Effects of Agricultural Commodity Programs

1
Effects of Agricultural Commodity Programs

• Kristin Mackie
• Lane Mayberry

2
Overview

• This chapter summarizes the direct and indirect
  effects of various commodity programs, and shows
  the benefits that tend to be dissipated over
  time. It also describes the major beneficiaries
  of these programs.

3
Prices

• Farm commodity prices for various goods has been
  supported through a number of different programs
  since the 1930s. Prices also have been
  supported through direct purchases of products
  and through the use of non recourse loans, target
  prices, trade restrictions.

4
Short run beneficiaries

• Several different groups receive short run
  benefits from farm price-support programs, but
  the amount of the benefit varies widely.
• For ADM, a large agri-business firm manufactures
  corn based sweeteners and reaps huge benefits
  from the sugar program, the peanut program in
  contrast raises the cost to manufacturers of
  peanut candy.

5
Owners of specialized resources

• Owners of land, allotments, and other specialized
  resources are the major gainers from the farm
  programs that increase product price.
• The first generation of owners receive most of
  the benefits.

6
Procedures and Direct Payments

• Producers who have more to sell stand to gain
  more from farm price supports. In contrast,
  small farmers are affected relatively little when
  product prices are increased because the benefits
  are tied to the volume of sales.
• Recent farm bills have included limits on the
  amount of government payments receive per person
  but legal loopholes limited their effectiveness.
• 1985 farm bill was also exempt from payment
  ceilings, and 112 dairy producers in CA, FL,
  ID,TX, and AZ received payments of more than one
  million each under the program.
• One third of U.S. farms produce app. 90 of total
  agricultural output the output determines the
  effectivenes

7
Loans and payments

• Price supports and supply controls were
  eliminated for most farm commodities under the
  1996 farm bill
• Under the 2002, farm bill, there is a 40,000 per
  person annual limit for direct payments. In some
  cases individual farmers can receive up to
  80,000 per year on separate farming operations.

8
Mandatory supply control programs

• They are alternatives to voluntary price support
  programs.
• After the mandatory supply control program is
  approved in the required producer referendum, the
  individual producer has no choice as to whether
  or not to participate.
• Tobacco was the only remaining example of a
  mandatory supply control program in effect in the
  U.S. prior to its elimination in 2004.

9
Farmers as producers

• Farmers as producers gain little from farm
  programs
• The benefits from price supports, subsidized
  inputs, tax preferences, and so on are largely
  offset by increased costs of specialized inputs.
  
• The conclusion is that higher product prices and
  lower input prices generally have little or no
  effect on farmers as producers except for these
  short run transitional gains.
• Farm programs have little effect on the returns
  of farm labor because labor resources in general
  are not very specialized in agriculture

10
Labor vs. other specialized resources

• Agricultural farm labor is not highly
  specialized.
• An example of specialized resources would be corn
  prices increasing and land prices directly
  increasing to reflect the increase future returns
  to land, only if there is a market in which land
  prices are determined by expected future supply
  and demand conditions.

11
Farm operators and farm labor

• Farm programs have little effect on the long-term
  profitability of agriculture.
• When labor can flow readily between agriculture
  and the rest of the economy, the long-run return
  to labor and management in agriculture is
  determined mainly by opportunity cost. (By the
  alternatives that farm laborers have for
  nonagricultural uses of their resources.)

12
Political Bureaucracy

• Politicians and the political bureaucracy also
  benefit from price support programs
• Farm state legislators use farm programs to
  obtain and maintain political support
• Farm programs are also important to the
  bureaucracies that administer and evaluate the
  effects of these programs.

13
The Direct and Indirect effects of price support
programs

• The direct effect of price-support programs is to
  increase producer prices of farm products.
• An important indirect effect previously discussed
  is the increase in production costs as the higher
  product prices are capitalized into input prices.

14
Effects on market process

• Farm price support programs delay economic
  adjustments.
• Market forces constantly tend to cause resources
  to be deployed from less productive to more
  productive firms.
• Market prices provide correct signals to
  producers and consumers only when prices are free
  to change in response to changing economic
  conditions
• The higher prices resulting from price support
  programs make it more difficult for consumers,
  especially those in lower income groups, to buy
  food.

15
Effect on market stability

• Price supports and marketing orders are often
  justified as measures to stabilize markets.
• The governments manipulates short run policies
  hoping to benefit themselves or their political
  party.
• Every four years or so, Congress enacts a new
  farm bill. The periodic swings from relatively
  high to relatively low price supports tend to
  create instability in U.S. agriculture.
• The price support programs in general is to
  increase farm incomes rather than to stabilize
  markets.

16
Short Run and Long Run effects

• In the short run, an effective price support
  program provides windfall gains, primarily to
  owners of land and other specialized resources at
  the time the program is instituted.
• Competition causes prices of these inputs to
  increase until expected rates of return in
  agriculture are no higher than those in other
  sectors.
• Farm labor incomes with or without price supports
  are determined largely by general economic
  conditions and non-farm employment opportunities.
• The longer the length of the run, moreover, the
  greater this effect is likely to be.

17
Substitution in Consumption and Production

• Supply and demand become more elastic the longer
  the adjustment period.
• The longer a price support program remains in
  effect, the greater the pressures from competing
  products.
• The cotton price support program of the 1930s
  provided a raise for the development of
  substitutes because of the raised prices of
  cotton.

18
Restrictions on Competition

• Restrictions on competition are at the heart of
  price support programs because all price support
  programs are inconsistent with the competitive
  market process.
• Individual producers and consumers no longer have
  the right to engage in mutually beneficial
  exchange as in a free market.
• Price support programs in agriculture invariably
  block the free flow of price information and
  restrict consumers options to buy domestically
  produced or imported products at the lowest
  prices

19
Continues

• Thus, consumers as tax payers are hit twice by
  price support programs they must pay higher
  prices for the products, but must also pay higher
  taxes to finance the price support programs.