Download Economics, by R. Glenn Hubbard and Anthony Patrick O'Brien

Principles of Microeconomics:
Econ102
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Price & Income instability results from:

An inelastic demand for agricultural products
 Very low price elasticity of demand
 Biological factors
 Rapidly diminishing marginal utility
 Very large price cuts are needed to
induce small increases in food
consumption

Fluctuations in farm output
 Natural events are beyond farmers’ control
 Small changes in output result in relatively
larger changes in prices & incomes

Shifts of the demand curve for farm products
 Dependence on world markets
 Weather & crop production abroad
 Cyclical fluctuations
 International politics, foreign exchange, etc.
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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
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19-3
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
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Technological Progress
Significantly increased the supply of agricultural products
Amount of capital increased 15 times between 1930 and
1980, permitting a fivefold increase in land cultivated per
farmer
One unit of farm labor / units of farm output
 1950: 14; 1970: 43; 1980: 60; 1990: 91; 2000: 128; 2008: 154
Productivity in agriculture has advanced 2x as fast as in
the nonfarm economy
Lagging Demand
Income-Inelastic
Increases in consumer incomes produce less-thanproportionate increases in spending on farm products
Population Growth
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19-5
Long-run decline of agricultural prices and farm
income
P
S1
P1
P2
S2
a
c
b
D1 D2
0
Q1
Q2
Q
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 Major consequences
Year
In
Millions
Of
People
As %
Of Total
Employm
ent
#
Of
Farms,
(000)
1950
9.3
15.8
5388
Consolidation
1960
6.2
9.4
3962
Agribusiness
1970
4.0
5.0
2954
1980
3.5
3.5
2440
1990
2.5
2.1
2146
Farm labor 2% of labor force
2000
2.2
1.6
2172
Farm-Household Income
2008
1.8
1.2
2200
Increased minimum efficient scale
(MES)
Massive exit of workers
*Includes self-employed farmers, unpaid farmworkers, and hired
farmworkers
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.gov
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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
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Necessities of life
Many farmers have relatively low incomes so they
should receive higher prices & incomes through
public help.
“Family farm” institution
It is a fundamental U.S. institution and should be
nurtured as a way of life.
Extraordinary hazards
Droughts, floods, insects and other disasters not
faced by other industries
Competitive markets for output while inputs have
significant market power
The Parity Concept: Rationale for price supports
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Effective price floor
P
D
Generates surplus output
Gain to farmers
S
Surplus
Ps
a
Tax Burden
Of Surplus
Loss to consumers
 Higher burden on the poor
Efficiency losses
Pe
b
 Over-allocation of resources
c
Other social losses
Environmental costs
International costs
D
S
0
Qc Qe Qs
Q
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Restricting supply
 Acreage allotments
Bolstering demand
Gasohol
Biodiesel
Corn-based ethanol
The ethanol program
Higher food prices
Secondary effects
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Criticisms of parity concept
Criticisms of price supports
Symptoms not causes
Misallocation of resources between agriculture and the rest
of the economy
 Too many farmers……low prices……..low incomes
 Supports encourage much of the same
Misguided subsidies
Policy contradictions
Free-trade policies
Wildlife habitats
Health problems
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Public choice theory revisited
Rent-seeking behavior
Special-interest effect
Political logrolling
Changing politics
Declining political support
World trade considerations
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Recent farm policy
Freedom to Farm Act of 1996
Ended price supports and acreage allotments
“Freedom to Plant” approach; Markets……...not government
Transition payments
 Declining annual payments through 2002
 Based on a farmer’s previous production levels
 No regard to current prices or output
 In 1999, reduced export demand & strong crop production
 Resulted in larger subsidies than before Act
Food, Conservation, and Energy Act of 2008
Direct payments (do not decline year to year; permanent
Countercyclical payments
Marketing loans
transfers
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Price supports
Import Quotas
Domestic Costs
32 percent above world price
Developing countries
 Exclusion
 Increased world supply
 U.S. ….from a sugar-importing nation to a
sugar-exporting nation
U.S. efficiency loss
Global resource misallocation
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