A22-Lancaster Farming, Saturday, October 19,1985
NEWARK, DE - To keep
commodity loan rates more in line
with market trends, Congress is
considermg several proposals for
moving-average loan rates as it
deliberates over contents of the
1985 farm bill.
What’s the rationale behind
moving-average loan rates, and
how well can they be expected to
work?
In the past, commodity loan
rates which are announced prior
to each crop year - have been tied
to various criteria such as parity,
cost of production and (since 1981)
minimum levels legislated by
Congress. None of these criteria
has proven satisfactory for long,
according to University of
Delaware extension farm policy
specialist Gerald F. Vaughn.
“Loan rates set by legislation
are relatively inflexible, so they
don’t move with market ups and
downs,” the economist says.
“When they become a price floor
above market-clearing levels, such
loan rates contribute to huge and
burdensome commodity sur
pluses.”
Farm policymakers are now
looking for a more flexible ap
proach. One that’s gaming at
tention would base loan rates on a
moving-average of recent market
prices.
"Expected prices would be the
best guide for farmers in making
production and marketing
decisions,” Vaughn says. “But
because it’s impossible to ac
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Congress considers moving-average loan rates
curately predict the next crop
year’s prices, a moving-average
based on price trends over the past
few years would be a good sub
stitute for farm policy purposes.”
According to Vaughn, com
modity prices over the past three
to five years, or the past five years
excluding high and low years,
ought to provide an adequate
average for this calculation. Under
this method, as each new crop year
comes and goes its prices would
become part of the calculation and
a previous year would be dropped.
This means the average would
move up or down in line with
market trends.
“To guard against a precipitous
drop in the moving-average loan
rate if market prices suddenly
plummeted and stayed depressed
for a prolonged period, a minimum
loan rate level could be set, though
this shouldn’t be above market
clearing levels,” the economist
says.
“The loan rate could be set at a
specified percentage of the market
price moving-average, such as 75
or 85,” he continues. “A higher
percentage could take the loan rate
to above market-clearing levels
during a year of sharply falling
market prices, which would lead to
costly government acquisition and
storage of commodity surpluses. A
lower percentage probably would
offer farmers too little price
protection.”
Compared to past loan rate
levels, which were higher and less
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flexible, Vaughn says the moving
average approach would have
certain advantages. It would be
more market-oriented and less a
hindrance to U.S. exporting, as
well as less likely to be capitalized
into the value of land* and other
fixed farm assets.
“Moving-average loan rates still
might get out of line with market
trends if extreme price changes
occurred within a short time,” the
farm policy specialist says. “The
main concern with a moving
average approach, however, is
that we have had little experience
with the concept.”
The Agriculture and Food Act of
1981 provided for setting loan rates
for soybeans and upland cotton
based on past movements in
market prices, but minimum loan
rates were legislated for both
crops. Since 1982 for soybeans and
1983 for upland cotton, these
mmimums have been higher than
the loan rate levels the moving
average calculation would have
set. So it’s difficult to evaluate the
effectiveness of moving-average
loan rates for these crops.
“Designing the moving-average
loan rate as an effective policy tool
for a wide range of commodities
probably would also requrie tying
target prices for deficiency
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payments to market prices.
Otherwise, if target prices
remained fixed at 1985 levels while
moving-average loan rates shifted
to lower levels, the widening gap
between loan rates and target
prices would likely lead to larger
government outlays for deficiency
payments,” the economist
predicts.
Even with moving-average loan
rates, Vaughn says production
control programs would probably
be necessary to avoid falling prices
from increased production. If this
were to happen, the loan rate could
at times again become the price
floor, holding prices above market
clearing levels.
A recent USDA study tested the
possible effects of moving-average
loan rates by simulating their use
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for major crops over the 1986-1990
crop years. The study showed that
such loan rates provided tem
porary price protection without
interfering with price signals from
the marketplace. However, it also
shoed that unless accompanied by
production control programs, the
moving-average loan rates tended
to provide a lower level of price
protection.
“Moving-average loan rates
could help provide a safety net for
farmers while making possible
market-clearing prices in both
domestic and world markets,”
concludes Vaughn. “This assumes
that other elements of the 1985
farm bill would share these ob
jectives and not work at cross
purposes against moving-average
loan rates.”