Economics of agriculture

• Farm commodities - Wheat, soybeans, cattle, rice, etc.

• Food products - Items sold through restaurants or grocery stores

• Farm products refined into commercial food products → # of competing firms decreases

• Farm commodities sold in highly competitive markets

• Food products sold in monopolistic + oligopolistic markets

Short run

• Price + income instability

• Inelastic demand for agricultural products

• Fluctuations in output - Farmers have limited control over output (can’t control nature)

• Fluctuations in demand - Small decrease in demand → Gives farmers significantly less income

• Demand volatility comes from dependence on world markets + international politics

Long run

• Technological progress → Supply of farm products has increased

  • Increase in amount of land cultivated per farmer

  • Caused by gov’t-funded programs of research + education

• Demand for farm products has increased slowly, because it is inelastic with respect to income

  • Demand increases slower than demand for goods + services in general

  • Each consumer’s intake of food remains relatively fixed

• Declining industry

• Agribusiness - Large corporate farming firms

Farm policy - Programs designed to prop up prices + income

• “Family farm” should be nurtured

• Farmers subject to more hazards (floods, droughts, etc.)

• Farmers buy inputs from industries w/ high market power

• Parity concept - Year after year for a fixed output of farm products, a farmer should be able to acquire a specific total amount of other goods and services; relationship between the prices received by farmers for their output and the prices they must pay for goods and services should remain constant

• Parity ratio - Ratio of prices received to prices paid, expressed as a percentage

Price supports - Gov’t price floors on farm products

• Product surplus

• Farmers benefit (receive more revenue)

• Consumers lose (pay higher prices)

• Allocative inefficiency

• Added tax burden to taxpayers

• Environmental costs (pollution)

Reduction of surpluses

• Acreage allotments - In return for guaranteed prices for their crops, farmers had to agree to limit the number of acres they planted in that crop

• Gov’t trying to increase demand for US agricultural products

Criticisms + politics

• Parity concept doesn’t make sense

• Price-support strategy treats symptoms, not causes, of farm problem

• Subsidy system benefited farmers who needed subsidies the least

• Farm policy leads to contradictions

Recent farm policies

• Freedom to Farm Act - Ended price supports and acreage allotments for wheat, corn, barley, oats, sorghum, rye, cotton, and rice

• Food, Conservation and Energy Act of 2008 - Current subsidy programs continue the “freedom to plant” and “direct payment” approaches to farm policy but make direct payments permanent and provide revenue protection for farmers. The revenue guarantees kick in automatically when crop prices (or total revenues) fall below targeted levels

• Direct payments - Cash payments are fixed for each crop based on a farmer’s historical pattern of production and are unaffected by current crop prices or current production

• Countercyclical payments (CCPs) - Based on previous crops grown and are received regardless of the current crop planted

• Marketing loan program - Farmers can receive a loan (on a per-unit-of-output basis) from a government lender