Agricultural policy objectives
The farm problem
Economics of Food Markets
Lecture 3
Alan Matthews
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)
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
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
Sources of price instability
P
P
Q
Q
The cobweb model of price
instability
Price
Price
SS
SS
S'S'
P2
P0
P2
Pe
P3
P1
S'S'
P0
Pe
P1
DD
Q0 Q
2
Qe Q3 Q1
Quantity
DD
Q2
Q0 Qe Q1
Q3
Quantity
Declining terms of trade
• Demand grows slowly
because of slow
population growth and
Engel’s Law
• Supply grows more
rapidly due to
technological change
• Rising living
standards in nonfarm
sectors
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
Illustration fixed asset theory
P
Acquisition cost
Demand for labour
(MVP)2
Demand for labour
(MVP)1
Salvage value
Q3
Q2
Q1
Q
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 Engel’s 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
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.