Price Stability Econ 4300 2008. Price Stability Read Chapter 7 of Schmitz, Furtan and Baylis...
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Transcript of Price Stability Econ 4300 2008. Price Stability Read Chapter 7 of Schmitz, Furtan and Baylis...
![Page 1: Price Stability Econ 4300 2008. Price Stability Read Chapter 7 of Schmitz, Furtan and Baylis “Agricultural Policy, Agribusiness, and Rent-Seeking Behaviour”](https://reader036.fdocuments.net/reader036/viewer/2022062421/56649d255503460f949fb8c4/html5/thumbnails/1.jpg)
Price Stability
Econ 4300
2008
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Price Stability
Read Chapter 7 of Schmitz, Furtan and Baylis “Agricultural Policy, Agribusiness, and Rent-Seeking
Behaviour”
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Stability
• Policy objective is price and income stability– What is stability?
• Constant over time
• Increasing over time
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Price Stability
• Buffer stocks– Store commodity when prices low, release into
the market when prices high– Needs to be a storable commodity– Storage costs can not be high
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Price Stability
• Do producers and consumers really what stable prices?– Has been shown that under certain conditions,
consumers prefer variable prices– Similarly for producers– However, when both considered, stable prices
result in higher social welfare
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Income Stability
• Price stability can reduce income stability– Demand and supply not perfectly elastic– When supply less, the lower sales are off-set by
higher prices– When supply high, the higher sales are off-set
by lower prices– A role for private storage to buy commodity
when price is low and sell when high
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Middle-Man Market Power
• A pure monopoly can gain from storing a commodity– With monopoly, price to consumers higher than
perfect competition– Price to consumers constant over time– Price to producers lower than under perfect
competition– Price to producers varies with supply
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Middle-Man Market Power
• Agriculture – difficult to prove– Processors – not in storage business, storage
costs could be high– Grain dealers – with only 3 or 4 major world
players, they are often suspected of MP
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Price Expectations
• Price forecasts– Naïve: E(Pt+1)=Pt
– Adaptive: E(Pt+1)=Pt + γ[Pt – E(Pt)]
– Rational Expectations:• Use all current and past information (It)
• Pt = Et(Et+1 | It)
• What info? PROs, WCE, Minneapolis, El Nino, La Nina, contracts, weather forecasts, …
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Risk and Producer Uncertainty
• Models generally assume risk neutral
• Producers are typically risk averse
• If risk is reduced, through gov’t programs for example, supply will increase
• Increased supply -> lower prices
• If a gov’t program, does it fit within the WTO?
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Farm Sector Stabilization
• Why for governments attempt stabilization?– Economic
• If highly variable prices and producers are risk averse, output will be less than socially optimal
• Producers make fewer long-term investments, reducing production in the long-term
– Political
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Causes of Price Variability
• Excess demand shifts– Droughts/surpluses in importing countries
• Excess supply shifts– Crop failure/bumper crop in exporting country
• Government intervention– Export subsidies, macro policies
• Other– Elasticity of excess demand and supply
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Stabilization
• Can prices be stabilized?
• Conditions that exist – price trends– Stability vs. income support
• Causes of stabilization program failure– Income uncertainty and inability to project– Declining incomes– Political uncertainty
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Canadian Support Programs
Agricultural Stabilization Act (1958)– Guaranteed 90% of 3-yr moving average price– Fed funded– Payouts small until 1974– In 1976, grains removed– Payments ‘exploded’ in 1980’s– Program ended in 1991
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Canadian Support Programs
Western Grain Stabilization Act (WGSA)– Stabilize crop income– To replace ad hoc policies– Gov’t and producer funded– Prices declining but production increasing, so
incomes did not decline to trigger payments– By the late 1980’s, the WGSA was insolvent
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WGSA impacts
• Reduced price variability
• Increased supply
• Raised producer incomes
• Payouts in 1977, 1978 (small)
• Payouts in 1987 to 1991 (huge)
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Canadian Support Programs
Special Grains Program– Payment due to low grain prices, 1986, 1987– $1 billion each year– One-time special payment
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Canadian Support Programs
Tripartite Stabilization– Developed for non-grain– Fed., Prov. and producer contributions– Similar impacts to WGSA– Countervailing tariff actions by United States
(especially red meats)– Programs discontinued by 1994
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Canadian Support Programs
Farm Income Protection Act (1991)– A) GRIP – gross revenue insurance– B) NISA – net income stabilization– C) crop insurance
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Canadian Support Programs
GRIP– Guaranteed gross revenue per acre– Sask. withdrew from program after 18 months,
too expensive
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Canadian Support Programs
NISA– Fed., (later Prov.), and producer funded– Individual funds (Fund 1 gov’t money and
taxable when withdrawn, fund 2 producer’s money and not taxable)
– Funds can not go into deficit– Concerns – timing of payments, declining
incomes, ‘savings’ accounts,
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Canadian Support Programs
Agricultural Income Disaster Assistance– 1998 temporary– Designed with WTO rules– Payment if net income < 70% of moving avg.– Costly administration (producers and likely
government)– Discouraged diversification
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Canadian Support Programs
Canadian Agricultural Income Stabilization (CAIS)– Replaced NISA– Based on production and reference margins– Inventory adjustments– Producer contributions initially required, then
dropped– Replaced in 2007
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Canadian Support Programs
AgriStability (AS) and AgriInvest (AI)– AS – payment if current year margin falls
below 85% of reference margin– AI – producer and government contributions
deposited in an AgriInvest account
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Canadian Support Programs
Provincial Programs– Most provinces have ended their own programs
and joined the federal programs. Provincial funding part of these programs.
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