For months the evening news broadcasts and morning headlines have been detailing the bailout du jour and we have been equating that action with the voters’ demand for change. So far, the bailouts and regulatory controversies have occurred in the financial markets along the East Coast. But would you see positives or negatives in governmental intervention in the grain market, for example, if for some reason their was a failure of the Chicago Board of Trade, the Mercantile Exchange, or the grain trading floors in Kansas City or Minneapolis?

Markets allocate resources, but when there is a failure to do that, to what degree is the government warranted in any intervention? Without a deep exploration of the mind of Eighteenth Century economist Adam Smith, it may be worthwhile to consider government involvement in agricultural markets. According to USDA economists Marc Ribaudo, Fred Kuchler and Lisa Mancino, in the November issue of Amber Waves ag markets are competitive, composed of numerous diverse buyers and sellers, transparent, and should be efficient without direct government intervention. However, the economists contend that on-going government intervention includes: conservation payments, price supports, pesticide exposure limitations, food labeling requirements, and public-funded research.

Justification for government intervention is identified in various ways:
1) When our decisions impact others and no compensation is involved, such as water pollution.
2) Public goods that do not lend themselves to market allocation, such as national defense.
3) Marketable goods with insufficient information about them, such as organic foods.
4) Near-monopoly situations that exclude some market participants.

The issue of water pollution is one example of government intervention where conservation payments have been developed to assist farmers in solving problems that would eventually impact others downstream. The economists call that a substitute for consumer demand. Another intervention, such as the Clean Water Act, uses regulations and imposes requirements and penalties.

Another example of intervention follows the outbreak of foodborne illness, resulting from consumers unwilling to pay higher prices for safer foods, or the lack of information about a food, where a consumer may not believe a seller’s claim. Without some certification of purity, safety may be sacrificed in the absence of government oversight, say the economists.

A third example is market concentration, such as the meat packing industry, where the top four beef packers account for 81% of fed cattle slaughter. The economists contend, “The market system works best when there are many buyers and sellers acting independently and where no single actor or set of actors can influence prices. With only a few buyers, processors may have sufficient market power, individually or cooperatively, to exert downward pressure on the price they pay producers. If that were to happen, the quantity supplied and prices paid to farmers would ultimately be lower than under more competitive conditions.”

Market failure occurs when decisions made in self interest conflict with society’s desire for an efficient allocation of resources. The USDA economists say when that happens, there is a wide variety of remedies such as more stringent regulation, tax incentives, subsidies, and government-set standards.

Summary:
Although most people would identify the US as a free market economy, the agricultural markets alone have a diverse number of government interventions to ensure the market allocates resources. Recent examples in the news have dealt with various bailouts and failures of regulatory oversight in the financial markets. So far, the commodity market has not made the daily headlines, but that may be a result of all of the USDA program involvement before and after a commodity value is established.