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Ag Policy, Lecture 14 Knutson, 6 th Edition Chapter 7

Ag Policy, Lecture 14 Knutson, 6 th Edition Chapter 7. Target Price Target Price & Loan Rates Introducing the Target Price in 1970’s. Target Price Program. Income Support similar to marketing loan Doesn’t set a price floor Creates a system to restore income lost by low prices

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Ag Policy, Lecture 14 Knutson, 6 th Edition Chapter 7

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  1. Ag Policy, Lecture 14Knutson, 6th Edition Chapter 7 • Target Price • Target Price & Loan Rates • Introducing the Target Price in 1970’s

  2. Target Price Program • Income Support similar to marketing loan • Doesn’t set a price floor • Creates a system to restore income lost by low prices • Deficiency Payment Rate = Target price – Market Price 10

  3. Target Price (Case #1) • Income Support • Set below competitive equilibrium • Does it matter? • Why not? • Why? $ S P 1 TP D Q/yr q 1

  4. Target Price (Case #2) • Set above competitive equilibrium • Gov. Cost = (TP-MP)*QS $ S TP Deficiency Payments P 1 MP D QS=QD Q/yr q 1 No CCC stocks

  5. Target Price (Case #2a) • Another way to look at this • Supply curve vertical until above target price $ S TP Deficiency Payments MP D Q/yr QS=QD

  6. Target Price & Non-Recourse Loan (Case #1) • Both set above competitive equilibrium $ S TP Deficiency Payments MP=LR D Qd Qs Q/yr CCC stocks

  7. Target Price & Marketing Loan (Case #2) • Both set above competitive equilibrium $ S TP Deficiency Payments LR Loan Gains or Benefits MP D Q/yr QS=QD

  8. Target Price & Loan Rate (Case #3) • Target price set above competitive equilibrium and loan rate below market price $ S TP Deficiency Payments MP LR D Q/yr QS=QD

  9. Target Price & Loan Rate (Case #4) • Both set below competitive equilibrium • What are the impacts? $ S MP TP LR D Q/yr QS=QD

  10. 1970’s Market Orientation Focus • Target price was create during the market orientation of the 70’s • Until then we mostly used price support • Non-Recourse loans • Government Purchase programs 10

  11. Price Supports Only • Prior to 70’s • Price Support • CCC Stocks • Limited Exports • Target Price • Markets clear • No Stocks • Increase exports $ S MP=LR TD D Qd Q/yr Qs CCC stocks

  12. Adding a Target Price to a Price Support • Add a Target Price • Where? • What about LR? $ S MP=LR TD D Qd Q/yr Qs CCC stocks

  13. Adding a Target Price to a Price Support • Add a Target Price • Above LR • Don’t change LR • Result? • More supply • More Stocks • So LR needs to be lower, but that can be politically difficult $ S TP Deficiency Payments MP=LR TD D Qd Q/yr Qs Qs CCC stocks Larger stocks

  14. Adding a Target Price to a Price Support • Lower LR • Lowers MP • Adds Exports • Reduces Stocks $ S TP Deficiency Payments MP=LR TD D Qd QT Qs Q/yr CCC stocks Exports

  15. Adding a Target Price to a Price Support • Ineffective LR • No Stocks • More exports • What happens if we increase the target price? $ S TP Deficiency Payments MP LR TD D Qd Q/yr Qs Exports

  16. Target Price Terminology • Base Acres Average planted acres over a number of years • Farm Program Yield (FPY) Average yield proven over a number of years • Deficiency Payment Rate (DPR) Target Price – Market Price (in current year) • Deficiency Payment = DPR * Base * FPY

  17. Lecture 14, Wrap up • Can you illustrate the impact of a target price • With a non-recourse loan? • With a marketing loan? • With export demand? • Terminology

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