Policies aimed at lowering the
price of food
by increasing the food supply
Text extracted from
The World Food Problem
Leathers & Foster, 2004
http://www.lastfirst.net/images/product/R004548.jpg
How to increase food supply
• An outward shift in the food
supply curve
– Reduces the equilibrium price
• Farmers would need to
– Produce more at the same price, or
– Produce the same amount at a
lower price
• What would motivate farmers to
increase food supply?
– Reduction in cost of production
How to reduce the cost of
production
• Reduce input prices
• Encourage investment
• New technologies
– increase productivity
Soy harvest, Brazil
http://www.brazil.studyintl.com/programs/ag/images_ag/soy_harvest.jpg
Subsidized inputs
• Irrigation
– Dam building
• Abundant, inexpensive water
• Benefits poor and wealthy
farmers
http://www.unesco.org/water/wwap/case_studies/ruhuna_basins/index.shtml
Sri Lanka Irrigation
Subsidized inputs
• Fertilizer
– Benefits of subsidies
• Encourages learning by
doing
• Helps overcome
– risk aversion
– credit restraints
• Helps poor farmers
• Offsets tax and pricing
policies
http://www.thaitradesource.com/directories/fertilizer/fer2.jpg
– that hurt farmers
• Maintains soil fertility
Fertilizer, Thailand
Subsidized inputs
• Fertilizer
– Problems with subsidies
• Knowledge of fertilizer use is
widespread now
• Subsidies help large farmers
more
• Best way to help small farmers
is by eliminating urban bias
• Reduces incentive to use
natural organic fertilizers
– That hold water better
http://sweetchillisauce.com/Letters/Manurepic.html
Subsidized inputs
• Fertilizer in Africa
– Subsidies removed
• 1970s and 1980s
– Fertilizer use dropped
• Less profitable to use
– Free Market has not responded
to removal of subsidy
http://www.new-agri.co.uk/image/046/dev01.jpg
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Risk aversion by farmers
Seasonal demand
High transport costs
Undeveloped financial services
Farmers lack cash
– Some role of government needed
Subsidized inputs
• Pesticide Subsidies
– Encourage farmers to use
more
• Environmentally destructive
– Undermine efforts to
promote IPM
• Integrated Pest Management
– Biological control
– Minimal chemical use
http://www.ipminstitute.org/images/ipm_year.gif
Mechanization
• Farm machinery subsidies
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Tax breaks
Tariff protection
Subsidized credit
Inflated official exchange rates
• Can import machinery cheaply
• Problems with subsidies
– Benefits primarily to large farmers
• Out-compete small farmers
• Buy out small farms
• Greater inequity
http://www.technoserve.org/involve-donate.html
Tractor, Kenya
– Yields not necessarily increased
– Employment reduction
– If profitable, free market will works
• Poor farmers can rent machinery
Credit Subsidies
• Is assumed that small
farmers have trouble
getting loans
– No collateral
– High risk
• Government subsidies:
– Direct Government loans
• at low interest rate
– Require banks to lend
• at low interest rates
http://www.hindu.com/thehindu/mp/2005/07/11/stories/2005071100210
500.htm
State Bank of India
Credit Subsidies
• Problems
– Benefits rural wealthy
• Discriminates against poor
– High cost leads to
• Deficit financing
• inflation
– Discourages savings
– Better uses of money?
http://www.rdiland.org/OURWORK/OurWork_Accomplishments.html
• Agricultural research
• Better rural roads
• Improved education
Alternatives to subsidized credit
• Increase local savings institutions
– Must be convenient, secure
– Good interest rate
• Promotes saving
• Availability of money lowers lending
interest rates
• Benefits poor
• Microcredit
– Small loans to poor families, women
– Administered locally
http://www.globalenvision.org/_image/microcreditmicro.jpg
Microcredit recipients, India
• Know reputation of borrower
personally
• Understand likelihood of business
success
• Status in community falls if loan not
repaid
Microcredit
• Case study, Philippines
– Farmer borrowed $52
• To buy two piglets
– Planned to feed piglets table
scraps
• Low cost
– Had reputation for honesty,
hard work
– Repaid $2.30/week
• 26 weeks
• Total of $60
– Sold fattened pigs for $200
http://community.webshots.com/photo/3884771/10038848300107682
71iWotCapauD
Improving Roads
• Raises prices farmers receive
– Reduces cost of
• Cost of transport
• Cost of inputs
• Price fluctuations
– Increases
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http://he.wikipedia.org/wiki/%D7%99%D7%A8%D7%A7%D7%95%D7%AA
Production
Exports, imports
Wages
Farm labor employment
Agricultural specialization
– Fruits and vegetables can be
marketed further away
Improving Roads
• Case study: Bangladesh
– Villages with good
infrastructure
• Hard-surface Roads
– Used 92% more fertilizer
– Used 4% more
labor/hectare
– Paid Ag workers 12%
more per day
http://www.dfid.gov.uk/images/countries/asia/bangladesh_bicycle.jpg
Bangladesh Road
– Compared to villages with
poor infrastructure
Improving Rural Infrastructure
• Rural electrification
– Electrical farm machines
– Irrigation pumps
– Telephones
• Marketing systems
– Transmits supply, demand needs
– Improves choice through
competition
• Radio, newspapers
– Market price news
Central Market, Mexico City
• Terminal markets
– Buyers, sellers in one place
– Improves production, nutrition
Price Stabilization
• When prices are unstable
– Farmers less likely to invest in
production
• Risk averse
• Governments stabilize prices
– Buy commodity at set price
• Encourages Black Markets
– Buffer Supplies
• Buy when prices cheap
• Store for sale when supplies drop
– Buffer Funds
• Raise commodity taxes when prices high
– Encourage Futures Markets
• Farmers pick price at beginning of season
http://www.tradingsimulation.com/resources/articles/mot.jpg
Subsidizing Agricultural
Research
• Important areas for Ag
technology research:
– Yield response to fertilizers and
pesticides
– Drought tolerance
– Disease and pest resistance
– Food quality
– Food handling and storage
– Labor for production and food
processing
– Compatibility with social,
cultural and economic norms
http://maizeandgenetics.tamu.edu/drought.htm
Return on Research
• Case study: hybrid corn
– For every $1 invested in hybrid
corn in the U.S.
• Until 1955
– Was $0.35 return per year
• Since 1955
• Due to reduced price
• Case study: Cassava mealybug
– Research cost $27 million
– Benefits exceeded $4 billion
http://www.fofweb.com/Subscription/Science/Environ
_Issues/EN0728.jpg
Why don’t farmers invest in
research?
• Operation too small
– To sponsor research
– To benefit from research
• Majority of ag tech benefit
goes to consumers
– Farmers lose revenue when
new tech is introduced
– Farm prices fall faster than
production can increase
http://www.donau-uni.ac.at/imperia/md/images/donau_uni_allgemein/presse/bilder2005/labor_w_236x157.jpg
Why doesn’t industry invest
more in Ag research?
• Require patents to make
research profitable
– Machinery can be patented
– Most biological innovations
cannot be patented
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http://www.plantbreeding.iastate.edu/news.html
Walt Fehr, ISU Soy breeder
Animal breeding
Animal nutrition
Plant breeding
Plant pathology
Entomology
Agronomy
Soil science
– This research must be
Government sponsored
CGIAR
• Consultative Group on
International Agriculture
– International Rice
Research Institute (IRRI)
– International Maize and
Wheat Improvement
Center (CIMMYT)
– 13 other International
research centers
• Helps fill research gap in
small countries
Challenge of ag research in Africa
• 90 percent of ag is mixed cropping
– More than one crop in a field
• Intercropping
– 2 crops at same time
• Relay Cropping
– Not all crops planted at same time
• Sequential cropping
– Second crop planted after first harvested
• Challenge:
http://www.afrol.com/images/agriculture/kenya_trees.gif
Agroforestry, Kenya
– improve productivity
– While maintaining sustainability
• Agroforestry
– Alternate trees and crops
• Conserves water, soil, organic matter
Extension
• Government subsidizes
– Education and advice to
farmers
• Case Study: Iowa
– weed killer 2,4-D
– Took only 11 years
http://www.extension.iastate.edu/Connection/2002AR/farmbill.html
ISU extension
• From time first farmers
heard about it
• To when most were using
it (1955)
Sustainable Farming
• Role for government to
promote
– environmentally
appropriate practices
– Extension to teach
farmers
http://www.sendacow.org.uk/printed.asp?active_page_id=113
• Will prevent future
declines in productivity