Paul C. Westcott

Implications of U.S. Policy Changes for Corn Price Variability

U.S. agricultural commodity policy has undergone large changes over the last ten to fifteen years, particularly regarding supply management programs and governmental stocks programs. In this article, I address die question of whether these policy changes have made the agricultural sector more or less variable, particularly for prices. Corn sector simulations under alternative policy environments are performed to analyze the short- and long-run responsiveness to assumed yield shocks. In the current policy setting with lower stocks, shocks result in larger initial price impacts than if stocks were larger. However, greater supply responsiveness from increased planting flexibility of current law combined with the initially greater price impacts can result in lower price deviations over a multiyear, postshock adjustment period than occur in a higher stocks /lower supply response environment. Interestingly, the larger the negative yield shock, the lower the increment needed in the supply response elasticity in the lower stocks scenarios to result in equal postshock price deviations as occur in the higher stocks/lower supply responsiveness scenarios. This result illustrates the importance of the interaction of the supply response function with the magnitude of the price impacts in determining the ability of the sector to handle shocks and the speed at which it responds to shocks. For larger negative yield shocks, the supply elasticity increment needed in the lower stocks scenarios to equilibrate price deviations after the shock can be smaller because the initial price difference that the supply response function faces is larger.

Planting Flexibility and Land Allocation

Break-even price relationships between competing crops ate derived to illustrate how planting flexibility alternatives affect planting choices. The primary factor differentiating among flexibility alternatives is whether deficiency payments are linked to planting choices. If they are, target prices, program yields, and, in some cases, acreage reduction programs affect net returns comparisons and crop competition. Deficiency payments may be separated from the planting decision on some land either by removing deficiency payments for the acreage involved or by continuing them regardless of the crop planted. Planting choices then would be based on expected net returns from the marketplace.