Final
Chapter 11: Agricultural Price and Income Policies
Federal government price and income program in agriculture have been existence in one form or
another since 1929. The culture have been changed, revise, and extended from time to time and
continue to be important to most agricultural producers of grains, cotton, rice, soybeans, tobacco,
peanuts, sheep and lambs, milk, and sugar.
Public policy is as a specific type of group action designed to achieve certain aspiration held by
members of society. The policy must be consistent with many of the goals of society, the most basic of
which is the quality of life. Quality of life includes such general goals as peace, security, freedom, and
justice. When we talk about the security, it includes economic, political, and social stability. With the price
level increasing at a 2 to 4 percent annual rate during the 1990’s, there still is concern over the loss of
economic security due to the decline in the purchasing power of the dollar. As far as political stability in
the United States is concerned, we are fortunate that our government system has stability built into it
with the sharing power between the executive, legislative, and judicial branched of government.
Value of farm people
Until recently, agricultural fundamentalism has an important impact on agricultural policy. These
agrarian values are based on “laissez-faire” economics, Jeffersonian Democracy, and the French
physiocratics philosophy. These basic ideas were summarized by Paarlberg in what he called the
Agricultural Creed. The creed’s articles are:
1)
Farmers are good citizens, and a high percentage of our population should be on
farms.
2)
Farming is not only a business, but a way of life.
3)
Farming should be a family enterprise.
4)
The land should be owned by the person who tills it.
5)
It is good to make two blades of grass grow where one grew before.
6)
Anyone who wants to farm should be free to do so.
7)
A farmer should be his/her own boss.
It is indeed true that a high proportion of farmers are good citizens, but it is also true that a high
proportion of urban people are good citizens. One would be hard pressed to say that one group was
better than others and thus support the statement that a high percentage of our population should be on
farms. Most agricultural producers own their own farms, but it has been necessary for farm size to
increase in order to maintain a competitive position. This expansion in farm size has been done to a large
extent through the purchasing of land on credit. Agriculture, like any other business, has found wise use
of credit to be necessity.
Over the years, government policies have provides opportunities for people to farm. Since
colonial times, the government has provided incentive to encourage land settlement throughout the
United States. The major public policy was the Homestead Act of 1862.
At the present, however, anyone desiring to farm has a limited opportunity to do so because of
the capital requirements that are necessary to obtain an economic-sized farm. It is almost essential to
either inherit a family farm or have one’s relations give the land or provide some substantial financial
assistance.
Parity
Because of past problems of low incomes in agriculture, all major agricultural legislation has
attempted to promote parity in some way. Some of the ways have been in terms of parity prices, parity
incomes, or a fair return on factors of production used in agriculture.
Parity means equality of value. It means prices that will give a unit of an agricultural commodity
the same purchasing power as that unit has in some previous period. However, the definition of the
parity concept causes problems because it does not take into account changes in demand, supply, and
resource productivity over time. To allow for these changes and for product substitution, the calculation
of parity prices was modified in the Agricultural Act of 1948. This act changed the base period for
calculating parity prices for individual farm products to the most recent 120-month moving average.
Equality of Bargaining Power
The central theme of the National Farmers Organization (NFO) formed in 1955 in Iowa is bargaining
power of agriculture. The NFO believes that agricultural producers and being taken advantage of by the
large processors, wholesalers, and retailers in the food and fiber system.
Farm Problems
Overcapacity, price instability, and poverty are the primary agricultural problems. Agricultural
policies have been enacted to deal with these problems. These policies retired land from production, or
reduced the amount of product that could be produced and sold under marketing quotas. The Food,
Agriculture, Conservation, and Trade Act of 1990 were a policy that used direct deficiency payments to
producers with provisions for some acreage set-aside and a land retirement program. The Federal
Agricultural Improvement and Reform (FAIR) Act adopted in 1996 has discontinued large price and
deficiency payment to ease the burden of adjusting to reduced price protection in the new farm program.
Farm Programs through the Year
Two –Price Plans
Two –price programs are designed to take advantage of the different elasticity of demand in the
domestic and foreign markets so as to increase total revenue to agricultural producers. The relatively
inelastic domestic demand and the relatively more elastic demand in the foreign market can be used to
the producers’ advantage. The price elasticity of demand in the foreign market is more elastic for most
agricultural products because other countries’ products are substitutes for many US agricultural exports.
Figure 1: Economic Effect of Two-Price Plans
Domestic Market
Foreign Market
$/bu
$/bu
4.00
3.50
3.00
2.00
D
D
0
500
800
Quality of Wheat per year (mil. Bu)
0
.7
.1
0
Quality of Wheat per year (mil. Bu)
From above graph, suppose US has 1.5 million bushels of wheat to sell. Then, because of the restriction
of domestic marketing to 500 million bushels, a $4.00 per bushels prices id attained for a total domestic
revenue of $2.00 billion. If the other 1 billion bushels is sold at the foreign market price of $3.00 per
bushels, total foreign revenues of $3 billion is attainable. Total revenue from both markets is $5 billion. If
we were to market more wheat in the domestic market, domestic revenues would be $1.6 billion.
Have Agricultural Programs Increased Agriculture Income?
Income benefits are capitalized into land value and therefore become production costs; higher prices for
agricultural commodities mean that agricultural land produces greater income. Hence, people bid up its
price because of its increased profitability. In long run, benefits accrue to present landowners rather than
to later generations of producers. With greater reliance on the export market for wheat, feed grains, and
soybeans, farm incomes are subjected to wider swings because of fluctuating demand in the foreign
market. Because of the increasing share of exports to total farms products sales, the elasticity of demand
for farm products has been increasing over the past 25 years. The individual short-run price elasticity of
wheat, feed grains, and soybeans are less than 0.5, whereas their long-term elasticity are approaching or
slightly exceed 1.0. The implication of this situation is that permanent supply controls will noe raise real
farm receipts markedly in the long run.
Agricultural programs have had only short-run impacts on increasing farm incomes. In the longer
run, these income benefits are capitalized into land values. Thus, policy benefits in the long run are
captured by present landowners.
The process of policy development is a decision-making process. The steps involved are (1)
recognizing and defining the problem, (2) outlining the issues, (3) developing alternative solutions, (4)
choosing a policy solution,(5) putting the policy into effects; and (6) appraising its effectiveness.
Chapter12: Marketing Agricultural Commodities
Marketing is concerned with those productive activities that add time, place, and form utility to
agricultural commodities. The existence of marketing is a result of specialization and trade in the
economic system. A market need not to be a place. A market consists of buyers and sellers with facilities
to communicate with each other. A well-organized market enhances the quality of communication
between buyers and sellers so market prices can be determined. These prices, in turn, guide producers’
production decisions and consumers’ purchasing decisions.
Efficiency is highly regarded in our society. Market efficiency can be measured by comparing the
value of output to the value of inputs. Three approaches to the study of marketing are the functional,
institutional, and market structure. The functional approach analyzes marketing activities such as the
exchange, physical, and facilitating functions that must be performed. The institutional approach
examines the organizations or people involved in marketing. The market structure approach stresses the
nature of competition in markets.
A marketing margin is the difference between the price consumer pay for the final products and
the price received by producers for the raw products. Margins vary widely among agricultural
commodities because of such factors as the amount of processing that is necessary, perishability of the
product, bulkiness of the product, and the seasonal nature of production. Large marketing margins may
not mean that marketers are taking financial advantage of producers and consumers.
Future markets determine prices for many agricultural commodities. They can be used to forward
price commodities through hedging operations. Other marketing alternatives are available through the
use of put and call options. Marketing orders and agreements were established in the 1930s to even out
the flow of products on the market. The purpose of orderly marketing is to increase producers’ net prices,
and, therefore, their incomes.
Rice model
The purpose of creating rice model is to study the effects of factors resulting in the change of
demand and supply in order to be used as a tool to analyze tendency and estimate production, marketing
and price of rice in the future. Simultaneous equations can be used to accurately design production plan
and find suitable markets.
The study of rice model reveals that income per capita, prices of substitute products and the
retailed price of rice are factors that significantly affect the demand of domestic rice consumption. The
flexible values of demand over those factors are -0.26, 0.11 and -0.06% consecutively. This means that
when people have more income, they eat less rice and turn to other kinds of food. The substitute
product in this case is wheat due to the change of eating habits and the increasing use of wheat in our
daily life. The retailed price of rice affects the consumption of rice the least because rice is essential to
daily consumption.
As for export demand of Thai rice, factors that affect the export of Thai rice are the quantity of
rice production of trade partners and competitors, population income in those countries and export price
of Thai rice. The flexible values are -1.49, 0.67 and -0.24 consecutively. This means that when the rice
production of trade partners/competitors increases, Thai rice export decreases. On the other hands,
when rice production of trade partners increases, the import of rice decreases in those countries. As for
our competitors, when their rice production increases, their export increases as well. In terms of
population income, when the population income of our trade partners increases, the import of Thai rice
also increases, especially high-quality rice.
competitiveness
of
the
country
In terms of price, when export price increases,
decreases;
hence,
the
decrease
of
export.
Factors that significantly affect the supply are the sale price of rice, the price of fertilizers, water
quantity available from irrigation dams, technology, and years of unusual draught. The flexible values of
supply over these factors are 0.15, -0.16, 0.10, 0.01 and -0.10 consecutively. This means that when the
rice price of the previous year increased, farmers will increase their production of the current
year. However, when the price of fertilizers increases, rice production will decrease. Enough water
supplies from irrigation dams will increase that year’s production. Technology development has positive
effect on rice supply. However, draught years, delayed rainfall or unusually small amount of rainfall
result in decreasing rice production. The prediction of production, consumption, export and price of rice
and the estimation of the effect of strong baht can be done using this model.
Farmers’ Poverty
The study shows that in 2007 Thailand has 1,388 million impoverished farmer families and 1,491
million families who were managed to step out of poverty. Most poor families were growing rice for
household consumption. There are normally 4 people in a family and they own around 14 rai of land per
household. These families depend on rain for their cultivation. Only 54% of families hold legal rights
over the land. Only 4% of heads of the families furthered their study beyond the compulsory education.
Impoverished families earn 12,835 baht/head/year with total expenses of 17,574 baht/head/year. The
net agricultural income is 1,520 baht/head/year and other income of 6,192 baht/head/year. These
families earn less than their total expenses, so they barely have cash in hand. Families who got out of
poverty generally earn 3-7 times more than the impoverished ones. They even have cash of around
1,314
-
17,308
baht/head/year
remaining
before
paying
debts.
Impoverished farmers still depend on income from out-of-farm job. They earn 6 times more than
working in their farm. They also spend a lot on food outside their farm and their expenses are for
household goods. Impoverished farmers have lower returns from their land and manpower than those
who got out of poverty, but they have more security in terms of food. 80% of impoverished farmers are
in debt. An average debt per household is 42,314 baht or 10,003 baht per head. 17% of them cannot
pay back their debts on time. Their unpaid debts are around 27% of the total debts. Those who got out
of poverty have twice as much debt than the impoverished ones. Most loans are for non-agricultural
activities.
In the long run, neither group of farmers will have problem in paying their loans since both groups
have more assets than debts. However, short-term or medium-term loans may prove to be the problem.
Factors that affect the income of both groups are the plot size, size of irrigation area, expenses on plants,
animals, fertilizers, pesticides, and petrol, operating costs, manpower, the number of trained family
members who apply new knowledge to farming, the size of farm and the size of loans. Most factors
relate directly to family income except expenses on fertilizers, pesticides and petrol. The number of
trained family members relates to the family income the most. The types of farms that generate the
most income among impoverished group are dairy farms, and brackish-water animal farms. Cattle and
fruit
orchards
generate
most
income
for
the
group
that
got
out
of
poverty.
In conclusion, providing new knowledge for farmers and encourage them to apply that knowledge in
their farms are of great importance. The government should provide irrigation management, and water
sources development.
Local authorities should be sufficiently funded to effectively handle water
problems. More budgets should be allocated for agricultural equipment and self-sufficiency theory should
be implemented. Less dependence on out-of-farm products and more savings are also crucial factors.