Modelling Distortionary Aspects of the US Wheat Program and Policy Reform

Abstract

Evaluation of US agricultural policy reform is complicated by the interaction of price support programs and production constraints. Researchers have typically presumed that price support policies as observed in the US wheat program increase the producer incentive at the margin,' however, little work has been done to determine whether such a presumption is warranted by the data. In this paper the structural model of price support based on production constraints is developed and its predictions compared with the data. From the structural model, a simulation model is constructed to evaluate the effect of US agricultural policy reform on us wheat production, exports and price. Simulation results demonstrate that the elimination o/price support and production controls increases acreage planted to wheat, as a portion of acreage which was previously set aside is returned to production. The net increase in production leads to a corresponding decrease in market price. The price effects are found to be potentially large given the inelastic nature of excess demand.