The Agri-Food Sector Is a Special Case?
7. 31. 2012
Government intervention in the agri-food sector is widely observed in various countries from those with high farming productivity and advanced economies to those with developing economies dependent on export-oriented farm products. Actually this economic characteristic in the agricultural and food sector frequently appears as a problem which prevents the international negotiation for trade, such as the WTO rounds, from being proceeded smoothly, while other natural resources and manufacturing products seem to be traded over relatively less trade barriers. It is true that market failure is discovered in almost all industries and therefore corrected by more or less regulations and controls by a country; however, the significance of market intervention in the agri-food sector might be accounted for not only by a matter of degree of the market failure, but rather by unique industrial structure to the sector. In this essay, it is investigated whether the agri-food sector can be distinguished from other sectors, from following points of view: efficiency, equity, and so-called ‘non-economic’ objectives.
First, market failures in some agri-food sectors illustrate the industry-specific factors and necessity for government controls over the sectors although some complain that market imperfection is a general economic phenomenon amongst all industries. A typical example for this is inflexibility of land market. Land is the most fundamental factor of farm production; however, as MacLaren (1995) says, investing into additional land is not necessarily profitable in the long term because opportunity costs for marginal land use varies. Therefore, structural policy supports for farmland allocation can work effectively, otherwise it is difficult to improve fragmentation of farmland occurring in the process of land inheritance. Another example of market failure in the agri-food sector is imperfect competition both in the processing and retailing stages of the food chain. McCorriston (2002) reports food-firm concentration ratios in these stages amongst European countries and states the significance of high figures in the retailing sector, mentioning to the growth of their own-label products. This analysis can be interpreted as dominance over whole intermediate processes of the food chains by a few large-scale companies and so comparative intensiveness of imperfect competition in the agri-food sector.
Second, production and market risk in the agri-food sector also characterize a country’s incentive to intervene in the sector in order to support farmer’s household and protect consumer’s welfare from price fluctuations of indispensable foodstuffs. Even though variations in production and price are not special factors in the agri-food sector and avoidable with hedging and private sector’s insurance, according to Tangermann (2011), there is a different kind of risk beyond farmer’s capacities, which is called catastrophic risk, e.g. irregular weather, epidemics of pests, and natural disasters. On the other hand, OECD (2011) criticizes that even if governments are required to involve in this risk facing farmers, they should pay attentions to the definition of the risk because covering the too wide range of risk, even where farmers have to manage on their own, can discourage them to take optimal risk management strategies. In addition, variable agricultural output lets commodity prices fluctuate from period to period and affects food consumers, especially those who live in developing countries with relatively high Engel’s coefficients.
Finally, externalities of food production are typically taken up as one of the so-called ‘non-economic’ objectives of the market intervention by governments. As described as ‘so-called,’ some externalities in agriculture involve theoretical possibilities of being marketable and corrected by agricultural policies, in accordance with Winters (1990). This is also the case of environmental pollutions in manufacturing industries; however, it is even more complicated to internalize side effects of food production because they contain positive externalities too, e.g. multifunctionality in agriculture.
*Conclusion omitted for a matter of space.
References
MacLaren, D. (1995). An Introduction to Agricultural Economics, Australian Economic Review, 4th Quarter: 93-108.
McCorriston, S, (2002). Why should imperfect competition matter to agricultural economists?, European Review of Agricultural Economics, 29(3): 349-356 and 367-371.
Tangermann, S. (2011). Risk Management in Agriculture and the Future of the EU’s Common Agricultural Policy, ICTSD International Centre for Trade and Sustainable Development , Issue Paper NO. 34, Geneva, pp. ⅳ-10.
OECD (2011). Agricultural Policies in OECD Countries: Monitoring and Evaluation 2011, Paris, pp. 35-48.
Winters, L. A. (1990). The So-Called “Non-Economic” Objectives of Agricultural Support, OECD Economic Studies, 13 (Winter), Paris, pp. 237-266.
