Ch. 12 Reproducible Private Property Resources: Agriculture

Ch. 12 Reproducible Private Property Ch. 12 Reproducible Private Property Resources: AgricultureResources: Agriculture

IntroductionIntroduction Over 840 million people suffer from chronic Over 840 million people suffer from chronic

hunger & malnutrition;hunger & malnutrition; > ¼ of these are children (215 million)> ¼ of these are children (215 million)

– most live in South Asia & Southern Africa.most live in South Asia & Southern Africa.

– Haiti, Tajikistan, & Sierra Leone have over 50% of Haiti, Tajikistan, & Sierra Leone have over 50% of population is undernourishedpopulation is undernourished

Total amount of food available is not problemTotal amount of food available is not problem– World produces 17 % more calories per person today World produces 17 % more calories per person today

than 30 years agothan 30 years ago

IntroductionIntroduction Why has this problem arisen?Why has this problem arisen? 3 common hypothesis:3 common hypothesis: 1) persistent global scarcity of food.1) persistent global scarcity of food. 2) maldistribution of food.2) maldistribution of food. 3) temporary shortages caused by weather 3) temporary shortages caused by weather

and other natural causes.and other natural causes.

Formulating Global Scarcity HypothesisFormulating Global Scarcity Hypothesis Two forms of the hypothesis:Two forms of the hypothesis: 1) Strong form: per capita food production 1) Strong form: per capita food production

is decliningis declining 2) Weak form: relative price of food is 2) Weak form: relative price of food is

rising due to steep supply curve.rising due to steep supply curve.

Quantity of Food

Price of Food

Fig. 12.1 The market forFood

Sa

Elastic Supply

Q0

P0

Q5a

P5a

Sb

Inelastic Supply

Q5b

P5b

Testing the HypothesisTesting the Hypothesis

Per capita food production has increased in Per capita food production has increased in world and developing countries implies that world and developing countries implies that strong form can be rejected.strong form can be rejected.

Food prices have risen more rapidly than Food prices have risen more rapidly than inflation in about half of the countries, thus inflation in about half of the countries, thus there is some support for weak form of the there is some support for weak form of the hypothesishypothesis

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-7

TABLE 12.1 Trends in U.S. Agriculture TABLE 12.1 Trends in U.S. Agriculture A 20th-Century Time Capsule (1 of 2)A 20th-Century Time Capsule (1 of 2)


TABLE 12.1 Trends in U.S. Agriculture TABLE 12.1 Trends in U.S. Agriculture A 20th-Century Time Capsule (2 of 2)A 20th-Century Time Capsule (2 of 2)

Outlook for the FutureOutlook for the Future

1930 to 200 yields per acre increased from 30 1930 to 200 yields per acre increased from 30 to 130 bushelsto 130 bushels

Milk and dairy production increased from Milk and dairy production increased from 4,572 pound in 1944 to 10,000 pounds by 4,572 pound in 1944 to 10,000 pounds by 1971. By 2000 it was 17,000 pounds per cow.1971. By 2000 it was 17,000 pounds per cow.

Huge shift to mechanization on U.S. farmsHuge shift to mechanization on U.S. farms

Outlook for the FutureOutlook for the Future 1) Technological progress: 3 techniques1) Technological progress: 3 techniques

– 1)recombinant DNA1)recombinant DNA– 2)tissue culture2)tissue culture– 3) cell fusion3) cell fusion

ApplicationsApplications– 1)making food crops more resistant to disease/pests1)making food crops more resistant to disease/pests– 2)hardy crops; drought resistance; poor soil2)hardy crops; drought resistance; poor soil– 3)crops make their own fertilizer3)crops make their own fertilizer– 4)increasing crop yields4)increasing crop yields

Outlook for the Future (cont.)Outlook for the Future (cont.) Five problemsFive problems

– 1)allocation of agricultural land1)allocation of agricultural land» Trend of increasing shift from agric. to urban use can’t continueTrend of increasing shift from agric. to urban use can’t continue» Corn for ethanol has caused price to riseCorn for ethanol has caused price to rise

– 2)energy costs2)energy costs– 3)environmental costs: too much fertilizer and pesticide use 3)environmental costs: too much fertilizer and pesticide use

pollutes waterpollutes water» U.S. nitrogenous fertilizer useU.S. nitrogenous fertilizer use300% in past 25 years300% in past 25 years» Netherlands Netherlands 150%; 150%; Denmark Denmark 225% 225%» Also soil erosion causes negative externalityAlso soil erosion causes negative externality

– 44) Growth in Organic Foods) Growth in Organic Foods» organic food sector is growing; 2.8% of U.S. food sales noworganic food sector is growing; 2.8% of U.S. food sales now


TABLE 12.2 Pesticide TABLE 12.2 Pesticide Consumption per Hectare of Consumption per Hectare of Agricultural Land (Kg/Ha)Agricultural Land (Kg/Ha)


TABLE 12.3 Comparison of EU and U.S. TABLE 12.3 Comparison of EU and U.S. Standards for Organic CertificationStandards for Organic Certification


TABLE 12.3 Comparison of EU and U.S. TABLE 12.3 Comparison of EU and U.S. Standards for Organic CertificationStandards for Organic Certification


The Role of Agricultural PoliciesThe Role of Agricultural Policies

Four types of agricultural policies have Four types of agricultural policies have subverted normal functions of price subverted normal functions of price system:system:– 1) subsidies for specific farming inputs 1) subsidies for specific farming inputs

including fertilizers and pesticidesincluding fertilizers and pesticides– 2) guaranteed prices for outputs2) guaranteed prices for outputs– 3) marketing loans based on crop prices3) marketing loans based on crop prices– 4) trade barriers to protect against competition 4) trade barriers to protect against competition

from imports.from imports.


FIGURE 12.2 Farm Program Payments as a Share FIGURE 12.2 Farm Program Payments as a Share of Production Value, 2002-2005 Crop Yearsof Production Value, 2002-2005 Crop Years


A Summing UpA Summing Up

Some countries are beginning to eliminate Some countries are beginning to eliminate some of the price supports and subsidies. some of the price supports and subsidies.

Genetically modified foods are a new Genetically modified foods are a new source of controversy. source of controversy.


Distribution of Food ResourcesDistribution of Food Resources

The second of the three hypotheses used to The second of the three hypotheses used to explain widespread malnourishment. explain widespread malnourishment.

This hypothesis suggests that it is This hypothesis suggests that it is imperfections in food distribution, particularly imperfections in food distribution, particularly in less developed (or poorer countries) that in less developed (or poorer countries) that cause the malnourishment problem. Thus, the cause the malnourishment problem. Thus, the problem is one of poverty not a lack of food, problem is one of poverty not a lack of food, suggesting different policy prescriptions. suggesting different policy prescriptions.


Defining the ProblemDefining the Problem Evidence from the United Nations suggests Evidence from the United Nations suggests

that the problem is one of nonuniform that the problem is one of nonuniform distribution. distribution.

Chapter 6 suggested that high poverty levels Chapter 6 suggested that high poverty levels are generally conducive to high population are generally conducive to high population growth which leads to more income growth which leads to more income inequalityinequality


TABLE 12.4 Food Situation in TABLE 12.4 Food Situation in Developing CountriesDeveloping Countries


Domestic Production in Less Domestic Production in Less Developed CountriesDeveloped Countries

Most developing countries lack foreign exchange Most developing countries lack foreign exchange with which to buy food imports. with which to buy food imports.

The law of comparative advantage says that The law of comparative advantage says that nations are better off specializing in those nations are better off specializing in those products for which they have a comparative products for which they have a comparative advantage—measured in the opportunity cost of advantage—measured in the opportunity cost of another good.another good.

Price distortions and externalities associated with Price distortions and externalities associated with agriculture have caused most developing countries agriculture have caused most developing countries to have an excessive dependency on imports.to have an excessive dependency on imports.

Undervaluation BiasUndervaluation Bias Two government programs undervalue agriculture and Two government programs undervalue agriculture and

destroy incentives:destroy incentives: 1) Marketing boards1) Marketing boards

– holds food prices downholds food prices down– import artificially cheap food from the U.S.import artificially cheap food from the U.S.

2) Export Taxes:2) Export Taxes:– source of revenuesource of revenue– makes food products more expensive to sell abroadmakes food products more expensive to sell abroad– reduces farmer incentives to produce foodreduces farmer incentives to produce food– farmers try to smuggle it out of countryfarmers try to smuggle it out of country

Feeding the PoorFeeding the Poor Advantages of food stampsAdvantages of food stamps Improve income distribution from agricultural Improve income distribution from agricultural

production:production:– Green revolution: maize hybrids caused productivity to Green revolution: maize hybrids caused productivity to

double or triple for small farmers in Central America, double or triple for small farmers in Central America, East Africa, East Asia, Mexico, India, Pakistan.East Africa, East Asia, Mexico, India, Pakistan.

– Developing countries need sustainable technologies Developing countries need sustainable technologies (e.g. solar powered irrigation systems) and financial (e.g. solar powered irrigation systems) and financial capital for famer owned local cooperativescapital for famer owned local cooperatives

Feast and Famine CyclesFeast and Famine Cycles

1) Cobweb Model1) Cobweb Model– farm output and prices fluctuate greatlyfarm output and prices fluctuate greatly– model presents one explanation for this volatilitymodel presents one explanation for this volatility– assumptions:assumptions:

» farmers forecast next year’s price based on this year’sfarmers forecast next year’s price based on this year’s

» if prices are high this year, produce large supply next if prices are high this year, produce large supply next year, making price fallyear, making price fall

» low price this year is also next year’s forecast, so low price this year is also next year’s forecast, so produce small supply next year and so on and so on.produce small supply next year and so on and so on.

D

S

Q0

P0

Q1

P1

Q3

P3

Quantity

PriceFig. 12.3 The Cobweb Model

Feast and Famine Cycles (cont.)Feast and Famine Cycles (cont.)

Price Elasticity and Farm RevenuesPrice Elasticity and Farm Revenues– demand for most farm products is price inelasticdemand for most farm products is price inelastic– this implies that farm revenues will fall in “good” this implies that farm revenues will fall in “good”

weather years and will rise in “bad” weather yearsweather years and will rise in “bad” weather years

Quantity

Price

P0

S0

D1

S1

P1

P2

D2

A

B

C

D

Fig. 12.4 Price Elasticity of Demand and the Size of Price Fluctuations

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Ch. 12 Reproducible Private Property Resources: Agriculture