1. Ag Policy, Lecture 14 Knutson, 6 th 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? $ P 1 D q 1 Q/yr S TP

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

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

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

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

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

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

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

13. 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 $ MP=LR D Q/yr S QsQs CCC stocks QdQd TD TP Deficiency Payments Larger stocks QsQs Adding a Target Price to a Price Support

14. Lower LR –Lowers MP –Adds Exports –Reduces Stocks $ MP=LR D Q/yr S QTQT CCC stocks QdQd TD TP Deficiency Payments Exports QsQs Adding a Target Price to a Price Support

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

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