instability Inelastic demand Fluctuations in output Fluctuation in demand Dependence on world markets LO1 19-2

3. Economics of Agriculture Effects of changes in farm output on agricultural prices and income D QpQp PpPp Q 0 P PnPn PbPb QnQn QbQb Normal Farm Income n p b Increases in output reduce farm income LO1 19-3

4. Economics of Agriculture The effects of a demand shift on agricultural prices and income D1D1 P1P1 Q 0 P P2P2 QnQn b a D2D2 Shift in demand causes large change in price and farm income LO1 19-4

5. Economics of Agriculture LO1 Source: Derived from the authors from Foreign Agricultural Trade of the United States, http://www.ers.usda.gov/Data/FATUS; and Bureau of Economic Analysis, http://www.bea.gov http://www.ers.usda.gov/Data/FATUShttp://www.bea.gov 19-5

6. Economics of Agriculture LO1 Source: Author calculations using nominal values from Global Financial Data, globalfinancialdata.com, adjusted for inflation with the GDP deflator published by the Bureau of Economic Analysis, bea.gov 19-6

7. The Long Run: A Declining Industry Supply increased rapidly Technological progress Demand increased slowly Inelastic with respect to income Population growth LO2 19-7

8. The Long Run: A Declining Industry Long-run decline of agricultural prices and farm income D1D1 P1P1 Q 0 P P2P2 Q1Q1 b a D2D2 S1S1 S2S2 Q2Q2 c LO2 19-8

9. The Long Run: A Declining Industry Major consequences Increased minimum efficient scale (MES) Consolidation Agribusiness Massive exit of workers Farm labor 2% of labor force Farm-Household Income LO2 19-9

10. The Long Run: A Declining Industry LO2 Year In Millions Of People As Percentage Of Total Employment Number Of Farms, Thousands 19509.315.85388 19606.29.43962 19704.05.02954 19803.5 2440 19902.52.12146 20002.21.62172 20081.81.22200 Source: derived by the authors from Economic Report of the President, 2010, Table B-100; U.S. Bureau of Labor Statistics, http://www.bls.gov, and Department of Agriculture, Economic Research Services, http://www.ers.usda.govhttp://www.bls.gov http://www.ers.usda.gov Farm Employment* *Includes self-employed farmers, unpaid farmworkers, and hired farmworkers 19-10

11. The Long Run: A Declining Industry LO2 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 LO3 19-12

13. Economics of Farm Policy LO3 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 LO3 19-14

15. Economics of Farm Policy Agricultural Adjustment Act of 1931 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 LO3 19-15

16. Economics of Farm Policy 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 LO3 19-16

17. Q 0 P b a S S D D PePe QeQe PsPs Tax Burden Of Surplus QcQc QsQs LO3 Economics of Farm Policy Surplus c 19-17

18. Economics of Farm Policy Reduction of surpluses Restricting supply Acreage allotments Bolstering demand Gasohol Biodiesel Corn-based ethanol The ethanol program Higher food prices Secondary effects LO3 19-18

19. Criticisms and Politics Criticisms of parity concept Criticisms of price supports Symptoms not causes Misguided subsidies Policy contradictions LO4 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 Food, Conservation, and Energy Act of 2008 LO5 19-20

21. The Sugar Program Price supports Domestic costs Import quotas Developing countries U.S. efficiency loss Global resource misallocation LO5 19-21