Lecture Income Supports

Lecture Income Supports - Economics of Income Supports AGB...

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Economics of Income Supports AGB 312 Agricultural Policy 20 & 21 October 2009
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Outline for Today and Tomorrow • Income Support Programs – Common Elements • Target Price/Deficiency Payments – Counter-Cyclical Payments (CCP) – Milk Income Loss Contracts (MILC) • Payment Limits • Marketing Loans/Loan Deficiency Payments
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Coupled Direct Payments, 1970-1996 • Boom in commodity prices – U.S. began to sell wheat to the USSR in the early 1970s – Export opportunities • Start of the environmental lobby in the US (Into your zone now…) • Policy shifts to “direct payments” – Let markets clear – Prices can fall below the previous levels – Now, income support as payments • Great for exports – At expense of others • High cost (again)
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Perceived Problem • “Problem” is income is “too low” • But don’t want to forgo export opportunities – Price support raises prices, makes it more difficult to compete • “Solution” is to pay farmers – Variety of conditions and mechanisms • Separate income support from price support!
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Methods of Income Support • Deficiency Payments (relative to production base) – Target Price/Deficiency Payment – Loan Deficiency Payment – Marketing Loan Guarantee/Marketing Assistance Loan
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Methods of Income Support • Direct Payments – Cash payment regardless of price level • Counter Cyclical Payments – Major program crop CCP – MILC - Milk Income Loss Program
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Common Elements of US Income Supplements • A payment rate - to imply a rate of return suggestive of a price – $/acre – $/ bushel, $/cwt, $/pound, etc – Difference between a market price and a program price
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Common Elements of US Income Supplements • Base Production - to disconnect or decouple the amount of the payment from the current amount marketed – Actual production history (e.g., milk) – “Base acres” and “program yields” • Base acres derive from individual farms – Typically based on farm’s production history • Program yields relate to county or “local” norms – Also historical, not current production
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Coupled Direct Payments • Called “coupled” because payments depend on production, price, or both – Directly influence a farmer’s prod’n decisions – Guaranteed a specific return • Target Price/Deficiency Payment – Difference between a target and another price – Original idea in 1973 • Marketing Assistance Loan/Loan Deficiency Payment – Cotton and rice in 1985, later all
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The Loan Rate Loan Rate is at price = P 2 (Compare to “Free Market”; Price is higher) What is the impact on Quantity demanded? (Decreases) What is the impact on Quantity supplied? (Increases) What about the welfare of buyers and sellers; who is better off; who is worse off?
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Lecture Income Supports - Economics of Income Supports AGB...

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