Farm prices, output, and incomes are affected by subsidies.
Uncle Sam wants to return to the farm business.
In 1996, the U.S. Congress made a new future for the U.S.
They wouldn't look to Washington, D.C., for decisions on what crops to plant or how much farmland to keep.
That act is to leave something.
The Freedom to Farm Act would allow the government to increase farm subsidies, but also allow them to be taken out of the business of farming.
Farmers will lose their federal subsidies in 2012 but taxpayers will still earn as much as they want in the marketplace.
The rationale for continuing high prices and bumper profits was examined in this chapter.
We confront the questions of severe blow.
The agriculture industry is very competitive.
It would be more difficult to enter the automobile industry, the air that makes it line business, or even the farm machinery market than it would be to enter farming.
Economic profits don't last long in agriculture because it is difficult or impossible for would-be producers to enter these low barriers to entry.
Individual farmers want to expand their rate of output until the marginal cost is equal to the price.
U.S. farmers can only maintain economic profits if they and total economic costs are high.
Current production techniques and prices aren't likely to last.
There will be more people in agriculture because of economic profits.
The early producers of microcomputers faced that kind of dilemma.
Individual firms must improve their productivity to stay ahead.
The rate of technological advancement in agriculture has been amazing.
The yearly production of eggs has increased from 183 to 260.
Milk output increased from 5,400 to 19,576 pounds per cow.
The wheat output has gone up.
The corn output has gone up.
Farm output per labor-hour has increased 10 times over the past year.
Our most hightech industries have similar rates of productivity advance.
The "green revolution", advanced machinery, improved animal breeding, improved plants, better land-use practices, and computer-based management systems are some of the technological advances.
Continuous increases in technology and output are welcome in most industries.
There is a long-term problem with the agricultural industry.
There is a limit to the amount of food people want to eat.
The relatively inelastic demand for food is a reflection of the constraint on the demand for agricultural output.
When harvests percentage change in quantity per centage change in quantity are good, farmers must reduce prices a lot to induce a substantial increase in the quantity demanded divided by the per of food demanded.
The percent centage change in price is dependent on the elasticity of demand.
The supply shifts result in wide price swings.
Per demanded divided by percent demanded by per % change in quantity
Since 1929, per capita income has doubled.
The increase in per capita food consumption has been small.
Slow growth of U.S. demand for food must be reconciled with the increasing ability of U.S. agriculture to produce food.
This means that farm prices will fall over time.
The ratio of farm prices to nonfarm prices fell from 1910 to 2007.
Without government price-support programs and foreign demand for U.S. farm products, farm prices would have fallen further.
Short run in nature is the second major problem.
The harvests are abundant if the weather is good.
This could be a good thing.
A drop in prices is implied by abundant harvests.
On the other hand, a late or early freeze, a drought, or an insect pest can reduce harvests and push prices higher.
Natural forces are not the only cause of price instability.
Time lags between the production decision and harvest contribute to price instability.
Farmers have an incentive to increase output if annual prices for farm products are high.
National prices serve the same signaling function in agriculture as they do in nonfarm industries.
The fixed duration of the U.S. Department of Agriculture is what distinguishes the farmers' response.
In the computer industry, a larger quantity of output can be supplied to the market quickly by drawing down inventories or increasing the rate of production.
In the long run, the farmer can only till more land, plant additional seed, or breed more animals.
There will be no additional food supplies.
During World Wars I and II, corn prices rose and then fell sharply.
Prices have moved in both directions.
The agricultural supply response to a change in prices is always one harvest later.
Short-term price swings are intensified by the lag in responses to agricultural supplies.
Corn prices are high at the end of the year because of a reduced harvest.
Corn farming will appear to be profitable when prices are high.
Farmers will want to plant more corn to share in the high profits.
The corn won't be on the market until the following year.
There will be an abundance of corn on the market by that time, as a result of both better weather and increased corn acres.
Corn prices are likely to plummet.
Farmers can't avoid the boom or bust movement of prices.
Even a corn farmer who has mastered the principles of economics has little choice but to plant more corn when prices are high.
If he doesn't plant additional corn, prices will fall because his own production decisions don't affect market prices.
He denies himself a share of corn market sales by not planting additional corn.
Each producer is independent in a competitive market.
The historical instability of corn prices is shown in Figure 29.2.
Corn prices go up and then go down at the same time.
In 1915-20, 1935-37, 1946-48, 1973-76, 1980-84, and 1997-2000, there is a price swing.
President Bush proposed expanded use of corn-based ethanol as an alternative fuel source.
Farmers rushed to plant additional acres, raising the possibility of another boom-bust cycle.
The U.S. agricultural industry operated without government intervention until the 1930s.
An expanding population, recurrent wars, and less advanced technology helped maintain a favorable supply-demand relationship for farm products.
There were occasional short-term swings in farm prices, but they were absorbed by the healthy farm sector.
The period 1910-19 was prosperous for farmers because of increased foreign demand for U.S. farm products.
After 1920, the two basic problems of U.S. agriculture grew to crisis proportions.
Most farm prices were historical highs in 1919.
European countries no longer demanded as much American food after World War I.
In 1919 the U.S. exported nearly $4 billion of farm products.
The increase in intended corn acres is partially offset by the Agricultural Statistics Service.
90.5 million acres of corn will be planted in the Corn Belt and Great Plains, the largest area since 1944, as well as fewer expected acres of cotton and rice in the Delta million acres more than in the previous year.
Farmers are motivated by price swings.
The price movement in the next harvest may be reversed by the sudden change in production.
The end of the war implied an increased availability of factors of production and continued improvement in farm technology.
The impact of reduced demand and increased supply can be seen in Figure 29.3 In 1919, farm prices more than doubled their levels.
Prices suddenly fell.
Farm prices fell in the early 20th century.
The decline in farm prices began in 1930.
The average farm price was 75 percent lower in 1932 than it was in 1919.
The average income per farmer from farming fell from 1919 to 1932.
Small farmers were hardest hit by the Great Depression.
They didn't have as much resources to survive years of declining prices and income.
In good times, small farmers need to expand output and reduce costs to maintain their incomes.
The Great Depression accelerated the exodus of small farmers from agriculture.
The number of small farms has fallen dramatically.
There were over 3 million farmers under 100 acres in 1910.
There are less than 1 million small farms today.
They don't have the resources to maintain a high rate of technologi.
The number of small farms has declined while the number of large farms has grown.
Since 1910, the farm population has been reduced by 23 million people due to the loss of small farmers.
The U.S. Congress has responded to agricultural problems with a variety of programs.
Most want to raise the price of farm products.
Other programs want to reduce production costs.
Direct income support to farmers is provided by the federal government.
The primary focus of U.S. farm policy has always been price supports.
Congress ordered that farm products be sold at a fair price.
Congress meant a price higher than the market equilibrium.
Congress had to find a way to make up for the food surplus after setting an above-equilibrium price for food.
Congress wanted to get rid of the surplus by selling it abroad at world market prices.
The Agricultural Adjustment Act of 1933 reintroduced the idea of fair prices.
Farmers went bankrupt in droves during the Great Depression.
The purchasing power of farm products was restored by Congress.
Congress reasoned that if parity prices could be restored, farm incomes would improve.
Reducing the production of food is the easiest way to increase farm prices.
Congress pays farmers for voluntary reductions in crop acres.
If farmers didn't agree to increase crop prices.
The federal government started a program to prop up dairy prices.
This is similar to a set-aside program.
The government pays dairy farmers to slaughter or export dairy cattle.
Between 1985 and 1987, the government paid dairy farmers over $1 billion to "terminate" 1.6 million cows.
Milk and other dairy products were more expensive because of the reduction in dairy herds.
There are marketing orders.
Industry groups can limit the quantity of output brought to market.
Individual farmers can't raise the market price by withholding output.
Individual farmers dispose of excess if a quantity greater than authorized is grown.
Growers had market power because of the destruction of crops.
There is a limited market supply of farm products.
Sugar, dairy products, cotton, and peanuts are not allowed into the country.
There are voluntary export limits for beef in foreign countries.
The foreign supply of other farm products is limited by import taxes.
The demand for farm products was altered by an executive order.
The Commodity Credit Corporation became a buyer of last resort for selected farm products.
Through its loan programs, the CCC becomes a buyer of last resort.
A wheat farmer could borrow money from the government for every grain of wheat he gave up in exchange for cash.
If the market price of wheat went over $2.75 the farmer could sell the wheat and use the money to repay their loans.
The government keeps the crop as full pay if the market price falls below the loan rate.
By offering to be determined by the intersection of supply and demand.
The figure shows the effect of price supports on individual farmers.
The agriculture market is pushed out of equilibrium when farmers respond to price supports.
More output is supplied than demanded.
The policy dilemma is caused by the market surplus created by government price supports.