Potential price variability in the US grain and livestock sector in the 1980s under alternative policy scenarios: an econometric approach

Andrew Scott Morton

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This study utilizes an annual structural econometric model of the U.S. grain and livestock sector to simulate market price instability resulting from potential fluctuations in domestic crop yields and demand for U.S. grain exports over 1981-90. The policy alternatives examined are a continuation of post-1977 grains policy and management strategy (PA I); elimination of grain policy programs (PA II); replacement of the existing farmer-owned reserve program (FOR) with an FOR equivalent subsidy to private commercial storage at any price (PA III); and continuation of post-1977 grains policy without authority to implement acreage reduction programs (PA IV);Results from estimation of the econometric model suggest that a l bushel increase in government carryover (FOR and CCC-owned stocks) displaces commercial carryover .242 and .259 bushels for wheat and feed grain, respectively. Impact multiplier analysis indicates that a l MMT (million metric ton) increase in government wheat and feed grain carryover increases current wheat and corn farm prices .16 and .02 per bushel, respectively. Such increases also increase current livestock price .001 and .004 (PL(,1979) = 2.62), respectively. FOR carryover for the 1977-80 period has been quite price elastic (estimated elasticities are 3.63 and 3.77 for wheat and feed grain). These estimates suggest that the reserve program as managed over 1977-80 has added to the elasticity of total demand for both wheat and feed grain, thus, significantly enhancing grain price stability;Mean grain and livestock prices generally follow each other fairly closely over the 1981-90 period for all policy alternatives. Wheat, corn, and livestock prices are 331, 38, and 17 percent more volatile, on average, over 1981-90 in the free market alternative (PA II) compared to the current policy alternative (PA I). These prices are 94, 29, and 13 percent more volatile when the FOR is replaced with a simple subsidy to all commercial storage at any price (PA III). Finally, results suggest that lack of acreage reduction authority (PA IV) requires FOR carryover to be 14 and 8 percent greater, on average, for wheat and feed grain (compared to PA I) to maintain market price volatility comparable to the current policy alternative.

Date: 1982-01-01
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