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Ag Policy, Lecture 10 Knutson, 6 th Edition Chapter 7

Ag Policy, Lecture 10 Knutson, 6 th Edition Chapter 7. Marketing Loan Supply Controls. Price Supports & Loan Programs. Price Supports (Government Purchase or Non-recourse loan) Sets market floor Government accumulates excess supply

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Ag Policy, Lecture 10 Knutson, 6 th Edition Chapter 7

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  1. Ag Policy, Lecture 10Knutson, 6th Edition Chapter 7 • Marketing Loan • Supply Controls

  2. Price Supports & Loan Programs • Price Supports (Government Purchase or Non-recourse loan) • Sets market floor • Government accumulates excess supply • Extremely trade distorting, therefore we haven’t used this tool much in recent farm bills • Marketing Loan Program (Income Support) • Created in effort to enhance export competitiveness • Does Not Create a Price Floor • No stocks accumulated

  3. Marketing Loan • Take loan - repay at lower of Loan Rate or World Price • Or just take a check for the difference • What happens in the market? • Examples on the Board • Effective demand, supply ? • Where is loan rate relative to competitive equilibrium • Impact on Quantity Supplied • Impact on Quantity Demanded by consumers • Impact on Market Price • Impact on CCC Stocks • Does elasticity of supply and demand matter?

  4. Production Controls • Over the past 70 years, various tools have been used to combat surpluses, primarily resulting from: • Supporting farm prices above marketing clearing levels • Tools can be voluntary or mandatory • All involve some degree of slippage

  5. Production Controls • What is Slippage?

  6. Production Controls • Long-term Programs • CRP (Conservation Control Program) • Soil Bank (1950’s) • Dairy herd buy-out • Short-term reduction • Set-aside or ARP (Acreage Reduction Program) • PIK (Payment-In-Kind)

  7. Production Controls • Acreage Allotments and Marketing Quotas (Mandatory) • Acreage allotment specifies number of acres crop on which a crop can be produced • Marketing quota restricts quantity of a commodity that can be marketed • Tobacco in US • Milk in Canada

  8. Production Controls • Benefits of Allotments and Quotas are Capitalized into the value of: • Land • Quota or Allotment Certificates • What is Capitalization? • Who benefits from Quotas/Allotments?

  9. Production Controls Summary • Most production controls have seen very limited success • Why? • If successful you have to consider effects of capitalization impacts on land values

  10. Lecture 10, Wrap up • Marketing Loan • Know the difference between a Marketing Loan and a regular non-recourse loan • Be able to draw the market impacts of a marketing loan • Calculate cost of Marketing loan program • Production Controls • Draw an ARP in conjunction with a price support • Draw the impact of a quota, what is the market price?

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