LAWRENCE D. MCKINZIE, Purdue University


In 1955 Heady hypothesized that supply response for individual crops should be elastic. His hypothesis was based on the observation that nearly every farmer possess the necessary skill and equipment to choose between growing two or more alternative crops and that this choice would reflect the expected relative returns of the two crops. At the same time, Heady suggested that the response for agricultural output as a whole should be fairly inelastic given the difficulty of bringing new land into production. However, results of sixty years of econometric supply response work must be interpreted as measuring a rather low degree of price response. This evidence has generated the view that supply for individual crops is generally inelastic--a view that remains in sharp contrast with expectations based on economic theory and knowledge of agricultural production. This thesis represents an inquiry into this contradiction. Its argued that the high collinearity among prices, which is to be expected given a high degree of substitutability among crops, has caused empirical results to have been misinterpreted. Multicollinearity has led to the omission of most or all substitute prices from many studies. Omission of these relevant variables has biased the resulting own-price estimates toward the inelastic output effect. This argument implies a need for estimates of the entire system of price interrelationships in order to more fully understand the supply responses for individual crops. But, at the same time, this reasoning emphasizes the difficulty of obtaining such a system of estimates--a Catch 22 phenomenon. However, traditional econometric techniques are employed which result in a complete system of own- and cross-price interrelationships for eight major crop supplies in the U.S. Furthermore, by viewing crop supply response as a system, as opposed to individual equations, it is demonstrated that a deeper understanding of supply behavior is possible. If the relative price of any particular crop is higher or lower than some norm, the estimates imply major shifts for future production mixes. Subsequent adjustments then occur which work to bring the relative prices back toward their normal level. On the other hand, if all prices rise proportionately, little supply response is suggested.



Subject Area

Agricultural economics

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