Government policy and decision making : impact on commodity price formation
Authors:   , Mergen David J. 
Published: July 2024

"The government has consistently been heavily involved in U.S. agriculture. Feed grain and wheat commodity programs have been in effect every year since their introduction in the 1930's. Since 1938, all programs have included price supports (nonrecourse loans) and over half established acreage controls. Through these programs the government has been an important factor in agricultural markets. At times, for instance, government holdings of wheat have equaled as much as a year's domestic production. For corn, government holdings have risen to equal as much as a third of a years production. This heavy government intervention in agriculture has made the question of how that intervention affects price formation of particular importance. That the government has a large impact is fairly obvious. Shortrun price formation (within the marketing year) has been heavily influenced by government sales of grain and price support loans. The government sales and price support loans have often held the market price close to the loan rate. From 1950 to 1979 grain prices were within 25 cents of the loan rate all but 7 years for wheat and 8 years for corn. Longrun price formation (across marketing years) has been heavily influenced by acreage controls. Acreage controls have been very important in determining planted acreage and production. During the period 1961 through 1979 in those years when acreage controls were in effect the average corn acreage diverted or set-aside was 18 million acres. This can be compared to an average 69 million acres planted in those same years. For wheat, from 1962 to 1979, when acreage diversion or set-aside was required, an average 10 million acres were diverted or set-aside. During those years the average planted acreage was 56 million acres. The objective of this thesis is to provide an analysis of how government intervention in agriculture, through commodity programs, affects shortrun and longrun price formation. The analysis of shortrun price formation has two goals. The first is to analyze how price support loans and government sales of grain affected shortrun price formation prior to 1977. The second is to analyze how the introduction of the Farmer Owned Reserve (FOR) and an increased government selling price (the price at which the government sells grain) changed shortrun price formation after 1977. The analysis of shortrun price formation contributes to previous studies in three ways. First, while many ideas in the shortrun model are not original to this thesis, here the ideas are incorporated into a comprehensive framework. Second, this thesis provides an extension of previous studies by including the events of the 1970�[trademark]s. Third, this thesis provides a more indepth analysis than previous studies by analyzing the price formation implications of government intervention more fully and providing statistical evidence for those implications. The analysis of longrun price formation centers on impact of government intervention on the acreage supply response of wheat and the feed grains. Included in this analysis is an examination of the behavior of producers and the government. For producers, how the commodity program influenced the decisions of producers to plant or not plant is analyzed. For the government, the analysis is of the factors affecting government decision makers in setting the level of acreage control variables. The analysis of longrun price formation goes beyond previous studies of wheat and feed grain acreage in attempting to explain the impact of government intervention on producers and in attempting to explain the level of government intervention. This is an area that needed further study. Rauser and Stonehouse (1978) point out the "lack of progress in modeling the effects of government intervention on producer�[trademark]s supply response, the behavior of government policy makers and reactions and feedback effects between private and public sector." Other studies have attempted to develop measures of the level of acreage restrictions in a program such as the effective support and effective diversion rates developed in Houck et al. (1976). These studies, however, have not addressed the question of how government intervention changes the acreage response of producers to prices and other variables. The events of the 1970�[trademark]s, when in several years no acreage controls were in effect, have highlighted the importance of understanding the different responses of producers when the government is intervening to affect acreage from when the government is not. This study is also the firs t real attempt to explain the level of acreage control variables. Other studies have not attempted to explain the behavior of government decision makers in establishing an acreage control program. Keeping in mind the objectives of the thesis, it is organized as follows. Chapter 2 reviews past feed grain and wheat commodity programs. The main features of the commodity programs are presented along with an analysis of the factors influencing their adoption. The analysis covers both economic and non­economic factors influencing decision makers. Chapter 3 analyzes the impact of government intervention, through commodity programs, on price formation. In the first section conceptual models of shortrun price formation are developed and presented. The models show how price support loans, government sales of grain, and the Farmer Owned Reserve (FOR) have influenced the aggregate demand for feed grains and wheat. In the second section a conceptual longrun price formation model is developed and presented. The model shows the impact of acreage controls on acreage planted and the factors influencing the government in establishing acreage controls. Chapter 4 presents empirical price formation models based on the conceptual models. The models are estimated using simple and multiple linear regression. The empirical wheat and corn models in the first section show the relationship of the loan rate and market price prior to 1977, during those years when the government held significant stocks. The empirical models in the second section show the relationship of prices, stocks, and demand to planted acreage."--Introduction.