Price and market policy for agriculture

Price and market policy for agriculture

Price and market policy for ag~ic~lt~~e Theodor Heidhues The focus of this policy assessment is history on recent the regulatory measures o...

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Price and market policy for ag~ic~lt~~e

Theodor Heidhues

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Widespread and substantial intervention in agricultural product markets is a phenomenon common to every group of countries: Western market economies, developing countries of various political inclinations and centrally planned socialist economies. Limiting our attention to market-oriented economies, the objectives of price and market protection include stability of prices and quantities at domestic markets, provision of income to agriculture beyond what farmers would receive from the market, and maintaining or increasing efficiency of resource allocation in agriculture. Economists have consistently argued that these objectives often conflict and that major inefficiencies resuh from price and market policies. Governments, however, have shown no tendency to reduce such market interventions. This state of affairs suggests that there are explicit or implicit objectives other than the ones stated above. The answer seems to lie in the dynamics of agricultural change. Once we leave the world of economic equilibria and observe processes of change in agriculture we can deduce additional, often implicit policy objectives such as controlling the rate of change in factor use, particularly the use of labour. Under such criteria agricultural policy in general and price and market policy in particular fare much better than under static efficiency criteria. Domestic market interventions of various types have a double effect in the international sphere. Production increasing support measures in one country reduce export chances of more efficient producers. (The US-European arguments with respect to grain and the developed - developing countries’ problems for sugar are cases in point.) The other international dimension is the direct equivalent of domestic stability and security arguments. National interventions tend to reduce the world market for a particular commodity to a very small residual market with extremely high price changes, ie a high degree of instability. Therefore, various organisations have attempted to limit this instability by international agreements on behaviour in world markets. In recent years the issues have been widened to include a reasonable world food reserve and food aid regulations. A special problem is presented by the socialist economies of Eastern Europe and East Asia. The USSR in particular is - primarily for climatic reasons - a highly irregular participant in world grain markets. Nevertheless it refuses the kind of cooperation that would increase market stability. The ancient capitalist principle of never FOOD POLICY

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informing your competitor seems to be particularly attractive to those who failed to experience the internal development of the market system during recent decades.

A look at the real world The majority of farm products are typically traded at markets with many buyers and sellers. This implies an institutional environment that prevents and very likely will continue to prevent accumulation of market power in the hands of producers. Economies of scale in crop production find their limits in the geographical distribution of production. In animal production the potential degree of concentration is largely a function of the dependence on crops. Poultry and hog production tend toward larger units and a higher degree of concentration than dairy production. Beef occupies an intermediate position depending on the particular resource composition and the system of production. The immediate consequence of this market structure at the producer level is a noticeable lack of incentives for individual farms to build up their own marketing system with product differentiation, attention to particular customers, and other instruments. Therefore we find that either governments or producer groupings such as marketing cooperatives have taken responsibility for certain elements of market organisation such as quotation of prices and market reporting. On the other hand, the theoretical possibility for producers to increase their market power through producer-controlled cooperatives met with limited success, fluid milk being a possible exception. Again, the geographical spread of production limits an effective concentration as Brandow’ has argued for the USA.

’ G.E. Brandow. ‘On bargaining in agriculture’, WorldAgriculture, Vol 18, No 3, July 1969, p 8-l 1. ‘This has been argued convincingly by W.W. Cochrane. Farm Prices, Myth and Reality (Minneapolis, Univ of Minnesota Press, 1958). 3 J.K. Galbraith, Economics and the Public Purpose (Boston. Houghton Mifflin, 1973).

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Polypolistic market structures and consequent lack of market power of individual producers develops into a sectoral disadvantage for agriculture only if either the processing and distribution or the input supplying industries are highly concentrated. There seem to be differences among countries and among products within countries. Any general conclusion is difficult but there exists a tendency towards high levels of concentration in some input supply industries such as fertiliser producers. The concentration on the part of processing industries seems insufficient for such firms to exercise noticeable market power. While farmers have essentially no power to differentiate and therefore discriminate against their colleagues by market manipulation, they can and do affect cost factors.* In fact they keep trying to obtain differential rents by immediate adoption of new technologies, only to find their position eroded by general adoption soon after. Finally, a form of self-exploitation3 is not uncommon in that the prevalence of small family farms in many parts of the world permits free choice of working time. Low productivity of labour and correspondingly low incomes per hour can be compensated for by longer working hours within certain limits. Polypolistic market structure within an environment of concentration would be of little concern as long as the market is strong, ie when effective demand grows at least as rapidly as supply. This is not the case, however. Except for short periods, the last hundred years were characterised by a combination of mainly absolute growth of the agricultural sector in terms of GNP, but at the 117

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4 D.E. Hathaway and B.E. Perkins, ‘Occupational mobility and migration from agriculture’, in Rural Poverty in the United States, Report of the National Commission on Rural Poverty, 1968; R. Gasson. immobi/;t~ of Occupationa/ Small Farmers, (Department of Land Economy Occasional Papers, Cambridge University. 1969). and E. Guth, ‘Analyse des Marktes fiir landwirtschaftliche Arbeitskrifte’. Agrarwirtschaft, Sonderheft 52, Strothe Verlag, Hannover, 1973. 5 G.L. Johnson, Some Basic Problems Arising for Economists and Statisticians Agricultural Policies, from US (Manchester, Manchester Statistical Society. 1959). 6 A.P. Power and S.A. Harris, ‘Agricultural expansion in the UK with declining manual labour resources’, HM Treasury, Government Economic Service Occasional Papers No 7, HMSO. 1973.

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same time by a persistent relative, and at high levels of development also an absolute, decline of the labour force. Average income elasticities of demand for food are small. Measured at the producer level they may be as low as O-20 - O-10 in highly industrialised countries. Also, in these countries, rates of population growth decline and thereby cannot offer alternative sources of demand growth. These circumstances are likely to put a squeeze on agriculture in periods of rapid growth, while on the other hand economic growth in general and growth of demand for nonagricultural labour facilitate the decline of agricultural labour. The factors determining potential supply are primariiy resource, especially land, availability and technology. Although after two centuries of rapid expansion the cultivated area of the world does not increase much today, the possibilities of technological advance are still great indeed. Both in the developing world and in industriaiised countries food production has grown at sustained high rates; taking into account population increase, production kept pace with population growth in developing countries. In the developed market economies there is a continual tendency for supply to grow faster than demand. The actual level of supply is, of course, affected strongly by inputoutput price ratios and by the agricultural price level. Under free market conditions we observe a pressure on agricultural product prices because of the combination of slow increase in demand and comparatively high rates of a technologically induced increase in productivity for any given level of factor use. Thus the market signals overcapacity by means of comparatively low factor returns. These low returns, especially for agricultural labour, persist in the face of limited labour mobility, which in populous developing countries is caused by insu~cient non-agricultural opportunities and the fact that a measure of social security for the agriculture provides underemployed. In developed countries even under conditions of full employment, low opportunity costs persist for some groups in agriculture such as farm people over 45 to 50 years of age or farmers in industrially underdeveloped regions. Their chances in other occupations would be very poor.4 There are problems of quasi-fixity of assets other than labour> but these are not qualitatively different from conditions in other sectors. Sometimes the point has been made that the competitive structure of agriculture and the corresponding rapid adoption of new technologies make this problem appear quantitatively more serious than in other industries. Thus we see that the core problem of agricultural change is, in developed countries at least, the secular decline of labour demand. It has not come to an end even in countries with a highly developed agriculture like the USA or the UK, although the rate of labour outflow has decfined in recent years.6 In order for the process of reducing the farm labour force to continue, an income disparity must exist between marginal groups in agriculture and non-agricultural occupations. The social conscience of modern societies, however, will not permit these income differences to become too large. Governments are faced then, with the problem of guiding this adjustment process to avoid either extreme - overly depressed agricultural income or the retention of too many people in farming for too long. Since this process of change has lasted for decades and in FOOD POLICY February

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most countries is likely to continue in the foreseeable future, there is no once-and-for-all solution. The problem will remain as long as the situation described above will exist. Instability of markets The chronic disequilibrium between agriculture and other sectors is one of the major roots of government price and market policies. The other one, emphasised more in some periods than in others, is the problem of instability of agricultural markets. It led to numerous analyses in the early post-World War II period’ and attracted renewed attention after the near food crisis of 1972/73.8 Price and quantity fluctuations in agricultural markets derive partly from causes open to analysis and projection. In part they are highly irregular and unpredictable. Examples of the first types of variations are seasonal, mostly caused by fixed harvest time, and cyclical quantity and price fluctuations. These are characterised by lagged production response in competitive markets, display a cobweb-type behaviour and have been analysed extensively.’ Irregular quantity variations at the supply side are frequently caused by adverse or especially favourable weather conditions. Thus they represent an element of supply variability completely outside of human control. Moreover, international trade transmits the effects of extreme weather conditions in some parts of the world to others, while at the same time it alleviates the immediate effects in the country primarily affected. On the demand side irregular changes may originate from business cycle fluctuations. Of particular importance are depressions whenever these are sufficiently great to lower real per capita income. Animal products are generally more affected than crops.

‘Th. Schultz, Agriculture in an Unstable Economy (New York, McGraw-Hill, 1945), D.G. Johnson, Forward Prices for Agriculfure. (Chicago, Univ of Chicago Press, 1947). A. Hanau, ‘The disparate stability of farm and nonfarm prices’, in Proceedings, International Conference of Agricultural Economists, 10th Conference, 1958. (London, 1960). 8 D. Blandford and J.M. Currie. ‘Price uncertainty - the case for government intervention’. Journal of Agricultural Economics, Vol XXVI, No 1, Januarv 1975. p 37-51. 9 A. Hanau, Die Prognose der Schweinepreise (Berlin, Vierteljahreshefte zur Konjunkturforschung, 1927), and F.V. Waugh, ‘Cobweb models’. Journal of Farm Economics, Vol 46. 1964. D 732-750

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Small quantity changes tend to cause large price changes, since demand elasticities at the producer level are low. Moreover, shortterm supply elasticities are low unless reserves are readily available or foreign trade functions sufficiently smoothly to even out difficulties. If this is not the case, shortages and surplusses can only be eliminated after a sufficient time for production adjustments or changes in foreign trade flows. The removal of surplusses is often more difficult because asset fixity may closely circumscribe downward adjustments of production. These price changes lead to corresponding changes in producer and consumer positions without any distributive purpose. High prices cause an unnecessary burden on the consumer while low prices lead to depressed farm incomes. In particular, price fluctuations affect farmers’ investment decisions because of extreme uncertainty under free market conditions. Thus the agricultural economy is characterised by two major phenomena - the need for stabilising markets, and successive stages of sectoral disequilibrium with a tendency for depressed farm incomes to prevail - which have led governments to pursue an active price and market policy. Agricultural income is an elusive concept in itself. Usually it is defined either as total factor returns or returns to labour. It is measured, therefore, as sectoral GNP per capita in comparison to other sectors, or, on the basis of similar concepts, it is derived from farm accounting data where provisions are made for a return to capital. This functional income concept is helpful in describing the economic development of the agricultural sector. It may say little 119

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about personal income of farmers which includes returns to land and other capital goods. Moreover, farm households may draw their income from a variety of sources such as non-agricultural investments and part-time off-farm employment. Although sectoral factor income concepts will be used in the following discussion their limited applicability must be kept in mind.

Alternative policies Historically, different forms of price and market policies have been chosen depending upon the particular farm policy objectives and the trade position of a country. Some elements of market policy are not controversial. These are those designed to improve the functioning of the market system such as ensuring sufficient market transparency. Also the objective of stabilisation in the face of harvest variation is commonly accepted even if the choice of instruments varies. However, the borderline between stabilisation and income support is frequently ill-defined and the policies to achieve stabilisation are usually part of the overall system of price and market policies. The following discussion attempts to list alternative forms of policies in fairly broad categories in order to elucidate their basic characteristics. In practice such policies experience many modifications and occur in varying combinations.

“The development of import policies has been described in detail in D. Gale Johnson, World Agriculture in Disarray, (London, Fontana/Collins and Trade Policy Research Centre, 1973). “This method was usual in Germany prior to changing to the EEC system which uses the first mentioned system.

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Protective measures at the border Protective measures at the border are designed to affect availability of imports in domestic markets. lo The classical form of protection is the collection of border tariffs. Their effects on domestic market supply and prices are well known. Tariffs dominated in the period prior to World War I and the first years after the war as the major instruments in agricultural price policy. They were gradually replaced by a system of much more stringent regulations, a process which began during the crisis of the early 1930s and was perfected in the post-World War II period. Traditional tariff protection provided insufficient income guarantees in periods of fluctuating world market supply, demand, and prices. The solutions that evolved have taken two forms: a system of variable levies as is practised today in the European Communities, and import or export quotas. Tariffs or equivalent border instruments provide protection for farmers at home. However, they can do very little to eliminate fluctuations of quantities and thereby of prices. On the contrary, they may under certain conditions even increase price fluctuations. This seems to be the major reason for moving either towards a system that combines tariff-type protection with the automatic elimination of downward price fluctuation, or to discretionary import quotas which enable an administration to pursue the same objective. Such quotas lend themselves to bilateral negotiations of market access quotas.” Both instruments are potentially symmetric with respect to export control. The equivalent of a variable levy on imports is an export levy in times when world market prices exceed desired domestic market prices. The EEC used this device in 1973/74 to control the level of grain and sugar exports. In similar situations a country may use export quotas or export bans in order to prevent domestic prices from increasing beyond a politically acceptable limit. The brief 1973 US FOOD POLICY

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export ban on soybeans is an example of the introduction of such a policy under highly uncertain market conditions. It now appears that this was probably ill-considered in view of long-term US trade interests. For importing countries this ban gave a very brief and uncomfortable view of things to come if supply conditions should worsen. It should be mentioned here, that trade inhibiting effects similar to the ones described above are often obtained by means of non-tariff trade barriers such as veterinary regulations, quality requirements, grading systems and similar devices. Their explicit objective is largely unrelated to trade; but the temptation is great for governments to use such instruments where open restrictions run counter to international rules of behaviour. Domestic interventions Domestic interventions also take a variety of forms; but again we observe developments towards a combination of price support and price-quantity stabilisation. Relatively simple price subsidies paid to farmers grew into more elaborate systems with either added income stabilisation or intervention buying. The first line of development is characterised by the deficiency payment system which was introduced in the UK after World War II. In its pure form it provides for an open-ended absolute producer price stabilisation without additional interference in foreign trade. The difference between world market price and domestic price goal is paid by the government. The second means of added stabilisation is a domestic guaranteed purchasing system in which the government or government supported agencies intervene at the market to ensure a minimum producer price. In order to avoid giving support to foreign producers, the intervention buying system has to be complemented by some kind of border protection which keeps the foreign supply prices at or above the domestic market price. The EEC market organisation reflects this second option. Intervention buying may be discretionary or compulsory. Generally governments should shy away from this second type of intervention for perishable products, while it can be and frequently is used for storable products such as grain. More direct forms of intervention at the supply side - usually considered when self-sufficiency at price levels above world market prices has been reached - are supply controls of various forms. Examples are the attempts at comprehensive controls in the USA in the early 1960s and the sugar marketing system of the EEC. Supply controls may limit marketable quantities directly or put limits on the use of factors of production, mainly land. The marketing or factor input quotas may be made negotiable in order to avoid or reduce the misallocation of resources resulting from a rigid fixing of a production base. To be workable supply controls require either a very limited number of controllable marketing channels or a high degree of administrative organisation which very often is not available. Therefore such controls are frequently discussed, but seldom used. Two other forms of intervention operate on domestic demand. They are consumer subsidies and price discrimination between different uses of a product. Consumer subsidies are seldom used as a general instrument over prolonged periods of time. General consumer subsidies may provide emergency relief in periods of rapidly rising FOOD POLlCY

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product prices. Subsidising food specifically for low income or disadvantaged groups enables governments to achieve objectives of agricultural and general social policy with one instrument. All too often these instruments are used only for market surplusses while from the point of view of social policies they would have to be more permanent. Price discrimination between different uses of the same product, for example fluid and manufacturing milk, is favoured in many countries when the conditions, primarily separability of the different markets, are met. Finally export subsidies are often introduced in order to raise the demand function for domestic producers. The major effect of export subsidies is a subsidisation of foreign consumers. The EEC butter delivery to the USSR at highly subsidised prices caused a wide public discussion of this particular instrument and brought it into disrepute in Europe. The actual reason for introducing export subsidies in the first place is the comparatively higher degree of price level control on domestic than on foreign markets. To achieve an income support to farmers, governments secure a price level at home, above that of the world market, which brings about most of the desired income transfer to farmers while exports are sufhciently subsidised to ensure competitiveness at world markets. Whenever a significant proportion of production goes into exports it may be more advantageous to apply this instrument in a somewhat different fashion by charging a higher price for domestic use and paying farmers a blend price. These brief remarks can only give an indication of the variety of price and market policies for different products in various countries. A reasonably complete summary for its member countries is provided by OECD at regular intervals.‘*

Objectives of price and market policy Any general evaluation of price and market policy is rendered difficult by the variety of objectives governments pursue. Nevertheless in industrialised Western countries two major goals are clearly discernible under present-day conditions: 0 0

the stabilisation of farm prices and quantities; the support of farm income.

and

Additional objectives which in some cases may be thought of as constraints have been successively introduced; they include the improvements in the balance-ofcontrol of budget expenditure, payments, the reduction of inflation, the expansion of international trade, a speed-up of structural change in agriculture and an improvement of the economic position of the rural poor. This list can be expanded to include regional development and environmental conservation which will not be discussed here.

Policy l2OECD, Agricultural Various Countries; 1974-75.

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Reports:

A strong case for active government price and market policies can be made on the market stabilisation objective, especially in so far as such fluctuations serve no desirable economic purpose. Price stabilisation alone would have to be oriented toward medium-ter,m market clearing prices. Given the tendency of rapid productivity increases for many farm products, the price trend is downward in real terms. Thus, stabilising farm prices would mean a gradual real decline. The need for stabilisation increases with decreasing price elasticities. The potential for quantity stabilisation, however, depends FOOD POLICY

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the storability of products. Perishable products offer few possibilities for quantitative market interventions in contrast to storable products such as grain. Stabilisation by price and market policies, therefore, should be concentrated on basic storable products, in particular grain. To a limited extent similar considerations apply to other storable basic commodities such as sugar or dried skim milk. In general, however, grain can be converted easily enough into animal products, so that a successful stabilisation policy for grain will bring an element of stability into several other markets without too many additional interventions. Policies designed to stabilise domestic markets tend to increase instability at the world market. For instance, EEC grain policies, which shield the EEC domestic market effectively against fluctuations, have such an effect. In times of glut the high price system in the EEC tends to depress demand, especially derived demand for feed grain, and thus pushes world market prices even further down. In periods of scarcity on the other hand, as were experienced in 1973-74, the lower EEC prices compared to world market prices place the adjustment burden on countries without similar controls because prices do not rise and no reduction in EEC consumption resulting from higher prices can take place.

Farm income support Farm support as a policy objective originated in the set of real world conditions that led towards the permanent disequilibria between agriculture and other sectors. As Brandow has pointed out for the USA,13 price support policy with the objective of income support was originally intended for commercial agriculture. This applies to most other countries too. The objective of intra-sectoral distribution entered at a much later date. The broad direction of the level of farm income support was also discussed in an exemplary fashion by Brandowl who described the upper limit as a guarantee of comparable returns to all factors of production and the lower limit as the provision of a standard of living which is considered socially acceptable at any point in time. Stated dynamically, I have argued that the rate of decrease in the agricultural labour force must not exceed a socially acceptable limit.r5 This limit depends on the level of income disparity needed to induce people to migrate, on non-farm opportunities and on other factors. A necessary condition for this process of occupational change to materialise is a sufficient supply of alternative employment possibilities.

Other objectives ” G.E. Brandow, ‘Policy for commercial agriculture: a review of literature, 19451971,’ Unpublished Manuscript, January 1973. l4 G.E. Brandow. ‘In search of principles of farm Journal of Farm policy’. Econon,ics, Vol 44. 1962. p 1 145-l 1 55. l5 T. Heidhues. ‘Sectoral and regional analysis, objectives and methods’, in The Future of Agriculture, Papers and Reports. 15th International Conference of Agricultural Economists, Sao Paula 19 73, (Oxford, 1974).

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Other objectives of price and market policy for agriculture are more limited in scope. They are less general, and tend to be limited to individual countries or to specific time periods. Whenever price and market policies involve either intervention buying, storage and surplus removal, or deficiency payments to producers, they may place a considerable burden on the government budget. This is particularly true of open-ended commitments. Wherever governments have entered such commitments a discussion of limiting payments soon developed. Balance-of-payments effects of agricultural price policy have traditionally been emphasised in deficit countries. Production 123

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stimulation and import saving are considered welcome side effects under fixed exchange rates. Even under floating rates such considerations seem to play a role for some deficit countries. In periods of rapid inflation, farm price policies may be used as a stabilising device in that price rises are granted anticyclically. At least governments can prevent administered farm prices from speeding up an already existing inflationary process. Domestic price support policies for agriculture, as long as they are tied to production, imports or exports, distort international trade flows. Agricultural protection created considerable obstacles for trade liberalisation policies. The EEC, in particular, with its perfected system of export restitution inhibited more liberal trade practices. Since these agricultural policies tend to conflict with trade policies for industrial goods, it is more and more obvious that principles of general trade policy act as constraints on agricultural support policy. They cannot eliminate the latter, but they may prevent excesses and encourage international cooperation in the definition of rules for agricultural price support policies. Similarly the requirements of change in the general economy and the particular need for agricultural adjustment constrain the use of price and market policies for income support. Until twenty years ago agricultural price policy was often conceived as being able to conserve existing farm structure. This view has changed towards an attempt to use policy to control the speed of adjustment in terms of the reduction of labour on the one hand, and ensuring the concomitant growth of farms on the other hand. Even this brief and simplified discussion of policy objectives indicates that these are frequently not well defined, tend to be conflicting and, most importantly, they evolve over time, new objectives being added without abandoning existing ones.i6 Price and market policy is - given the variety of objectives in farm policy - one instrument among many. Others include social policies, policies to improve structural adjustments in agriculture and regional development in general. Given the complexity of objectives and the differences between product markets, price policies alone cannot serve all these different ends optimally.

Criteria for evaluation

” T. Josling, ‘Agricultural policies in developed countries. A review’, Journal of Agricultural Economics, Vol XXV, 1974, pp 229-264. I7 0. Gulbrandsen and A. Lindbeck, The Economics of the Agricultural Sector (Stockholm, Almquist & Wiksell, 1973), and T. Josling, ‘A formal approach to agricultural policy’, Journal ofAgricultural Economics, Vol XX, 1969, p 175-I 95.

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The strength and weakness of economics alike is the temptation to reduce problems to a comparison within an ideal world that is described in the framework of the neoclassical paradigm. It provides a basis of comparison for less ideal, real world situations. The neoclassical world is characterised by markets free of government intervention, free trade among nations, equilibria on all these markets, and actions of producers and consumers dictated by the maximisation of their respective welfare. Under a wide range of conditions market equilibria thus obtained maximise social welfare as measured by GNP or similar indicators. To obtain evaluative criteria for price and market policy for agriculture it is convenient to begin with this framework.” The particular attraction of this reference point is its neatness and comprehensiveness. It provides a general answer to the questions of price and quantity effects, domestically and for international trade; in particular it indicates resource costs, transfer to farmers and FOOD POLICY

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supplying industries, consumer burden outlays. Stability effects are not captured Briefly the effects of a system that their world market equilibrium level in a 0

0

0



See Guldbrandsen & Lindbech, op cit. ‘9J. Rosine, and P. Helmberger, A neoclassical analysis of the U.S. farm sector, 1948-l 970’. American Journal of Agricultural Economics, Vol 56, 1974, p 717-729.

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and governmental financial within this model. holds domestic prices above food importing country are:

Consumers buy less of the product concerned at higher prices. input supplying industries, and in most cases Farmers, governments receive a transfer in terms of additional expenditure for quantities bought. Additional resources are drawn into agriculture and domestic production increases. Additional returns are shared between farmers as owners of fixed production factors and suppliers of labour and input supply industries. Imports are reduced because of the decline in consumption and the expansion of domestic production.

The economic costs of such a policy evaluated under these terms are twofold. First, there is a loss of consumer welfare of uncertain magnitude. Attempts have been made to assess its magnitude in terms of loss of consumer rent, although this concept is not uncontroversial. The second economic cost component is resource costs. Price support policies attract resources into agriculture which - evaluated under free market prices - could be employed more gainfully elsewhere. Moreover they keep labour in agriculture at artificially high levels of labour returns. Estimates of the size of these different costs and transfers are available for some countries, eg Sweden.‘* The general conclusion is clear. Any kind of price support policy incurs economic costs; an EEC-type variable levy system by the loss of consumer welfare and inefficient use of resources in agriculture, and a deficiency payment-type system similar to the former British one only by inefficient resource use. The economic costs increase with decreasing slopes of the supply and demand functions. Since for agricultural production both curves tend to be fairly steep this puts a limit to such costs. Under this set of criteria direct income payments to farmers will always be judged superior to price policies under the assumption that such payments can be made neutral with respect to production. They would avoid trade disrupting effects. Moreover, transfer payments do not themselves constitute costs in terms of factor use and, therefore, within this framework, do not affect social welfare. Very often an additional argument is raised against agricultural price support policies - that price support benefits accrue mostly to the fixed factor land. They become capitalised in land prices and thus represent increased production costs leaving farm labour income as or almost as badly off as before. For example, it was estimated that for the USA, up to 92% of total benefit accrued to land.” Under the assumption of complete separation between land ownership and farming this argument against price policy would hold true. Agricultural price support would be landlord support. Under a family farm system where ownership and farming is identical, the economic source of a given amount of additional income would hardly matter. Thus the capitalisation argument would affect the comparative evaluation of price support policies very little under the agricultural policy objectives of most countries. The clarity of the argument against price support on the basis of the above evaluation and the persistence of price support programmes

Price and market policy for agriculture

in the majority of developed countries as well as the limited attempts at substituting direct income payments suggest that the criteria for policy evaluation are incomplete or - at least partly - inapplicable. Policy evaluation in the field of agricultural price policies should be more comprehensive, oriented more toward the objectives pursued and, finally, have a stronger empirical base than they have so far. One fallacy of the neoclassical model in spite of its completeness and consistency is, I believe, the disregard for the source of transfer payments, whether they be made indirectly via higher food prices or by direct government payments to farmers. There are two possibly conflicting issues. First, modern industrial societies attempt to decrease inequality in income and wealth. This tendency favours progressive direct taxation and distribution of government benefits out of such taxes according to need. Similarly, in agricultural policy the distribution effects of various policies are analysed more closely than before. Proposals for change frequently advocate direct income payments instead of price supports because payments can more easily favour low income farmers. The second issue concerns the difhculties governments have to match demands on their budget with sufficiently high rates of taxation. Thus they may hesitate to replace a system of indirect taxation through higher than world market agricultural prices by increased direct taxation. Similar conflicts exist in the provision of public services in the areas of health care, mass transpo~ation, etc. It would be presumptuous to attempt any generalised evaluation of price and market policies in terms of the set of objectives and constraints set out above. Only a few impressionistic arguments can be presented which might not even apply to every industrialised market economy. They are certainly inapplicable to the developing world. One of the major objectives, quantity and price stabilisation has been met to a considerable degree for basic storable commodities in the post-World War II period. In fact, the high degree of stability in the grain market in particular let the stability issue fade out of public discussion for a long time. This high degree of stability, one suspects, was less a consequence of stabilisation efforts than of income support oriented price policies in a number of countries. A major condition for this stabilisation success was the large quantities in storage in the USA. US reserves were able to supply nations with large harvest fluctuations in times of bad harvests without any difficulties until 1972. Even under the then emerging crisis huge’additional demand could be met with surprisingly little difficulty. This even happened with a buyer like the USSR which is faced with considerable harvest variability and yet is unwilling to cooperate internation~ly in the pursuit of stabilisation policies. As a means to support farm income, especially income in the commercial part of agriculture, price policies in many countries have been quite successful in maintaining not parity income for farm people, but a reasonable standard of living, and in allowing for a change to larger farms more commensurate with modern technology. They were not primarily designed to cure problems of rural poverty, and in practice they at best alleviated such problems. Differences in farm size distribution among countries prevent a more definite conclusion. Price policy did not prevent major structural change in agriculture in practically all countries. One could argue, in particular on the basis 126

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of neoclassical diagrammatical evidence, that these processes could have been speeded up considerably but I doubt it. Clearly deleterious were the effects of price policies on government budgets and on international trade. Lack of caution in price policy and the extension of price-quantity interventions to perishables or to products with high storage costs placed a considerable burden on government budgets. Attempting to support perishable products by market interventions in the form of support buying is a waste of funds. Examples are provided by several EEC marketing systems where reasonable forms of inferior utilisation of surplus products are not available. The disposal of such surplusses causes expenditures far in excess of benefits accruing to the farm sector. In international trade, dumping is considered a particularly obnoxious feature of support policies. Although the theoretical differences between import restriction and export support is less important, in practice the degree of self-sufficiency for a particular product is an important determinant in policy evaluation. As long as a measurable import gap exists, government policy can be directed at producer support without incurring intervention costs and without recourse to subsidised exports. Moreover there is a considerable range of choice of instruments. As soon as full self-sufficiency is approached some policies become inoperative. This applies in particular because world markets for many products are highly regionalised or subject to preferential trade arrangements. Governments often learned to adjust to such new circumstances only after a period of costly export subsidies, such as the USA experienced in the early 1960s and the EEC half a decade later.

The future

20T. Josling, Agricultural prices: their role in market economics, in The Future of Agriculture, Papers and Reports, 15th International Conference of Agricultural Economists, Sao Paul0 1973 (Oxford, 1974).

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Agricultural policy mixes must be designed not as equilibriumoriented policies but policies to control the degree of disequilibrium between agriculture and other sectors of the economy. The decline of the agricultural labour force in industrialised countries is a secular phenomenon. For this process of change to continue some income differences, ie, disequilibrium in the labour market, must continue. However, the degree of disequilibrium and rates of change should be controlled by public policy. With regard to the choice of instruments Josling’O recently said: ‘The high point of agricultural price policy is passed’. This is likely to be true as far as the relative weight accorded to price policy compared with other policies is concerned. It cannot, in my opinion, be taken to mean that price policy as a major instrument of agricultural policy will fade away. Price and market policies are among the earliest instruments used in supporting farmers. Usually they act in an undifferentiated fashion, and it is difficult to direct them at specific groups that need support most, even if we are likely to observe a trend towards more differentiated interventions aimed at more clearly specified objectives and more closely defined target groups. However, as we have seen, price policy contributes to the fulfillment of targets in many ways, primarily with respect to market stabilisation and farm income support, but less for those on the lower end of the agricultural income scale. Moreover, it causes the least administrative burden among all alternative forms of income transfer. Therefore, I suggest it should be

Price arid market policy for agriculture

used to the extent that farmers would receive government aid anyway under a more differentiated and target specific set of policies and insofar as market clearing constraints are not violated. Beyond this level other instruments should be given preference. In practice, much depends on choosing an appropriate price level and on establishing price ratios among support rates of different products that avoid unwarranted surplusses, ie surplusses unwanted in terms of stabilisation needs or with costly forms of secondary utilisation. This implies a higher degree of stabilisation for grain as the basic commodity and derived support rates for other products that place a reasonable burden of price and quantity induced income changes on farmers themselves. Special problems may arise when a product is produced mainly on small farms such as milk in continental Western Europe. Then price and market policies are easily dominated by considerations of small farm income support, as is demonstrated by EEC policies in this area. This discussion, like most agricultural policy debates, pertains to problems of the past two decades in the Western world. Here, many indicators point to a continuation of trends where the dominating triad of problems is stabilisation, farm income support and market surplusses. Although this scenario is the more likely one, the possibility that global conditions are changing in the direction of more balanced medium-term market developments and in the long term towards scarcity of food rather than surplus cannot be excluded. Should these developments occur, problems of agricultural policy in general and of price and market policy in particular would shift dramatically. Stabilisation would remain an issue. But surplus and the need for farm income support could be replaced by the problems of scarcity and limiting farm income, at least for those parts of agriculture and for those countries that are well endowed with resources.‘i National priorities and international cooperation would have to be directed toward the distribution aspects of food without charging what the market will bear. National price policies have international repercussions. Whenever major consuming countries pursue stabilisation policies for their domestic markets the rest of the world is almost forced to join in because of the destabilising effects of the first group on world market prices. The same consequences for domestic markets result from one or a few years of extreme variation in the world market. Since such actions by individual countries force the whole international community to follow on similar lines there exist three possible alternative ways of action: 1. Nationally determined stabilisation policies without cooperation. 2. A joint change of major producing and consuming nations to a free market system with smaller but potentially still major fluctuations at the world market. 3. International rules of behaviour for domestic income and stabilisation policies and joint efforts toward a world storage policy. ” See J. Robinson, ‘Some reflections on the philosophy of prices,’ The Manchester School of Economic and Social Studies, VolXXVI, 1958,p 116-135.

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Past policies, especially grain policies have had elements of all three alternatives. The emerging crisis in the early 1970s caused a shock in a number of regular grain importing countries in the developing and

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Price ad

markel policy for agriculture

industrial world, and greatly strengthened initiatives toward the third alternative. From the point of view of an individual country it could be argued that international trade would not only guide the longer-term division of labour between nations but also secure sufficient supplies under conditions of weather induced short-term harvest variations. Given the sizeable number of grain producing areas in the world a strong case can be made. However, it is open to doubt whether under such a system sufficiently large quantities will be kept in reserve to avoid emergencies. Such emergencies might imply starvation for some countries whose market access is constrained by foreign exchange shortage. Moreover, there remains some doubt whether exporting nations will in extreme situations curtail their exports and place the burden of adjustment on grain importing countries. Although it is possible that a free trade policy will maximise average welfare of peoples over the long term, grain is considered too important a commodity to incur the risks of even infrequent major shortages at irregular intervals. If past policies of practically all countries reveal government preferences in the trade-off between minimum cost supply on average and reasonable stability in all years, then the second objective enjoys strong preference even at the cost of an average loss of GNP. A reasonable policy for the future would seem to be an added emphasis on international rules of behaviour for domestic policies and more cooperation between nations in times of short supplies. The USA has indicated that it is unwilling to carry the burden of world reserves alone. Given the highly irregular market participation of state trading nations, regular importers must take added precautions in order not to be left out in the cold whenever a shortage arises. Finally the industrialised countries as a group have a responsibility to maintain reserves as a safeguard against emergencies in developing countries. Ideally such a policy should combine rules on price support behaviour, ie rules on the long term role market forces will have, and on a world reserve. Since there seems to be a fairly high preference for security of supplies even in the case of harvest failure, the resulting concert of national and international grain policies is likely to lead to reserves. These will put permanent pressure on prices unless active policies of supporting prices at minimal levels are pursued. Such policies will not be costless, and the special responsibility of industrialised countries has been mentioned above. If among these a nation or a group of nations refuse to cooperate even in the limited context of improving market transparency they should not automatically benefit from such reserves. On the other hand they should always have the option to join. In general, stabilisation policies in agriculture have involved some kind of price support because above-normal supplies act as an insurance against scarcity. Such insurance carries a comparatively low premium as long as easily storable basic products are involved. If carried too far and in particular if it causes surplus production of perishable commodities, price policy can easily become an unbearable burden for consumers and governments alike.

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