Lecture 1.
Agricultural and food markets : an introduction

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What we want to learn about this topic

introduce some of the issues and concepts dealt with in the course
get a sense of the very extensive government intervention in and regulation of agricultural and food markets. This course focuses on the evaluation of these interventions.
introduce the concept of the food chain and the way in which markets link the various stages of the food chain together
identify some potential problems with the operation of food markets

Short introduction to the issues

The policy context

agflation in world food markets - a temporary blip or reversal of historical downward trend in real food prices?
further reform of Europe's agricultural policy
the struggle to reach agreement on new international trade rules disciplining agricultural policy in the WTO Doha Development Round
agricultural exceptionalism - is agriculture different? And why?
role of agriculture and food industry in the Irish economy

The food chain

inputs -> farm production -> processors -> distributors and retailers -> consumers

resource markets (land, labour and capital)

input markets (fertiliser, feed, chemicals, veterinary services etc.)

primary commodity markets (farmer-merchant and farmer-processor interactions)

wholesale food markets (processor-retailer interactions)

retail food markets (retailer-consumer and food service-consumer interactions)

Issues in agricultural and food markets


Primary commodity markets: competitive markets - characterised by volatility, declining terms of trade, bargaining weakness of farmers, may not guarantee food security at either the household or national level
Factor and resource markets: missing and imperfect markets (environment, agricultural research)
labour market (concerns over income levels), land markets (managing competing uses)
Input and food wholesale markets: concentrated markets - suffer from concerns over market power, role of advertising, brands
Food retail markets: changing consumer behaviour (diets, nutrition), asymmetry of information (food safety, food quality)
International trade markets: Level playing field?, fair trade, disease spread, food miles

Government regulation of agricultural and food markets

Most countries adopt an active agricultural policy to address these perceived weaknesses in food and agricultural markets. Thus there is evidence that policy addresses significant and widespread socio-economic problems. However....
Note the high levels of border protection far exceeding anything we find in the industrial or services sectors
Note the high transfers from consumers and taxpayers to agriculture (OECD PSE estimates)
Note the frequency of trade disputes around issues to do with agricultural trade barriers and food safety
Are these costs simply a fair price which society is prepared to pay to achieve valid objectives? What are these objectives? Are they being met by existing policies? Could they be met more cheaply? This is the leitmotiv of this course.

The policy analysis perspective

How does the economist approach these issues? The following is a useful checklist.

What objectives is the policy trying to achieve?
What instruments is it using?
Is the intervention efficient?
Is the intervention equitable?

Reading suggestions

Matthews, A., 2004, 'Agriculture, food safety and rural development', in O'Hagan, J. and Newman, C., eds The Economy of Ireland, 9th edition, Macmillan, Dublin.
(read for a general introduction to issues raised in the course from an Irish perspective. Note that this is a more recent edition that the one you studied in second year. Download chapter from 9th edition)

Matthews, A., 2003, 'Agriculture', in Johnson, P. ed., Industries in Europe: Competition, Trends and Policy Issues, Cheltenham, Edward Elgar, pp. 26-54.

Rabinowicz, E., 1999, 'Redesigning the CAP to meet the challenges of EU enlargement and the WTO: what can agricultural economic research contribute?' Eur. Review of Agric. Econ. 26, 3, 265-281.
(this Presidential Address to the European Association of Agricultural Economists introduces some of the issues which this course will address).

Supplementary reading

For a recent review of policy issues in Irish agriculture, see
Report of the Agri-Vision 2015 Committee, 2004, Department of Agriculture and Food (file size 521KB)

Lecture 1. Agricultural and food markets : an introduction