ALTERNATIVE FARM COMMODITY PROGRAM OPTIONS FOR THE EIGHTIES: AN ANALYSIS OF ECONOMIC IMPLICATIONS WITH EMPHASIS ON GROWTH OF INDIANA CROP FARMS

MARK ALAN EDELMAN, Purdue University

Abstract

Agricultural policy decisions in the 1980's will be shaped by unfolding economic conditions, the perceived performance of current commodity programs, and the potential economic impacts of alternative policies. The primary objectives of this thesis were to analyze the economic effects of selected farm commodity programs on the corn and soybean markets and to compare the economic impacts of these commodity programs and alternative farm management decisions on the economic behavior of selected Indiana crop farms. A stochastic simulation model was used to estimate the aggregate market effects of target prices and deficiency payments, acreage set-aside programs, a farmer-owned grain reserve, and Commodity Credit Corporation activities over a seven-year period (1979/80 through 1985/86). Treasury outlays, average price levels, and annual variation in prices were estimated in real dollars for each policy alternative. The effects of various policy and farm management alternatives on net after-tax income, the standard deviation of expected income, and growth in net worth from retained earnings were estimated for four representative Indiana crop farms with an annualized, mathematical programming model. Studies conducted in the 1960's found that a shift towards a free market policy would tend to reduce market prices. This study found that compared to a continuation of current policy, elimination of government commodity programs would increase rather than decrease average market prices. However, annual price variation would increase about 25 percent. These results are based on expectations of relatively tight commodity supplies which many analysts have predicted for the decade of the 1980's. This is in sharp contrast to the excess supplies and production capacity which existed in American agriculture in the late 1950's and throughout the 1960's. Budget outlays for commodity programs which affect corn, could also be significantly reduced without having a major impact on price levels or variation. Elimination of target prices and deficiency payments to corn producers would reduce average Treasury outlays by one-third vis-a-vis a continuation of current policies. Such a policy would not increase annual price variation nor significantly alter effective price levels in the intermediate-run. Price instability could be significantly reduced by increasing government managed stocks. Compared to a continuation of current programs, a 15 percent increase in target prices, loan rates, and grain reserve trigger prices for corn would reduce annual market price variation by 25 percent but average Treasury outlays would increase from $1.00 to $6.00 per capita. Current trends in farm structure will not be altered significantly by the elimination of farm commodity programs nor by increased price supports for corn. In this study it was found that such policies would only increase growth in net worth from retained earnings by 10 percent. However, based on a range of typical investment preferences for Indiana farmers, it was found that growth in net worth could be cut in half or doubled. This study also found that small, specialized crop farms (200 acres) will have difficulty maintaining annual increases in net worth and net worth growth rates at levels comparable to those of moderate and large farms (500, 800, and 1200 acres). Small farms simply lack the resource base and growth potential relative to larger farms under most management behavior patterns.

Degree

Ph.D.

Subject Area

Agricultural economics

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