EconS 451: Lecture #1
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Government Intervention
Constituents of Government Intervention
• Primary Concerns
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Objectives of Government Intervention
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Methods of Influencing Farm Prices and Income
• Supporting prices
• Depressing prices
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Economic Impact of Different Price Support Programs
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Tariff
Quota
Export Subsidy
Price Support Loans
Price Support Loans or Purchases
Price per unit
Consumer expenditure and government costs from government
purchases to maintain price above equilibrium.
D
S
P2
P1
Consumer
Expenditures
Government
Purchases
Q1
Q2
Quantity
Farm Program Goals
Provide an economic safety net through farm income
support to eligible producers, cooperatives and
associations to help improve the economic stability
and viability of the agricultural sector, and to ensure
the production of an adequate and reasonably priced
supply of food and fiber.
Characteristics of Ag Sector
• Agriculture is different from other economic
sectors.
On the demand side:
 With low food prices—
• People don’t eat more meals a day
• They may change mix of foods
• Aggregate intake remains relatively stable
Characteristics of Ag Sector
• Agriculture is different from other economic
sectors.
On the supply side:
 With low crop prices—
• Farmers continue to plant all their acres
• Farmers don’t and “can’t afford to” reduce their
application of fertilizer and other major yielddetermining inputs
• Who farms land may change
• Essential resource—land—remains in production
in short- to medium-run
Why Chronic Problems In Ag?
• Technology typically expands output faster
than population and exports expand demand
 Much of this technology has been paid for by
US taxpayers
• The growth in supply now is being additionally
fueled by
 increased acreages in Brazil, etc.
 technological advance worldwide
Why Chronic Problems In Ag?
• Lower prices should automatically correct itself
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 Consumers buy more
 Producers produce less
 Prices recover—problem solved!
But in agriculture lower prices do not solve the
problem
 Little self-correction on the demand side
• People do consume significantly more food
 Little self-correction on the supply side
• Farmers do not produce significantly less output
What Was That Again?
• Supply and demand characteristics of aggregate
agriculture cause chronic price and income
problems
 On average supply grows faster than demand
(We will discuss ethanol later)
 Agriculture cannot right itself when capsized by
low prices
 (Always year-to-year random variability)
Historically—there have been
Two Major Components of
Farm\Commodity Policy
• Policy of Plenty: Ongoing public support to expand
agricultural productive capacity through research,
extension and other means
• Policy to Manage Plenty: Mechanisms to manage
productive capacity and to compensate farmers for
consumers’ accrued benefits of productivity gains
When Policy of Plenty
is Too Much
• Given agriculture’s inability to quickly adjust to
overproduction and low prices, there are 3 policy
strategies:
 Supply side
 Demand side
 Money transfers
Traditional Farm Policy Elements
• From 1973 (or earlier) to 1996, U.S. domestic farm policy generally
included the following elements:
 Base acreage
 Acreage reduction / set-asides
 Nonrecourse loans to support prices
 Government storage of commodities
 Domestic and foreign demand expansion
• Food for Peace - Wikipedia, the free encyclopedia
• How American Food Aid Keeps the Third World Hungry
 Target price for major crop commodities
• Deficiency payments for the difference between target price and market
price
Government – “Farm Bill”
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Every five years, Congress revisits and passes a massive piece of legislation
known as the Farm Bill. 2007 will be one of those years. The 2007 could
become the most scrutinized food-and-farm-policy debate in recent history.
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Originally conceived as emergency support for millions of farmers and
unemployed during the dark times of the Dust Bowl and Great Depression, the
Farm Bill has snowballed into one of the most — if not the most — significant
forces affecting food, farming, and land use in the United States.
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Issues effecting the 2007 Farm Bill
 Increasingly expensive and variable petroleum product prices and
increasingly variable climatic conditions;
 Looming water shortages and threatened fish populations;
 Economically depressed rural communities;
 Euphoria over corn and soybean expansion for biofuels;
 Escalating medical and economic costs of child and adult obesity;
 Continued Record payouts to corporate farms that aren’t even losing
money;
 Over 35 million Americans, half of them children, who don’t get enough to
eat.
Farm Bill Overview
What is the Farm Bill?
• The Farm Bill is essentially a $90 billion tax bill for food, feed,
fiber, and, more recently, fuel. Each bill receives a formal name,
such as the Food and Agriculture Act of 1977, or the Federal
Agriculture Improvement and Reform Act of 1996 (a.k.a. “Freedom
to Farm”), but more often, each act is simply referred to as “the
Farm Bill.”
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While many people equate its programs and subsidies with
assistance for struggling family farmers, the Farm Bill actually has
two primary thrusts. Food stamps, school lunch, and other
nutrition programs account for 50 percent of current spending —
an average of $44 billion per year between 2000 and 2006.
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Income and price supports for a number of storable commodity
crops combine for another 35 percent of spending.
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In addition, the Farm Bill funds a range of other program “titles,”
including conservation and environment, forestry, renewable
energy, research, and rural development.
What is the Farm Service Agency?
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FSA is a federal agency that operates within the US Department of
Agriculture and organizes/manages farmer direct programs
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FSA headquarters is located in Washington, D.C.
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FSA’s 15,000-plus employees are based in 2,400 local USDA Service
Centers around the US and Puerto Rico
 Most of the agency’s staff is located in offices throughout the
US and American trust territories
 “Grass roots” approach to service allows staffers to work oneon-one with producers
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Program technicians, loan officers, administrative professionals and
many others are employed to carry out FSA services
Farm Service Agency Programs
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Direct and Counter-cyclical Payment program
Marketing Assistance Loans
Loan Deficiency Payments
Conservation Reserve Program
 Conservation Reserve Enhancement Program
• Disaster assistance
• Farm loans
• Commodity operations
 Domestic and foreign food assistance
FSA Programs by Commodity
Grains, Oilseeds and Cotton
 Direct and Counter-Cyclical
Payment Program
 Hard White Wheat Incentive
Payment Program
 Extra Long Staple Cotton
Competitiveness Program
 Peanut Quota Holder Compensation Program
 Marketing Assistance Loan and Loan Deficiency Payment
Programs
 Payments in Lieu of Loan Deficiency Payments for Grazed
Acreage Program
 High Moisture Corn and Sorghum Recourse Loan Program
 Seed Cotton Recourse Loan Program
FSA Programs by Commodity
• Dairy
 Dairy Price Support Program
 Milk Income Loss Contract Program
 Dairy Indemnity Payment Program
• Sugar
 Sugar Allotment Program
 Sugar Loan Program
• Tobacco
 Tobacco Program (burley,
flue-cured and other tobaccos)
http://www.fotosearch.com/photos-images/tobacco-field.html
http://agpolicy.org/tobacco/Buyout%20Payments%20by%20State.pdf
YouTube - American Leaf:
Tobacco's Last Harvest
Clip #2
YouTube - American
Leaf: Tobacco's Last
Harvest Clip #1
Tobacco field Stock Photos and Images.
78 Tobacco field pictures and royalty
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from over 100 stock photo brands.
YouTube - 2007 Agricultural
Media Summit - Tobacco
Farm
http://agpolicy.org/tobacco/Buyout%20Payments%20by%20State.pdf
Direct and Counter-Cyclical Payment Program
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The Farm Security and Rural Investment Act of 2002 replaced production
flexibility contract payments (created under the 1996 act) with direct
payments and added new counter-cyclical payments for 2002-07 crops
 Both payments are based on historical acreage bases and payment
yields, not current production
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Payment rates are set in the 2002 Act
 For each commodity, the direct payment equals the direct payment rate
times 85 percent of the farm’s base acreage times the farm’s direct
payment yield
Direct and Counter-Cyclical Payment Program
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Counter-cyclical payments are made when a commodity’s effective price is
below the target price
 The effective price is the direct payment rate plus the higher of: (1) the
national average market price received by producers during the
marketing year or (2) the national loan rate for the commodity
 Target prices are set in the 2002 act
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The DCP program is available on-line
 Submit contracts, assign crop shares and choose payment options,
among other functions
Marketing Assistance Loans
and Loan Deficiency Payments
• Non-recourse marketing assistance loans help an eligible producer
pay bills when they come due without having to sell the harvested
crop at a time of year when prices tend to be lowest
 When market conditions may be more favorable, a producer may
sell the crop and repay the loan with the proceeds of the sale
• Non-recourse marketing assistance loans give producers the
option of delivering to CCC the quantity of a commodity pledged as
collateral for a loan as full payment for that loan at loan maturity
Marketing Assistance Loans
and Loan Deficiency Payments
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In lieu of securing a non-recourse marketing assistance loan from CCC, a
producer may be eligible for an LDP
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This payment equals the amount by which the applicable loan rate where
the commodity is stored exceeds the alternative loan repayment rate for
the respective commodity
 The LDP equals the LDP rate times the quantity of the commodity for
which the LDP is requested
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Market loan repayment and LDP provisions are intended to prevent
delivery of loan collateral to CCC
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The LDP program is available online
 Submit an application and set up payment options, among other
functions
Critical Changes in U.S. Policy
• Since 1985 there has been:
 An export “mindset”
 A movement away from “managing plenty” to
supporting income with government payments
• This view culminated in the 1996 Farm Program “FAIR Act”:
 Elimination of supply control instrument: set aside
program
 Replaced “price floors” with government payments
• Farm Policy Presentation
Exports, Exports, Exports
• For the last quarter century, exports have been
heralded—and continue to be by some—as crop
agriculture’s salvation
 Exports is the production safety valve that can
rebalance agricultural markets
 Exports will grow at accelerating rates
 The 2002 Farm Bill: Title III Trade
COOL (Country of Origin Labeling)
Basic Details of Mandatory COOL
Processed food is exempt as well as food service
Blended products may be difficult
Ground Beef for Example:
Economic cost analysis
COOL increases
cost to MC2
Justifying MC increase
Animal Production System – Segregation costs
COOL and U.S. Animal ID
What About Exports
1.6
1.4
US Domestic Demand
1.2
US Population
1
0.8
0.6
US Exports
*Adjusted for grain exported in meat
0.4
0.2
1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops
1979=1.0
What About Exports?
160,000
140,000
Thousand Metric Tons
US Exports
120,000
100,000
80,000
Developing Competitors’ Exports
60,000
40,000
20,000
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam
15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower,
Copra, and Palm Kernel
Exports and Govn Farm Policy
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U.S. agricultural policymakers have long relied on the world
marketplace to serve a diverse agenda–including management of the
domestic farm economy, promotion of geopolitical interests, and most
prominently, bolstering exports. The U.S. has aggressively pursued
agroexport growth since the 1970s, when the nation experienced its
first trade deficit of the century and the international community
suffered a widespread food crisis.
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Since the U.S. is the world's largest exporter of cereal grains, its
domestic and foreign agricultural policy has a significant impact on
the world market.
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U.S. agricultural policy is aggressively targeted at building new market
share and promoting international reliance on U.S. food exports.
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Import dependency undermines international goals (formulated at the
1974 UN World Food Conference and embodied in the International
Declaration of Human Rights) to encourage food self-reliance and
security from hunger.
Trade effects
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Consumer preference in targeted nations has shifted to U.S. cereals,
mainly wheat and corn, as imports of these surplus U.S. commodities
have flooded local markets. Indonesian consumers, for example, who
have long enjoyed access to abundant supplies of locally produced
rice, now prefer wheat noodles, partially as a result of cheap U.S.
wheat subsidized through GSM credit programs. Once nations become
dependent on foreign suppliers, following the loss of domestic
production and shifts in consumer preference, they become
increasingly vulnerable to international price and supply volatilities.
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Worldwide grain shortages in 1996—led by declines in U.S.
production—caused prices to double in U.S. and world markets. As a
result of ballooning cereal prices, the FAO estimated that low-incomefood-deficit countries (LIFDCs) experienced a 75 percent surge in their
food import bills between 1995-96. As the supplier of more than onethird of world wheat exports and of other food grains, the U.S. now
transfers its production fluctuations directly to the world market
following recent changes in U.S. stockholding policy
Trade effects continued
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Industrial country food importers, like Taiwan, can afford to ride
out extreme fluctuations in grain import prices. These cycles are
financially devastating, however, to LIC food importers, which
account for 80 percent of world wheat imports and 60 percent of
coarse grain (corn, barley, millet, oats, rye) imports.
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Despite U.S. pledges to provide food during emergency periods of
civil strife and crop disasters, the U.S. government’s four- millionton Food Security Commodity Reserve will have little stabilizing
effect in a world market that annually consumes 910 million tons of
food grains. Counter-cyclical food aid programs are also unlikely to
cushion the effect of future price surges. Once the main outlet for
Commodity Credit Corporation (CCC) stocks, food aid and credit
programs will become more expensive to operate as the U.S.
government will need to purchase grains directly from the
commercial market.
Implications from WTO
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WTO negotiations drastically limit the ability to set domestic farm policy in
this and other countries
• Although new GATT commitments will impose little restraint on subsidy
spending in the near future, new changes in U.S. federal stockholding
policies could potentially curtail some in-kind subsidies—such as food
aid. The U.S. government, which managed 26 million tons of grain
annually on average from 1978-90, completed long-term plans in 1996
to eliminate virtually all its stockholdings by terminating its supplymanagement and Farmer-Owned-Reserve programs.
• Food security and other social objectives often trump economic
considerations in the case of food and agriculture
Problems with Current U.S. Policy
Key Problems
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U.S. export-expansion policies have undermined foreign production
capacity, altered consumer preference, and consequently created
dependence on imports of wheat and other grains.
Domestic U.S. farm policies aggravate supply and price volatility for wheat
and other cereal crops.
Developing nations are pressured during trade negotiations to exchange
domestic food security policies for access to the world trade market and
debt-servicing arrangements.
The use of subsidies and trade negotiations to promote U.S. agroexport
growth has resulted in a dangerous dependency on imported food grains
among many countries while undermining the food security plans of several
U.S. trade partners.
The PL-480 program, EEP, and other export-promotion programs have
effectively undermined the capability of targeted nations to produce and
store native staples. Subsidized prices of conventional wheat and corn
imports regularly undercut the prices of domestically and regionally
produced varieties of staple grains.
Domestic Policy Impacts?
 Crop producers get subsidy support while real
subsidy beneficiaries (integrated livestock
producers and other users, sellers of inputs
and marketers of output) remain above the fray
 Tufts University estimated that the poultry and
hog industries alone saved $20 billion between
1997 and 2005 because corn and soybean
prices were below the cost of production
• Tyson saved $2.6 billion
• Smithfield saved $2.5 billion
Different Government Program
Constituents
Small Family Farmers
Constituent
Primary Concerns
•Limited-resource farmers
•Income support; credit; education
•Farming as primary occupation, low sales
•Price and income support; credit; education
(<$100,000)
•Farming as primary occupation, high sales
•Price and income support; price stability;
($100,000-$249,999)
credit; education; risk management
•Retirement
•Income support not tied to production;
higher land values
•Residential/lifestyle
•Freedom to pursue lifestyle
Different Government Program
Constituents
Larger Scale Farmers
Constituent
•Large farms (sales $250,000-$499,000)
•Very large farms (sales $500,000+)
Primary Concerns
•Higher and more stable prices; freedom
from government regulations; risk
management
Different Government Program
Constituents
Agribusiness
Constituent
•Nonfamily farms
Primary Concerns
•Higher and more stable prices; freedom
from government regulations; risk
management
•Processors
•Adequate high-quality supplies; low input
prices; high processed product prices; strong
export markets
•Throughput companies
•Adequate consistent-quality supplies; strong
export markets
Different Government Program
Constituents
Taxpayers
Constituent
Primary Concerns
•National
•Low program costs; low administrative costs
•Regional
•Higher local tax revenue from increased
incomes and higher land prices
Consumers
Constituent
•Consumers
Primary Concerns
•Low food prices, food safety; adequate
food supplies; variety of food types;
healthful food
Different Government Program
Constituents
Environmentalists
Constituent
•Conservationists
Primary Concerns
•Prevention of soil erosion
Preservation of farmland
•Water quality advocates
•Agricultural practices that limit migration of
agrichemicals from farms to surface and
ground water
•Wilderness advocates
•Maintenance of open space
•Animal rights advocates
•Humane treatment of animals
Different Government Program
Constituents
Rural Communities
Constituent
•Long-time residents
Primary Concerns
•Maintenance of traditional communities and
rural lifestyle; employment opportunities;
open space preservation; viability of rural
communities
•New residents
•Open space; odor control; rural landscapes
•Tourists
•Rural landscapes; recreational/heritage
activities
Different Government Program
Constituents
Social Welfare Advocates
Constituent
•Civil rights advocates
Primary Concerns
•Adequate economic opportunities for
minorities; opportunities for minority farmers
•Anti-poverty advocates
•Provision of minimum income levels for rural
residents
•Agrarians
•Maintenance of viable agriculture, small
scale agriculture
History of Government Support
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Price parity…….1930’s….1940’s……..1960’s.
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Price support loans……1960’s…..current
• (mostly storable commodities).
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Movement toward more market oriented supports.
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Opening of trade corridors……..globalization.
Objectives of Government Intervention
1. Support and raise farm incomes.
2. Protect or preserve small farms and to slow the rate of
exodus from rural areas.
3. Achieve self-sufficiency in food and fiber production or to
decrease dependence on imports.
4. Reduce price and income instability.
5. Hold down consumer costs and/or increase consumption of
food and fiber products.
Methods of Influencing Farm Prices
Supporting or Raising Farm Prices
1. Government acquisition or purchase
2. Price-support loans
3. Guaranteed or target prices from government payments
4. Direct and indirect export subsidies
5. Supply reduction schemes
6. Domestic food subsidies and/or distribution programs
7. Tariffs, variable levies, import quotas or other restrictions on
imports.
Methods of Influencing Farm Prices
Depress or hold down commodity prices
1. Price ceilings
2. Relax import controls
3. Release stocks from government controlled stocks
4. Embargoes on exports
Price Support Loans or Purchases
Price per unit
Consumer expenditure and government costs from government
purchases to maintain price above equilibrium.
D
S
P2
P1
Consumer
Expenditures
Government
Purchases
Q1
Q2
Quantity
Deficiency Payments
Price per unit
Consumer expenditure and government payments from supporting price
above equilibrium by making deficiency payments.
D
S
Government
Payments
P3
P2
P1
Consumer
Expenditures
Q1
Q2
Quantity
What is Important!
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Understand the different interest groups and constituents of government
intervention and their general concerns.
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Be able to discuss the primary objectives of government intervention, as it
relates to U.S. Ag. policy.
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Understand the common methods the government utilizes to influence
prices and income.
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Be able to describe the impacts to domestic production, consumption and
imports from a tariff, and compare/contrast the difference between a tariff
and a quota.
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Describe the different impacts related to price support from government
purchases (or support loans) and deficiency payments and the relative
change in consumer expenditures and government purchases (payments).