The effect of macroeconomic factors on the well-being of a representative midwestern crop and livestock farm
Abstract
Changes in monetary and fiscal policy in the United States in the late 1970s and early 1980s along with declines in the value of agricultural assets in the early 1980s has refocussed attention on the effects of macroeconomic factors on agriculture. Recent studies have looked at the effect of macroeconomic factors on the farm sector through the effect of macroeconomic factors on exchange rates. Others have incorporated the effects of changes in interest rates and inflation on the capital structure of the sector. This study examines the effect of macroeconomic factors on firm well-being. Specifically, this study: (I) Determines the effect of macroeconomic factors on real corn, soybean, hog, and input prices; and (II) determines how these changes in input and output prices affect the well-being of the farm. To accomplish these objectives, the study uses a vector autoregression to examine the effect of macroeconomic factors on agricultural prices and the effect of the change in macroeconomic environment. Next the study uses the results of the vector autoregression in a discrete stochastic programming model to determine the effect of macroeconomic factors on firm well-being. In general, agricultural prices respond to changes in macroeconomic factors. Real corn, soybean, and input prices decrease with a decrease in the deficit while real hog prices increase with an increase in the deficit. Increases in money supply and higher inflation, on the other hand, cause the real corn, soybean, and input prices to increase while the real hog price declines. Further, the shift in macroeconomic environment in October 1979 caused lower grain prices and higher hog prices. Expected terminal wealth, farm well-being and annual income rise as the deficits increase or the growth in money supply slows. The exception to this rule is where the decision maker is extremely risk averse. Given a relative risk aversion of 10.0, the certainty equivalent is the lowest for average growth in money supply.
Degree
Ph.D.
Advisors
Baker, Purdue University.
Subject Area
Agricultural economics
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