The Independent-News, Volume 103, Number 5, Walkerton, St. Joseph County, 7 July 1977 — Page 3

ECONOMICS OF PROPOSED FARM LEGISLATION The idea of guaranteeing farmers there cost of production plus a "reasonable” profit hrs appeal to many farmers, policy makers, and consumers, says a Purdue University agricultural economist. However, there are various subtle and significant economic implications of using cost of production for determining target prices and loan rates to bolster farm prices. The economist, Marshall A. Martin, assistant professor of agricultural economics, discusses his analysis in Indiana Agricultural Experiment Station Bulletin 162. A less technical summary, with some more recent information, will be contained in the publication "Cost of Production: An Appropriate Guide for Setting Target Prices and Loan Rates?” expected to be available later this summer. Martin says that a key issue in the current farm policy debate is the determination of the level of the target prices and loan rates. The final outcome of this debate could have a substantial influence on U. S. agricultural export opportunities, farm land values, grain storage programs, and treasury costs. Target prices, a new concept introduced in the 1973 Agriculture

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and Consumer Protection Act, are the basis for calculating deficiency and disaster payments for producers. Deficiency payments are income supplements, made in order to protect farmers from short-run declines in product prices. Disaster payments are made when natural disasters prevent normal planting operation or cause a reduction in production to two-thirds of normal production. Target prices are currently applied only to acreage in a farm’s historical allotment. Loan rates are established for the calculation of nonrecourse loans on farm products and apply to all of the farmer’s production. Either protentially represents a direct subsidy by the taxpayer to the farmer. However, in the case of loans, a portion of the subsidy can be recovered through the sale of commodities taken over by the government when the farmer elects not to repay the loan. Alternatively farmers may elect to repay the loan and recover the commodity, thereby eliminating the potential subsidy. All the proposals for new farm legislation suggest that the cost of production should be the basis for establishing target prices, and perhaps loan rates as well. The econ-

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omist notes, the level at which target prices and loan rates would be set relative to the cost of production varies among the different proposals. He adds, however, that the variation is now less than it was among the various bills which were introduced earlier this year. If the level of support covers both variable and fixed costs, according to Martin, inputs used in production which are owned by the producer would be guaranteed a minimum return. This guaranteed return would most likely be bid into the price of the input, he predicts., leading to an increase in the cost of production followed by an increase in the target price. The result would be an input price spiral. Land, he points out, is an input which is extremely susceptible to this type of input price spiral. "If farmers expect an increase in the price they would receive from future crop sales, thev would be willing to pay more for cropland. This would provide a windfall profit to those who sell land. However, it would make it more difficult for non-landowning farmers to acquire land," he says. The cost of production basis for determining target and loan prices is based entirely on product supply considerations, Martin points out.

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It does not take into account product demand conditions. The market price for a product is determined by both supply and demand conditions. Thus, if the target price and loan rate are based only on the cost of production irrespective of the demand conditions, they may be out of line with the long-run price established by the market, called the "equilibrium price,” he says. Deviations between the support prices and the long-run equilibrium market prices can lead to serious economic and political problems, according to Martin, who notes that if the world market price is less than the loan rate, export sales could be lost. This would adversely affect the balance of trade, he adds. In addition, in the absence of restrictions on production and some type of acreage diversion payments, farm income would decline due to the loss of export sales unless the U. S. government is willing to subsidize export sales and/or acquire the excess production through some type of Commodity Credit Corporation activity. If the loan rate is to be kept above the long-run equilibrium price for any sustained period of

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THE INDEPENDENT-NEWS - JULY 7, 1977

time, according to Martin, acreage allotments would be required. This would be necessary to avoid burgeoning surplus stocks and large treasury costs, he concludes, adding. "This of course was a troublesome economic and political problem in the 1950’s and 1960’5. HAPPY ADS Happy 26th Birthday BLUBBA GIRL From THE OTHER FOUR

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