Price vs. Income Price vs. Income SupportSupport

• Price support –

• Production controls

• Income support – involves government support of farm income−

−

−Income is supported but price is not supported

Price and Income Support Price and Income Support (combined)(combined)

(Basically raises price and thus also supports (Basically raises price and thus also supports income)income)

• Purchase program−

• Nonrecourse loan (CCC LR)− −

• Production control (ARP)−

Government Purchase Government Purchase ProgramProgram

• Government stands willing to purchase

• What happens in the market?• Will need to know

– 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?

Nonrecourse LoanNonrecourse 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)

Nonrecourse Loan Rate (Case Nonrecourse Loan Rate (Case #1)#1)

• Is it Price or Income Support?

• Set below competitive equilibrium

• Does it matter?

– Why not?

– Why?

$

P1

D

q 1Q/yr

S

LR

Nonrecourse Loan Rate (Case #2)Nonrecourse Loan Rate (Case #2)

• Set above competitive equilibrium

• Does it matter?

$

P1

D

q 1Q/yr

S

LR

qd2 qp2

CCC stocks

Acreage Reduction ProgramAcreage Reduction ProgramNo Nonrecourse LoanNo Nonrecourse Loan

• What happens?

• Any guess at why it isn’t drawn as a parallel shift?

$

P0

D0

Q/yr

S0

q1

S1

q0

P1

Acreage Reduction ProgramAcreage Reduction ProgramWith Nonrecourse Loan #1With Nonrecourse Loan #1

• What happens?

• Does the LR do anything?

$

P0 = LR

D0

Q/yr

S0

qd1= qs1

S1

qd0

P1

qs0

CCC Stocks0

Acreage Reduction ProgramAcreage Reduction Program With Nonrecourse Loan #2With Nonrecourse Loan #2

• What happens?

• Does the LR do anything?

$

P1=P0 = LR

D0

Q/yr

S0

qd0 = qd1

S1

qs1 qs0

CCC Stocks0

CCC Stocks1

Loan Rate with Export Demand

• Set above competitive equilibrium in domestic market and above TD curve

• Does it matter?

$

P1

DD

q1 Q/yr

S

LR

qd2 qp2

CCC stocks

TD

Loan Rate with Export Demand #2

• Set above competitive equilibrium in domestic market and above ED curve

• Does it matter?

$

D

Q/yr

S

LR

qdd qp

CCC stocks

TD

qed

ExportDemand

DomesticDemand

Loan Rate Below International Equilibrium

• Set below competitive equilibrium

• Does it matter?

$

D

Q/yr

S

LR

qdd qp

TD

ExportDemand

DomesticDemand

P

Target Price (Case #1)

• Is it Price or Income Support?

• Set below competitive equilibrium

• Does it matter?

– Why not?

– Why?

$

P1

D

q 1Q/yr

S

TP

Target Price (Case #2)

• Set above competitive equilibrium

• Does it matter?

$

P1

D

q 1Q/yr

S

TP

Qp2= Qd2

No CCC stocks

MP

DeficiencyPayments

Target Price (Case #2a)

• Another way to look at this

• Supply curve vertical until above target price

$

D

Q/yr

S

TP

Qp2= Qd2

No CCC stocks

MP

DeficiencyPayments

Target Price & Loan Rate (Case #1)

• Both set above competitive equilibrium

• Now what happens?

$

LR

D

Q/yr

S

TP

Qp2

CCC stocks

MP

DeficiencyPayments

Qd2

If loan rate wasn’t effective thisWould be the market price

Target Price & Loan Rate (Case #2)

• Target price set above competitive equilibrium and loan rate below market price

• Now what happens?

$

LR

D

Q/yr

S

TP

No CCC stocks

MP

DeficiencyPayments

Qp2= Qd2

Target Price & Loan Rate (Case #3)

• Both set below competitive equilibrium

• What are the impacts?

$

LR

D

Q/yr

S

TP

No CCC stocks

MP

Qp2= Qd2

Target Price and Loan Rate with Export Demand

• Set above competitive equilibrium in domestic market and above ED curve

• Does it matter?

$

DD

Q/yr

S

TP

qd2 qp2

No CCC stocks

TDLR

MP

InternationalDemand

DomesticDemand

DeficiencyPayments

Question: How can we get price from

current $2/bu to desired $3/bu?

• What can you do?

$

DD

Q/yr

S

TD

MP = $2.00

Question: How can we get price from

current $2/bu to desired $3/bu?

• What can you do?– Supply control

$

DD

Q/yr

S

TD

MP = $2.00

S2

Qd1=Qp1Qd2=Qp2

Question: How can we get price from

current $2/bu to desired $3/bu?

• What can you do?– Supply

control– Price

support

$

DD

Q/yr

S

TD

MP = $2.00

LR = MP = $3.00

qd2 qp2

Qd1=Qp1

Question: How can we get price from

current $2/bu to desired $3/bu?

• What can you do?– Supply

control– Price support– Export

subsidy

$

DD

Q/yr

S

TD

MP = $2.00

MP = $3.00

qdd2 qp2

Qd1=Qp1

InternationalDemand

TD2