ARE120%20LN04~2008

ARE120%20LN04~2008 - ARE 120 Julian Alston Spring 2008...

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ARE 120 Spring 2008 Julian Alston April 15, 2008 Lecture 4 PRICE AND INCOME SUPPORT PROGRAMS Reading: Read chapters 2 and 7 for this class and next class. Outline: 4.1 Introduction 4.2 Price Support Programs Housekeeping : Review Sessions : Handouts: Figures for lecture 4. Review: Midterm Tuesday April 29; Review on Monday? Friday? Homework: Homework #2 due Thursday, April 24
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4. PRICE AND INCOME SUPPORT PROGRAMS 4.1 Introduction We will spend the next two classes looking in detail at policies that have formed the major elements of U.S. commodity price and income support programs over the past 20-30 years or so. We are looking at policy instruments : Price Support Policies Price Support Loans and Government Purchases Target Prices and Deficiency Payments Marketing Loans Supply Control Allotments Quotas Land Retirement Set-Aside or Acreage Reduction Program Other Dairy Production Controls (Dairy Herd Improvement Act) Tree-Pulls and Dairy Termination Pro-rates Not Covered Trade Policies (later) Stocks Policy (CCC Storage; Farmer-Owned Reserve) Marketing Order Programs Insurance Programs Disaster Programs Important Concepts Parity Decoupling Slippage Dynamic Responses Market Power in Trade
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2 4.2 Price Support Programs For many U.S. agricultural commodities, the major instruments used to support U.S. farm commodity prices (and hence farm incomes) have been * price support (loans) with government purchases * target prices with direct deficiency payments Other policies have been used in conjunction with these primary instruments: * various supply control and compliance provisions * stocks and surplus disposal programs * related policies such as marketing loans * border instruments We will not be talking in detail today about border instruments such as tariffs, quotas, export subsidies, or supply controls. These will be dealt with over the next two weeks. PRICE SUPPORT (LOANS) AND GOVERNMENT PURCHASES OF COMMODITIES Under a purchase program , the government sets the floor price and agrees to purchase any products offered to it at the support price (e.g., milk support provided by government purchase of cheese, butter, skim-milk powder). A price support loan is more complex. At harvest, the government through the Commodity Credit Corporation (CCC) offers a nonrecourse loan, for which the commodity is the collateral. The farmer receives a loan equal to the support price for each unit of the commodity placed under loan. The farmer pays interest plus the cost of storage. At the due date (say nine months from harvest) the farmer must pay off the loan either by (a) delivering the commodity to the government, or (b) paying back the money. Hence, as well as providing a source of credit, under this policy, the support price becomes a binding minimum market price.
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3 Figure 4.1 shows effects of a binding support price (loan rate) for a large-country exporter Key points: partitioning into domestic and export demand (and corresponding CS)
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This note was uploaded on 05/03/2008 for the course ARE 120 taught by Professor Alston during the Spring '08 term at UC Davis.

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ARE120%20LN04~2008 - ARE 120 Julian Alston Spring 2008...

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