Agriculture:
Farmers’ Problems, Government Policies, and
Unintended Effects
Del Mar College
John Daly
©2002 South-Western Publishing, A Division of Thomson Learning
Agriculture & High Productivity
• Increased productivity in the agricultural
sector has pushed the supply curve of farm
products rightward
• Increased productivity results in lower
prices for consumers and lower revenues for
farmers.
High Productivity Doesn’t Always
Benefit Farmers as a Group
Owing to increased
agricultural
productivity, the
supply curve shifts
rightward. As a
result, equilibrium
price falls and
equilibrium
quantity rises. The
demand curve
between E1 and E2
is inelastic so total
revenue is lower at
E2 than at E1.
Agriculture and Income Elasticity
• Recall that income elasticity of demand measures
the responsiveness of a change in quantity
demanded to changes in income.
• The combination of income inelasticity of demand
for food and high agricultural productivity leads to
the demand for food increasing and the supply of
food increasing even more.
• Supply increases that outstrip demand increases
lead to falling prices.
High Productivity and Income
Inelasticity Together
Both the demand
for and supply of
food have been
increasing for most
of this century.
High productivity
in the agriculture
sector, relative to
income inelasticity
for food, has meant
that supply has
increased by more
than demand. As a
result, prices have
fallen.
Agriculture and Price Inelasticity
• If market demand is inelastic and supply is subject to
severe shifts from season to season, price changes are
likely to be large and total revenue is likely to be highly
volatile.
• The demand for many agricultural products is inelastic.
• The supply of many food products changes from one
year to the next because it depends not only on
technological and productivity changes but also on the
weather.
• The instability in price and total revenue increases the
uncertainties of farming.
Large Price Changes and Volatile
Total
Revenue
If demand is
inelastic and supply
is subject to severe
changes from
season to season,
price changes will
be large and total
revenue will be
volatile. Suppose
the supply curve
shifts from SB to
SG. As a result,
price falls from PB
to PG, and total
revenue falls from
PB x QB to PG x QG.
Price Variability and Futures
Contracts
• Farm incomes were at the mercy of annual
fluctuations in farm prices. This is why
some of the government’s agricultural
programs were started.
• Futures Contract: An obligation to make
or take delivery of a specified quantity of a
good at a particular time in the future at a
price agreed on when the contract is signed.
The Changing Farm Picture
• There are fewer farms
in this country today
than there were in the
first half of the
twentieth century.
• Farm employment has
declined from 10
million in the late
1940s to 2.8 million
today.
Q&A
•
•
Explain how a farmer can protect herself against
adverse price swings.
An individual farmer could be in any of the following
situations:
a) Bad weather for all farmers including himself.
b) Good weather for all farmers including himself
c) Bad weather for all other farmers but good weather for
himself.
•
Which situation would the farmer prefer and why?
For farmers as a group when would increased
productivity lead to higher revenue?
Agricultural Polices Before the
FAIR Act
• Farmers had not been able to control supply by
themselves, and thereby, couldn’t control price.
• Price support is a price floor, a government
guaranteed minimum price.
• The effects of price supports are: a surplus, fewer
exchanges, higher prices paid by consumers of
crop X, and government purchase and storage of
the surplus
Effects of an Agricultural Price
Support
At a price support of $6
per bushel, consumers of
crop X pay higher prices,
and a surplus results.
Fewer bushels of crop X
are bought by private
citizens, and the
government buys and
stores the surplus (for
which taxpayers pay)
Restricting Supply
• Prices of agricultural products can be increased
directly by price supports or indirectly by
restricting supply.
• Acreage Allotment Program: restricts output by
limiting the number of farm acres that can be used
to produce a particular crop.
• Marketing Quota System: sets a limit on the
quantity of a product that a farmer is allowed to
bring to market.
• Soil Bank System: farmers were paid to take part
of their land out of cultivation.
The Objective of SupplyRestricting Agricultural Policies
The objective of
all varieties of
supply –
restricting
agricultural
policies is to
shift the supply
curve leftward
and raise price.
Target Prices and Deficiency
Payments
• Target Price: a guaranteed price; if the
market price is below the target price, the
farmer receives a deficiency payment equal
to the difference between the market price
and the target price.
• Deficiency payment = target price – market
price
With target prices, the
government guarantees
farmers a price per unit of
product produced. For
example, if government sets
the target price of crop X at
$6 per bushel, farmers
produce Q1 bushels. When
this quantity is placed in the
market, consumers will only
pay $2 per bushel. The
difference between the $6
target price and the $2 price
consumers pay is the
deficiency payment per
bushel that government pays
farmers.
The Target Price
System
Q&A
• If the target price for a bushel of wheat is
$7, what will the per-unit deficiency
payment equal?
• Can agricultural policies that are designed
to benefit farmers who rent their land
benefit the landowners instead? Explain
your answer.
Federal Agriculture Improvement
and Reform Act of 1996 (FAIR)
• Instead of subsidizing or restricting the
supply of crops, the government simply
gives each farmer a check and lets him
grow anything he wants or nothing at all.
• The FAIR Act repealed target prices and
deficiency payments and supply-restricting
policies on such crops as wheat, feed grains,
cotton, and rice.
Production Flexibility Contract
Payments
• Production Flexibility Contract Payments:
direct payments to farmers who produced
certain crops in any year fr9om 1991 to
1995.
• Payment=Contract Acreage x 0.85 x Yield
per acre x Crop Payment Rate
FAIR Act Facts
• The FAIR Act allows farmers to react to
market fundamentals by allowing farmers to
grow any crop without loss of support.
• The costs of the program stabilized federal
farm spending instead of farm income.
• Nonrecourse Commodity Loans is a
particular type of price support.
What the FAIR Act Doesn’t Do
• It does not move agriculture from a system of
price supports , acreage restrictions to a
completely free market.
• Price supports remain in various forms
• Import restrictions remain on certain products.
• Doesn’t prevent Congress from establishing
emergency assistance for farmers when crop
prices are low, droughts are severe, and so on.
Q&A
• A farmer’s contract acreage is 1,000 acres,
yield per acre is 100 bushels of crop, and
the crop payment is 28¢ a bushel. What is
this farmer’s production flexibility contract
payment?
• It’s been said of the FAIR Act that farmer
now have much greater flexibility to make
planting decisions. Why is this so?