Government support payments, another component of farm income, steadily 

 increased from a low of 3.2 million current dollars in 1954 to a high of 20.8 

 million current dollars in 1977. The real value of government payments peaked 

 in 1964 and have steadily declined since. The original intent of these sup- 

 port payments was to stabilize farm income by providing relief from widely 

 fluctuating commodity prices. Although providing a temporary solution, sup- 

 port payments have, in some cases, aggregated the problem in the long run. 

 For some of the State and regional products, support payments are compensation 

 whenever the farmer sells below a standard price. In essence, an artificial 

 price above the natural market price is maintained which induces area farmers 

 and ranchers to increase production, further lowering the market price, and 

 widening the gap between the natural and artificial price. These payments 

 appear to encourage low unit production. 



Another problem is that the aggregate demand for farm products is highly 

 inelastic (i.e., the percentage change in the quantity demanded is always less 

 than the percentage change in price), yet the demand curve confronting the 

 individual farmer is almost perfectly elastic (i.e., the individual farmer can 

 sell all he wants at a given price). The farmer has little control over the 

 price at which he sells, but may sell all he likes at the market price. This 

 encourages the farmer to increase production because it is the only way income 

 may increase when productions costs are high and prices are low. As each 

 farmer strives to increase profits, market supply of farm products increases 

 and prices fall. Given an inelastic aggregate demand for food, a decline in 

 prices lowers total revenue. In the long run, the farmer is caught in a 

 rather vicious circle. The cobweb theorem states that farmers react differ- 

 ently in the short run than in the long run. During lower prices, farmers 

 tend to plant less acres in the year following price cuts. Some producers 

 take even more drastic steps such as slaughtering livestock and destroying 

 crops to reduce supply and increase prices. 



In recent years, the real income for State and regional farmers has 

 steadily declined, but retail food prices have increased. Food items in the 

 index prepared by the Survey of Current Business rose 86.8% in 1959-74, but 

 consumer prices rose only about 70%. Much of the inflation in consumer prices 

 can be attributed to rising U.S. retail food prices. Since 1974, rising 

 energy costs have replaced high food prices as the major contributor to infla- 

 tion. The real prices of tomatoes, eggs, oranges, and milk have fallen since 

 1974 despite current prices. Real beef prices rose during this period and are 

 still rising. In the case of beef. State and regional farmers are receiving a 

 higher price. In short, the amount of the consumer's income spent on food has 

 risen, but the income received by the farmer has declined. 



In view of the price dilemma, farmers should know how consumers react to 

 a change in the price of a commodity or to a change in their income. Price 

 elasticity indicates the percentage change in the quantity demanded by consum- 

 ers when prices change as little as 1% (Table 12). 



Elasticities are for the demand at the retail level. If the price of 

 these commodities increases 1%, the price elasticities of these products indi- 

 cate that the quantity consumer demand would fall by 0.6196% for beef, 0.0933% 

 for vegetables, 0.6591% for poultry and fish, 0.4134% for fruits, and 0.0679% 

 for eggs (Table 12). 



105 



