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

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.

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

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

  2. 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

  3. 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

  4. 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

  5. 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?

  6. 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)

  7. 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?

  8. 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

  9. Loan Rate (Case #2) • Set above competitive equilibrium • Does it matter? $ S LR P 1 D qd2 qp2 Q/yr q 1 CCC stocks

  10. 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

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