Effects of Marketing Loans on U.S. Dry Peas and Lentils: Supply Response and World Trade
by William Lin and Gary Lucier
Economic Research Report No. (ERR-58) 41 pp, May 2008
The 2002 Farm Act extended the marketing loan program for the
first time to dry peas and lentils. The marketing loan program
provides producers with a minimum return for their crop, thereby
reducing their market risk. Since passage of the 2002 Act, acreage
for dry peas and lentils has steadily increased. This study
investigates the role of marketing loans in that increase and the
implications for world prices and U.S. exports.
What Is the Issue?
With passage of the 2002 Farm Act, many observers believed that
the protection against financial risk offered by marketing loans
for dry peas and lentils would lead to greater production of these
legumes. If true, that development would expand U.S. exports and
lower world prices. Key questions posed in this study are:
- What share of acreage expansion for U.S. dry peas and lentils
can be attributed to marketing loans, as opposed to market
forces?
- How did expected marketing loan benefits affect world prices
and U.S. exports of dry peas and lentils?
- Given the proximity of U.S. dry pea and lentil growing areas
(North Dakota and Montana)
to Canada and the fact that Canada is the largest U.S export
market for pulse crops, what are the likely impacts on Canadian
pulse growers if U.S. exports rise significantly?
What Did the Study Find?
Effects on Acreage
Dry Peas-U.S. dry pea production started to increase in
2000, due to a 36-percent increase in planted acreage in North
Dakota. This expansion was largely attributed to an increase in the
expected dry pea yield and to lower costs of production. The 2002
Farm Act created further incentive to expand production. Marketing
loans have an impact on acreage whenever the expected grower price
is lower than the loan rate. The presence of marketing loans in
2003 contributed to the expansion of dry pea acreage of one-third
in North Dakota and one-fifth in Montana, above and beyond any
increase due to market forces. In 2004 and 2005, the expected price
and loan rate differential was much smaller, and marketing loan
benefits provided only a limited stimulus to dry pea acreage, with
an effect only in North Dakota.
Lentils-In North Dakota and Montana, the presence of
marketing loans had an influence on 2003 expansion of lentil
acreage similar to that for dry peas, but loans played a minor role
in 2004 and 2005 lentil expansion.
Effects on Prices
Dry Peas-Marketing loans for dry peas had a negligible
impact on world prices during 2003-2005, according to a simulation
model adapted for this study. Critical factors in determining this
result include the small U.S. share of world markets, the share of
U.S. producer revenue attributable to marketing loans, and
inelastic supply and demand elasticities. Model results showed that
marketing loans contributed to a reduction in the world price of
0.33-0.55 percent in 2003, depending on the demand price
elasticity, and had an even smaller impact in 2004 and 2005.
Lentils-The effect of marketing loans on the world price
of lentils in 2003 was likewise minimal, and was virtually zero for
the 2004 and 2005 lentil crops.
Effects on Exports
Dry Peas-Marketing loans have had a minor impact on the
volume of U.S. exports of dry peas, increasing exports by at most
1.8 percent in the 2003 crop year, with a smaller estimated impact
in 2004 and 2005.
Lentils-Marketing loans for lentils are estimated to have
led to an increase of 2.2 percent in exports in 2003, with no
impacts found for 2004 and 2005.
Effects on Trade with Canada
U.S. dry pea and lentil exports to Canada have increased
substantially since 2003. However, these increases were largely
attributed to factors other than U.S. marketing loans (such as the
stronger Canadian dollar). The direct impact of U.S. marketing
loans on Canadian imports of U.S. dry peas and lentils has been
negligible.
Long-term Trade Effects
The study's assessment of future effects of marketing loans on
the U.S. dry pea and lentil industry is dependent on certain
conditions:
Dry Peas-Growth of the U.S. dry pea trade will depend on
whether sustainable feed markets can be developed in the United
States to absorb the additional production. Any increase in feed
markets, in turn, will depend on a consistent supply of dry peas
for use as feed. Until a larger domestic market for dry peas is
assured, the dry pea industry will continue to rely on export
markets to sell any production growth induced by marketing
loans.
Lentils-While lentils are used primarily for human food,
conditions similar to those for dry peas apply to the development
of a larger domestic market.
How Was the Study Conducted?
This analysis is based on an acreage response model, which
treats the acreage response for dry peas and lentils, along with
spring wheat, durum wheat, barley, and other minor field crops, as
a system of acreage allocation decisions. The model consists of
four acreage share equations for dry peas, lentils, spring wheat
(including durum), and barley, which are estimated using pooled
time-series (1997-2005) and cross-sectional (four States) data.
Expected net returns include a nitrogen credit generated by
(nitrogen-fixing) dry peas and lentils used in a rotation with
grains.
Estimated impacts of marketing loans for dry peas and lentils on
world prices are based on an adaptation of a simulation model. U.S.
supply elasticities and shares of revenues from marketing loan
benefits are taken directly from the acreage response analysis. The
simulation model is cast in an ex ante context, based on the
expected grower price and expected marketing loan benefits.