Why do governments intervene in the agricultural sector

Each farmer may be issued a quota that stipulates how much he can sell in a given year. This is done with peanuts in the United States and milk in Canada. Limiting supply can raise market prices as long as government inspectors monitor the market to ensure that no production beyond the quota is sold for a lower price. Limiting production effectively cartelizes the industry, and the government enforces the cartel. While this policy raises prices, the only people who benefit are the individual farmers who receive the quotas when they are initially allocated.

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.

More common than issuing quotas is the practice of requiring or paying farmers to take land out of production. This "set-aside" approach rarely is very effective at supporting agricultural prices. Farmers are not stupid; they set aside their least productive land first. Furthermore, a policy that creates artificial scarcity of land induces farmers to intensify their production practices on each acre that remains in production, raising its yield. So unless very large reductions in acreage are required, set-asides alone rarely reduce production very much.

Moreover, intensifying production often requires heavier doses of fertilizer and agricultural chemicals, with potentially adverse environmental consequences. For example, farmers in the European Economic Community EC , where support prices for grain are higher than those in the United States, use more than twice as much fertilizer per acre than U.

As a result a number of northern European countries are encountering elevated levels of fertilizer nutrients in their groundwater. The most common U. Support prices must be accompanied by import quotas.

Otherwise, foreign producers would sell their products in the U. If that happened, the U. Quotas limit imports of dairy products to less than 3 percent of consumption. 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. The CCC buys grain at the support price, stores it, and releases it back into the market if the market price rises to a prescribed trigger level of, say, percent of the support price. In this manner the policy protects growers against the risk of low prices but also protects consumers against unusually high prices.

This type of government program can provide some protection against wide swings in prices if the acquisition support price is set at about 75 percent of a five-year moving average of market prices leaving the highest number and the lowest number out of the calculation. The markup between acquisition and release price should cover the cost of operating the buffer stock program. Farm organizations, however, often lobby to raise the acquisition and release prices, so that "stabilization policy" becomes price support policy.

When this happens, government inventories tend to rise without limit until the stabilization agency exhausts its budget for buying the product. At that point the agency has to subsidize the export of the inventories, with the taxpayers picking up the loss on the operation. 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.

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.

Price Supports Cause Overproduction By supporting prices above the market-clearing level, governments encourage farmers to expand production. To produce more, farmers apply more inputs per acre. They also compete against one another for the finite amount of farmland, bidding up its price. In this way the value of the price supports is capitalized incorporated into land prices. Thus, it is the owners of farmland, and not farmers per se, who are the principal beneficiaries of agricultural price supports.

See Ricardo. Price supports cause larger production and smaller consumption since consumers will buy less of any good as its price rises , resulting in overproduction at the support price. The only way for the price support agency to get rid of its inventories is to use export subsidies to make them cheap enough that foreigners will buy them. The EC uses this approach for grains. From the midseventies to early eighties, internal EC grain prices were to percent of the prices at which other countries were willing to export their grain.

Subsidies to agriculture account for over two-thirds of the total EC budget. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you! Published by Modified over 6 years ago. Income problems stem from 1 a long- run tendency for farm incomes to fall below urban incomes and 2 fluctuations in agricultural prices causing variability in farm incomes. Local Food Puts it All Together. Local Food Action Initiative Promote local and regional food sustainability and security.

Advance Seattle's goals of. Demand for U. Agricultural Output Much of the demand for U. Krueger, A. CrossRef Google Scholar. List, F. Metzler, L. Monitoring and Outlook. Simpson, J.

Smith, A. Smith, M. Tracy, M. Viner, J. University of Limerick Ireland.