Chap 6: World Agriculture

OUTLINE

1.  U.S. and Soviet Agricultural Policies in recent past

2.  A Model of How subsidies work/don't work

3.  Von Thunen Model

The first sections will be for the students to read and review on their own. Study guide will be provided, the above two sections 5 and 6 will be discussed in class.

 

 

 

1.  U.S. Agricultural Policy

A. Historical Past, 17th thru 19th century

   

 

 

 

 

 

B. Late 19th and 20th century: Review

1. Transportation transforms market access (Globalization Starts)

a. all markets become international

b. love/hate relationship with American railroads

  • the original "Bill Gates" and other robber barons: the Vanderbilts, Harrimans, Stanfords (as in Stanford U.) and Jay Gould

These are the railroads that settled the northwest:

For a year, Perham attempted to sell enough stocks to begin building the line, but was forced in 1865 to sell his interests to a group of Eastern businessmen, who appointed John Smith as Northern Pacific's first President. Fundraising continued, with little success until 1870, when Jay  Cooke and Gregory Smith purchased the NP. Shortly after, on 2/15/1870 the first spike was laid at Thompson's Junction, twenty miles west of Duluth, Minnesota.

Once the first spike was down, the Puget Sound land rush was on. Speculators began snapping up parcels in anticipation of the railroad choosing their area as it's terminus. Cities rushed to offer inducements, essentially bribing the railroad to come to town. 1870-1871 saw cities such as Port Townsend, Olympia, Seattle, Bellingham, Tacoma, Whidbey Island, Mukilteo, Fidalgo (San Juan Islands), and Portland all scheming to attract the railroad. 

 

 

 

 

 

 

 

 

c. Chronic American farm labor shortages transform Agriculture

  • the cotton gin, McCormick Reaper, Combine....
  • Replace labor with capital and energy (industrialize agriculture)
Reaping

...labor shortage, both in Europe and especially in the Western United States, spurred the farmer on to find new and more efficient ways to harvest his crop. (17F, pg. 53)   The first successful reaper was  created by Rev. Patrick Bell in the early 1800's.

Binder Repear (below)

One of the largest used early reapers was one made by the McCormack company.  The McCormack reaper was widely used and accepted in United States and England.  The rest of Europe was much slower to adopt the new technology.  In  1890 only 1/10 of France or Germany had adopted the use of the reaper in their fields. 

The reaper would cut the stalks where they would lie in the fields until they were manually pick up.  Later a board was added behind the blades and a man would push the stalks off into piles. 

 

 

 

 

 

 

d. farm is a "factory"

  • maintain minimum labor costs
  • maximum profits

 

 

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2. The "Good" War: WWI (The Benefits of Globalization for US Farmers)

  • American farmers make-up for European shortfalls
  • Get rich from destruction
  • World markets favor World war

 

 

 

 

 

 

 

 

 

3. The Roaring 20s

  • disaster on the American Farm, the great depression starts early

  • supply too great,

  • solution close "factories" (i.e. family farms -- note the "peaking behavior on the graph").

                     Number of farms hits a plateau during this period before the steep decline in the 1940s

 

 

 

 

4. The Great Depression of the 30s

a. just when you thought things were bad

  • over supply couples with collapsing demand
  • international markets closed
  • plus environmental disastors (Dust Bowl)

                       

 

 

 

 

 

 

5. Recovery: New Deal years and the 1940s

a. American style "Socialism" (so this is family [farm] values) -- Farm Subsidies Begin

  • more about this in the 50s
  • see model example

b. Another "Good" War: WWII

 

 

 

c. The Marshall Plan

        

 

 

 

 

 

 

 

 

 

d. The Cold War & Food for "Peace" (i.e. join us not our enemies)

U.S. Food Aid distributed by World Food Program/ Mauritania during 1995 drought

Conflict World — 11 January 2012

Newstrack

North Korea has said that before the death of the nation’s long-term ruler Kim Jong Il, the United States offered to provide food aid if Pyongyang halted its uranium enrichment programme.

 

 

 

 

 

 

 

 

 

 

 

6. American Socialism meets Soviet Socialism 50s and beyond

a. American price supports (parity)  (see fig. 6.19) encourages:

  • ever increasing surpluses
  • constant headache of storage and disposal
  • yet real farm income declines relative to economy
  • family farm declines (see fig. 6.8)

b. Soviet underpricing encourages constant shortages

  • constant headache of empty shelves and long lines (think North Korea today)

 

 

 

 

 

7. 1970s The Golden Age of the Cold War for Agriculture or Marx meets Adam Smith (Nixon meets Mao & Brezhnev)

           

  • Dispose of American surpluses abroad
  • Encourage continued waste in Socialist Systems

 

 

 

 

 

 

 

 

8. 1980s Soviet & Chinese socialism crumble
  • Deng Tsao Ping re-establishes the "family" farm

   

For Deng -- who never officially took the posts of Communist Party chief or head of government -- the guiding principle was pragmatism. "It doesn't matter if a cat is black or white," he was fond of saying, "as long as it catches mice." The results were immediate and impressive. The standard of living in China shot up. Freed from the shackles of Maoism, the people rediscovered style, music, romance, fun, and hope.

 

 

  • Russians allow agricultural prices to rise
 Rising food prices
have hit Russians hard

 

 

 

 

 

  • American farmers furious (and we thought "Evil Commies" were our "friends")

 

 

 

 

 

 

9. 1990s "Freedom to Farm"

  • Congress modifies American Agricultural Program
  • Freedom to go bankrupt
  • Family farm forgotten, except for the Iowa caucus
  • 2007 Farm "Bill" cost $300 Billion
  • $300 billion, with 75 percent going to food assistance. The remaining 25 percent went to conservation, energy, nutrition, education and, most importantly, farm safety-net programs, including payments to farmers and crop insurance.

    The United States currently pays around $20 billion per year to farmers in direct subsidies as "farm income stabilization

     

10. Current WTO Problem and Accusation by Developing Countries that Developed Countries heavily subsidize and overproduce resulting in DUMPING

In 2010, the EU spent €57 billion on agricultural development, of which €39 billion was spent on direct subsidies. Agricultural and fisheries subsidies form over 40% of the EU budget.

 

 

Current WTO deadlock

 

 

C. The Farm Problem in North America (Fig 6.17)

  1. Food Demand fairly inelastic
  2. Supply increased too easily
  3. Green Revolution has spread to much of the world
  4. Result lower prices, hence lower income to small farms
  5. Solution -- more socialism or bankruptcies???

 

 

 

 

 

 

 

 

 

 

D. U.S. Farm Subsidy Program (..."are you now or have you ever been a member of the American "Socialist" Farm Subsidy Program...if so shout 'God Bless America' and vote for your favorite Republican/Democrat...)

1. Parity Prices -- "Once upon a time in a Galaxy far, far away and long, long ago"... farmer's received exactly the right relative price for their produce

2. Floor Prices -- If no one else is foolish enough to buy at this "high" price Uncle "Sugar" will

3. Land Bank -- Uncle Sugar will pay you to remove some land from production (and possibly help the environment)

4. Effect of system (Fig 6.19)

  1. Market doesn't balance based on price
  2. Surplus production continues, and is encouraged
  3. Consumers pay too much
  4. "The Farmer on the Dole"
  5. Waste of limited Resources

5. Unanticipated result

  1. Scale economies dominate
  2. Big Farms get biggest absolute subsidies
  3. Although small farms receive relatively higher subsidies based on sales (Fig 6.20)

 

 

VI. Johann Heinrich von Thunen's classic "Der Isolierte Staat" 1826

A. Johnny von Thunen

Johann Heinrich von Thünen,  1780-1850

  • Background: philosophy, biology, economics, and languages
  • 1810 buys a "farm" in Meckelenberg
  • 1826 publishes "Der Isolierte Staat"
  • first economic study of spatial organization (i.e. economic geography)
  • proved that agricultural land rent declines with distance from a center (Market)
  • "DUAL " solution is that value of agricultural output (Profit measured in $/acre) also declines with distance

B. Von Thunen's Economic Model of Spatial Organization

1. Model is to explain optimal location of agricultural activities with respect to a central market based on transportation costs

2. Assumptions

1) One isolated town (Market) in center of a region

2) Flat land, result is equal transportation costs in all directions

3) Equal quality of land

4) Equal production costs on every farm

3. Solution equation

Net Profit = Output/Acre {(Market Returns - Production Costs) - (Distance * Transportation Costs)}

4. Therefore Farmers that are closer to Markets can receive higher profits (which translates into higher land cost (or rent) for land that is closer to markets)

 

2 Dimensional Graphical Solution

 

 

TURN TO WORKSHEET

 

Bird's Eye Solution

 

 

 

 

Relaxing Initial Historical Assumptions

Attempts at Application

Specialization Based

 

 

Land Value Based

 

 

 

 

Extension to Urban Rent Curves

Bid Rent and Location Gradients: The Importance of Relative Location

Much of the theory of urban land use is based on the work of Alonso (1964) and Muth (1969) and draws on concepts from microeconomics. Within this theory, patterns of land use are determined by land values that are, in turn, related to transportation costs. We will find that each type of urban activity will have its own bid rent function and the combination of several bid rent functions will define the rent gradient. To illustrate the theory, it is useful to begin with an extremely simplified example.