History and Overview of Production Controls and Marketing Quotas

1. History and Overview of Production Controls and Marketing Quotas Josh Morgan

2. Three Main Types of Government Policy Tools • 1. Price supports • 2. Restrictions on output or input use • 3 Compensatory payments

3. Price Supports • The simplest type of a price support program is when the government sets price above the market clearing level. • There will be surplus production. • Example- Current U.S. Dairy program, Congress sets the level of price support. The price is then supported by a standing offer from the government to buy enough milk products (dry milk, butter, and cheese) to raise milk price to the support level.

4. Price Supports with Restrictions on Output Levels or Input Use Price supports inevitably lead to increased production, which leads to surpluses and Treasury costs, thereby creating an incentive for further government involvement through programs to control production. Government acquisition of surpluses is costly to the taxpayers. One way to minimize this is to restrict the quantity of the product produced or marketed.

5. Restrictions on Input Use Acreage Allotments • Land is the input most commonly restricted in production control programs. • The increase in price due to the price support, provides each farmer with the incentive to produce more output per acre on their restricted number of acres.

6. Voluntary Diversion of Land • The Soil Bank Program which was instituted in the Agricultural Act of 1956. Farmers were paid to take land out of production. • The overall objective of farm programs involving the voluntary diversion of land is the same as for mandatory acreage-allotment programs, to increase product price by reducing production.

7. Restrictions on Output • Problems associated with mandatory acreage allotments have resulted in legal restrictions on the amount each producer can legally produce and sell. • Ex. In 1965 the tobacco price support program was changed so that production was restricted by a marketing poundage quota. • Marketing quotas are more effective means of restricting production than are restrictions on input use. • Quotas also distort the pattern and resource use- therefore increasing the cost of production.

8. Market Value of Allotments and Quotas • When quantity restrictions are placed on the production or marketing of a product and the profits associated with those activities increase, the right to produce or sell that commodity acquires a value. • The demand for quota and the price producers are willing to pay to rent or purchase quota are determined by conditions in the product market.

9. The Market Value of the government determined right to produce and sell a product is the present value of the stream of expected annual quota rents. • The value of the right to produce is capitalized into the market price of the quota. • Price support programs that restrict production through quotas and allotments increase production costs for producers, regardless of whether they own or rent quota. • Example: Rental value on 1 acre of tobacco was $1000 per year.

10. Compensatory Payments • A proposal to adopt price supports that involved the use of compensatory payments was contained in the Brannan Plan of the late 40’s. • Named after Charles Brannan, the secretary of agriculture in the Truman Administration. • Government does not purchase the amount that consumers do not purchase at the price support level. • Instead, the amounts produced is sold by producers at whatever price will clear the market. • Referred to as “Deficiency Payments”

11. History and Operation of Production Control Programs • The Agricultural Adjustment Administration (AAA) was created in 1933. • Initiated a program of production controls and price supports for the basic crops. • Marked the turning point from a free to a highly controlled market.

12. Effectiveness of initial attempts to increase product prices by controlling production was undercut by three factors. • 1.Farmer ingenuity in circumventing planting restrictions. • 2. Incentives for farmers to increase production in response to high price supports. • 3. Production –increasing effects of other government programs such as soil conservation payments and low-cost credit.

13. First Phase: Supply Management • Prices to farmers for the basic crops were guaranteed by the U.S. government by granting producers “nonrecourse loans” on their commodities stored by the CCC. • Commodity Credit Corporation (CCC) was created as a companion policy of the AAA in 1933 to provide for loans to farmers and storage when production was “too large.” • In 1936 it was declared unconstitutional by the U.S. Supreme Court. • Congress quickly enacted the Soil Conservation and Domestic Allotment Act of 1936, which combined conservation with production controls.

14. The Agricultural Marketing Act of 1937 provided for agricultural marketing orders , which were used for milk, oranges, vegetables and other specialty crops. • 1949 farm bill, last permanent farm legislation enacted into law, provided for acreage allotments and marketing quotas if approved by 2/3 of the voting producers.

15. Why Supply Management Failed • 1st reason Farmers ingenuity in circumventing planting restrictions. • Farmers took the less productive land out of production. • Skip-row planting. By doing so, it enabled farmers to have only one acre counted against the allotment for every two acres in the field. Yields per row increased because the plants retrieved more sunlight and water. • 2nd reason Other government farm programs increased the supply of farm products, working against the stated policy goal of decreasing farm output.

16. The Second Phase- Surplus Problems and Export Subsidies • Surplus problem was rooted in prices being held above the market level. Was recommended that price supports be reduced below 90% of parity. • The Agricultural Act of 1949 gave the secretary of agriculture authority to lower price support levels. • Continuing surplus problems led to the implementation of another approach to reduce the total capacity of U.S. agriculture. • 1956 Soil Bank Program farmers were paid to take cropland out of production. Basic idea was to take land out of production as a way of reducing the output of farm products. From ’61 to ’72 there was an average of 12% of the U.S.’s farmland in the Soil Bank Program.

17. All effective price support programs and programs that artificially reduce market prices below world levels are inconsistent with the competitive market process. Such programs impede mutually voluntary exchange and distort markets through accompanying import quotas, export subsidies, and other restrictions on compensation.