Role of Government in Agricultural Markets

• Food safety and consumer protection• Trade regulation and producer protection• Research and education • Market efficiency

Consumer Health and Safety• Food and Drug Act

– 1906, 1938– 1958 Delaney Clause

• Food Quality Protection Act– 1996 replaced the Delaney Clause– Initiated HACCP

• Wheeler-Lea Act 1935– Truth in advertising– Labeling laws, 1973, 1990

Labeling Claims• Trend to product differentiation

– Evaluate label claims– Production claims

• Organic standards established• Not all terms have standard definition

– “Natural” “Nebraska Corn-Fed Beef”– USDA-AMS is establishing standards for

• Naturally raised• Grass-fed• Other claims

Regulations on Food Prices

• Price control or freezes– Typically war time and/or rapid inflation– Retail price freeze -> farm price impact– WWI 1917-18– WWII 1941-1946 also rationing– Korean conflict 1950-1953– 1971-1973 inflation

Economic and Social Progress • 1862 Department of Agriculture• 1862 Morrill Land Grant Act• 1887 Hatch Act, experiment station• 1914 Smith-Lever Act, extension• Currently over 10,000 agricultural

researchers employed by gov’t

Regulate Competition

• US founded on private enterprise• Concerns about market power

– 1890 Sherman Anti-trust Act – 1914 Clayton and FTC Acts set rules– 1936 Robinson-Patman Act

• Price discrimination illegal unless economically justified

Regulations of Monopolies• Recognized natural monopolies and

dealing with monopolies• Capper-Volsted Act 1922

– Right of farmers to collectively bargain• Agricultural Marketing Act 1937

– Established marketing orders for dairy and fruit and vegetables

Facilitate Trade and Service

• PSA 1921– Set standards for trade– Assured prompt payment– Changed to GIPSA in 1990s

• Grades, weights, & standards• Promotion and research 1980s

– Checkoff activity

Data and Price Reporting• Competitive markets require equal access

to information for buyers and sellers• USDA-NASS

– Acreage, yield, inventory, etc– Farm number and demographics

• USDA-AMS– Price reporting– Slaughter and production– State and Federal partnership

• Auctions and grain prices

Mandatory Price Reporting• Federal law passed congress in 1999

– Started with 7 Midwest states initiating new price reporting regulations

– Industry and government found it “better” to have a single federal regulation

– Slaughter cattle, hogs, lambs and wholesale beef, lamb but not wholesale pork

• Currently– AMS collects, reports summary, doesn’t keep individual

company prices– GIPSA can demand all records from companies to do

an investigation if they have just cause

Standardization and Grading

• Reduces marketing costs– Improves communication– Possible to trade on description rather than

inspection– Grading sorts commodities by defined quality

standards– Quality grades typically optional

Criteria for Grades and Standards

• Based on characteristics that – Are important to users– Are easily recognizable– Can be measured and interpreted by graders to

reduce variation within a grade– Have common terminology– Represent the distribution of production– Make it cost effective to operate

Public or Private Grades• Use differs by industry

– Cattle use USDA grades • Grading done by USDA employee

– Hogs use private grading• Grading done by employee of buyer

– Grain use USDA standards but grading by the buyer

Examples of Grades: Beef• Quality grade uses marbling as a measure of

eating experience (taste, texture, juiciness)• Yield grade is measure of retail meat yield in

the carcassQuality Grades Yield Grades

Prime 3-4% 1 11-12%Choice 60-65% 2 48-50%Select 30-35% 3 33-40%Standard --- 4

1-2%5 <1%

Examples of Grades: Hogs• Historically used USDA grades (US 1-2)• Moved to objective measures of the

carcass• Measurement systems

– Carcass weight ranges– Carcass Leanness

• Backfat measure at 10th or last rib• Fat-O-Meter measure fat thickness and loin depth

to estimate percent lean in the carcass• Ultrasound to estimate percent lean in carcass

Examples of Grades: Grain

Class: #2 Yellow Corn1. BCFM (Max)1/  3.0%2. Damaged Kernels (Max)2/ 5.0%3. Moisture (Max)  14.5%4. Test weight (Min) lbs./bu 54.011/ Broken corn and foreign material2/ Includes heat damaged kernels (0.2% max)

Examples of Grades: Grain

• Class #2 Yellow soybeans• Foreign Material (Max.) 2.0% • Damaged Kernels (Max.)1/ 3.0% • Splits (Max.) 20.0% • Moisture (Max.) 14.0% • Test Weight (Min.) lbs./bu. 54.0 • 1/Includes heat damage kernels (0.5% max)

Examples of Grades: Grain• Class: #2 Soft White Wheat• Protein: Ordinary• Moisture (Max): 13.5%• Dockage (Max): 0.6%• Test weight lbs/bu (Min.): 58.0• Falling Number (Min.): 300• Wheat of Other Classes (Max): 3.0%• Total Defects (Max):1/ 3.5%• 1/ Includes damaged kernels, foreign material, shrunken & broken

kernels

Mandatory v. Optional Grades

• Few precedents for compulsory• Cost may increase if mandatory• Industry may already have grades• Grades may inhibit innovation

– Produce to the minimum to make a grade– May not match convey value trait as well as

another measure, i.e., tenderness

Problems of Grades and Standards

• Subjective nature of “quality”• Made for industry not consumers• Designing grades and grading methods

– Accurate, fast, cheap, meaningful– Number of grades

• Implementing grades

Farmers and Grades

• Not always used – May not trust of grades or grader– Risk – reward

• Large discounts on small percentage• Small premiums on small percentage

– Direct measurement possible with new technology

• Percent lean• Protein percent

Marketing Agencies & Grades

• May add value to commodity• Role of private brands• Larger firms may develop own grades• Specification contracts with more detail

may replace grades

Consumers and Food Grades

• Grades often confusing and offer little differentiation

• Consumers often do not understand grades

• Brand loyalty may replace uniform grades

FARM POLICY• Historically, agriculture has been

highly protected in many countries, including U.S.

• Main reasons advanced for supporting domestic farmers:1. Risk reduction

Shield farmers from weather and world price volatility

2. Food security Ensure country’s food supply

3. Rural society Stimulate rural economy Promote rural development

FARM POLICY

Policies to Support

Farm Income

Food and Nutrition

Rural Development

Natural Resources

Trade

FARM POLICY• Evolution of U.S. farm and rural sector

Evolution of U.S. farm policy• 1920s:

– Emphasis on “orderly marketing”• Encouraged storage and marketing throughout the year• Provided loan-storage programs

• 1930s:– Forerunners of current farm programs– Favored supply control to achieve “fair” prices

• Acreage controls, import and marketing quotas, soil conservation programs

• 1940-52: – Large increase in U.S. farm prices and incomes

• Consumers faced wartime food rationing and price controls• Farm programs established in 1933-38 continued with minor

modifications

Evolution of U.S. farm policy• 1950s and 1960s

– Great expansion in productive capacity due to science and technology

– Downward pressure on prices due to enhanced productive capacity

– Previous farm programs continued and worked on supply and demand policies

• “Food for peace program” 1954• Soil Bank program of 1956• Food Stamp Act of 1964

Evolution of U.S. farm policy• 1970s

– Prices and farm income increased due to large expansion in worldwide demand

• Increased world population and incomes, and devaluation of U.S. dollar relative to other currencies

– Enhanced outlook triggered a large supply response

• Planted acres increased by 47 million between 1969 and 1978, took land out of Soil Bank

• Increase in quantity supplied led to depressed prices and farm incomes by the end of the decade

Evolution of U.S. farm policy• 1980s

– Compromise between two views• More market orientation: Flexible price supports,

less government purchase and storage, greater reliance on direct subsidies to farmers

• Government intervention to improve balance between supply and demand: Acreage controls, selective reductions in support prices, export subsidies

Evolution of U.S. farm policy• 1990s

– FAIR Act of 1996• “Decoupled Payments”

– Removed linkage between farm income support payments and farm prices

– Declining support payments over 1996-2002 period• Ended supply controls, giving farmers flexibility

regarding crop choices• Loan Deficiency Payments (LDP) replaced non-

recourse commodity loans• Promotion of export market development,

especially for higher value-added products• More emphasis on conservation

Evolution of U.S. farm policy• 2000s

– Emphasis on risk management with subsidized crop insurance and new insurance products

– Farm Security and Rural Investment Act of 2002• Extends market-oriented reforms of 1996 FAIR Act• Introduces Countercyclical Payments

– Triggered when current prices fall below target level, but amount paid based on historical production

• Three types of farm income support programs– Decoupled Payments– Countercyclical Payments– Marketing loans

Evolution of U.S. farm policy• 2000s

– Emphasis on risk management – Farm Security and Rural Investment Act of 2002

• Extends market-oriented reforms of 1996 FAIR Act• Introduces Countercyclical Payments• Three types of farm income support programs• Conservation programs

– All programs are expanded– New working-lands conservation payments through

Conservation Security Program• Rural development

– New programs and increased funding for rural areas• Trade

– Expanded support to promote export market development, especially for higher value-added products

Farm Policy

• A function of their time– Farm income and society– Current thinking and innovation

• A function of government budgets• Slow to change • Often see response quickly• Devil is in the details

Summary

• Policy• Protection• Infrastructure• Market efficiency