15

PRICE STABILIZATION THROUGH DEFICIENCY PAYMENTS*

George Kennedy a n d Wilfred Candler

Introduction A question of continued importance in agricultural policy is: How

can prices received by farmers be stabilized? The U.S. government, for example, has historically made wide use of price supports for agricultural products. These supports typically involved pegging prices above equilib- rium (or market clearing) levels. This led to increased quantity, but decreased demand and, hence, surplus supplies. While such supports did succeed in raising farm prices, resulting supplies purchased by the govern- ment were costly. With continued pressure to control food prices at the retail level, and the expected depressing effects of such controls on farm prices, farm price stability warrants further attention.

To stabilize a price is to eliminate excessive price fluctuation. Excessive price fluctuation occurs if a price falls below a given floor or rises above n given ceiling. Price stabilization may involve any of the following three alternatives:

( 1 ) raising low prices to a floor (i.c., eliminating price “troughs”); or (2 ) lowering high prices to a ceiling (i.e., eliminating price “peaks”);

or (3 ) raising low prices to a floor ~ n d lowering high prices to a ceiling

(i.e., eliminating both “troughs” and “peaks”). This paper is concerned only with alternative (1 ).

One way of supporting farm prices without creating a surplus is through government deficiency payments to farmers-farm price adjusts freely to bring supply and demand together. While deficiency payment schemes are not new to agricultural policy,’ a number of important

Journal Paper No. 5819, Purdue Agricultural Experiment Station. The research reported in this paper was conducted under USDA-EKS Memorandum of Agreement ME-434846-1 1455. The views expressed, however, are the exclusive responiibility of the author;.

1 For example, deficiency payments have been used widely in the United Kingdom [71. ~~ ~

WILFRED CANDLER is the Director of the Farm and Rural Development Division, Agriculture Canada and GEORGE KENNEDY is an Economist with the Research Division, Economics Branch, Agriculture Canada.

Conadion Journol of Agriculturol Economics 23(2), 1975

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questions remain concerning their effects. The purpose of this paper is to estimate farm level effects of one type of deficiency payment scheme.

In the next section, a graphic model is presented to describe how a dcficicncy payment scheme would operate and the direct effects which it would have. Following that, the paper is concerned with estimating the likely outcome of a deficiency scheme for hogs.

Graphic Model In a deficiency payment scheme, the government subsidizes farmers

in times of low prices so that the effective price they receive is a floor price. For example, if the floor price is $20.00 per unit and the existing farm price is $18.00 per unit, the government subsidizes farmers $2.00 per unit; hence, farmers effectively receive the floor price ($18.00 from processors plus $2.00 from the government). The government subsidy could be paid through the processors.

The operation of this type of scheme is illustrated in Figure 1. The Price

FIGURE 1 Effects of Deficiency Payment

“equilibrium”‘ processor demand function is represented by Do and the equilibrium farmer supply function by So. If equilibrium price, P,, is below the floor, PI, the scheme subsidizes farmers to raise the effective price received to the floor. Farmers respond to this effective price rise (assuming an upward sloping supply curve) by increasing quantity supplied 2 “Equilibrium” refers to supply and demand in the absence of government interference. This Use of

equilibrium is not intended to have any normative connotations.

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from Q, to Q , . Processors, as shown by their demand function (Do), are only willing to pay P,,,; for this increased quantity.” The difference between the price farmers actually receive (P,,:,) and the price they effectively receive (PO is the government per u n i t subsidy. The total sovernment subsidy is Q, X (P, - PPa).

Estimated Outcome of a Deficiency Payment Scheme for Hogs

Slaughter hog prices historically have shown wide fluctuations in both the United States and Canada [1].4 Reduction of price uncertainty has been nominated as one motive for abandonment of free market for contract or vertically integrated transfer of hogs from producers to packers [6]. It therefore seems worthwhile to consider what would be involved in government support of existing free market institutions through some form of price stabilization.

To estimate the outcome of a deficiency payment scheme for hogs, we impose i t on U.S. historical data appearing in the USDA publication, Livestock and Meat Statistics, for the years 1957 through 1971, and show how the data are affected by it.5 We assume a floor 8 percent below (or 92 percent of) a three year moving average.“ Further we assume the desired stability lies in monthly prices between years; hence, the three year moving average relevant for January, 1971, is the average of January prices 1968 through 1970.

Hog Production Assumptions

Below we make explicit hog production assumptions from which the

( 1 ) Farmers have two responses to current changes in slaughter hog prices: (a ) a positive supply response in shifting market hogs forward or back one month (the “holdover” response), and (b) a negative supply response in the number of gilts saved. If price goes up, for example, farmers are assumed to sell market hogs early to take advantage of higher prices and retain more gilts for breeding.’ The holdover response is assumed greater than the gilt retension response, implying a n upward sloping supply curve.

( 2 ) Farmers farrow a particular sow one, two, three or four times before selling her; the maximum number of litters per sow is four.

( 3 ) The decision regarding the number of litters per sow is unaffected by changes in slaughter hog prices. That is, the proportions of producers on different farrowing systems are not affected by price

mathematical model [2] is derived:

3 Note that processor price is destabilized as a low price, P.. is made lower. Po.. 4 A strong relationship between price changes in the United States and Canada has existed [3]. A n

attempt to measure instability in the Canadian hog industry is reported in [I?] . 5 Lacking suitable price-quantity predictions for the future, a n ex-poste analysis is used. 6 The level of the floor (i.e., 92 percent of the moving average) could be .allowed to slide in

proportion to varying feed costs or the level of the stabilization fund. In this form, the scheme would tend to stabilize the value added by farmers, rather than market price. ?,is value added approach to stabilization has already been incorporated in the Western Grain Stabilization Scheme, and is particularly appropriate in the context of rapidly changing farm costs.

7 The assumpiion that the more gilts that are retained, the higher the market price is consistent with the view [lo] that hog producers base future price expectations on current prices, which is the underlying assumption of the familiar cobweb model for hogs. If prices reach an exceptionally high level, howcvei. such that farmers believe a price fall is inevitable, it can bc expected that breeding stock will be liquidated as farmers attempt to take advantage of the exceptionally high prices.

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changes induced by government policy. This implies that farmer response to changes in slaughter hog prices with respect to the breeding herd is in terms only of gilts retained (i.e., the farmer does not alter his intensity of farrowing because of price changes) .*

(4 ) A sow which is to be retained is rebred two months after farrowing. ( 5 ) A sow which is to be sold is sold one month after farrowing (except

in a one litter sow system, where it is sold two months after farrowing).

( 6 ) There is a four month period from the time of conception until farrowing.

(7) There is a six month period from farrowing until offspring have reached minimum slaughter weight, and a seven month period from farrowing to average slaughter weight.

(8) In the absence of any scheme, market hogs are sold on reaching average slaughter weight.

(9) The decision to retain gilts for breeding is made at the time that gilts reach average slaughter weight.

(10) Gilts which are retained are bred two months after this decision is made (i.e., two months after reaching average slaughter weight).

(1 1 ) Market hogs may be kept a maximum of two months after reaching minimum slaughter weight (or one month after reaching average slaughter weight).

The farm level model used comprises supply and demand equations for slaughter hogs, and these are equated in determining simulated price. Market supply of slaughter hogs appears in the model as a “residual”; i.e., price is assumed to affect both the holdover and gilt retention decision, and hence market supply. Packer demand for slaughter hogs is represented by a constant elasticity demand functi0n.O An elasticity of -.5 is assumed for each month.’” Effects of retail price and packer inventory on demand for slaughter hogs are assumed to enter through packers’ elasticity of demand coefficient. A detailed exposition of the model is given in [8].

Relevant measures to summarize the results are calculated in the presence and absence of a deficiency payment scheme. Differences in the two sets of summary measures provide an estimate of its likely impact.

In the next section, we discuss U.S. government expenditure on a deficiency payment scheme. Following that, we discuss summary measures involving a mean or standard deviation, as reported in Table 1 .

The farm model used involves the specification of some eleven para- meters. Results reported below follow directly from values assigned these parameters. In this paper, only one setting of the parameters is explored; the results, however, were shown to apply over a fairly wide, range of parameter values [S]. This suggests that the specific parameter values are not critical in determining the impact of a deficiency payment scheme, and increases the likelihood that conclusions of the model are applicable to the real world.

8 In times of particularly high market prices, assumptions ( 2 ) and ( 3 ) may not be valid. 9 Constant elasticity demand functions have been used in [4;, 51.

10 Myers, er al. [9] estimated monthly average price elasticity of demand for slaughter hogs to be --.43, ranging from -.35 in November to -32 in July. But monthly variation in price elasticity is inherent in their estimation procedure; i t . . i t follows directly from assuming a linear demand equation.

TABLE 1 Estimated Outcome of a Deficiency Payment Scheme for Hogs, 1957-1971,

with Floor Price 8 Percent Below Three Year Moving Average

Standard Deviation Variables Average Without With Difference Without With Difference

Scheme Scheme Scheme Scheme Absolute %

1. Price of Slaughter Hogs Received by Farmers (dollars/cwt.) . . . . . . . . . . . . . . . . . . . . . . . . . . 18.30 18.76 .47 2.5 3.49 3.02 -.47

(dollars/cwt.) . . . . . . . . . . . . . . . . . . . . . . . . . . 18.30 18.11 -.19 -1.0 3.49 3.51 .02 2. Price of Slaughter Hogs Paid by Packers

3. Quantity of Hogs (rnil.lbs./rnonth) . . . . . . . . . . 1597.54 1604.38 6.84 .4 157.11 158.47 1.36

4. Farm Income (mil. dollars/month) . . . . . . . . . . . . 290.04 299.56 9.52 3.3 54.85 53.67 -1.18

TABLE 2 Monthly Changes in Price of Slaughter Hogs Received by Formers, Given a Deficiency Payment

Scheme with Floor Price 8 Percent Below Three Year Moving Average, 1957-1971

Annual Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Year

( 1 S/CWt.) ' 1957 .oo .oo . 00 .20 .13 .11 .07 .05 -03 .02 .o 1 .o 1 .05 1958 .oo .oo .oo .OO -.02 -.03 -.03 -.03 -.02 -.02 -.03 -.03 -.02 1959 -.03 -.02 -.02 .82 1.16 2.20 3.88 3.75 3.48 3.04 2.86 4.49 2.13 1960 3.90 2.85 1.55 1.40 1.52 1.53 1.28 1.66 1.41 .52 -.04 -.39 1.43 1961 -.85 -1.35 -1.05 -.11 .63 1.44 .83 -.04 -.66 -.78 -.55 -.70 -,27 1962 -.80 -.93 -.74 -.19 .20 .01 -.35 -.39 -.34 -.13 -.06 -.07 -.32 1963 -.09 -.01 .85 1 50 1.07 .79 .49 .42 .39 .35 .47 .86 .61 1964 .52 .45 .33 .4 1 .30 .44 .24 .17 . l l -.01 .10 -.06 .25 1965 -.19 -.22 -.17 -.24 -.42 -.47 -.61 -.54 -.42 -.41 -.41 -.46 -.38 1966 -32 -.48 -.31 -.27 -.22 -.I6 -.14 -.04 .02 .06 .09 .12 -.15 1967 .16 .24 .23 .25 .28 .30 .35 .3 1 .29 .23 .25 1.76 .39 1968 1.24 1.01 .65 .42 1.07 .95 .6 1 1.75 1.15 1.11 .85 1.80 1.05 I969 1.17 .69 .29 .09 -.03 -.21 -.50 -.65 -.71 -.68 -.82 -.78 -.18 1970 -1.05 -1.26 -1.11 -.96 -.95 -.86 -.92 -.79 -.OO .91 2.96 4.25 .02 1971 4.34 3.64 2.73 2.97 2.53 2.89 2.48 2.05 1.89 1.48 .95 .45 2.37

h, 0

TABLE 3

Monthly Changes in .Price of Slaughter Hogs Poid by Packers, Given o Deficiency Payment Scheme with Floor Price 8 percent Below Three Year Moving Average, 1957-1971

Annual Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Year

~ ~~~~~ ~

( 1 $/cwt.) 1957 .oo .oo .oo -.31 .I3 . l l .07 .os .03 .02 .o 1 .o 1 .o 1 1958 .oo .oo .oo .OO -.02 -.03 -.03 -.03 -.02 -.02 -.03 -.03 -.02 1959 -.03 -.02 -.02 -1.08 -.28 -1.21 -1.75 .49 -.62 -.I6 .I4 -1.76 -.53 1Y60 .92 1.23 1.55 .33 -.32 -.13 .18 -1.50 -.39 .52 -.04 -.39 .16 1961 -.85 -1.35 -1.52 -2.72 -1.91 -2.01 -.62 - 3 5 -.66 -.78 -1.07 -.70 -1.23 1962 -.80 -.93 -.74 -1.28 -.92 -.26 -.35 -.39 -.34 -.13 -.06 -.07 .52 1963 -.09 -.01 -.76 -.36 1.07 .79 .49 .42 .39 .35 .07 -.43 .16 I964 .52 .45 .33 -.08 .01 -.36 .24 .17 . l l -.01 -.44 -.06 .07 1965 -.19 -.22 -.17 -.24 -.42 -.47 -.61 -.54 -.42 -.41 -.41 -.46 -.38 1966 -.52 -.48 -.31 -.27 -.22 -.16 -.14 -.04 .02 .06 .09 .12 -.16

2 9 .23 . l l -1.88 .07 1967 .16 .24 .23 .25 .28 .30 .35 .3 1 1968 1.24 1.01 .65 .42 -.98 .77 .61 -1.87 1.15 -.28 .55 -1.50 .16 1969 .63 .69 .29 .09 -.03 -.21 - .SO -.65 -.71 -.68 -.82 -,78 -.22 1970 -1.05 -1.26 -1.11 -.96 -.95 -.86 -.92 -.79 -1.49 -1.44 -2.36 -1.62 -1.23 197 1 .09 3.64 -.15 .12 1.37 -.4l 2.48 .69 .52 1.48 .95 .45 .94

TABLE 4 Monthly Changes in Quantity of Slaughter Hogs, Given o Deficiency Payment Scheme

with Floor Price 8 Percent Below Three Year Moving Average, 1957-1971

N N

Annual Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Year

(million pounds) 1957 0 0 0 13 -5 -3 -2 -1 -1 -1 -1 0 -.l 1958 0 0 0 0 1 1 1 1 1 1 1 1 .7

139 21.8 12 -15 -35 1959 1 1 1 59 12 58 87 -59 1960 -124 -101 -78 -21 12 1 -11

36 60.9 1961 43 57 80 131 104 104 21 23 28 41 63 1962 43 44 41 69 52 12 14 16 13 7 3 4 26.5 I963 5 1 51 22 -57 -32 -19 -17 -19 -20 4 30 4 . 9

1965 10 10 9 11 14 14 16 15 14 13 14 12 12.7 1966 13 12 11 9 7 5 4 1 -1 -2 4 4 4.1

70 13 -22 2 20 -19.9

1964 -34 -24 -19 5 -1 18 -10 -7 -5 0 29 4 -3.7

1967 -7 -9 -11 -11 -9 -10 -10 -12 -12 -11 -6 109 .1 1968 -58 -38 -27 -19 50 -30 -21 82 4 5 13 -30 79 -3.7

1970 34 34 37 37 33 29 31 29 72 86 166 83 55.9 1969 -36 -27 -12 4 1 7 15 19 25 26 27 27 5.7

1971 -70 -130 -13 -34 -93 4 -93 4 3 -36 -64 4 6 -21 -53.3

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Government Expenditure The cumulative U.S. government payment to farmers to support price

at 92 percent of a three year moving average over the period 1957 through 1971 is estimated to be $2.1 billion,” or a n average of $.I4 billion per year.

If the floor were set 1 percent lower, a t 91 percent of a three year average, government expenditure would fall to $1.7 billion, a change of $324 million. Hence, we can say that a I percent lower floor “saves” the government $342 million.

Price of Slaughter Hogs Received by Farmers‘?

In the absence of a deficiency payment scheme, average monthly price of slaughter hogs received by farmers is $18.30 per hundredweight (Table 1 ) . Deficiency payments increase average price by $.47 to $ 1 8.76. Also, they succeed in stabilizing it, as indicated by a decrease in standard deviation from $3.49 to $3.02 per hundredweight. Given a 1 percent lower floor, the standard deviation is $3.1 3; hence, through lowering the floor 1 percent, the government “saves” $342 million, but loses a $.11 per hundredweight reduction in standard deviation.

Monthly changes in prices received by farmers are presented in Table 2. Note that there are no price changes before April, 1957, the first month of a government payment. The April equilibrium price ($17.40) is $.20 below the relevant floor price ($17.60). Since April is the only month of 1957 in which a payment occurs, price changes in remaining months of that year result from carry-over effects of April intervention. Increased price in April induces a negative holdover response from farmers, meaning that hogs otherwise sold in May are sold one month early, in April. This implies a decreased supply and an increased price in May. Again, given a higher price in May, a negative holdover response is induced, and June hogs are shifted forward to May. The process continues. but with each passing month price changes (and hence holdover responses) are diminished such that by December all holdover effects of April intervention have worked their way out of the system.

For the first four months of 1958 no changes occur in price received by farmers as carry-over effects of changed holdovers are finished, and those due to gilt retention decisions are yet to begin. The first litter of extra gilts retained for breeding in April, 1957 (due to the $.20 price increase) reach market thirteen months later (in May, 1958), which accounts for a $.02 fall in May’s price. This price decline induces some hogs to be held over for sale in June, lowering June’s price, and so on.

March, 1961, exemplifies a month where farmer price falls (below equilibrium value) even though a subsidy is made. This can again be explained by farmers’ holdover and gilt retention responses to earlier price changes. Because the price decline in February, 1961, is greater than in March, 1961, it can be expected that more February hogs are held over for sale in March, than March hogs for sale in April. This increases 1 1 A sensitivity test was made assuming no farmer response ( in holdovers or pills retained) to effective

changes in slairphrer hog prices. This could be expected if deficiency payment5 were unexpectedly given at some later date. Government expenditure. in this case. was estimated lo be $1.8 billion.

12 Where a deficiency payment occurs, “price received by farmrs” refers 10 effective price received, not going market price actually received from packers. I t is packer price p l u ~ deficiency payment.

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March’s supply. It is further increased by offspring from additional gilts retained thirteen months earlier due to a price rise of $2.85 (February, 1960), and nineteen months earlier due to a price rise of $3.75 (August, 1959). Increased supply in March causes the price to fall below the floor. The March subsidy raises farmer price to the floor ($16.10), which is $1.00 less than equilibrium price ($17.10). This illustrates the way in which the model captures some of the secondary destabilizing effects of an initial government stabilizing intervention.

Price of Slaughter Hogs Paid by Packers

In the absence of government interference, price of slaughter hogs paid by packers and received by farmers is the same-$18.30 per hundredweight (Table 1) . Given deficiency payments, average price paid by packers is decreased $. 19, to $18.1 1. Its variance is increased, but only slightly, as standard deviation increases $.02 per hundredweight.

This latter finding-that a deficiency payment scheme only marginally destabilizes packer price-is indeed surprising in view of the one period supply-demand analysis of Figure 1. Given deficiency payments, farmers are expected to increase quantity supplied, which lowers processor price. An already low processor price is lowered, i.e., destabilized.

Monthly changes of piices paid by packers are presented in Table 3. There are several months where a subsidy occurs, yet packer prices go up, not down as suggested by the supply-demand model (Figure 1 ) . In January, 1960, for example, a $51 million subsidy is accompanied by a packer price rise of $.92 per hundredweight.

If the supply function incorporated in the simulator were downward sloping, this would explain the divergence of simulation results with pre- dictions of the supply-demand model. However, the supply function of the simulator, like So in Figure 1, is upward lo ping.'^ The divergence can, however, be explained by the fact that the one period supply-demand analysis of Figure 1 neglects all carry-over effects, whereas the simulator is able to incorporate them.

In the first month of subsidy, April, 1957, price paid by packers falls $.31 (Table 3) . This is consistent with predictions of the supply-demand model, which is what we would expect considering it is the first month of intervention and no carry-over effects are present.

By looking at January, 1960, we can illustrate how carry-over effects can induce a packer price rise in a month where a subsidy occurs. In the month preceding January (December, 1959). price received by farmers rises substantially ($4.49, in Table 2) , implying a significant quantity of January slaughter hogs sold one month early, in December. Figure 1 is reproduced below as Figure 2 . Assuming Figure 2 represents January, 1960, this can be reflected as a shift in the supply function for slaughter hogs from So to S1.l4 This determines a price, PI, which is below the floor, 13 As current price increases. quantity of next-month hogs brought forward for sale this month exceeds

quantity of gilts withheld from market this month for breeding. 14 Because price received by farmers rises in January. some February hogs will be sold one month early. in

January. ,Note. however, that this does not constitute a rightward shift in the supply function, So; rather it is the positive response to current price which gives rhe supply function an upward slope. Further shilts in the function, due to past price changes can be expected to occur as offspring from past increases in breeding stock reach market.

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so farmers are subsidized to raise effective price received to the floor. Receiving PI, farmers supply Q, (as indicated by the relevant supply function, S , ) . The net decrease in quantity, from Q , to Q,, causes packer price to rise from P, to P,. Hence, packer price is stabilized in a month of direct government intervention through a shift in the supply function due to the previous months’ intervention.

Price

02 0, 01 Hogs FIGURE 2

Deficiency Poyment Scheme, Allowing For Carry- Over Effects

Quantity of Slaughter Hogs In response to price changes caused by a deficiency payment scheme,

farmers increase supply on average by .4 percent per month (Table 1 ) . Variance of monthly supply increases, as shown by an increase in the standard deviation from 157.1 1 to 158.47 million pounds per month.

Monthly changes in quantity of slaughter hogs due to a deficiency payment scheme are given in Table 4. In the first month of intervention (April, 1957), farmers increase supply by 13 million pounds, given a $.20 per hundredweight increase in price. Since there are no carry-over effects in the first month of intervention, we know that this response is to current price; hence, it is consistent with our assumption of an upward sloping supply curve, ceteris paribus.

In some other months, however, farmers receive a higher price, yet reduce the quantity of slaughter hogs supplied. For example, in January, 1971, price received by farmers increases by $4.34 per hundredweight (Table 2 ) and farmers reduce quantity supplied by 70 million pounds.

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At first glance, this appears to be a negative response to current price and hence inconsistent with an upward sloping supply curve. By separating the components of quantity supplied, we can see if this is so.

Farmer response to current price changes include only the holdover and gilt retention decisions. Given a price increase of $4.34, they decide to sell 318 million pounds of February hogs in January and retain nine million pounds of gilts for breeding. Hence, net farmer response to current price change is positive, as net quantity supplied is increased 309 million pounds.

Two carry-over effects are present in January. First, offspring from gilts retained earlier shift the January supply function to the right by two million pounds. Second, and more important, about 382 million pounds of January hogs were sold last month (December), given a price increase of $4.25 per hundredweight that month; for the January supply function, this implies a shift to the left of 382 million pounds.’: The net carry-over effect is to decrease supply by 380 million pounds. The 70 million pound reduction in quantity supplied is the difference between the net shift in the supply function (380 million pounds) and the movement along the function, i.e., the positive response to current price (309 million pounds). In summary, what appears to be a negative response to current price is, in fact, a positive response outweighed by carry-over effects of past price changes.

Farm Income Increases in average prices received by farmers and average quantity

of slaughter hogs supplied, induced by deficiency payments, imply increased income for farmers. Average farm income per month rises 3.3 percent (Table 1) . Its standard deviation falls from $54.85 to $53.67 million per month.

This completes our attempt to estimate the outcome of a deficiency payment scheme for hogs in the United States. In the following section, we present our conclusions.

Conclusions We repeat the caveat that our results apply only to the nominated

values of the model parameters, and hence should be treated with some degree of skepticism. Given this caveat, and given our assumptions, some fairly specific statements can be made about the merits of a deficiency payment scheme for hogs.

A deficiency payment scheme was shown to be a plausible way of stabilizing the price of slaughter hogs received by farmers. At a ‘‘cost”’o of about $.14 billion per year, the U.S. government could achieve an average reduction in the standard deviation of price of slaughter hogs received by farmers equal to $.47 per hundredweight.

If stabilizing farm income is a government objective, deficiency payments can be used to achieve it; standard deviation falls $1.18 million per 15 The effects of a shift of this type were illustrated in Figure 2. Note that packer price rises $0.09

per hundredweight in January, 1971 (Table 3 ) , which is in accord with our earlier reasoning that a supply curve shift can induce a rise in packer price in months where a deficiency payment occurs.

16 “Cost” should be viewed as an income transfer from government to farmers.

27

month. Or, if raising the level of price of slaughter hogs received by farmers or the level of farm income happen to be the objectives, deficiency payments again appear to produce desirable results. Average price of slaughter hogs received by farmers rises 2.5 percent, while average farm income rises 3.3 percent.

Packers benefit from a deficiency payment scheme in the sense that the average price they pay for slaughter hogs falls 1 percent. Packer price, however, is slightly destabilized. Figure 1 suggested that deficiency payments could be highly destabilizing for packer price because in months of low price, farmers respond to deficiency payments by increasing quantity supplied, thus depressing an already low price. But, as we saw in Figure 2, this is prevented by carry-over effects (due to last month’s holdovers) which tend to limit short run destabilizing quantity increases by farmers.

Under simulated levels of this study, the deficiency payment scheme does not greatly affect quantity of slaughter hogs. Quantity of slaughter hogs increases .4 percent per month, and is slightly destabilized. In con- clusion, deficiency payments appear to be a reasonable way of achieving hog price stability, with side effects which seem likely to be included in the objective function of policy makers.

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States, 1953 to 1967.” Cririadiciii Fmwi Ecoriornics, 3, 3 (1968), 7-10. 2. Candler. Wilfred and George Kennedy. A Simi~lafio~r A/inI?sis of AIfeniurirte Price

Ceilings for Pork. Research Bulletin. Lafayette, Indiana: Purdue University. (Forthcoming.)

3. Dawson. J . L. ”Canadian Hog Prices Within a North American Market.” Cwiodimi

4. Duloy, J . H. and R. M. Parish. Air Appraisnl of n Floor-Price Scheme for Wool. New England Marketing Study No. 1. Dept. of Agr. Econ., Univ. of New England, 1964.

5 . Durbin, S . I. “A Simple Wool Marketing Simulation Model.” Unpubl. M. Agr. Sc. Thesis, Massey University. Palmerston North, New Zealand.

6. Frahm, D. G. “Analysis of Producer, Feed Supplier and hlsat Packer Responses to Contractual Coordination in the Hog-Pork Subsector.” Unpubl. Ph.D. Thesis, Dept. of Agr. Econ., Purdue University, 1972.

7. Hallett, G. The Ecoiromics of AgricuIfitrnI PoIic.~. Oxford: Basil Blackwell, 1968. 8. Kennedy. George. “A Simulation Analysis of Alternative Stabilization Schemes for

Hog-Pork Prices.” Unpubl. Ph.D. Thesis, Dept. of Agr. Econ., Purdue University, December, 1973. Myers, L. H., et nl. Short-Term Price Striictiire of the Hog-Pork Secfor of rhe Lriiiicd Stnfes. Res. Bull. 855. Lafayette: Agr. Expt. Station,Purdue University, 1970.

10. Schultz, T. W. and 0. H. Brownlee. “Two Trials to Determine Expectation Models Applicable to Agriculture.” Qirnrterly /ourria/ of Ecoriomics, 56 ( 1942), 487-496.

11. USDA. Liveslock and Meut Sfnlistics. Statistical Bulletin No. 333. Washington: USDA, 1962, and Sirpplenieut for I971 to Smristical BirIIcti~i No. 333. Washington: USDA, 1972.

12. West, D. A. and H. W. Smith. “Instability in the Hog-Pork Industry.” Caiiadinir Farm Eco/iomics, 8, 2 (1973). 1-8.

FlirtlI Eco/io/l,ic.y, 7. 4 ( 1972). 8- I I .

9.