Customer Support: Parity Price Control

September 26, 2016 12:15 PM
 
 

Last week we looked at supply control to boost farm income, this week we tackle price control.

The most common concept of fixing the price for ag products is parity pricing. Parity prices are based on the idea of a Golden Age in agriculture from 1910 to 1914 when farms prospered along with the rest of the economy.

If we could simply reestablish the balance of those prices today, farmers would be receiving their fair share, at least in the views of proponents. Parity prices are still calculated by law by the USDA and published each month, and promptly ignored. For example, these are the parity prices for July 2016:Corn $13.00; Soybeans $31.10; Wheat $18.10; Cotton $1.93; Milk $51.90; Hogs $164; Cattle $320

What would happen if prices were mandated at these levels?

First, our roundtables would be very boring.

Second, export demand for these commodities would disappear.

Third, even if demand stayed the same, imagine what you would be bidding for farmland or cash rents or replacement heifers. You don’t have to look very far back to see what happens to costs during a price jump like this would be.

Fourth, I suspect farm income would plummet. While you can set the price, you cannot force buyers to buy. As we talked about last week, income is price times quantity. The result would be ever-growing unsold surpluses.  

Fifth, price controls like parity prices require a massive bureaucracy to administer, and invite widespread cheating and black markets.

Price controls have never worked historically and usually have unfortunate unintended consequences. During WWII, wage controls during the labor shortage led employers to compete for workers by paying for health insurance, since that was not considered wages. As a result, today, your health care coverage is largely a function of where you work, which economists point to as perhaps the biggest problem in health care delivery.

Once again we are faced with the struggle to define what is fair to deal with farm income. Only fair is decided individuals one transaction at a time, not by comparison to history or by absolute equality.

There is a reason nobody pays attention to parity prices even though we still crank them out.

They don’t work, and never have.

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