ECONOMIC ANALYSIS OF COMMODITY FUTURES AND OPTIONS AS ALTERNATIVES TO LOAN AND TARGET PRICE PROGRAMS (POLICY, SOCIAL WELFARE)
Abstract
Price support programs have been the foundation of agricultural policies in the U.S. since the Agricultural Adjustment Act was legislated in 1933. The original goal of the Act was to transfer income to a farm population economically devastated by the Great Depression. However, changes in the structure of agriculture, changes in the distribution of program benefits, the cost of the programs, and the relationship between the programs and technological change have led a growing number of economists to call for the dismantling or modification of price support programs. The criticism and debate surrounding current price support programs has stimulated interest in alternative programs. Both theoretical and empirical evidence suggest programs that reduce farmer's price risks are in the public interest. Important private markets exist for reducing farmers' price risk. Futures markets for grains have been in operation for over 120 years. Agricultural options markets reopened during 1984 and 1985 after a 50 year hiatus. Both futures and options hedging have been suggested as alternatives to the current target price and loan programs. However, little is known about the probable effects of large scale use of hedging by farmers. Therefore, the purpose of this dissertation was to conduct an economic analysis of the use of commodity futures and options as alternatives to loan and target price programs. The results of the study suggested two important conclusions. First, a change from existing loan and target price programs to unsubsidized futures or options programs would reduce the corn revenue of farmers approximately 20 percent per year. However, losses to farmers would be offset by gains to consumers and taxpayers. Second, if for political reasons it is necessary to subsidize the revenue of farmers, subsidized options programs offer several advantages compared to existing programs. For example, subsidized options programs can replicate the distribution of farmers' corn revenue generated under loan and target price programs, while producing smaller net social costs than loan programs and substantially less variable government costs than target price programs. In conclusion, the results of this study suggest that programs based on commodity futures and options represent viable alternatives to loan and target price programs.
Degree
Ph.D.
Subject Area
Agricultural economics
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