Agricultural Price Support Programs

O CCC Loan Program © CCC Deficiency Payments

$5.00 4.00 3.00 2.00



'rice |







Target Price






The farmer is paid the difference between the target j and the market price.

0 4 8910 12 16

Quantity in Thousands of Bushels

0 4 8910 12 16

Quantity in Thousands of Bushels

Using Graphs The farmer sells surplus crops to the government under the plan shown in Panel A. The farmer receives a payment equal to the difference between the target price and the prices the farmer received for the crops. What was the total payment the farmer received under the loan program? Under the deficiency payment program?

check sent to producers that makes up the difference between the actual market price and the target price.

Panel B in Figure 6.6 illustrates the deficiency payment approach. Under this program, the farmer made $25,000 by selling 10,000 bushels at $2.50 each on the open market. Because this was $1.50 below the target price of $4.00 a bushel, the farmer received a deficiency payment of $1.50, times 10,000 bushels, or the $15,000 represented by the shaded area.

When the $15,000 deficiency payment was added to the $25,000 market sale, the farmer made $40,000-the same as under the loan program. Under this program, however, the CCC does not have the political and economic problem of disposing of the surplus. Farmers liked this program and would have produced even more crops if they could. Instead, they had to promise the CCC that they would limit production. In many cases, aerial photographs were taken to verify that the acreage planted was within the limits of the agreement with the CCC.

Reforming Price Supports

In an effort to make agricultural output responsive to market forces, Congress passed the Federal Agricultural Improvement and Reform (FAIR) Act of 1996. Under this law, eligible producers of grains, cotton, and rice can enter into a seven-year program that allows them almost complete flexibility to plant any crop on any land. Other products, such as milk, sugar, fruits, and vegetables, are not affected.

Under FAIR, cash payments take the place of price supports and deficiency payments. Because these new payments have turned out to be as large as the ones they replaced, however, the overall cost of farm programs has not gone down. Instead, in 1998 a drop in worldwide food prices made things even worse for farmers. This, as we saw in the cover story, prompted Congress to pass a $5 billion aid bill for farmers-with possibly more in the works.


When the program expires in the year 2002, farmers will cease to receive all payments. By then, farmers should have had enough experience with the laws of supply and demand to no longer need government help. If farm income is still down when the bill expires, Congress may decide to bring farm support back-thereby choosing the goal of economic security over efficiency.

When Markets Talk

MR Markets are impersonal mechanisms that ^Ur bring buyers and sellers together. Although markets do not talk in the usual sense of the word, they do communicate in that they speak collectively for all of the buyers and sellers who trade in the markets. Markets are said to talk when prices in them move up or down significantly.

Suppose the federal government announced that it would raise personal income taxes and corporate taxes to pay off some of the federal debt. If investors thought this policy would not work or that other policies might be better, they might decide to sell some of their stocks and other investments for cash and gold. As the selling takes place, stock prices fall, and gold prices rise. In effect, the market would "talk"-voicing its disapproval of the new tax policy.

In this example, individual investors made decisions on the likely outcome of the new policy and sold stocks for cash or gold. Together, their actions were enough to influence stock prices and to send a signal to the government that investors did not favor the policy. If investors' feelings were divided about the new policy, some would sell while others bought stocks. As a result, prices might not change, and the message would be that, as yet, the market has not made up its mind.


Consumer Confidence A statistic called the Consumer Confidence Index attempts to gauge consumers' feelings about the current condition of the economy and their expectations about the economy's future direction. The index is weighted 60% in favor of expectations and 40% in favor of current conditions. Large movements in this index indicate or signal changes in consumer spending patterns.

Checking for Understanding

1. Main Idea Using your notes from the graphic organizer activity on page 150, describe why price ceilings are often set.

2. Key Terms Define price ceiling, minimum wage, price floor, target price, nonrecourse loan, deficiency payment.

3. Describe two effects of having a fixed price other than the equilibrium price forced on a market.

4. Explain how loan supports and deficiency payments work.

5. Describe how markets speak collectively for buyers and sellers.

Applying Economic Concepts

6. Price Floor Would small businesses be more affected by a change in the minimum wage than large businesses? Explain your answer.

7. Understanding Cause and Effect The price of fresh fruit over the course of a year may go up or down by as much as 100 percent. Explain the causes for these changes in terms of changes in demand, changes in supply, and the elasticity of demand for fresh fruit.

Level 2.

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