Consequences of USDA's Farmer-Owned Reserve Program for Grain Stocks and Prices, Vol. 2

CED-81-70(II): Published: Jun 26, 1981. Publicly Released: Jun 26, 1981.

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The Farmer-Owned Reserve (FOR) Program subsidizes farmers to hold stocks of grain in reserve in order to regulate the amount of grain available and thereby stabilize prices. Data on stocks and prices of wheat and corn during the FOR program's first 3 years were examined, and estimates of its effects were made. The analysis focused on: (1) quantities of stocks, using annual and quarterly data for wheat and corn; (2) grain prices, using annual, quarterly, and daily data; and (3) grain price stabilization, comparing the variability of prices before and after the FOR program was in effect.

Analysis of annual and quarterly data indicates that the FOR program had a much smaller effect on the overall stock of grain than quantities in the FOR suggest at first glance because as participation in the FOR program increases, stocks held outside the program decrease. This quantity of grain can be helpful in providing insurance against future production shortfalls, but it is expensive insurance. Considering annual storage costs, the government is paying about $2.00 per bushel per year, excluding administrative costs, for the added grain stocks. Regression estimates of the FOR program's effect on grain prices for the 1977 and 1978 marketing years reveal no significant direct effects. Because FOR-induced increases in prices are paid by grain users, the Nation as a whole does not benefit. Potential long-term stabilization benefits cannot be observed. The primary FOR activities observed to date appear to have been directed at short-term stabilization, but the evidence indicates that this effort has not been successful. The problems of the program are sufficient to warrant serious consideration of modifications and alternatives to the FOR program by Congress and the Department of Agriculture. The most promising modifications involve steps to: (1) decrease the extent to which accumulation of FOR stocks reduces non-FOR stocks, (2) increase the assurance that some stocks will be held until the extreme shortage situations occur, and (3) re-orient FOR management away from efforts of short-term stabilization, frequent policy moves, and program changes.

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