Government intervention in agriculture: Still relevant in the 21st century?
Report presented to the Union des Producteurs Agricoles (UPA)
by Groupe AGECO, October 2015
The Quebec-based Groupe AGECO, a consulting firm specialized in economic studies in the agri-food sector, recently submitted a report on the justification of government intervention in agriculture to the Quebec Union des Producteurs Agricoles (UPA). We are publishing below a excerpt from the summary of the report1.
For the most part, the report reexamines the theory of the “farm problem” in light of current agricultural challenges. This dogma came to light in the United States following the 1929 economic downturn and the proactive policies that were implemented at that time, which still underpin the US farm policy. From the 1930s to the 1980s, it has formed the mainstream view in American agronomics. Accordingly, the report showcases the great names in economics––such as John K. Galbraith, Theodore Schultz, D. Gale Johnson or Willard Cochrane––by showing that the theoretical foundations that ground government intervention have (unfortunately) withstood the test of time.
In fact, “the agricultural sector’s inability to maintain its equilibrium level, leading to a high price volatility and the repeated failure to provide over the long term a stable and adequate compensation for production resources”2 remains a current issue. The main reason has not changed––the price inelasticity of supply in the short term. In other words, when prices are high, producers invest and increase output, until when prices decline and producers… continue to produce to repay investments, even if it means under-paying their work and their equity. And after close to a decade of prices artificially inflated by the financialization of agricultural markets and the rethoric on “the consumption boundless growth to feed nine billion people by 2050,” the adjustment will be as long and dramatic as the international community’s reaction to design a new world governance system will be delayed.
momagri Editorial Board
More than 75 years after the first verbalization of the “farm problem”, agriculture in developed countries has experienced comprehensive structural, social and technological changes. These transformations led some agricultural economists to question the existence of the “farm problem.” The term refers to a set of attributes regarding the supply and demand of agricultural products that result in the inability of the agricultural sector to maintain its equilibrium level. This continued imbalance leads to high price volatility and the repeated failure to provide a stable and adequate compensation over the long term for production resources. These are the reasons that guided various governments to implement intervention measures for agriculture during the 20th century: Farm credit programs, agricultural insurance, subsidies for purchases of inputs, border protection measures, surplus management, export subsidies, price and income support, supply management and aid procedures for agricultural product marketing. These programs, which were more or less connected to each other in some countries, aimed to provide farmers with a safety net through a more stable and predictable environment conducive to investment and the development of production. In a backdrop of concerns regarding government intervention in agriculture, this objective of this study was thus to reexamine the reasons behind such intervention in light of the criticisms raised in economic publications, the current agricultural context and the new threats to which the sectoris exposed.
After examining the recent publications on the topic, we feel that the specific attributes of agriculture, which are at the root of the “farm problem,” are very much present with us today. Among the authors consulted, we think that no one ascertains that the nature of supply––existence of production cycles, perishable nature of products, impact of climate conditions and farm pests, fixity and specificity of the workforce and high rate of technological innovation––or that of demand––price and income inelasticity, competitive structure of production against more concentrated buyers––regarding agricultural commodities have not significantly changed. Even Bruce Gardner (1992), whose work is considered as the cornerstone of the criticism of the “farm problem”, agrees that “the econometric results made it possible to support the existence––and more importantly the inevitability––of the “farm problem”. The main reassessment of the “farm problem” concerns the end of income inequity between agricultural households and non-agricultural households. It is indeed noticed that, in some developed countries, the income of agricultural households is equivalent to––and even sometimes higher than––that of non agricultural households. Is this enough to infer that the “farm problem” is no longer an issue? Since the analyses on agricultural income include by definition the impact of support measures to agriculture, we feel they are rather a factor in showing that intervention can correct, at least in part, the effects of the specific attributes of agriculture, but that they do not imply that markets provide adequate incomes for production resources. In addition, the high proportion of off-farm incomes in agricultural households living in unincorporated undertakings makes it difficult to assess the parity of agricultural and non-agricultural incomes. When we look at net agricultural incomes excluding subsidies, we note that they are often negative, and primarily excessively variable. While we acknowledge the headway made in income parity, we must not forget the fact that we note a volatility increase in many agricultural markets. This volatility, which occurs by episodes of very high or very low prices, has a disruptive and destabilizing effect on the agricultural sector, as well as on the other segments of the agri-food industry. The 2008 food crisis has also shown that such volatility can affect consumers as well, at least the households for whom buying basic groceries represent a significant share of the family income. Today, agricultural markets are still experiencing widespread instability.
There is an international trend toward a government withdrawal from risk management, and an increased recourse to private tools to manage risks, such as futures markets and contract agreements. While it is true that such tools can help manage risks in business, markets are still far from providing a complete set of tools allowing producers to hedge against the many risks that typify the agricultural sector, especially systemic and long-term risks. Similarly to other economic sectors experiencing market failures, it seems that governments must still play a role in agriculture.
With a view of having to feed nine billion people by 2050 under conditions that ensure the sustainability of resources used, it therefore seems that government intervention is still relevant in the 21st century. This intervention must be reconsidered to include the new public expectations in agriculture and the new constraints, especially regarding the scarcity of resources and the new sources of risk. It must also adapt to include private risk management tools while accounting for their limitations. Creating the conditions to promote investment and the development of production represents a crucial challenge that will confront governments. Government intervention will help reduce income instability and remunerate producers for tasks that cannot be paid, or poorly paid, by markets. As a result, it will ensure the expansion of the agricultural sector at a critical juncture of its development, when, for the first time, the growth of demand for agricultural products could be higher than the growth of supply.
1 The complete text of the report is available from:
2 Exerpts from the introductory remarks to the report