what are agricultural price supports

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What is the main argument for agricultural price support? Price supports are subsidies or price controls used by the government to artificially increase or decrease prices in the agriculture market. Click to see full answer.

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What causes price fluctuations in agricultural markets?

Price Support Programs. USDA assists farmers and ranchers in managing their business by providing information about commodity programs, sign up periods, payments, and qualification criteria. Commodity Loan Programs. Electronic Loan Deficiency Payments. Market Loss Assistance Payment.

How to buy an agricultural supply business?

Agricultural price supports often stimulate larger production, tax consumers, and impede international trade. They often transfer income from lower-income consumers to wealthier owners of farmland. Price supports do little to help farmers with below-average incomes because benefits are distributed in proportion to sales.

What is a price support?

Since the 1930s the United States and Canada have operated agricultural price-support programs. The intent has been multifaceted, but primarily the purpose has been to manage agricultural output levels in order to increase the price per unit and thereby raise the net income of farmers. In the United States, the Agricultural Adjustment Administration was formed in 1933, after …

What are agricultural grants?

 · What is the main argument for agricultural price support? Price supports are subsidies or price controls used by the government to artificially increase or decrease prices …

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Why do farmers raise their prices?

A second reason is that farmers are often viewed as disadvantaged . Rural communities lack many of the amenities that cities have. And because labor productivity is generally lower in agriculture than in manufacturing, wage rates are lower. Also, technological change tends to expand agricultural production faster than consumption, reducing the price of farm products. In 1870, for example, the price of wheat was over eleven dollars per bushel in 1991 dollars. Today, it is only about four dollars per bushel, a drop of over 60 percent. Although consumers gain by paying lower prices, the incomes of farmers drop. As labor leaves agriculture in search of higher income in the cities, the reduced supply of farmers causes the remaining farmers’ incomes to rise back to their previous level. This can take years, however.

How does the CCC support price?

The United States currently uses a hybrid approach to price supports that also involves loans. At harvest the CCC gives grain farmers nine-month loans equal to their production times the support price. The support price is called the “loan rate.” The CCC accepts the grain as collateral for the loan. If, during the term of the loan, the market price rises above the support price, farmers repay the loans with interest and sell the grain in the market. If the market price remains at or below the loan rate, farmers forfeit the grain to the CCC, keep the money, and have no further obligation. Such loans are called nonrecourse loans, meaning that the lender has no claim on the borrower beyond the collateral (in this case the crop).

How does labor affect farmers?

Although consumers gain by paying lower prices, the incomes of farmers drop. As labor leaves agriculture in search of higher income in the cities, the reduced supply of farmers causes the remaining farmers’ incomes to rise back to their previous level. This can take years, however.

What was the decline in per capita food production in Africa during the postcolonial period?

This has been particularly prevalent in Africa, the one continent to experience consistently declining per capita food production in the postcolonial period. In many African nations, state marketing boards are granted a legal monopoly to buy agricultural products from farmers and to resell them to domestic consumers and in export markets. Such boards often pay farmers only a third to half of the domestic consumer price or the export price. The result, according to the World Bank, is that after growing 0.2 percent per year in the sixties, per capita food production in sub-Saharan Africa fell at the rate of 0.9 percent per year from 1970 into the early eighties.

Why do farmers get quotas?

Because of their scarcity, the quotas immediately take on value. All future entrants must buy a quota to gain the right to sell the product. That raises the investment required to become a farmer and the cost of production. Once the original quotas are sold to new farmers, those farmers become a strong lobbying force against ever giving up quotas.

How to reduce the risk of a crop?

Nevertheless, there are ways to reduce this risk other than through government price supports. One is insurance. Farmers can purchase government-subsidized crop insurance against natural disasters. Farmers can also buy a form of price insurance in the futures markets. Commodity-futures options are really a form of price insurance for which a farmer pays a premium (the price of the option). Before planting his crop, a farmer can purchase a guarantee of a minimum price, without incurring the obligation to sell at that price should the market price be higher at harvest time. More sophisticated commercial farmers employ the full range of price insurance instruments available to reduce their market risk. But these instruments are used less by farmers than they would be if the government did not provide a subsidized form of price insurance through its price-support programs.

How does the CCC dispose of commodities?

The CCC disposes of the commodities it buys in ways that will not displace market demand and depress the domestic market price. For example, dairy products are often given away to low-income people, in the school lunch program, and as foreign aid. A variant of this policy is designed to stabilize market prices.

What is the purpose of the price support program?

The intent has been multifaceted, but primarily the purpose has been to manage agricultural output levels in order to increase the price per unit and thereby raise the net income of farmers.

How have farm commodity programs affected the Great Plains?

Farm commodity programs have had a major impact in the Great Plains, wherever wheat, corn, and other feed grains are dominant crops. Program participation by Plains farmers has been relatively high, which has led to a major income transfer into the economies of rural counties. In fact, in many years U.S. farm price-support programs have constituted from one-third to one-half of net farm income in many Plains states. These payments reached record highs in 2000, when direct government payments represented $28 billion– 61 percent–of the U.S. total net farm income of $46 billion. And in several of the Plains states, the government payment component was 75 percent or more of the total state net farm income. Canadian programs have had similar impacts on producer income levels in the Prairie Provinces. Moreover, the layers of regulatory and compliance detail attached to program participation in the United States and Canada have significantly shaped cropping patterns and land-use practices. Conservation management practices have been instituted over time using the economic incentive of farm program participation.

What were the main crops that were a part of the Agricultural Adjustment Act of 1933?

producers led to the Agricultural Adjustment Act of 1933, which established government supply management for, initially, seven major farm commodities: wheat, corn, cotton, rice, tobacco, milk, and hogs . The arguments for establishing these programs and continuing them since have largely centered upon the farmer’s poor bargaining power in the marketplace, the belief that agriculture has a constant propensity to overproduce, and the need for price stability.

How has Canada influenced the income of agriculture producers?

A second means by which Canada has influenced the income of agriculture producers has been through heavily subsidized rail transportation services for grain movement. In essence, the rates are in relation to the distance from the Prairie Provinces to the key ports, thus equalizing the terms for producers across the entire grain-producing region. In so doing, Canadian crop production took on a geographic configuration far different from what it would have been without graduated transportation subsidies.

When was the agricultural adjustment administration formed?

In the United States, the Agricultural Adjustment Administration was formed in 1933, after commodity prices fell by more than 50 percent from 1929 to 1932. Farmers were experiencing negative net farm income year after year, trying desperately, and often unsuccessfully, to avoid bank foreclosure. Farmers continued producing even though there were no markets for what was already in hand.

Is the 2002 farm program going to continue?

Because the current 2002 U.S. farm program is scheduled to continue for at least the next five years, the economic safety net legislation is in place for the near-term future. However, given the larger economic and political uncertainties facing this nation, there is no guarantee that future funding will be at the initial levels proposed. If budget constraints force cutbacks, this safety net could begin to unravel.

Does Canada have a price support system?

Instead it has relied on the Canadian Wheat Board (CWB) to set the marketing and export policy for its major agricultural grains. Using this single-seller agency and heavily regulated producer quotas, it has accomplished a price support system for Canadian producers in its three Prairie Provinces.

Why is trade important in agriculture?

Trade is highly important to U.S. agriculture. In recent years, export sales have represented about one-fourth of the total revenue from sales of U.S. farm products. Consequently, there is widespread concern in the agricultural sector about recent losses in markets for farm exports and about the harmful effects of trade barriers imposed by other countries. Exports of U.S. farm products in fiscal 1986 are expected to be less than $28 billion—down about $16 billion from the record high of $44 billion in 1981.

What are the implications of technological advances in agriculture?

The implications of widespread technological advances in agriculture are straightforward for U.S. farm policy. Rising foreign farm productivity and increasing competition in export markets for U.S. farm products implies a progressively higher price tag for U.S. consumers and taxpayers to maintain current U.S. price support programs. Moreover, to the extent that domestic farm programs raise product prices, they provide an artificial production incentive for farmers in other countries.

What is GATT trade?

The General Agreement on Tariffs and Trade (GATT) is a multilateral treaty among more than eighty governments (including the United States) established in 1947 to liberalize and expand trade through negotiated reductions in trade barriers. The conflict between U.S. farm programs and free trade, apparent when GATT was formed, led the United States to insist on special treatment for agricultural products. The incompatibility of current farm programs with an open economy can be traced to farm policies instituted during the Roosevelt New Deal era. It is not difficult to see why price supports for U.S farm products have led to protectionist policies. The Agricultural Adjustment Act of 1933, as amended, requires that the U.S. Government impose quantity restrictions whenever imports would “materially interfere” with the operation of U.S. farm programs. Consequently, agricultural and other “primary products” were not bound in the GATT treaty by the general principles that prohibit import quotas and export subsidies.

What is the 1985 Farm Bill?

The 1985 farm bill represents a continuation of the failed farm policies of the past, rather than a major change in direction . Farmers will be more dependent on government payments than ever before. Economic pressures may yet, however, bring about a reduction in agricultural trade barriers. Increasing competition in markets for U.S. farm products and budget pressures may force U.S. policymakers to do what they have heretofore been unable or unwilling to do—modify our domestic farm policies to make them compatible with the GATT objective of liberalized trade.

Does the US subsidize agricultural products?

agricultural interests are highly critical of subsidized agricultural exports by other countries, especially by members of the European Economic Community (EEC), the United States continues to subsidize the disposal of surplus farm products under the Public Law (PL) 480 (“ Food for Peace”) program. For example, about $1.5 billion is budgeted for PL 480 in 1986.

Is agriculture a free enterprise?

Although U.S. agriculture is generally considered to be a bastion of free enterprise, the reality is quite different. Our domestic agricultural policy has been a perennial albatross in efforts by the United States to liberalize trade. As shown below, there is an inherent contradiction between domestic price supports and free international trade.

Does GATT restrict imports?

Although GATT permits import restraints for agricultural products, there are limits as to how far countries may legally go in restricting imports to protect domestic farm programs. Not all of the U.S. import restraints on farm products can be explained by the GATT exemption. University of Chicago economist D. Gale Johnson shows that U.S. import restrictions on sugar, dairy, peanuts, and beef products clearly have violated the GATT principle that import quotas should not be used to reduce imports by more than the extent to which domestic production is reduced. [ 3] Therefore, when measured against the touchstone of free trade, United States trade policies as they affect farm products fall short in both the letter and the spirit of the law.

What is FSA in agriculture?

The Farm Service Agency (FSA) is an organization with a legacy of responding quickly to program legislation, being service-oriented, and focusing on producer needs. Read more about Price Support Initiatives. Commodity Loans.

What is a farm service agency?

The Farm Service Agency (FSA) is an organization with a legacy of responding quickly to program legislation, being service-oriented, and focusing on producer needs.

What is marketing assistance loan?

Marketing assistance loans provide producers interim financing at harvest time to meet cash flow needs without having to sell their commodities when market prices are typically at harvest-time lows.

Is the commodity loan rate available in PDF?

The commodity loan rates are available in PDF only and are available here.

Why do farmers get a deficit payment?

Every year, farmers produce and sell a certain product at a certain price that is determined by the market. If the market price is lower than that price at which the farmers want to sell , the farmers are in a deficit. Therefore, in order to assist American farmers, our government gives price supports for some crops and dairy products. So in a case where the market price is lower that the target price for farmers, farmers receive a “deficiency payment”, or price support, from the government in order to make up for the difference.

When were farm subsidies reenacted?

1995 – Farm subsidies reenacted by Clinton Administration as production began to swell.

The Impact of a Price Support on a Market Outcome

We can understand the impact of a price support more precisely by taking a look at a supply and demand diagram, as shown above. In a free market without any price support, the market equilibrium price would be P*, the market quantity sold would be Q*, and all of the output would be purchased by regular consumers.

The Impact of a Price Support on the Welfare of Society

In order to analyze the impact of a price support on society, let’s take a look at what happens to consumer surplus, producer surplus, and government expenditure when a price support is put in place.

The Impact of a Price Support on the Welfare of Society

With the price support in place, consumer surplus decreases to A, producer surplus increases to B+C+D+E+G, and government surplus is equal to negative D+E+F+G+H+I.

Government Surplus Under a Price Support

Because surplus in this context is a measure of value that accrues to various parties, government revenue (where the government takes in money) counts as positive government surplus and government expenditure (where the government pays out money) counts as negative government surplus.

The Impact of a Price Support on the Welfare of Society

Overall, the total surplus generated by the market (i.e. the total amount of value created for society) decreases from A+B+C+D+E to A+B+C-F-H-I when the price support is put in place, meaning that the price support generates a deadweight loss of D+E+F+H+I.

Price Supports Versus Price Floors

In terms of market outcomes, a price support is pretty similar to a price floor; to see how, let’s compare a price support and a price floor that result in the same price in a market. It’s pretty clear that the price support and the price floor have the same (negative) impact on consumers.

Why Do Price Supports Exist?

Given this discussion, it may seem surprising that price supports exist as a policy tool that gets taken seriously. That said, we see price supports all the time, most often on agricultural products- cheese, for example.

What is price support?

In the case of a price control, a price support is the minimum legal price a seller may charge, typically placed above equilibrium. It is the support of certain price levels at or above market values by the government. A price support scheme can also be an agreement set in order by the government, where the government agrees to purchase …

What is the benefit to producers of the price support?

The benefit to producers of the price support is equal to the gain in producer surplus (represented in blue).

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