Economics of Agriculture
Agricultural economics is the application of the principles and methods of economics to the processes and problems of the agricultural industry. Contemporary agricultural economics has several major focuses, including the application of technology to agriculture, concerns over the environment and resource issues, trade and economic development, risk and risk management, price determination and stabilization, market structure and organization of agribusinesses, and the consumption and food supply chains that provide the market for agricultural products. One example of the application of agricultural economics is in the area of helping farmers make better decisions for market-oriented farming in order to help them maximize their profits or reach other goals.
Keywords: Agribusiness; Agricultural Economics; Farm Management; Globalization; Marketing; Optimization Theory; Resource Economics; Return on Investment; Risk; Supply Chain
Agricultural economics is a social science in which the principles and practices of economics are applied to farming and agriculture. Agricultural economics studies how scarce resources are allocated, distributed and used in farming. It also provides information on prices, markets, agricultural policy, and economic institutions for use in farm management. Although some experts define agricultural economics as economics applied to both agriculture and rural areas, others separate rural economics from agricultural economics.
History of Agricultural Economics
According to Runge (2006), the science of agricultural economics began to emerge in the late 1800s, combining a wide range of other disciplines, including economics, econometric methods, mathematical statistics, resource economics, marketing theory, and organization theory. In the United States, modern agricultural economics is the product of two distinct lines of thought. The first comprised neoclassical political economy and the theory of the firm as applied to farm production. This line of thought expanded on classical theory of the firm and emerging approaches to measuring and applying statistical methods to validate the relationship between costs, prices, and profits for farms. The second line of thought arises from the agricultural depression experienced in this country in the late 1870s through 1890s which resulted in better strategies such as collective bargaining and cooperatives for organized marketing of agricultural commodities.
Another influence on the science of agricultural economics is optimization theory. This is a branch of mathematics used in choosing a specific solution from a set of alternatives in such a way as to best maximize a specific criterion. For example, this technology has been applied to optimize wheat crop rotations and to help reduce the uncertainty that is often associated with agriculture. Optimization theory has allowed the analysis of patterns of growth and decline in modern farms. It also allowed the growth of agricultural economics into the areas of natural resources and agricultural development in developing countries during the mid 20th century. Advances in agricultural economics and increasing globalization have led to concern about the economics in developing third world countries (Runge, 2006).
The current evolution of agricultural economics has several major focuses:
- Environmental and resource issues
- Trade and economic development
- Risk management
- Price determination and stabilization
- Market structure
- Food supply chains
In many ways, technology has revolutionized agriculture practices just as it revolutionized other industries. Of interest to agricultural economics is not only technical change as it affects agriculture, but the returns to capital investments and human capital investments as well. Another modern focus in agricultural economics is on environmental and resource issues. In particular, an important recent focus in agricultural economics has been on issues related to environmentalism and the preservation of natural resources. Agricultural systems can have impact on the greater environment, and such effects need to be taken into account in agricultural economics. For example, many today are concerned over the effects of agricultural runoff of pesticides and fertilizer, proper containment and management of livestock manure, and methane emissions from livestock and manure management processes.
Trade and economic development have become of increasing interest with increasing globalization and concern over the economic development of the third world. Much of the interest in this area focuses on microeconomic studies of agricultural change and food insecurity in developing countries as well as on issues involving globalization and global trade (Runge, 2006). A focus area for modern agricultural economics is risk and risk management in the agricultural sector. Agriculture has always been a risky business due to the inherent nature of the task. Although the application of modern technology can help mitigate some of those risks, it can also create risks of its own. For example, the adoption of hybrid or genetically engineered crops can potentially increase production and profitability or have disastrous consequences. One of the major concerns of agricultural economics is the risk inherent in agriculture and how best to manage such risks.
Agricultural economics is also concerned with price determination and stabilization, particularly in light of instability in the agricultural commodities markets. Market structure and the organization of agribusinesses is an interest area for agricultural economics. Examples of work being done in this sector include the organizational structure of farms (e.g., division of labor, delegation of authority, and span of control), economics of contracting, and effectiveness of cooperatives. Finally, agricultural economics is concerned with the consumption and food supply chains that provide the market for agricultural products.
Like general economics, agricultural economics is useful in helping theorists see the big picture about the impact of various factors on the success of a farm in terms of productivity or profitability. However, agricultural economics can also be directly applicable to individual farmers in helping them to optimize their use of limited farm resources. Agricultural economics can provide farmers with the data needed to make rational decisions for farm management.
One of the applications of agricultural economics is in helping farmers with market-oriented farming (Kahan, 2004). Due to globalization and trade liberalization, many farmers today have great opportunities to sell their products in both national and international markets. If farmers manage their farms with a market orientation, this situation can lead to higher profitability. However, with these new opportunities come new risks and greater competition. As a result, farmers need the data to make rational decisions so that they can better compete.
Although many agricultural economists encourage farmers to think of themselves as part of the agribusiness complex, most non-corporate farmers have more than profitability to consider when making farm management decisions. All farms are responsible for producing crops and/or livestock and consume inputs such as seed, fertilizer, and labor. Family farms also often consume some of the products they produce (e.g., produce, milk, eggs, meat) as well as products produced and offered by other famers in the marketplace. As a result, farmers have a number of goals, not all of which are directly related to profitability. Smaller farmers — particularly in developing areas — often have as their main goal to produce food for the family table rather than to be profitable in the marketplace. However, as farmers become more successful in the marketplace and are able to better provide for their families, they tend to become more profit-oriented and want to maximize their profits. This allows them not only to survive at the level of basic needs, but to also purchase non-food items in the marketplace and provide other goods and services for their families. In conjunction with maximizing profit, farmers also want to reduce their risks as well as provide a steady income from their products. However, farmers who are able to meet their income goals may not want to continue to increase their profitability...
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