Agricultural policy objectives The farm problem

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Agricultural policy objectivesThe farm problem

• Economics of Food Markets
• Lecture 3
• Alan Matthews

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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)

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Rationale for agricultural policy

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

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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

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Sources of price instability
P
P
Q
Q
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The cobweb model of price instability
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Declining terms of trade

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

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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

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Illustration fixed asset theory
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Acquisition cost
Demand for labour (MVP)1
Demand for labour (MVP)2
Salvage value
Q3
Q2
Q1
Q
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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

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The pattern of agricultural adjustment

• Changes in resource use reduction in labour
  input accompanied by intensifcation in use of
  land through greater use of variable and capital
  inputs
• Increased size of farm business and increased
  specialisation
• 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 depending on
  the resource base of the family farm and family
  circumstances.