Agricultural policy objectives The farm problem - PowerPoint PPT Presentation

About This Presentation
Title:

Agricultural policy objectives The farm problem

Description:

To examine stated objectives of government intervention in agricultural markets ... input substitution also encourage farm amalgamation and lower the demand for ... – PowerPoint PPT presentation

Number of Views:86
Avg rating:3.0/5.0
Slides: 16
Provided by: alanma4
Category:

less

Transcript and Presenter's Notes

Title: Agricultural policy objectives The farm problem


1
Agricultural policy objectivesThe farm problem
  • Economics of Food Markets
  • Lecture 3
  • Alan Matthews

2
Lecture objectives
  • To examine stated objectives of government
    intervention in agricultural markets
  • To review explanations why farm incomes may have
    a tendency to lag behind non-farm incomes
  • To discuss alternative patterns of agricultural
    adjustment

3
Extensive government intervention in agri-food
markets
  • Most countries adopt an active agricultural
    policy. Evidence that policy addresses
    significant and widespread socio-economic issues.
  • High share of EU spending on agriculture
  • High levels of border protection
  • High transfers from consumers and taxpayers to
    agriculture (OECD PSE estimates)

4
Rationale for agricultural policy
  • food security
  • instability of agricultural markets
  • lagging farm incomes
  • maintenance of the rural population/rural
    development
  • environmental and landscape benefits - the
    multifunctionality of agriculture

5
Food security
  • Market-determined size of agricultural sector may
    mean relying on food imports
  • Food security often equated with food
    self-sufficiency
  • What is risk to food supply in developed
    countries?
  • Sources of risk (war, disease, climate)
  • Input markets may be more vulnerable than product
    markets
  • Risk a function of diversification of import
    sources
  • Huge overproduction in relation to subsistence
    needs
  • Self-sufficiency not necessarily the most
    efficient response (stocks, supply contracts)

6
Objectives of the Common Agricultural Policy
  • Article 39 objectives
  • to increase agricultural productivity
  • to ensure a fair standard of living for the
    agricultural community
  • to stabilise markets
  • to ensure the availability of supplies
  • to ensure that supplies reach consumers at
    reasonable prices
  • Generally, income objectives dominate farm policy
    objectives in developed countries, although
    rarely defined very explicitly

7
Sources of price instability
P
P
Q
Q
8
The cobweb model of price instability- where
supply is a function of lagged price
9
..but some problems
  • Even cycles require equal supply and demand
    elasticities
  • Naïve expectations mechanism
  • Observed cycles tend to be twice as long as those
    predicted by model
  • Note that price and output instability offset
    each other from the point of view of revenue or
    income instability
  • but basic insight remains valid

10
Declining terms of trade
  • Demand grows slowly because of slow population
    growth and Engels Law
  • Supply grows more rapidly due to technological
    change
  • Treadmill effect
  • Rising living standards in nonfarm sectors

11
Why does farm labour market not return to
equilibrium?
  • With downward pressure on farm incomes, we expect
    outmigration from farming to restore relative
    incomes why does this not happen?
  • love of farming nonpecuniary considerations
  • Market imperfections barriers to movement
  • Human capital explanation markets do work
  • Fixed asset theory resources trapped in
    agriculture

12
Illustration fixed asset theory
Supply of labour
P
Acquisition cost
Demand for labour (MVP)1
Demand for labour (MVP)2
Salvage value
Labour supply should fall from Q1 to Q2 as a
result of the fall in the demand for labour, but
decision to exit is made with respect to the
salvage price, so labour Q1Q2 is trapped in the
sector
Q3
Q2
Q1
Q
13
Agricultural adjustment and the farm problem
  • price instability in a supply-demand framework
    caused by low price elasticities of supply and
    demand
  • agricultural adjustment in a supply-demand
    framework the treadmill of technical change
    together with Engels Law drives food prices down
    and leaves farms unviable
  • technological change and input substitution also
    encourage farm amalgamation and lower the demand
    for labour in agriculture
  • low farm incomes result from sticky labour
    supply response
  • barriers to exit
  • neoclassical human capital explanation
  • fixed asset theory

14
The pattern of agricultural adjustment
  • Changes in resource use reduction in labour
    input accompanied by intensification through
    greater use of variable and capital inputs
  • Changes in output mix farm diversification into
    niche, exotic or higher value added activities
  • Increased size of farm business and increased
    specialisation
  • Reduction in farming activity either through
    part-time farming and pluriactivity or through
    retirement and exit
  • growing concentration of production and output on
    larger farms accompanied by the growing
    marginalisation of small-scale farming, leading
    to increased differentiation in farming
  • Differences in survival strategies depends on the
    resource base of the family farm and family
    circumstances.

15
Recommended readings
  • Gardner Farm Problem
  • See also Matthews 2003 in Lecture1
Write a Comment
User Comments (0)
About PowerShow.com