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

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

• Price Supports

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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

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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

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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

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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?

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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)

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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?

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Loan Rate (Case 1)

• Is it Price or Income Support?
• Set below competitive equilibrium
• Does it matter?
• Why not?
• Why?

S
P
1
LR
D
Q/yr
q
1
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Loan Rate (Case 2)

• Set above competitive equilibrium
• Does it matter?

S
LR
P
1
D
Q/yr
qd2
qp2
q
1
CCC stocks
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Lecture 9, Wrap up

• 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