1. Would the US economy be better off without government intervention in agriculture? Who would benefit? Who would lose?
2. Are large price movements inevitable in agricultural markets? What other mechanisms might be used to limit such movements?
3. Farmers can eliminate the uncertainties of fluctuating crop prices by selling their crops in “futures” markets(agreeing to a fixed price for crops to be delivered in the future). Who gains or loses from this practice?
The US economy would be not better off without government intervention in agriculture. However it would not be worse off either. The US economy as a whole would not be impacted with or without government intervention in agriculture. According to the chapter it seems that farm prices depend on the economy and not the other way around. Farm prices are dependent either on Congress setting a price floor through subsidies like set asides and government stockpiles or to market conditions when there is no government condition. Because of technological advances in agriculture there are currently less US farmers producing more agricultural products. When government intervention is reduced as it was in the late 1980 s and early 1990 s US agricultural prices behaved closer to the market mechanism. However the market mechanism is prone to corrections and outside influences. Because there are less people in the US directly dependent on the health of the agricultural sector of the US economy less people would be directly affected with ups and downs of a lassaiz-faire agricultural market. The agricultural market took a downturn at around 1997 when the economies of Asian nations were in trouble. When these nations were in trouble they were less willing and able to purchase US agricultural products. They reduced the demand for these products while the supply was high; therefore the prices of these products were lower. Hence farmers incomes were lower and they were facing trouble. Luckily for the US farmers this happened during an election year and Congress bailed them out. However the US economy was not impacted by the health of the agricultural sector or the US government s intervention to save it. The US farmers benefited from this action but the rest of the US did not necessarily benefit or decline as a result. Because prices tended to be stabilized by government intervention a farmer s income would be more stable as a result. However US taxpayers do feel this pinch as they end up paying to bail out farmers in times of crisis since it is Congress who helps farmers in times of crisis and Congress gets this help from taxes on the American public. The consumer does lose an opportunity cost of buying agricultural goods at low market prices when the agricultural market is in recession if the government sets a price floor for agricultural goods. The US economy however is not hurt by this government intervention and the consumers lost opportunity cost. The necessity of government intervention to help farmers during a recession in the agricultural market may be indicative of trouble ahead for the US economy.
Without any kind of outside supply stabilizing influence large price movements are inevitable in agricultural markets. The supply of agricultural produce depends on many factors among which are demand for the product technology weather. The Law of Supply states that the higher the supply of a product the lower the price. Conversely the Law of Demand states the greater the demand for a product the higher the price of that product will be. Technological advances in agriculture have less farmers in the US producing more products with less economic cost. Thus technology allows for a greater supply. Because people can only consume so much the amount of produce consumed per person doesn t vary greatly on average. This means that the demand for produce is inelastic that is consumer response (the percentage change of the amount of produce they demand) doesn t vary greatly whether or not the price of produce or the income of the consumer is high or low. If produce comes out exceptionally well in one year the supply may be great enough to set a low equilibrium price. In reaction to this a farmer may do one of two things. Because an individual farmer has no real market power he cannot necessarily alter market prices of his produce by adjusting the supply he puts out. He may choose to grow and sell an alternate product or he may produce less of this product in hopes of selling this product at higher prices. However because of the time gap between time when the good is planted and finally sold on the market agricultural market conditions may be very different than the market the farmer initially responded to. Conversely a farmer must grow excess goods when prices are high simply in the hopes of cashing in on high prices before they inevitably fall from excess supply. Without government intervention this becomes a vicious cycle with the farmer producing more and more at lower prices if he chooses not to sell an alternate product. These prices may be stabilized in a number of ways. When there is a market surplus the government can subsidize purchase destruction or storage of the excess in order to artificially control the supply and therefore the price of the produce. The government can also encourage or subsidize export of excess farm products and limit via import quotas and tariffs goods entering the US agricultural market. Also although individual farmers have no market power collectively farmers may control the supply on the agricultural market to inflate prices when necessary.
The practice of selling agricultural produce in the “futures” market can be a method of price (and therefore income) stabilization for a farmer. That is there will be a fixed supply (what is to be sold to the futures market) at a fixed price no matter what the actual market demands and prices will be. In a way a futures investor is “betting” on what the demand and therefore the price of an agricultural good will be. An investor hopes to make money from this “bet” if and when the product sells for a higher price than what he paid for it. He would have bought the product at a price that is lower than the current market price and sell it for a profit. If his future sells at a lower price than what he paid for it he then loses money. The farmer s income however is stabilized and he has no fears of an agricultural market going sour because a major group of consumers aren t willing or able to buy his product as was the case in the Asian economic crisis if the late 1990 s. In this a farmer gains peace of mind and income security. He loses the opportunity cost of a booming agricultural market since his produce is already sold at a fixed price. A farmer who sells his commodities to a futures market therefore cannot take advantage of high demands and the higher prices that come with it.