1. Price vs. Income Support Price support – Production controls Income support – involves government support of farm income − −Income is supported but price is not supported

2. Price and Income Support (combined) (Basically raises price and thus also supports income) Purchase program − Nonrecourse loan (CCC LR) − Production control (ARP) −

3. Government Purchase Program Government stands willing to purchase What happens in the market? Will need to know – 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?

4. Nonrecourse 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)

5. Nonrecourse Loan Rate (Case #1) Is it Price or Income Support? Set below competitive equilibrium Does it matter? –Why not? –Why? $ P 1 D q 1 Q/yr S LR

6. Nonrecourse Loan Rate (Case #2) Set above competitive equilibrium Does it matter? $ P 1 D q 1 Q/yr S LR q d2 q p2 CCC stocks

7. Acreage Reduction Program No Nonrecourse Loan What happens? Any guess at why it isn’t drawn as a parallel shift? $ P0P0 D0D0 Q/yr S0S0 q1q1 S1S1 q0q0 P1P1

8. Acreage Reduction Program With Nonrecourse Loan #1 What happens? Does the LR do anything? $ P 0 = LR D0D0 Q/yr S0S0 q d1 = q s1 S1S1 q d0 P1P1 q s0 CCC Stocks 0

9. Acreage Reduction Program With Nonrecourse Loan #2 What happens? Does the LR do anything? $ P 1 = P 0 = LR D0D0 Q/yr S0S0 q d0 = q d1 S1S1 q s1 q s0 CCC Stocks 0 CCC Stocks 1

10. Loan Rate with Export Demand Set above competitive equilibrium in domestic market and above TD curve Does it matter? $ P1P1 DD q1q1 Q/yr S LR q d2 q p2 CCC stocks TD

11. Loan Rate with Export Demand #2 Set above competitive equilibrium in domestic market and above ED curve Does it matter? $ D Q/yr S LR q dd qpqp CCC stocks TD q ed Export Demand Domestic Demand

12. Loan Rate Below International Equilibrium Set below competitive equilibrium Does it matter? $ D Q/yr S LR q dd qpqp TD Export Demand Domestic Demand P

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

14. Target Price (Case #2) Set above competitive equilibrium Does it matter? $ P 1 D q 1 Q/yr S TP Q p2 = Q d2 No CCC stocks MP Deficiency Payments

15. Target Price (Case #2a) Another way to look at this Supply curve vertical until above target price $ D Q/yr S TP Q p2 = Q d2 No CCC stocks MP Deficiency Payments

16. Target Price & Loan Rate (Case #1) Both set above competitive equilibrium Now what happens? $ LR D Q/yr S TP Q p2 CCC stocks MP Deficiency Payments Q d2 If loan rate wasn’t effective this Would be the market price

17. Target Price & Loan Rate (Case #2) Target price set above competitive equilibrium and loan rate below market price Now what happens? $ LR D Q/yr S TP No CCC stocks MP Deficiency Payments Q p2 = Q d2

18. Target Price & Loan Rate (Case #3) Both set below competitive equilibrium What are the impacts? $ LR D Q/yr S TP No CCC stocks MP Q p2 = Q d2

19. Target Price and Loan Rate with Export Demand Set above competitive equilibrium in domestic market and above ED curve Does it matter? $ DD Q/yr S TP q d2 q p2 No CCC stocks TD LR MP International Demand Domestic Demand Deficiency Payments

20. Question: How can we get price from current $2/bu to desired $3/bu? What can you do? $ DD Q/yr S TD MP = $2.00

21. Question: How can we get price from current $2/bu to desired $3/bu? What can you do? –Supply control $ DD Q/yr S TD MP = $2.00 S2S2 Q d1 =Q p1 Q d2 =Q p2

22. Question: How can we get price from current $2/bu to desired $3/bu? What can you do? –Supply control –Price support $ DD Q/yr S TD MP = $2.00 LR = MP = $3.00 q d2 q p2 Q d1 =Q p1

23. Question: How can we get price from current $2/bu to desired $3/bu? What can you do? –Supply control –Price support –Export subsidy $ DD Q/yr S TD MP = $2.00 MP = $3.00 q dd2 q p2 Q d1 =Q p1 International Demand TD 2