PRICE FLOORS AS FARM POLICY.   Term Paper ID:24700 Click to get this paper

Essay Subject: Definition, purpose of subsidies, effectiveness, impact on sonsumers, alternatives. Supply/demand graphs.... More...

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Paper Abstract: Definition, purpose of subsidies, effectiveness, impact on sonsumers, alternatives. Supply/demand graphs. Paper Introduction: Introduction Historically, the family farm in the United States has been considered one of the cornerstones of both the economy and the culture. The pioneers who colonized the West did so on farms and ranches, and the family farm epitomizes American values. In recent years, however, farming has increasingly been influenced by agribusiness, which consists of large corporations bringing economies of scale to huge operations. Commodity prices have fallen, and the smaller farmers are often forced to sell their assets and find other means of employment. This research considers one of the strategies used to stem this trend, price floors, and the economic ramifications of this strategy. Price Floors Price floors are minimum prices that the government guarantees farmers. If a Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. While these are political choices that are madeas a matter of policy, they have very real economic effects on taxpayersand consumers of social services. The argument against protecting the small farmer isthat the economic distress that results affects a greater number of peoplein the community than if the small farmer puts his capital to other uses(Graebner 6). In other cases, however, price floors merelyincrease the amount of profit that companies receive for their activities(Bronstien 9). Commodityprices have fallen, and the smaller farmers are often forced to sell theirassets and find other means of employment. Overseas competition might be a threatto farmers in this country, but they also have the opportunity to selltheir goods in foreign nations. Farmers gain in the short-run becausethey receive revenues for their crops which they would not otherwisereceive. This political consideration is one that carries someweight when considering whether to eliminate farm subsidies altogether. Other professions and businesses donot receive the same preferential treatment that the small farmer hasreceived, and price floors offer not only assistance to the small familyfarmer, but to larger agribusiness companies, as well. If a farmer is unable to obtain that price in the market, thegovernment will purchase the goods at that price from the farmer. This creates the problem of what to do with the extra food once it hasbeen produced. If, inthe long-run, the farmer determines that it is not profitable to remain infarming, he may well choose to put his assets to other uses. "Reduction in Government Supports will Help Agriculture." Feedstuffs (Mar 2 , 1995): 1, 14.Ruffin, Roy J., and Paul R. Another alternative is to improve the market for Americanfoodstuffs overseas. This would reduce the cost of production tofarmers. The argument for subsidies and price floors is that smaller farmerscannot compete against large agribusiness, and so there costs are likely tobe above p1. Economic Effects of Subsidies Food has a very inelastic demand curve; its aggregate supply curvetends to be more elastic. The pioneerswho colonized the West did so on farms and ranches, and the family farmepitomizes American values. If the goal is to protect the small farmer through governmentintervention, the government could work with colleges and universities todevelop crops with higher yields that would reduce the cost to growers.The government can also work with its trade officials to increase theavailability of foreign markets to domestic crops. Butthe farmers cannot plant any other crops in their fields as this would makethem ineligible for the farm subsidy since they would receive "extra" moneythat their colleagues were not eligible for. Works CitedBronstien, Barbara. This economic inefficiency is the first problem with price subsidiesfor food. "Costs of Farming Expected to Rise if Aid Programs Cut." Journal of Commerce and Commercial (Apr 11, 1995): 4B. These efforts wouldhave the result of providing farmers with additional markets for goods thatthey produce. But whenprice floors are in place, the suppliers are guaranteed their price and sothere is no incentive to reduce their production. Price Floors Price floors are minimum prices that the government guaranteesfarmers. They receive more moneyfor the quantities they produce, even when they cannot sell the product. There is also the question of how the government is paying for thesubsidies to farmers. In some cases, the government buys the food at theguaranteed price and redistributes it to those in society who have a need.The government cheese giveaways of the 198 s illustrates this. Society as a whole does notbenefit when prices increase, and the effect is felt most deeply by thepoor, who are then forced to spend a greater percentage of their income onfood to the detriment of other purchases. This leads to the absurd (andhighly market inefficient) situation of paying farmers for not farming.The following graph illustrates this situation as the supply curve shiftsupward (to S'). Suppliers whose costs are above p1 willnot produce and will find other places to put their capital, whilesuppliers whose costs are below p1 will remain in the market (Ruffin &Gregory 71). Any action which results in a surplus (or a shortage, for thatmatter) puts the market in an inefficient position. This would also give farmers the incentive necessary toinvestigate different crops that might have long-term benefit over cropsthat they are currently growing. Should the government even be interested inprotecting the small farmer? For this reason,those in the nonfarming sector argue that the preferences are unfair andshould be eliminated. However,this is again an inefficient use of the market since the government is notselling the cheese for what it paid, but instead "sells" it at a loss. Thisprevents an excess amount of goods from being available on the market andcan serve to drive up prices as the limited supply contributes to upwardprice pressure for the specific commodity (Simon 4B). However, a dependence on foreign food imports could be a problemif a serious war erupts or supplies are otherwise eliminated. Theyhave no incentive to move to different crops that do not have priceguarantees because the risk is much higher (Bronstien 9). Farmers can also look at their operation from a business standpointand consider how they can change the situation to be more favorable tothem. Because of this,farmers may be planting crops for which they know they have no market,because there is a surplus, but which provides them with an income. The quantity supplied at the higher price is the same asthe quantity demanded (q'), and the revenue increase to the market overallis slightly higher as the decrease in quantity demanded is exceeded by theprice increase. This is a regressive approach to the market since those consumerswho can least afford it, the poor, must pay a larger percentage of theirincome for foodstuffs. If price supports are eliminated, people will have more money toconsume other goods and more money to invest, which benefits the economy asa whole. With the price supports, themarket produces a surplus of goods and only slightly fewer individuals arenot purchasing foodstuffs due to the higher prices (Ruffin & Gregory 343). Any business considers its internal strengths and weaknesses and itsexternal opportunities and threats. Thismove benefits the farmers in question, but causes problems for thesuppliers of goods whose demand curves are not as inelastic as food. In theshort-term, they result in a surplus in the market which is wasteful; inthe long-term, they artificially shift production from revenue generatingcrops to, in some cases, no crops at all. Wealthy individuals pay a smaller percentagebecause they have greater resources, but poor individuals must shift moniesfrom some other purchase to food when price floors are introduced. The goalhere is to provide the farmer with a guaranteed price for his goods so thathe will be able to continue his farming operation. Gregory. Introduction Historically, the family farm in the United States has been consideredone of the cornerstones of both the economy and the culture. NY: Addison-Wesley, 1997.Simon, Howard. Old food must beprocessed (frozen or canned) before it can be stored for long periods oftime; this is in contrast to durable goods which can be sold months andeven years after production and still have a useful life. This is because people must consumer foodproducts, but suppliers have other options for ways to use their capital.Suppliers do not have to grow food if the prices are too low. Principles of Microeconomics. In some cases, the government does not purchase the goods from thefarmer, but instead pays them not to produce at all (farm subsidies). However, they are not given any incentive to find alternate cropsor alternate ways of farming which would increase their ability to generatefuture revenue. Alternatives which can beconsidered are partnerships with colleges and universities in order tocreate higher yielding crops. This research considers one ofthe strategies used to stem this trend, price floors, and the economicramifications of this strategy. These companies might purchase goods that arenot for sale to the public, but are instead used for feed or otherproducts. [pic] Price floors in farming also lead to the question of how variousmembers of society are affected. Consumers lose because they pay an artificially high price for thegoods. A samplesupply and demand curve, showing an equilibrium price, is illustratedbelow: [pic] As illustrated by this chart, the revenue to suppliers is p1multiplied by q1, and the equilibrium point is (q1, p1) where the supplycurve crosses the demand curve. Also, they are not encouraged to seek overseas markets fortheir products (or other supply routes) since they can simply be paid fornot producing at all. Under typical marketconditions, a surplus would result in prices being driven down as supplierscut prices to sell their inventories, or begin producing less. Ideally, price floorsare meant to ensure that farmers whose costs exceed the price of theirgoods can remain solvent. The money comes from the taxpayers, and must eitherresult from an increase in taxation (taking additional money from taxpayersthat would have been consumed or invested) and shifting it to the farmers.Or, the revenue might come from a cutback in some other program, whichresults in increased demands on that program and possibly the eliminationof the program altogether. In recent years, however, farming hasincreasingly been influenced by agribusiness, which consists of largecorporations bringing economies of scale to huge operations. "Cutting Farm Subsidies Would be 2 Percent Hit." The Business Journal Serving Greater Sacramento (Mar 2 , 1995): 6-7.Muirhead, Sarah. Alternatives to Subsidies Are there alternatives to subsidies that could solve the problem thatthe small farmer faces? Farmers can also investigate and invest in fertilizers and laborsaving devices which can provide them with lower production costs. In some cases, the government has paid farmers to plow under fields,or to not plant them at all. Small business receives support from thegovernment in the form of small business loans, but these are repaid to thegovernment with interest (although the rates are typically lower than thoseavailable in the market as a whole). As the quantity sold increases, farmers would receivegreater revenue; if they are able to reduce their costs, additional benefitwould result. "A Farm Crisis is Looming." American Banker (Aug 14, 1995): 9.Garebner, Lynn. This has resulted to avoid having a surplusof goods and thus avoid the inefficient distribution of food products. The endresult of this is that the American economy is likely to see a greaterdependence on a few large companies for its agriculture rather than on manysmall farmers, and may also see a greater dependence on foreign foodentering the country (Muirhead 1). The government sometimes steps in and provides subsidies, inthe form of price floors, which establish a new equilibrium point asillustrated: [pic] The relatively small increase in price (to p') resulted in a largeincrease in quantity supplied (qs) and a smaller increase in quantitydemanded (qd), but the decrease in quantity demanded was not enough tooffset the increase in quantity supplied. Conclusion Price floors are not an efficient way of clearing the market. They can seek alliances with companiesthat consume farm products. This is a particularly important consideration when examining the foodindustry because it is composed of perishable goods. Once farmshave been eliminated, they are difficult to recreate, so a disruption inforeign imports in the future could prove problematic, much as the oilshocks of the 197 s. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.