Ag Policy, Lecture 9 Knutson, 6 th Edition Chapter 7 Price Supports.

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Presentation transcript:

Ag Policy, Lecture 9 Knutson, 6 th Edition Chapter 7 Price Supports

Program Crops Wheat Corn Grain sorghum Barley Oats Upland cotton Rice Peanuts Oilseeds - sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed –Soybeans a little different Sugar and tobacco 09

Price vs. Income Support Price support – direct government intervention through buying commodities Production controls to reduce supply and raise price Income support – involves government support of farm income −Supporting price in which case both price and income is supported −Supporting farm revenue through direct payments −Income is supported but price is not supported

Price and Income Support (combined) (Basically raises price and thus also supports income) Purchase program −Government purchases product at support price Nonrecourse loan (CCC LR) −Farmer takes out loan at harvest −Has option of forfeiting to CCC in lieu of full payment of loan Production control (ARP) −Raises price through controlling quantity of commodity entering the market

Government Purchase Support Price Government stands willing to purchase any amount of commodity at the established support price level What happens in the market? Examples –Effective Demand –Where is support price relative to competitive equilibrium? –Impact on Quantity Supplied –Impact on Quantity Demanded by consumers –Quantity purchased by government –Does elasticity of supply and demand matter?

Non-Recourse Loan Why a loan? –Lowest Prices typically at harvest –Allows farmer to store and market Farmer takes out loan from Commodity Credit Corporation (CCC) = loan rate (LR) * production Repayment Options –Sell crop and repay loan plus interest –Forfeit crop (no recourse for forfeiture)

Non-Recourse Loan What happens in the market? Examples on the Board –Where is loan rate relative to competitive equilibrium –Impact on Quantity Supplied –Impact on Quantity Demanded by consumers –Impact on CCC Stocks, Quantity forfeited to (purchased by) government –Does elasticity of supply and demand matter?

Loan Rate (Case #1) Is it Price or Income Support? Set below competitive equilibrium Does it matter? –Why not? –Why? $ P 1 D q 1 Q/yr S LR

Loan Rate (Case #2) Set above competitive equilibrium Does it matter? $ P 1 D q 1 Q/yr S LR q d2 q p2 CCC stocks

Price Supports –Know how to draw the graph –Identify market price, CCC Stocks, quantity demanded, quantity supplied –Be able to calculate all of the above using elasticity measures Lecture 9, Wrap up