Theoretical and Empirical Considerations in Agricultural Buffer Stock Policy Under the Food and Agriculture Act of 1977, Vol. 3

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

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The major theoretical developments in the agricultural price stabilization policy were analyzed, and this information was then used to develop a model to investigate the effects of the reserve program on prices, quantities, and real income for grain and livestock markets.

The program has not benefited grain producers, except for minor benefits in its first year. Large farmer-owned reserves tend to depress prices because demand for private stocks fall substantially. A more serious drawback is that it gives false price signals to the livestock industry. During the program's first year, the relative shortage of grain in the commercial market caused a tendency to higher feed prices and thus contraction in the livestock industry. This created a lower demand for feed and forced grain prices downward. Substantial economic imbalances can result from frequent policy changes, the effects of which cannot be anticipated. Over the first 2 years of the farmer-owned reserve (FOR) program, grain consumers and livestock producers generally benefited while meat consumers and grain producers did not. Grain producers' losses outweighed the gains of all groups combined. Frequent changes in agricultural policy are costly. An agricultural policy should be able to adjust automatically over the long term to changing economic conditions without causing unexpected changes in loan rates, set-aside requirements, etc. The FOR program appears to have stabilized short-term grain prices. The results of this study strongly favor government ownership over farmer ownership of the grain reserve to meet emergency needs. Farmer-controlled reserves are more responsive to market developments and more likely to reenter market channels than government-owned reserves. The government pays storage costs on a large part of the reserves that would otherwise be stored by private concerns.

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