Unlike most other commodity programs, the sugar program makes loans to processors and not directly to producers. The reason is that sugarcane and sugar beets, being bulky and very perishable, must be processed into sugar before they can be traded and stored. To qualify for loans, processors must agree to provide payments to producers that are proportional to the value of the loan received by the processor.
USDA has the authority to establish minimum producer payment amounts. The loans are nonrecourse. When a loan matures, USDA must accept sugar pledged as collateral as payment in full, in lieu of cash repayment of the loan, at the discretion of the processor.
The processor is not required to notify USDA of the intention to forfeit the sugar under loan. The current loan rates for raw cane and beet sugar are set in the Farm Bill. The Farm Bill allows processors to obtain loans for in-process sugar and syrups at 80 percent of the loan rate. Sugar sold in the United States for domestic human consumption by domestic sugar beet and sugarcane processors is subject to marketing allotments that are designed to limit domestic supplies.
An overall allotment quantity OAQ is established at not less than 85 percent of estimated deliveries for domestic human consumption for the marketing year October through September. The OAQ is divided between refined beet sugar For cane sugar, Hawaii is allotted , short tons, raw value STRV , and the allocations for the mainland cane-sugar-producing States Florida, Louisiana, and Texas are assigned based on the States' and processors' production histories.
USDA has authority to reallocate these allocations during the year and does so for Hawaii, which stopped producing sugar in Beet sugar processors are assigned allotments based on their sugar production histories. The program sets out allocation conditions for new entrants and for the effect of the sale of factories between processors. The program provides for several contingencies that could require reassignment of allotments during the crop year.
If a cane processor cannot market its allocation, it is reassigned to the other processors within the same State, taking into account their ability to make up the deficit and also the interests of producers served by the processors. If the deficit cannot be eliminated by this step, the remainder is allocated to the other cane-producing States, and then to the processors in those States.
If CCC inventories are insufficient to cover the deficit, then the deficit is assigned to imports. Otherwise, foreign producers would sell their products in the U. If that happened, the U. Quotas limit imports of dairy products to less than 3 percent of consumption.
The CCC disposes of the commodities it buys in ways that will not displace market demand and depress the domestic market price. For example, dairy products are often given away to low-income people, in the school lunch program, and as foreign aid. A variant of this policy is designed to stabilize market prices. The CCC buys grain at the support price, stores it, and releases it back into the market if the market price rises to a prescribed trigger level of, say, percent of the support price.
In this manner the policy protects growers against the risk of low prices but also protects consumers against unusually high prices. This type of government program can provide some protection against wide swings in prices if the acquisition support price is set at about 75 percent of a five-year moving average of market prices leaving the highest number and the lowest number out of the calculation. The markup between acquisition and release price should cover the cost of operating the buffer stock program.
Farm organizations, however, often lobby to raise the acquisition and release prices, so that "stabilization policy" becomes price support policy. When this happens, government inventories tend to rise without limit until the stabilization agency exhausts its budget for buying the product.
At that point the agency has to subsidize the export of the inventories, with the taxpayers picking up the loss on the operation. The United States currently uses a hybrid approach to price supports that also involves loans.
At harvest the CCC gives grain farmers nine-month loans equal to their production times the support price. The support price is called the "loan rate. If, during the term of the loan, the market price rises above the support price, farmers repay the loans with interest and sell the grain in the market. If the market price remains at or below the loan rate, farmers forfeit the grain to the CCC, keep the money, and have no further obligation. Such loans are called nonrecourse loans, meaning that the lender has no claim on the borrower beyond the collateral in this case the crop.
Price Supports Cause Overproduction By supporting prices above the market-clearing level, governments encourage farmers to expand production. To produce more, farmers apply more inputs per acre.
They also compete against one another for the finite amount of farmland, bidding up its price. In this way the value of the price supports is capitalized incorporated into land prices. Thus, it is the owners of farmland, and not farmers per se, who are the principal beneficiaries of agricultural price supports. See Ricardo. Price supports cause larger production and smaller consumption since consumers will buy less of any good as its price rises , resulting in overproduction at the support price.
The only way for the price support agency to get rid of its inventories is to use export subsidies to make them cheap enough that foreigners will buy them. The EC uses this approach for grains.
From the midseventies to early eighties, internal EC grain prices were to percent of the prices at which other countries were willing to export their grain. Subsidies to agriculture account for over two-thirds of the total EC budget. The United States takes a different approach for grains. With minor exceptions the United States does not make its domestic consumers pay more for grain than foreign buyers pay. Instead, the U. In normal years the market price is above the support price, and the CCC accumulates few inventories.
A so-called target price is then set at a somewhat higher level than the support price, usually through political bargaining between farm organizations and the federal government.
The government then pays to producers, as an income supplement, the difference between the target price and the higher of the support price or the market price. In contrast, with a price support, any excess production is a burden on the government. The U. Department of Agriculture operates a price support for cheese and has possessed warehouses full of cheese in the past. There are also price supports for milk and other agricultural products. Figure 5. The government posts a minimum price it is willing to pay for a product, called the support price The minimum price the government is willing to pay for a product.
Another explanation, however, is that temporary price supports and hence temporary inefficiency may result in a better long-run outcome than having producers go in and out of business due to varying market conditions.
In fact, a price support can be defined such that it's not binding under normal economic conditions and only kicks in when demand is weaker than normal and would otherwise drive prices down and create insurmountable losses for producers. That said, such a strategy would result in a double hit to consumer surplus. One common question regarding price supports is where does all of the government-purchased surplus go? This distribution is a bit tricky since it would be inefficient to let the output go to waste, but it also can't be given to those who would have otherwise purchased it without creating an inefficiency feedback loop.
Typically, the surplus is either distributed to poor households or is offered as humanitarian aid to developing countries.
Unfortunately, this latter strategy is somewhat controversial, since the donated product often competes with the output of already struggling farmers in the developing countries. One potential improvement would be to give the output to the farmers to sell, but this is far from typical and only partially solves the problem. Actively scan device characteristics for identification. Use precise geolocation data.
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