By Milton C. Hallberg, Pennsylvania State University

Agriculture almost everywhere is characterized by relatively small, family operations that profit maximizes having imperfect information and who, for the most part, face a highly inelastic demand for their output. It is possible for the individual farmer to increase capital expenditures on new technologies and in this way increase farm output. Overtime, however, as other farmers find that their neighbors’ profit levels rise, they too adopt the new technology and the market adjust to the greater aggregate quantity marketed, market price of farm output falls. Buyers of farm output are unwilling to purchase, at past high prices, the increased quantity of farm output now being placed on the market. In this paper, the author review briefly the types of adjustments farmers make as well as some of the obstacles to more rapid farmer expansion or contraction.

Real prices received by farmers have declined significantly and for all farm commodities. Real prices of farm inputs, however, have changed very little. Farmers have been able to survive this cost-price squeeze through the adoption of new technology and through greater use of machinery, fertilizers, other chemical inputs, and by increasingly seeking off-farm employment with which to supplement income derived from the farm. The latter has been the most significant adjustment made by farm families particularly on smaller operations.

There have also been significant changes in the industries that purchase and process farm output that have significant impacts on the farming sector. While a case can be made that the performance of these industries has been enhanced, the decline in number of establishments means that there are fewer handlers to which farmers can sell their produce. Further, these industries are increasingly interested in entering into contractual relations with farmers’ that limit farmers’ control over their operations.

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By Jean Kinsey

Production agriculture, agribusiness firms, ingredient and food manufacturers are all changing in response to the information they now share about consumers’ needs, preferences and political concerns. In a world of affluent, educated, and overfed people the marketplace dominates decisions about what to produce, where to sell it, and how to arrange for transactions. With differentiated products and concentrated firms the role of public policy changes from one of ensuring production, setting standards and negotiating global sales to one of facilitating trade and balancing the benefits of economies of scale verses monitoring (monopolistic/monopsonistic) power in the food system.

Themes that emerge in the new global food economy include a shift from supply to demand chains and then to an integrated network of distribution arrangements that moves food around the world. Others relate to consumers’ diversity yet common quest for convenience and value. Some have called it the “brave new world” of food production and consumption.

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By David Abler

The primary function of agriculture is to supply food, fiber, and industrial products. However, agriculture can also be a source of several public goods and externalities. Rural and urban populations often value agricultural land as open space and as a source of countryside amenities. Agricultural land is a frequently a habitat for wildlife species. The agricultural sector can contribute to the economic viability of many rural areas and to food security. On the other hand, conversion of forest and wetlands to agricultural production can damage ecosystems. Agricultural nutrients, pesticides, pathogens, salts, and eroded soils are leading causes of water quality problems in many countries. Water used for irrigation in agriculture is water unavailable to non-agricultural sectors or ecosystems. There is concern about the negative effects of livestock production on animal welfare. On both the positive and negative side, agriculture can be both a sink and a source for greenhouse gases.

The term multifunctionality refers to the fact that an activity can have multiple outputs and therefore may contribute to several objectives at once. As applied to agriculture, the term first came into use in the late 1990s in the European Union for, it is often argued, protectionist reasons. Some governments have attempted to justify agricultural price and income support programs and trade restrictions as a means of preserving the multifunctional attributes of their countries’ agriculture.

This paper addresses two questions. First, do price and income support policies promote a multifunctional agriculture in an effective manner? Second, would policies targeted more directly at multifunctional attributes be more efficient than price and income support policies? The answer to the first question is no, at least for policies targeted at agricultural outputs (price supports, import tariffs, export subsidies, etc.). Public goods are not directly linked to production but rather land use and agricultural structures. Evidence on the second question is sketchier, at least with respect to policies targeted at land.

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