Chapter 20 The Effects of Government Farm Programs

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Chapter 20 The Effects of Government Farm
Programs

• Presented by
• Josh Morgan and
• Kristin Mackie

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Overview

• The objective of this chapter is to describe the
  major effects of government programs in
  agriculture as a whole
• Farm Programs and related expenditures are
  classified into several broad categories and the
  major winners and losers in each category are
  identified.

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Programs That Increase Product Prices To Farmers

• Product prices may be increased by decreasing
  supply or by increasing demand. (graph 20.1
  pg.305)
• Programs may reduce supply in a number of ways,
  depending on the specific nature of the
  particular program.
• Production controls reduce the supply of farm
  products, thereby increasing prices to farmers.
• Various domestic and foreign food assistance and
  nutrition programs increase the demand for farm
  products through government purchases, food
  subsidies, and export subsidies, thereby
  increasing product prices.

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Farm Bills

• The 1996 farm bill eliminated production controls
  for wheat, rice, cotton, feed grains, and sugar
• The 2002 farm bill dismantled the system of
  peanut marketing quotas, and in October 2004 the
  tobacco program was eliminated.
• The supply of farm products is also reduced by
  restrictions on imports of price-supported
  products, which were imposed to prevent consumers
  from consuming lower-priced imported products
• The results is to reduce supply and to increase
  product prices to farmers. Government purchases
  of farm products increase demand and product
  prices (graph 20.2 pg. 306)

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Food Assistance and Nutrition Programs

• Various food assistance and nutrition programs
  increase the demand for farm products through
  government purchases, food subsidies, and export
  subsidies which increases product prices.
• Price supports of milk are are implemented
  through government purchases of manufactured milk
  products.
• Food stamps, school lunches, and other assistance
  programs increase the demand for farm products by
  subsidizing food purchases.
• A wide range of domestic and foreign aid programs
  continue to be important in maintaining the
  demand for U.S agricultural products.

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International Agreements

• International grain agreements for five and four
  year periods (made with China and Russia) were
  designed to stabilize prices and to increase
  overall demand for U.S grain.
• The agreements specified a range of grain exports
  to these nations each year at market prices.
• The agreements may, increase the demand for U.S.
  farm products to some extent.

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Programs that reduce prices

• Government subsidies for agricultural credit and
  electric power, conservation of land and water
  resources (including flood control, irrigation,
  and land reclamation),and research and extension
  services reduce farm production costs, increase
  output, and decrease produce prices. (graph 20.3
  pg. 307)
• Subsidized credit provided by FSA (Farm Service
  Agency), for example adds to total resources in
  agriculture by providing more credit than would
  be available at competitive market rates and
  terms
• Research and extension activities reduce per unit
  costs and increase total farm output.

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NRCS

• Natural Resource Conservation Services provides
  cost to farmers to carry out conservation and
  environmental practices and is also involved in
  the development of soil and water conservation
  programs.
• Subsidized soil conservation and research
  activities tend to increase production in the
  long run, whereas irrigation and floodwater
  control provide immediate increases in output.

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Department of Interior Water and Power Subsidies
in the West

• Irrigation is highly important to agricultural
  production in the West, and water is frequently
  priced to farmers below its value in
  nonagricultural uses.
• The farmers in the west receive a majority of
  their water supply through the Bureau of
  Reclamation.
• Irrigation systems also use artificially
  low-priced electricity produced by federally
  funded dams to pump groundwater for irrigation.
  Approximately 150,000 farms benefit from federal
  water projects The value of irrigation for a 160
  acre farm in CA, my be in excess of 100, 000

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Agricultural Production in the West

• Production in the west has been significantly
  increased through power and water subsidies.
• Without irrigated water CA would be relatively
  unimportant in agricultural production.
• CA is the leading agricultural state in the
  United States.
• The water and power subsidies in the west not
  only distort the geographical pattern of
  agricultural production within the U.S., but it
  also increases the scarcity of water for
  recreation and urban uses in the west.

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Net Effects Who Wins? Who Loses?

• Because some programs increase product prices
  received by farmers at the same time that other
  programs decrease prices, some of the
  expenditures are offsetting.
• Although 38 billion was spent on farm programs
  that increased farm product prices almost
  one-third as much was spent on programs that
  decreased farm product prices.

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Consumers and Taxpayers

• Because of farm programs (many comparable to the
  New Deal) prices of sugar, milk, fresh oranges,
  and a number of other products are higher then
  they would be without the programs.
• U.S. consumers pay for, and support these
  programs through higher prices on goods and
  through higher taxes.

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Owners of Specialized Resources

• Within the agricultural sector, owners of land,
  allotments, and other specialized resources are
  the biggest gainers from farm programs.
• In the case of the tobacco price support program,
  for example, the market value of the right to
  produce often exceeds 1,000 per acre, per year.
• Some gains are achieved through political efforts
  which consists of lobbying and political
  contributions.
• Normally the owners of land and producion rights
  at any given time are not the same people who
  received the windfalls when the programs were
  initiated

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Farmers as Producers vs. Farmers as Asset Owners

• The distribution of gains between producers and
  asset owners depends on how quickly the expected
  benefits or costs of program changes are
  incorporated into asset values.
• Many owners of land and other farm assets are not
  farmers.

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Labor vs. Other Specialized Resources

• Farmers as owners of specialized skills benefit
  from programs to assist agriculture.
• The gains from government programs that reduce
  input prices or increase product prices are
  incorporated into higher market prices of land
  and other assets if property rights are well
  defined and assets can be bought and sold. In
  such cases the farmers wealth increases as a
  result of the increases in asset values.
• Asset value is based on the expected contribution
  during the contracted time period. The asset
  owner receives an increased return each year as
  long as product price remains higher.

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Farm Operators and Farm Labor

• Price supports and subsidized inputs provide
  incentives for increased agricultural production,
  but competition for labor and entrepreneurial
  skills in other sectors tends to equate returns
  throughout the labor market.
• The supply of labor in agriculture is highly
  responsive to changes in wage rates
• Changes in product prices and the demand for
  labor result mainly in changes in farm employment
  rather than in changes in returns to farm labor.
  (figure 20-4 pg. 311)

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The effects of price support programs on the
market for farm labor

• Some farm programs increase the demand for labor
  whereas others decrease the demand for labor.
• An increase in product price, all other things
  remaining constant, will increase the quantity of
  output supplied, which will (typically)increase
  the demand for labor.
• Subsidized credit and tax preferences in
  agriculture reduce the cost of capital relative
  to labor to labor and increase the rate of
  substitution of capital for labor, thereby
  reducing the demand for farm labor.

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Price Support Programs

• The effects of subsidized credit, conservation,
  research, and education programs that reduce cost
  and increase supply vary widely between farm
  operators.
• Programs that increase technology, innovators
  gain in the short run, whereas those who adopt
  the technology later benefit little because of
  the increases in output and reduction in product
  prices.

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Government Employees

• Government employees gain from farm programs the
  of USDA employees increased more than four
  times from 1929 to 1999 even as the of farms
  and farmers decreased at a dramatic rate.
• USDA activities expanded into rural development,
  rural recreation, nutrition, and other areas

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Resource Allocation

• Resources are allocated to various uses on the
  basis of market prices
• Land when allocated by market forces, is based on
  the expected returns. Land has the highest
  expected use in agriculture because it is used
  for farming and housing
• Prior to the 1996 farm bill production control
  programs in agriculture diverted some of the
  worlds most productive farmland into
  nonproductive uses through various programs

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Policy Implications

• The largest 8 of farms received 47 of payments
  to farmers in government farm programs.
• Farm programs are necessary to stabilize
  agricultural markets, stabilization for farm
  programs is weak, much of the instability in the
  U.S. agriculture since WWII has been caused by
  government policies including fiscal policies,
  subsidized credit, and trade restrictions.

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Protectionism and the Deregulation of U.S.
Agriculture

• Programs like NAFTA and WTO were created to
  reduce and eliminate import restrictions.
• The FAIR act provided farmers with greater
  flexibility in making planting decisions than
  under previous farm bills.
• The 1996 and 2002 farm bills continue the long
  standing practices of transferring income from
  the non farm sector to the farm sector or the
  U.S. economy

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THE END