Meyers, William H.

English

Research Papers in Economics

Agriculture  and Trade Analysis Division
Economic Research  Service
United States Department of Agriculture
Staff Report # AGES870928
1988
Trade  and  Development
Shane,  M., ed.
Proceedings of a Meeting  of the
International Agricultural  Trade  Research  Consortium
December,  1986,  CIMMYT,  Mexico City, Mexico
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searc  ConsrtkE ~CitvMexMANDATORY  SUPPLY  CONTROLS  AND  TRADE
William  Meyers 1
The term  "mandatory  supply  controls"  refers  to  a  program  where  farmers  are  obligated  to
control acreage  in a manner  specified  by  the  government.  Under current "voluntary  acreage
reductions,"  farmers  are  induced  by  economic  incentives  to  take  land  out of  production.  In
the  United  States,  mandatory  supply  control  proposals  have always  been  coupled  with  a
referendum  in which  a majority  of farmers  must  accept  the program  before  it  is  implemented.
Therefore,  mandatory  supply  control  proposals  inevitably  require  a  higher price  for  producers
than  those under  current  programs,  since a higher  price  is  required  in order  to  entice  farmers
to accept  the  proposal  in  a referendum.
A  recent proposal  of this type  was  Senate  File  2869,  proposed  by Senator  Harkin of Iowa.
The  proposal  was to raise  loan  rates  to  70  percent  of parity  in  1987  and  increase  the  parity
rate  1 percentage  point  annually  to  a maximum  of 80  percent  of  parity.  This  proposal  also
carried  a provision  for subsidizing  exports  in order  to  prevent  the inevitable  loss  of export
markets  when production  is cut  back  to  achieve  these high  domestic  price  levels.
Scope  of  the  Analysis
Since  the  purpose  of  this brief paper  is to  generate  discussion  on  the  trade  effects  of
mandatory  supply  programs,  the analysis  is limited  to  wheat  and  feed  grains and  is  conducted
under very simplified  assumptions.  This  analysis  cannot  be  interpreted  as  an evaluation  of
Senate  File 2869,  since  it does  not  follow  the complete  provisions  of that program.  For
comparison  purposes,  three  alternatives  scenarios  are  analyzed:
(1)  Mandatory  supply  controls  with high  prices  for  a  single  commodity,
(2)  mandatory  supply  controls  with  high  prices  for  all  competing  crops,  and
(3)  mandatory  supply  controls  with  export subsidies  to  maintain  the  export  levels  under
current  programs.
The emphasis  of the  first two  cases  is  to  compare  the  export  response  to  higher  prices  when
only one  price  is  increasing  and when  all  crop  prices  are  increasing  together.  The emphasis
of the  third case  is to  compare  the costs  of payments  to  farmers  under current  programs  to
the cost  of payments  on  exports  required  to  prevent  export  losses  under  the  mandatory  supply
program.  One  argument  for mandatory  supply  controls  has  always  been  that  it is a  way  of
saving  government  funds,  while  providing  farmers  with  higher  income.  With  the  export
subsidy  provision,  it is  not clear  whether  the  program  would  cost more  or  less  than  current
programs.
The support  prices  assumed  for  all three  cases  are  presented  in  table  1.  These  begin  at  70
percent  of parity  for individual  commodities  in  1986/87.  The  prices  increase  across  time  both
because  the  parity percentage  rate  is  rising  by  1 point  per year  and  because  the  parity  index
is  rising with  the producer  price  index  projections.  The  CARD/FAPRI  regional  trade  models
for  feed grains,  wheat,  and soybeans  were  used  for  the analysis.
1The author is professor  of economics  and associate  administrator  of the Center for Agricultural  and Rural
Development,  Department of Economics,  Iowa State  University.
166Table 1--Assumed U.S. support  prices for mandatory supply programs
Commodity  :1986/87 :1987/88  :1988/89  :1989/90  :1990/91  :1991/92  :1992/93  :1993/94  :1994/95  :1995/96
Dollars  per unit
Corn (short  ton/bu)  3.46  3.55  3.70  3.87  4.03  4.21  4.45  4.71  4.99  5.34
Wheat (short  ton/bu)  4.74  4.86  5.08  5.30  5.52  5.77  6.10  6.45  6.84  7.32
Soybeans  (short  ton/bu) 8.54  8.76  9.15  9.56  9.94  10.41  11.00  11.62  12.32  13.11
Cotton  (short  ton/tb)  .87  .89  .93  .97  1.01  1.06  1.12  1.18  1.25  1.34
Rice (short  ton/cwt)  13.51  13.86  14.47  15.12  15.73  16.46  17.40  18.39  19.50  20.86
Dairy (short  ton/cwt)  16.31  16.74  17.47  18.25  18.98  19.87  21.00  22.20  23.54  25.19
Soymeat  (short ton/st)210.93  216.36  227.38  231.11  245.26  255.23  268.44  279.89  292.30  310.50
Mandatory  Supply  Controls  With  No  Export  Subsidy
When  there  are no  export subsidies,  the  reduction  in  U.S.  supplies  and  the  increase  in  prices
reduce  world  import  demand,  increase  competitors'  exports,  and  reduce  U.S.  exports.  The  final
impact on  U.S.  exports  is dependent  upon  the export  demand  elasticity.  Since  the  price
response  in the  regional  trade  models  used  for this  analysis  depends  on  the  underlying  supply
and demand elasticities  in  the  importing  and  exporting  countries,  the  export response  price
depends  both  on which  prices  are changing  and  the  duration  of the  price  change.  Previous
analysis  with  these  models  indicates  that the response  for price  change  is greater  when  only
one price  is changing  and  increases  with  duration  of  the price  change.2
Figure  1 illustrates  the  comparison  between  case  1 and  case  2.  The  single-commodity  effect,
when  only the  own-commodity  price  is changing,  is  indicated  by  the  point SC.  In  this  case,
exports  decline  from X O to  B  and  the  required supply  reduction  is  A-B,  given  the  initial
supply  and  demand  curves.  The  cross-commodity  result,  when  all  prices  are  increasing
together,  is  denoted  by  the  point CC.  In  this  case,  the  higher  prices  of other  commodities
shift  the demand  to  the  right  and  the supply  to  the left  in  U.S.  and  foreign  markets,  resulting
in an export  decline  from  X O  to D and  an  implied  supply  reduction of  C-D.
The  results  of the  analysis for  wheat  are presented  in figures  2-5.  The  decline  in wheat  net
imports  is  very similar  in the  two  cases,  since  there  is  relatively  little cross-price  effect  with
other  commodities  among  the  wheat-importing  countries  (fig.  2).  Competitor's  wheat  exports
expand  dramatically  under the  single-price  case,  but show  relatively  little change  when  other
crop  prices  are increasing  as  well.  This  is  a  consequence  of the  strong  cross-price  effects
with  other  grains  in  the major  wheat  exporting  countries  (fig.  3).  U.S.  wheat  exports  drop  to
zero  by  1995  in the  single-commodity  case  and  remain  near  the  low  1985  level  under  the
cross-commodity  case  (fig.  4).  In  this  case,  the U.S.  export  share  would  continually  fall
throughout  the  period.  The  value  of export  results  (fig.  5) indicate  that the  implied  price
response  of U.S.  exports  is  elastic  when  only  wheat  prices  are  changing,  causing  export  values
to decline,  but are  inelastic  when  all  prices are  changing,  causing  the  value  of  wheat  exports
to  rise.
2Meyers,  William  H.,  S.  Devadoss,  and Michael  Helmar.  "The  U.S.  Export Response  to Prices  and  the Impacts  of
Trade Liberalization:  A Regional Trade Model  Analysis."  Working  Paper  No. 86-WP15.  Center for Agricultural  and Rural
Development.  Sept.  1986.
167Figure 1
Mandatory  supply controls  with no  export subsidy
United  States  ._  Trade
where:  o and  m subscripts  denote
demand  and  supply  with other  prices
constant, and  with  other prices  at
higher mandatory  level, respectively.
Pm is the mandatory  price.
Po  is  the  initial price.
Xo  is the  initial export  level.
Figure  2
Wheat  net imports
Million  metric  tons
Figure 3
Competitor  wheat  exports
Million  metric tons
1001
Base
60
Single-commodity
effects
Cross-commodity
effects
60+
1985 90
Base
Single-commodity
effects
Cross-commodity
effects
95
Figure  4
United  States wheat exports
Figure  5
Value of  wheat  exports
Base
Single-commodity
effects
Cross-commodity
effects
168
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7
7
;uply  ithoter  rics  P  I with  therprics atXa  i tor  leel  repetivl/ Figure
Comp
401The results  for  feed  grains and  corn  are fairly  similar  (figs.  6-9).  In  the  case  of feed  grains,
competitors'  exports  increase  in  both  cases,  although  the  increase  is  smaller  in  the
cross-commodity  case.  The  United States  has  a  greater share  of world  production  and  trade
in feed  grains,  so exports  do  not fall  as  rapidly  as  wheat  in the  single-commodity  case.  The
implied  export elasticity  in  the single-commodity  case  is near  1;  but,  again,  the  implied
elasticity  in  the cross-commodity  case  is inelastic.
Since  these  models  are  primarily  based  on  empirical  data  over  the past  20  years,  it  is  likely
that the  estimated  equations  underestimate  the  response  of supply  to  such  large  price  changes
as  these.  These  is  no  historical experience  of similar magnitudes  of changes  in  prices,  so  the
prices  used  in these  analyses  are outside  the range  of data  used  in estimating  these  supply
and  demand  relationships.
Mandatory  Supply  Control  With  Export  Subsidies
The provision  for  export subsidies  is  proposed  to  mitigate  the  criticism  that  this  kind  of
policy  would  drastically reduce  export  levels  and  market share.  This  provision,  of  course,  also
adds  another  cost dimension,  which  will offset  the savings  generated  by  eliminating  the  target
price-deficiency  payments  scheme.  The  analysis here  is  designed  to  compare  these  two  costs
under  the assumption  that the  export levels  in the  baseline  under  current  programs  would  be
maintained.
This  comparison  is  illustrated  in figure  10.  It  is expected  that the  mandatory  price  level
would  be  greater than current target  prices.  Thus,  the  payment  per  unit  of export  would  be
higher  than the  payment  per  unit made  to  the  farmers  under current  programs.  It  is  not
immediately obvious  whether  the  total cost  would  be  higher  or  lower,  since  the quantity  of
exports  X  is  less  than  the quantity  of production  on  which  deficiency  payments  are made.
In figure  Vb,  the supply  S  includes  the  acreage  reduction  required  for  participation  in  the
target price program,  and it  is  assumed  that  all  producers  are  participating.  Thus,  when  the
higher  price P  is guaranteed  to  producers  and  export  levels  X  are  maintained,  an  additional
acreage  reduction of A-X  is  required  to  clear  the market.  The  difference  in the  program
costs  is area  G  less  area G0 . m
The  export  subsidy costs  are compared  to  the  government  costs for  grains,  soybeans,  cotton,
and dairy  in figure  11.  The cost  of mandatory  supply  controls  with  export subsidies  are lower
until  fiscal  year  1992.  Thereafter,  the costs  of the export  subsidy  program  continue  to  rise,
because  the payment  per unit is  increasing  at  the  same  time  as  the  rise  of exports  is
increasing.  By  contrast,  the cost of  current  programs  is  declining,  so  the  gap  between  the
two  reaches  more  than  $14  billion  by  fiscal  year  1995.
Conclusions  and  Implications
This  is obviously  not a complete  analysis,  since  it does  not  take  into account  the changes  in
farm  income  or the cost  to domestic  consumers  of the  higher prices  in  the domestic  market.
Looking  just at  the  trade  implications,  it  is  clear  that this  approach  to  provide  higher  income
to domestic  producers  would lead  either to  an  isolated  domestic  oriented  agriculture  or  to
higher government  outlays,  which  would continue  to  increase  the  longer  the  program  was
maintained.
169Figure  6
Feedgrain  net imports
Figure  7
Competitor  feedgrain  exports
Base
Single-commodity
effects
Cross-commodity
effects
Figure 8
United  States  corn exports
AnMillion  metric tons
50+
40+
1985 90
Figure 9
Value  of United  States corn  exports
Base
Single-commodity
effects
Cross-commodity
effects
95
Base
Single-commodity
effects
Cross-commodity
effects
170
rv
1r  r  /  /
f  r  r  r8
\\f  r  rtescon  xp
f  r  r  r  Ir  ton
"  . r
20  I  I  I
30+Figure 10
Mandatory  supply  controls  with  export subsidy
versus  current program
United  States Trade
S'ToT o  Xo
A  QED
A  Q
where:  Gm  is  mandatory  program  cost.
Go  is  the  current  program  cost.
Pm  is  the  mandatory  price.
Figure 11
Government
SBillion  U.S.  dollars
Pt  Is the  target  price.
Po  is  the  Initial market  price.
Xo  is the  initial export  level.
cost comparison
High  government
export  subsidy
program
Cost  of current
program
1987  90  95
171

Mandatory Supply Controls and Trade

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