Estimating supply response in the presence of farm programs

Extract: Previous empirical research on crop supply response has given insufficient attention to the fundamentally different nature of supply response under farm programs versus competitive markets. A simple theoretical model is presented which highlights the program participation option in the farmer's acreage allocation decision. The model also provides the basis for different expected supply elasticities under "free market" and "farm program" regimes for corn and soybeans. Econometric supply estimation for Corn Belt states for 1948-80 using a temporally disaggregated approach confirms a greater supply elasticity for corn and a lower supply elasticity for soybeans under acreage-restricting feed grain programs