Price Support Program Research Articles

Deterministic versus stochastic evaluation of the aggregate economic effects of price support programs

Economic effects of agricultural policies estimated with deterministic models may be biased because certainty equivalent requirements are not satisfied in the agricultural sector. This article compares numerically estimated expected values of key aggregate economic variables for two levels of target prices (i.e. supported price level) from deterministic and stochastic formulations of AGSIM, which is a large-scale econometric simulation model of crop and livestock production in the United States. For nominal target prices set by the 1990 Food, Agriculture, Conservation and Trade Bill (FACT), the deterministic formulation underestimated the level of deficiency payments (the difference between target price and market price) by a cumulative total of $800 million (6·2%) over the 5 year life of the Bill compared to estimates from the stochastic model. For target prices 10% below the FACT levels, the deterministic model underestimated deficiency payments by $1220 million (36·8%). Much of the economic impact estimation bias can be attributed to price received by participating producers under FACT having a probability distribution truncated at the target price, which is a strong departure from the certainty equivalent requirements needed to have mean outcomes from stochastic models equal outcomes from their deterministic counterpart. Estimated changes in deficiency payments from lowering target prices by 10% were overestimated by $420 million (4·3%) with the deterministic model, which suggests that deterministic models are less biased for estimating the change in deficiency payments than in estimating the level of payments. The bias associated with mean values of other variables, such as crop prices and farm income, was much less in percentage terms than bias in estimates of deficiency payments.

Impacts and Incidence of Agricultural Commodity Programs

Since the passage of the Agricultural Adjustment Act of 1933, commodity programs have had a major impact on resource use and returns to factors in U.S. agriculture. While the need to insulate domestic agricultural markets from the vagaries of international price movements has been emphasized in developing countries,2 farm price supports are often justified as a means of redistributing income from consumers to commodity producers.3 An important issue is whether producers are the ultimate beneficiaries of commodity programs. John E. Floyd, Paul R. Johnson, T. D. Wallace, and Gordon C. Rausser and J. W. Freebairn investigated social costs of commodity programs.4 These studies are based on estimates of producer and consumer surpluses that depend on price elasticities of demand and shortrun supply curves. For example, Floyd employed linearly homogeneous production functions and demonstrated that in the short run farm-price supports benefit landowners more than producers.5 Recently, D. Gale Johnson focused on long-run distributional consequences of commodity programs and argued that in the long run landowners are the recipients of all commodity program benefits. If they do not benefit in the long run, why do producers advocate price support programs for agricultural commodities? The puzzle is resolved (1) if rent adjustment is slow and producers gain in the short run or (2) if producers are also landowners. Although the short-run incidence of the benefits of commodity programs is influenced by the speed of

An Optimal Control Framework for Inter-regional Dairy Policy Analysis

AbstractAn eleven-region stochastic coefficient econometric model was estimated and used in an optimal control framework to evaluate the effectiveness of the dairy price support program and marketing orders in reducing and stabilizing government purchases of dairy products. The results showed significant pressure on the reduction of the support price both in the presence and absence of Class I differentials. The optimal control model also showed that the drop in price support levels did not dramatically alter the regional distribution of milk production.

Economists and public policy: Chicago political economy versus conventional views

Both conventional welfare economics and public choice analysis suggest that economists have an important educational role to play in the public policy process — in improving the decision-making process. In sharp contrast, information and incentive problems related to voting rules, the bureaucracy, and the legislature do not arise in CPE because these processes are all perfect agents of interest groups. Consequently, the political process is efficient and there is no scope for beneficial economic analysis as it relates to the sugar program or other public policies. That is, the polity is efficient or it would be reordered by competing interest groups to make it so. But, as Mitchell (1989: 290) stresses, the important unanswered question in CPE remains: if there is no scope for improvement how and why does change occur? The analysis here suggests that the sugar program (and similar policies) may persist not because they are beneficial to the public at large but rather because information and incentive problems in the collective choice process lead to perverse results. Consequently, economic analysts can make a positive contribution to the public policy process by providing information about the responsiveness of alternative institutional arrangements to the values and choices of individual citizens (Wiseman, 1989). The Friedmans' “Tide in the Affairs of Men” view holds that economic analyses are important in changing public opinion, which is an important precursor to changes in public policy. In scores of studies over the past fifty years, economists have shown that the sugar and other argiculture price-support programs are inconsistent with the goal of open markets and provide most of the benefits to people with above-average incomes. Although only modest changes have been made in farm programs, deregulation of agriculture finally is being seriously discussed. For example, in 1987 the Reagan Administration proposed a sweeping initiative under the Uruguay Round of GATT to phase out all trade-distorting agricultural programs by the year 2000. The fact that the elimination of agricultural trade restrictions was seriously discussed under GATT auspices for the first time in forty years reflects the growing recognition that the sugar program and other domestic farm programs are better explained by rent-seeking than by a “what is, is efficient” view of agricultural policies. This change in intellectual climate is consistent with the thesis that ideas have consequ4ences and that economists can play an important role in affecting both the intellectual tide and the course of public policy.

Economic Trends in Milk Pricing and Marketing

This paper discusses several contemporary issues relating to the pricing and marketing of milk and dairy products. We begin at the consumer side of the marketing system, looking at trends in consumption of dairy products and their implications for dairy farmers. We then turn to farm milk pricing institutions, separately examining the current status and fate of the dairy price support program and federal milk marketing orders. Finally, we discuss an assortment of other issues that will influence farm milk prices during the next ten years

The Market for Land and the Impact of Farm Programs on Farm Numbers

AbstractIf a land price is to be observed, there must be trades of land. If the aggregate quantity of land in agriculture is fixed, those trades must be among farmers. This paper presents a model in which farmers of differing “ability” trade land among themselves. The model is used to evaluate the impact of farm programs (a demand enhancement program; a price support program; a land retirement program; an income subsidy program) on output price, land price, and number of farmers. Effects of these programs depend on conditions that require empirical evaluation. Preliminary evidence suggests that some standard tools of farm policy have the effect of reducing farm numbers.

A Multimarket Bounded Price Variation Model under Rational Expectations: Corn and Soybeans in the United States

AbstractThe bounded prices model under rational expectations is extended to a multimarket setting. Because the resulting rational expectations model is highly nonlinear, Fair and Taylor's iterative procedure is employed in conjunction with the multimarket framework to obtain maximum likelihood estimates of a supply‐demand model for corn and soybeans. The estimated model is then used to simulate the market equilibrium effects associated with removing price support and acreage set‐aside programs over the sample period. Among other things, the results reveal that acreage set‐asides have dominated the induced supply effects of price support programs for corn.

Agricultural price and income policy in Norway

Government intervention in Norwegian agriculture has evolved from essentially a price support and price stabilization programme to a programme with specified income targets and regional development objectives. Intervention involves the use of quotas, direct payments, removals of products from commercial markets, import controls, payment limitations, and regional differences in target prices and subsidy payments to support agriculture in less favourable areas. Intervention in agriculture is extensive, leads to very high costs of support and high retail food prices, but generates high income per farm worker.

The Bond Price Support Program as a Change in Policy Regimes: Evidence from the Term Structure of Interest Rates

RECENTLY, MANKIW, MIRON, AND WEIL (1987) argued that a change in policy regimes generally affects the public's expectations of future interest rates. To illustrate this influence, they compare the operation of the gold standard with the post-gold standard regime in the United States. They find that nominal short-term interest rates were mean-reverting before 1914, but became nonstationary after the creation of the Federal Reserve System. We extend Mankiw, Miron, and Weil's analysis by noting that the period from 1914 to the present cannot be characterized as one uninterrupted episode of policy discretion. The United States temporarily abandoned discretion for a rule in the 1940s. The Fed and Treasury agreed in April 1942 that the Fed would adjust Federal Reserve credit in a manner that would produce relatively low market rates on longterm securities. In particular, the Fed committed itself to support twenty-year government bond prices at a level consistent with a 2.5 percent interest rate ceiling. We investigate the possibility that the bond price support program of the 1940s conditioned the behavior of short-term interest rates in a predictable way. According to the expectation theory of the term structure, a binding long-term interest rate ceiling implies that an increase in the current short rate must cause the sum of the innovation and the change in future expected rates to be zero. Otherwise, the long rate rises above the ceiling and the public perceives a violation of the bond rate commitment. Placing a binding ceiling on long-term interest rates tends to make short-term interest rates mean-reverting.

World War II, interest rates, and fiscal policy commitments

During a war, government will be able to issue debt only if the public expects that the value of the debt will not be inflated away after the war. I argue that the United States government used the 1940s bond price support program to convey its intention to offset high rates of money production during the war with low rates later. Whether this program was credible depended on the expected duration of the war and the rule the public expected government to use in tax-financing the postwar government expenditures. Ex ante, the public may have been rational in buying low rate long-term war bonds, even though postwar money rates generated negative realized rates of return.

European Community Milk Quotas: Impacts and Implications

The past decade has been a period of worldwide overproduction of milk, depressed world markets for dairy products, and high costs of dairy price support programs. Ln response to these problems, the European Community instituted mandatory milk supply quotas in 1984. This study focused on the impacts of quotas on selected member states and the implications for the United States dairy industry of a similar milk supply management program. Conclusions regarding the European Community quota system follow. Milk quotas have been effective in reducing milk supplies and surplus stocks of dairy products in government storage. If milk quotas become permanent, there is the problem of them being capitalized into land values. Quotas have led to a problem of maintaining cash flow for the individual dairy farmer. Lack of effective quota transfer causes serious problems in countries in which regional specialization is occurring. Long-term use of quotas leads to rigidity in the production sector. Thus, even though milk quotas are effective in controlling milk production, there are problems associated with their use.

The Gains from Trade Debete: A Further Reply

government programs. In figure 1 we use an even simpler analysis than previously. The excess supply schedule is ES, and ED is the excess demand schedule. For the exporter, the gain from is the crosshatched area Pabc. Suppose the government introduces a price support of PS with the result that exports increase from Q1 to Q2. Producers become better off by PAdbPa. Importers become better off by Pabef, but there is a government cost of Psdef. The price support program generates a net cost of Pabdef. Our disagreement appears to be over semantics. We called the above situation one of negative from because the cost to the treasury of Psdef far exceeds the standard from area of cdPs (given a price support of Ps). The so-called gains from trade are less than the government costs. We do not mean from our statement of zero from or negative from that the area above the excess supply curve does not exist (our original article makes this very clear), but rather that the area above the excess supply curve measured at the price support level is less than or equal to the government treasury cost. We do not confuse the overall welfare of a policy with the welfare effect of free trade. In figure 1, in a distortionary free world, there is a gain from free of Pabc. Introduce into the market a price support of P, and the from become less than the cost of the price support which was used to both increase producer price and expand exports. We choose to call this situation a negative from situation (despite the positive area above ES) since it P

Decomposition of Milk Supply Response into Technology and Price‐Induced Effects

AbstractAn economically relevant aggregate production function and an aggregate profit function are used to decompose milk supply response into technology and price effects. Decomposing milk supply response in this way provides insights into dairy industry efficiency and its impact on the effectiveness of price support programs as well as the extent to which aggregate milk production will expand despite prices motivating supply curtailment. An empirical analysis of supply response decomposition for the state of Washington is presented. Expected market price effects were obtained but were overwhelmed by technology effects resulting in milk output expansion when price signals motivated supply reduction.

The Rice Price Support Program in the midst of Structural Change (Written in Korean)

The Rice Price Support Program in the midst of Structural Change (Written in Korean)

An Economic Analysis of the U.S. Generic Dairy Advertising Program Using an Industry Model

The market impacts of generic dairy advertising are assessed using an industry model which encompasses supply and demand conditions at the retail, wholesale, and farm levels, and government intervention under the dairy price support program. The estimated model is used to simulate price and quantity values for four advertising scenarios: (1) no advertising, (2) historical fluid advertising, (3) historical manufactured advertising, and (4) historical fluid and manufactured advertising. Compared to previous studies, the dairy-industry model provides additional insights into the way generic dairy advertising influences prices and quantities at the retail, wholesale, and farm levels.

A Note on Alternative Market and Governmental Risk Transference Mechanisms

AbstractThe major mechanisms for the transference of price and output risk by crop producers are examined. These include the use of futures and options contracts, government price-support and deficiency-payments programs, and crop insurance. Iso-revenue curves are used to highlight the distinctions between these alternatives.

Who Receives Farm Government Payments?

SummaryIf we do not systematically attempt to collect data and assess distributional impacts, we shall always be surprised by the many unintended consequences of our public decisions. (Bonnen 1969, p. 447)Direct government payments to farmers have tripled in the last half of the 1980s. Market price support programs (for example, the Western Grain Transportation Act, among others) and supply management regulation continue to be topics of debate among policy analysts. Certainly the debate has become intensified by the discussions surrounding the Canada‐U.S. Trade Agreement and the Uruguay Round of talks under the General Agreement on Tariffs and Trade.When all census farms are distributed across gross sales classes, the “selected” programs included in this study tend to be more concentrated among the mid‐sized farms than are aggregate gross sales. However, if one considers Prairie grain farms distributed across farm size classes measured in terms of grain acres, gross sales, net farm income (specifically, NCFIWF) and the net “benefits” of “selected” government programs are similarly concentrated. For example, Prairie farms with 320 to 599 acres of grain report 24% to 26% of each of these four items.26The “selected” programs included in this study tend to pay about the same size of payout per farm household, regardless of the size of household income. We obtain this result because farm size in terms of gross farm sales tends to be the same, regardless of the size of household total net income.Across the spectrum of farm financial stability classes, the net “benefit” of the “selected” programs in this study tend to be distributed similarly to gross farm sales. The results depend on exactly how one implements the classification but more than two thirds of gross sales and more than two thirds of net “benefits” of “selected” programs accrue to farms with a higher level of financial stability.Across the spectrum of rates of return on equity as an indicator of farm efficiency, about one third of gross sales and one third of net “benefits” of “ selected” programs accrue to farms with a rate of return on equity of 10% or more.The potential impact of deregulation of supply management depends on one‘ s assumption. Three scenarios are presented here and, in each case, both “winners” and “losers” are identified. Between 4% and 37% of households on farms with quota would move from above to below the Statistics Canada low‐income cutoff (LICO), depending on the scenario under consideration. However, in each seen‐ario, there are cases of households moving from below to above LICO as a result of our calculated impact of deregulating supply management.This paper takes its lead from Bonnen's observation about “unintended consequences.” We do not offer an “evaluation” of any government program. Our sole objective is to illustrate “distributional impacts” so that all individuals in the policy debate may speak from an informed perspective. This paper represents an initial step in developing an “informed perspective.” As the first note to this paper indicates, an important ancillary objective is to illustrate the potential of Statistics Canada databases to provide tabulations to answer specific Questions posed by researchers and policy analysts.

Biotechnology, Anticipated Productivity Increases and U.S. Dairy Policy

AbstractA major difficulty with the U.S. milk price support program is the instability in fiscal budgeting caused by the rapid technological change occurring in the industry. Further, the introduction of foreseeable new technologies such as synthetic bovine Somatotropin (bST) will compound the levels and costs of government purchases of milk after the technology is introduced in 1990. In this paper, an optimal control model is developed to stabilize government purchases of surplus milk in anticipation of bST. Results indicate that the current policies of Food Security Act of 1985 do not adequately anticipate the introduction of bST, and this will present a large dilemma for dairy policy. Provisions of FSA are adequate to stabilize government purchases of milk at acceptable levels only if bST is not introduced. Either the technology must be restricted, possibly through product taxes, or support prices must be lowered dramatically. Even with lower support prices, CCC purchases may still climb to high levels (15 billion pounds), depending on the rate of adoption.

Agricultural Land Values and Rents under the Conservation Reserve Program

One objective of the Conservation Reserve Program (CRP) is to reduce the erosion of fragile land. Additional objectives are to decrease surplus production of agricultural commodities and to provide income support for farmers. The direct net impact on farm income is the CRP payment less the farmer share of establishing cover on the land and the lost returns from taking the acreage out of production. It has long been recognized that farm program payments tied to production are capitalized into land values (see, e.g., Herdt and Cochrane 1966; Floyd 1965; Offutt and Shoemaker 1988). Traditional price support programs have this effect because the increases in returns tend to accrue to land because of its relatively inelastic supply. However, the existing target price program provides farmers with a trade-off between increased market earnings due to supply control and receiving deficiency payments. Because existing supply control programs are voluntary, participation in the program requires the payment to be more economically attractive at the margin than producing on the acreage, in which case the program benefits are directly tied to acreage reductions and will tend to be capitalized into land values. As with target price and acreage reduction programs, the impact of the CRP on land values depends on the net effect on expected farm income and returns to land. That is, how big is the increase in land returns over the next best alternative and

The Nutritional Impact of the Dairy Price Support Program

This paper examines the impact of the dairy price support program and its resultant higher prices on nutritional intake, especially calcium. This assessment is particularly important because calcium is one of the two nutrients whose average intake is below the Recommended Dietary Allowance. A demand system with emphasis on dairy products is estimated, and in conjunction with data on the nutritional content of various foods, impacts on nutritional intake are measured.