Schuh
Challenges in Policy
policies of the recent past. The danger is that
we will go all the way back to the old quota
policies, with all their implications.
Moreover, there is also danger that we could
eventually substitute most of our foreign
supplies with domestic production, with a
market share arrangement worked out among
the various groups of domestic producers.
Avoiding such import substitution is a major
challenge if we are to make efficient use of
our resources.
In the case of dairy, we join many other
countries in having a serious adjustment
problem. Stocks of dairy products in gov-
ernment hands are rather large. The optimis-
tic outlook for beef prices may help bring this
sector into balance. But it is still useful to ask
whether a more appropriate policy for the
dairy sector might be devised.2 Would the
use of target prices and deficiency payments
bring about a more rapid adjustment to
changing economic conditions, thereby pro-
tecting producers while at the same time
permitting consumers to benefit from lower
prices? Does the present combination of
price supports and marketing orders give us
the most effective means of providing income
support to dairy farmers? Those are the kinds
of questions we must answer to be sure that
present policies are on the right track. Simi-
lar questions apply to the other commodities
mentioned above.
2. Can we do better than cost of produc-
tion as a guide to price policy? We have al-
ready seen that cost of production has many
of the same difficulties associated with the
concept of parity prices. There are measure-
ment problems, difficulties in agreeing on
the appropriate concept of cost, and a con-
tinuing political vulnerability.3 The chal-
lenge here, of course, is to disconnect com-
pletely the commodity price policies from in-
come policies, since to defend cost of produc-
tion is implicitly to provide income support
2For recent policy studies of the dairy sector, see Babb,
Fallert and Buxton, Hallberg and Fallert, Manchester,
and Novakovic and Thompson.
3For a discussion of these problems, see Schuh (1976a).
through the product market. Such disconnec-
tion would provide both a more efficient use
of our resources, and possibly permit a more
effective means of dealing with the income
problem. But as this audience is well aware,
most groups in society would rather receive
their transfer payments in implicit form
through the product market rather than in
the form of direct payments from the gov-
ernment.
Our objective in price policy should be to
assure that the markets operate to allocate
resources efficiently, without creating serious
adjustment problems. Obviously, some of
the large price swings of recent years
provided price “noise” rather than allocative
signals and led to distortions in resource use.
An optimal price policy would leave prices
free to operate within that range consistent
with orderly adjustments as seen from a
long-run perspective. The questions then be-
come: How do we identify the proper floors
and ceilings, and what are the institutional
alternatives for implementing them?
3. Can we manage the reserve stocks in a
fashion consistent with a true buffer-stock
policy? The principle of buffer-stocks is
clear. Production is removed from the mar-
ket when prices are low, and released back
into the market when prices exceed a certain
level. The dampened price fluctuations
which result are expected to lead to more
efficient resource use, and if managed in an
international context, can be expected to
promote trade since they reduce the incen-
tive for other countries to become self-
sufficient.
The difference between principle and
reality is great, however. First, there is the
challenge of understanding enough about
international agriculture and international
commodity markets to know how to manage
the reserves in a rational fashion, even if
there were no political difficulties. In the ab-
sence of proper management, reserves can in
fact be destabilizing. Equally as important is
the question of whether the political process
will permit the reserves to be released when
prices reach the trigger levels. The fact that
most stocks are held in producer hands will
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