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Agricultural policy and agribusiness

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This chapter is intended to ensure that students understand why agricultural policies are needed in both developing and developed countries. It will also shed light on the major forces that cause policy change, reasons for government involvement in agriculture and the place of agricultural policies in the future.

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Agricultural policy and agribusiness

  1. 1. CBU 5205 Agribusiness Marketing Agricultural Policies and its effects on Agribusinesses Daisy Odunze
  2. 2. Introductions  Governments have influenced agriculture directly through the following mechanisms; health regulation programs; price support laws and production controls; and the collection and distribution of agricultural statistics.  In addition to the general policies of the nation as a whole, agriculture is specifically affected by inflation, unemployment, and foreign policy.
  3. 3. Introductions  Agricultural policy describes a set of laws relating to domestic agriculture and imports of foreign agricultural products.  Governments usually implement agricultural policies with the goal of achieving a specific outcome in the domestic agricultural product markets.  Outcomes can involve, for example, a guaranteed supply level, price stability, product quality, product selection, land use or employment.
  4. 4. Introductions  Agricultural policy outlines the steps that will be taken to reach certain goals in the food and fibre economy.  Typically such policies affect the resources, production, and markets related to agricultural products and services.  They often are concerned with the safety, consumption, and nutritional value of food. Agricultural policy like most national-level policies is influenced by economic, foreign, and environmental policies and considerations.
  5. 5. Goals of agricultural policy  Maintaining a profitable, viable, efficient, and environmentally safe agricultural production sector capable of meeting demands for food and fibre while providing satisfactory incomes to producers for use of their land, labour, capital, and management.  Providing for an efficient, profitable, and dynamic agribusiness sector, including input suppliers and agricultural output sector.  Providing consumers with an abundant, varied and safe supply of food and fibre at the lowest possible cost consistent with other goals.
  6. 6. Goals of agricultural policy  Operating a food and fibre economy within the framework of a democratic society, relying on the free market system as much as possible consistent with other goals.  Maintaining and enhancing the competitiveness of the country’s agricultural product in the global market.
  7. 7. Forces that cause policy change  Price instability: one major problem faced by producers is instability of prices and incomes. Changes in supply and demand can and do affect farm prices.  Globalization: the cultures, politics, and economies of countries around the world have become more interdependent.  Technology: advances in technology have forced changes in agricultural policy
  8. 8. Forces that cause policy change  Food safety: most countries are concerned with the safety of their nation’s food supply.  Environment: agricultural policy is often changed to respond to issues related to the environment.  Agricultural industrialization: Policy focus in this area is on how the traditional family farm is affected by these sweeping changes.  Politics: politics plays a significant role in determining all policies, including agricultural policy.
  9. 9. Different Policy Tools  Agricultural subsidies is a governmental subsidy paid to farmers and agribusinesses to manage the agricultural industry .  The conditions for payment and the reasons vary with farm product, size of farm, nature of ownership, and country among other factors.  Enriching peanut farmers for political purposes, keeping the price of a staple low to keep the poor from rebelling, stabilizing the production of a crop to avoid famine years, encouraging diversification and many other purposes.
  10. 10. Types of Farm Subsidy  Direct Payments. Direct payments are cash subsidies for producers of crops such as: wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts.  Marketing Loans. The marketing loan program provides large subsidies by paying guaranteed minimum prices for crops.  Countercyclical Payments. provides larger subsidies when market prices are lowlike marketing loan. However, countercyclical payments are tied to a measure of historical production, whereas marketing loan subsidies are tied to current production.
  11. 11. Types of Farm Subsidy  Conservation Subsidies: farmers are paid not to grow crops, but to cultivate ground cover such as grass or trees on retired acres. A large share of land idled under the CRP in America are owned by retired farmers, thus one does not even have to be a working farmer to get these subsidies.  Insurance. Also in developed countries, both “yield” and “revenue” insurance are available to farmers to protect against adverse weather, pests, and low market prices
  12. 12. Types of Farm Subsidy  Disaster Aid: in case of crop damage. millions of dollars given to farmers, whether or not particular farmers actually sustained substantial damage.  Export Subsidies. Subsidies on exports are any payments, direct or indirect, to producers resulting in export prices that are below domestic prices. Used in this sense we can say that exports of a number of American farm commodities are subsidized.
  13. 13. Impact of Subsidies  Farm subsidies have the direct effect of transferring income from the general tax payers to farm owners. The justification for this transfer and its effects are complex and often controversial.  Global food prices and international trade  Poverty in Developing Countries  Impact on nutrition  Corporate farms  Non-farming companies  Public Economics Implications
  14. 14. Tariffs  Tariffs are Government taxes on imports that raise the price of foreign goods and make them less competitive with domestic goods.  Because they raise the price of the foreign-made goods, they make them less competitive.  Tariffs are also used to raise revenue for a government.  Tariffs impose a cost on all products that cross a border, thus raising prices within the country that imposes the tariff.
  15. 15. Tariffs  Higher prices affect supplies as farmers respond by increasing output and affect demand as consumers buy less. Countries apply tariffs primarily to protect domestic industries.  The domestic market effects of tariffs can also spill over onto world markets as the combined effect of more supply and less demand reduces imports.
  16. 16. Tariffs  If the country imposing the tariff is a large importer, then world prices can fall. Thus, the case against tariffs has two components: the distortions created within the country via higher domestic prices and the costs imposed on other countries via lost export sales and lower world prices.  The costs and benefits from a single tariff can spill over to other commodities as well.
  17. 17. Why Countries Use Tariffs  Providing protection against competition from imports for a specific commodity or sector  Temporary use of tariffs has been justified in order to protect new or infant industries and to provide a window to become established in the market  Managing the balance of payments by restricting imports is another rationale developing countries use to apply tariffs. 
  18. 18. Quotas  A quota is a Government-imposed restrictions on the quantity of a good that can be imported / exported over a period of time. imposes limits on the quantity of a good that can be imported over a period of time.  Quotas are used to protect specific industries, usually new industries or those facing strong competitive pressure from foreign firms
  19. 19. Quotas  A government can erect trade barriers to limit the quantity of goods imported (in the case of a Quota Share) or monopolise trade in certain commodities.  Quotas take two forms.  An absolute quota fixes an upper limit on the amount of a good that can be imported during the given period.  A tariff-rate quota permits the import of a specified quantity and then adds a high import tax once the limit is reached.
  20. 20. Embargo  An extreme form of quota is the embargo  A quota that bans the import or export of certain goods to a country for economic or political reasons., which, for economic or political reasons, bans the import or export of certain goods to or from a specific country.
  21. 21. Other Tools  Price control: Price floors or price ceilings set a minimum or maximum price for a product. Price controls encourage more production by a price floor or less production by a price ceiling.  Discriminatory government and private procurement policies: These are the rules and regulations that discriminate against foreign supplies and are commonly referred to as "Buy British" or "Buy American" policies.  .
  22. 22. Other Tools  Restrictive customs procedures : The rules and regulations for classifying and valuing commodities as a basis for levying import duties can be administered in a way that makes compliance difficult and expensive
  23. 23. Reasons for Governmental Involvement in agriculture  National security  Environmental Protection and Land Management  Rural poverty and poverty relief  Fair trade  Food supply and food safety
  24. 24. Arguments against market intervention by government  Dumping of agricultural surpluses  "Consider a farmer in Ghana who used to be able to make a living growing rice. Several years ago, Ghana was able to feed and export their surplus. Now, it imports rice. From where? Developed countries. Why? Because it's cheaper. Even if it costs the rice producer in the developed world much more to produce the rice, he doesn't have to make a profit from his crop. The government pays him to grow it, so he can sell it more cheaply to Ghana than the farmer in Ghana can. And that farmer in Ghana? He can't feed his family anymore."(Lyle Vanclief, Former Canadian Minister of Agriculture (2003)
  25. 25. Arguments against market intervention by government  According to The Institute for Agriculture and Trade Policy, corn, soybeans, cotton, wheat and rice are sold below the cost of production, or dumped. Dumping rates are approximately forty percent for wheat, between twenty-five and thirty percent for corn (maize), approximately thirty percent for soybeans, fifty-seven percent for cotton, and approximately twenty percent for rice. For example, wheat is sold for forty percent below cost.
  26. 26. Arguments against market intervention by government  Market Distortions  Market interventions may increase the cost to consumers for agricultural products, either via hidden wealth transfers via the government, or increased prices at the consumer level
  27. 27. Conclusion  Despite valid arguments made by supporters of trade controls, most experts believe that such restrictions as tariffs and quotas—as well as practices that don’t promote level playing fields, such as subsidies and dumping—are detrimental to the world economy. Without impediments to trade, countries can compete freely. Each nation can focus on what it does best and bring its goods to a fair and open world market. When this happens, the world will prosper. Or so the argument goes.

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