Chapter 32 Farm Policy

Chapter 32Farm PolicyChapter OutlineFARM PRICES SINCE 1950PRICE VARIATION AS A JUSTIFICATION FOR GOVERNMENT INTERVENTIONCONSUMER AND PRODUCER SURPLUS ANALYSIS OF PRICE FLOORSPRICE SUPPORT MECHANISMS AND THEIR HISTORYFarm Prices Since 1950Raw food commodity prices have increased much more slowly than overall inflation.From 1982 to 1998 overall inflation was 68%.Most food commodities cost less in 2000 than in 1982 in nominal terms (40% less in real terms.)Hog prices in 2000 yielded less than 40% of their 1982 levels. Price Variability as the Justification for Government InterventionArgument for intervention on this groundHighly variable prices create an unstable income for farmers reducing their interest in farming.Argument against intervention on this groundUsing options markets and crop insurance farmers can dampen the impact of this variability. Price FloorsA Price Floor (a price below which a commodity may not sell) is set to protect farmers from prices that go “too low.”Farm Markets Without SubsidiesPSDQ/tP*Q*ACHValue to the Consumer: 0ACQ*Consumers Pay Producers: OP*CQ*The Variable Cost to Producers: OHCQ*Consumer Surplus: P*ACProducer Surplus: HP*CPrice FloorsPSDQ/tP*Q*ACHGPrice FloorBPfloorQDValue to the Consumer: 0ABQDConsumers Pay Producers: OPfloorBQDThe Variable Cost to Producers: OHGQDConsumer Surplus: PfloorABProducer Surplus: HPfloorBGDWLBECGovernment Purchase of Excess GoodsPSDQ/tPrice FloorP*Q*ABCEFHGIJPfloorQSQDValue to the Consumer: OABQDConsumers Pay Producers: OPfloorBQDGovernment Pays Producers:QDBEQsThe Variable Cost to Producers: OHEQSConsumer Surplus: PfloorABProducer Surplus: HPfloorEDWLECFPSDQ/tPrice FloorP*Q*ABCEFHGIJPfloorQSQDValue to the Consumer: OAFQSConsumers Pay Producers: OJFQSGovernment Pays Producers:JPfloorEFThe Variable Cost to Producers: OHEQSConsumer Surplus: JAFProducer Surplus: HPfloorEDWLECFGovernment Lowers the Price to ConsumersVariable FloorsThe Eau Claire Rule: the wholesale price floor on milk is set as a function of the distance between a given community and Eau Claire, Wisconsin.This subsidizes milk production on the coasts of the United States.What Would Happen Without Price FloorsPrices would fall. Production would fall.Farmers would leave the industry until the price of commodities reached a level consistent with zero economic profit (normal profit).History of Price Supports: Buying programsBegan in the 1930s.Reached a peak in the 1980s.The federal government purchased vast quantities of corn, soybeans, milk to be stored. The milk was powdered or turned into blocks of American Cheese.The cheese given away to the poor in the 1982 recession (which was the origin of the phrase “government cheese”.) History of Price Supports: Output RestrictionsThe buying programs were ended in the 1980s and were replaced with programs where the government offered higher prices for limited production.The programspurchased dairy herds and slaughtered them.Ordered grain farmers to set aside plots if they wanted the subsidized price.