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Video - Agricultural policy problems: Price support
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Del curso dictado por University of Western Australia
Agriculture, Economics and Nature
162 calificaciones
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De la lección
Government policies in agriculture
Week 6 ties up the course through discussion of government policies that support agriculture, policies that protect the rural environment, policies with problems, and justifications for agricultural policy.
Conoce a los instructores
Professor David Pannell, BSc(Agric), BEc, PhDUWA School of Agriculture and Environment
University of Western Australia
Jacob Hawkins, BA(Biol), MESM, PhDSchool of Agricultural and Resource Economics
University of Western Australia
In this segment and the next one we'll
talk about some problems that can
arise when agricultural policies are introduced.
It doesn't always go smoothly.
So amongst the problems that we'll
talk about are that the policies don't always
meet their objectives, policies sometimes cost more
than they're worth, and they sometimes
have costly or damaging unintended consequences.
It's worth worrying about these problems when you're
thinking about introducing a policy,
because once bad policies are in place
they can be very difficult indeed
to repair them or remove them.
So we need great care when policies
are been designed and introduced,
because we're going to be stuck with them for awhile,
most likely.
So I'm going to illustrate these problems
with a couple of examples.
And today we're going to talk about the example of price
support, where the prices of agricultural products
are increased above market levels.
So if the prices of agricultural products
are increased above market levels
it prompts farmers to increase their production.
Of course, we saw that with the supply curve.
The higher the prices are the more supply there will be,
the more production producers will choose to produce.
The problem is that this results in excess production that
cannot be solved at market prices.
And then what are you going to do with that?
And the most common solution is to store this excess production
in the hope that at some future time it can be used or solved.
Storage causes problems, it causes costs,
it can cause wastage of product.
And those costs are borne by the farmers,
perhaps depending on the scheme, or by taxpayers.
It can also reduce the market price for everybody
if people in the market know that there
is a huge stockpile of the product that
might put a limit on how much they are willing to bid
for the products because they know there's
a lot there waiting to be sold.
The must spectacular example of this problem in Australia's
history was the wool crises.
In the late 1980s, early 1990s, the Australian Wool Corporation
operated a floor price.
That means that they refused to allow wool
to be sold if the market price, the price at auction,
fell below a specified level.
They set a floor price and then they enforced that
by buying any wool which received
a market price or an auction price that
was below that floor price.
Now the problem with that was that they set the floor price
optimistically when demand was really booming
and then refused to lower it when demand fell.
What they should have done was set the price temporarily
and then lower it once the demand fell.
And because the process was set so very high,
eventually far above the market price,
farmers maintained very high levels of wool production,
but most of it was passed in at auction
and had to be purchased by the Wool Corporation which
just put it into storage.
So this is the situation in this graph.
If the market had been allowed to operate
without this sort of floor price you
can see the point where the supply and demand
curves intersect and from that you
can see the level of production, the quantity of wool that
would have been produced and purchased,
and the price that it would've been sold for in the market.
But what happened was, they set a much higher price,
in this case 870 cents, and you can
see that there's a much higher level of production,
a much higher level of supply, and a much lower level
of demand.
So the vertical dotted lines coming down from the supply
curve on the right or the demand curve on the left
show the levels of supply and demand
under this very high price of 870 cents.
And so there's this huge gap.
Not very much wool being purchased, an enormous amount
being produced, and so the difference between those two
amounts had to be put into storage in the hope
that at some future time the price would rise
and it could be sold at that floor price.
It turned out that that was much too optimistic,
it never happened.
And eventually, after a couple of years of wool
being accumulated, stockpiled, the amount of wool being stored
reached almost a billion kilograms
and it was incurring around $3 million a day
in cost of storage and interest.
Eventually, this Australian government
stepped in and forced the scheme to be closed.
The scheme was being run by an organization that
was intending to operate for the benefit of farmers,
but clearly they were actually doing a lot of damage
to farmers because of the stupid design of the policy.
The losses that occurred as a result of the policy
were estimated to be around $12 billion.
And the losses where shared amongst farmers, taxpayers,
and wool processors around the world.
There are plenty of other examples
of similar disastrous price support schemes
with varying flavors, varying systems of operation.
So for example in the 1970s and 1980s,
the New Zealand government had price supports
on some of its main agricultural products.
And because agriculture is a large proportion
of the economy in New Zealand, these price supports
and the subsidies that were provided to farmers
became a massive burden on government.
And eventually after a change of government they were removed,
but that caused a lot of dislocation, a lot of pain
to farmers who were used to receiving these subsidies.
And it was very difficult for them
to go through the transition to not receiving them.
The European Common Agricultural Policy in the 1970s and 1980s
also had prices that were well above market prices,
and this led to very large stockpiles.
There was a milk lake, a butter mountain, other big stockpiles
of produce.
This led almost to the collapse of the European Union
budget in the 1980s and caused major cost
to farmers in developing countries,
because it reduced the world prices
of agricultural products.
And recently we had a similar scheme in Thailand
to increase the price of rice.
The Thai government set the price of rice
for domestic producers at roughly double the world
price, the world market price.
And this caused massive problems with corruption,
with rice being imported into Thailand from other countries
so that unscrupulous people could sell it
at double the market price, big wastage of produce that
was being stored in not very good conditions.
And overall, a cost to government in Thailand
that's estimated to be about $19 billion US.
Another one of these policies that
really is very poorly designed, really stupid in fact.
So the moral is, those who defy the markets will eventually
lose.
They may lose slowly or they may lose in a spectacular collapse,
but they will lose.
The solution is obvious.
Governments shouldn't artificially
inflate agricultural prices because the problems
dramatically outweigh the benefits.
If the government wishes to provide support to farmers,
that's fine, but there are many other ways to do it.
The assistance shouldn't be built into prices.
So once they recognized this, the European Union
went through a process of what was called decoupling.
That means that the assistance that farmers received
wasn't linked to prices.
They now receive a payment that's
not affected by how much output they produce,
so they don't have the incentive to increase their production.
There probably still is a bit of over production because
of this, but it's much less dramatic
than it was when the assistance was built into prices.
So in summary, policies to increase prices
for agricultural products to benefit farmers
have been common historically and they still
arise from time to time, but they cause numerous problems
and massive costs.
And they're probably the worst possible way
to try and assist farmers.
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