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Loan Deficiency Payments versus Countercyclical Payments: Do We Need Both for a Price Safety Net?

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Abstract

The federal government currently runs two major price support programs in agriculture, the marketing loan and countercyclical payment (CCP) programs. While these programs are both targeted at providing producer price protection, they have different political and financial costs associated with them. We outline these costs and project the effects of various loan rate changes on these programs for eight crops (barley, corn, cotton, oats, rice, sorghum, soybeans, and wheat) for 2005. Loan rate changes affect the price support programs by changing the payment rate producers receive when payments are triggered. We find that the crop's relative price strength versus its loan rate and the relationship between CCP base production and 2005 expected production have the largest influence on how loan rate changes affect outlays from the price support programs for the various crops. Of these crops, cotton is the only one that would be relatively unaffected by loan rate shifts. Corn and soybeans would see the largest declines in overall expenditures from price support programs if loan rates were decreased. Oats and soybeans would experience the largest percentage losses. However, the results also show that the federal government could maintain an agricultural price support structure at a lower cost than it is currently paying. The reduction in cost often comes in situations where the current array of price support programs overcompensates producers for price shortfalls. This shift would also likely find greater acceptance under the World Trade Organization (WTO) agriculture guidelines than would the current structure. For an administration that is looking to rein in deficit spending while at the same time negotiating new WTO guidelines, moving to lower loan rates could be an answer.

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Bibliographic Info

Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 05-bp44.

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Date of creation: Feb 2005
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Handle: RePEc:ias:cpaper:05-bp44

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Related research

Keywords: agricultural loan rates; agricultural marketing loan program; agricultural price supports; countercyclical payments (CCPs); loan deficiency payments (LDPs).;

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Cited by:
  1. Barr, Kanlaya Jintanakul & Babcock, Bruce A. & Carriquiry, Miguel A. & Nassar, Andre M & Harfuch, Leila, 2012. "Agricultural Land Elasticities in the United States and Brazil," Staff General Research Papers 35042, Iowa State University, Department of Economics.
  2. Brink, Lars, 2005. "WTO Constraints on U.S. and EU Domestic Support in Agriculture: Assessing the October 2005 Proposals," Working Papers 14601, International Agricultural Trade Research Consortium.
  3. Cooper, Joseph C. & O'Donoghue, Erik J., 2011. "Identifying and Reducing Overlap in Farm Program Support," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103261, Agricultural and Applied Economics Association.

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