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

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Price support direct government intervention through buying commodities ... Lowest Prices typically at harvest. Allows farmer to store and market ... – PowerPoint PPT presentation

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


1
Ag Policy, Lecture 9 Knutson, 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
Q/yr
qd2
qp2
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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