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U.S. Commodity Policy (Ch. 7)

This piece reviews essential economic concepts utilized in U.S. commodity policy analysis, focusing on the major components of the policy tools available. It examines how factors like supply and demand curves can shift, the implications of technological changes in agriculture, and the effects of price supports, production controls, and direct payments on market outcomes. Additionally, it discusses the elasticity of demand and supply, the impact of taxes on consumer behavior, and the significance of farm income and investment analysis for farm program payments.

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U.S. Commodity Policy (Ch. 7)

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  1. U.S. Commodity Policy (Ch. 7) • Review of economic concepts used in policy analysis • Major components of U.S. commodity policy tools

  2. A Review of Economic Concepts Used in Policy Analysis

  3. What can shift this Curve? P S1 Change in Supply S2 D Q 0

  4. What can shift this Curve? Change in Demand P S D2 D1 Q 0

  5. Origins of the Supply Curve MC1 P AC1 AVC1 Fixed Cost Q 0

  6. Technological Change and Supply MC2 AC1 MC1 P AC2 Pe In the short run, a cost reducing new technology will lower cost and early adopters will earn temporary economic profits. Q1 Q2 Q 0

  7. Technological Change and Supply MC2 AC1 MC1 P AC2 P1 But, economic profits will attract new firms and increase supply which drives down equilibrium price to the minimum of the average cost curve. P2 Q1 Q2 Q 0 Q3

  8. Long Run Average Cost Under perfect competition technological change has pushed farm size upward. MC P SRAC LRAC1 LR Pe 0 Q Size1 Size2 Size3

  9. Price Floors PF2 Pe PF1 QE

  10. Price Ceilings PC2 Pe PC1 Qe

  11. Quotas P S1 Pe D1 0 Qe Q Quota

  12. Elastic Versus Inelastic Demand Inelastic Inelastic demand implies a change in price will cause a relatively small change in quantity bought. Elastic P2 Elastic demand implies a change in price will cause a relatively large change in quantity bought. P1 Q2E Q2I Q1

  13. Elastic Versus Inelastic Supply Inelastic Inelastic supply implies a change in price will cause a relatively small change in quantity produced. Elastic P2 Elastic supply implies a change in price will cause a relatively large change in quantity produced. P1 Q1 Q2E Q2I

  14. Elasticity has implications for policy -1 Suppose a tax is added to the cost of a product. Inelastic P2 P1 Inelastic demand implies consumers pay most, but not all of the tax. The tax causes a relatively small change in quantity demanded. Q2 Q1

  15. Elasticity has implications for policy -2 Suppose a tax is added to the cost of a product. Elastic P2 P1 Elastic demand implies consumers pay less of the tax. The tax causes a relatively large change in quantity demanded. Q2 Q1

  16. Risk Farm Income Price Support Time

  17. Investment Analysis NPV = Net Present Value Investment = the initial investment Net Cash flow = Income minus expenses associated with the investment i = interest rate Salvage value = Any remaining value at the end of the valuation period N = length of planning horizon What does this imply for value of land that receives farm program payments?

  18. Major components of U.S. commodity policy tools • Price supports • Production controls • Direct payments • Trade protection • Subsidized crop insurance

  19. Price supports • Consider Fig. A7.2 & corrected A7.3 • Handling of resulting surpluses • Government purchase • Non-recourse loan

  20. Production controls • Acreage allotments, payments for idling land, marketing quotas • Consider corrected Fig. A7.4

  21. Direct payments • Target prices (Fig A7.5) • Marketing loan

  22. Subsidized crop insurance • Commercial crop insurance has not been widely used in major crops • Subsidized crop insurance intended as a replacement for disaster relief

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