Exam 1 2015

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Texas A&M University *

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614

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Economics

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Feb 20, 2024

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Exam 1 Fall 2015 (of course, good answers will have graphs) 1. Canada has agreed to reduce tariffs on imported milk products as part of the Trans- Pacific Partnership free trade agreement. Analyze the effect of Canada’s action. What do you think this means for their milk quota system? 2. Cottonseed is a by-product of cotton lint production. The seed is separated from the lint (fiber) in the ginning process. The seed is sold whole as an animal feed or it goes to a mill which crushes the seed turning it into cottonseed oil and cottonseed meal. Cotton lint is included as a farm program commodity through the STAX program. It has been suggested that the seed be eligible for farm program support using either ARC or PLC. Compare and contrast ARC and PLC for cottonseed. Why might a farmer choose ARC or PLC? As a by-product of cotton production, how would you set the PLC price trigger? 3. The 2014 farm bill included ARC and PLC, replacing the direct payment and counter cyclical payment. Are ARC and PLC decoupled? Are they counter-cyclical? 4. Farm programs have often focused on reducing price and income risk. Analyze the effects of ARC and PLC on price and income risk. If risk is reduced, who do you think benefits from that risk reduction, producers or consumers? 5. In many crop insurance policies, futures market prices are used to set the insurable price for the crop in case of crop failure. Recently, a prominent farmer has argued that crop insurance made him plant corn year after year because crop insurance guaranteed him a profit. He argues that the market, not crop insurance, should dictate what he plants. The futures market, which is what buyers and sellers think as of today what the future price will be, has had record high corn prices. Analyze the effect of crop insurance on corn production and prices. What happens if the futures market is projecting low corn prices?

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