A commodity specific policy simulation model for U.S. agriculture

Abstract

The objective of this study was to develop a commodity-specific policy simulation model emphasizing commodity production and marketing relationships, input demand, and financial stocks and flows which could be incorporated into an existing macroeconomic model of the U.S. economy. A review of previous agriculture policy modeling efforts revealed one or more of the following major shortcomings: (1) no consideration of financial and physical stock formation or financial flows, (2) linkages between crop and livestock production either weak or nonexistent and (3) the linkages between agriculture and general economy either ignored or recursive. The model developed herein reflects the behavioral assumptions that farmers and processors maximize expected profit and that consumers maximize utility subject to a budget constraint. Total output for individual crops is determined by acreage and yield response equations. Market prices are endogenously determined. Equations are incorporated which account for the options available to the federal government when the free market price is lower (higher) than the announced government support (release) price. The major crops individually modelled include wheat, cotton, corn, sorghum, oats, barley, and soybeans. For livestock, current desired breeding stocks drive available supply in subsequent periods. The interaction of supply and demand at wholesale and retail levels determine market prices. Livestock commodities receiving individual attention include cattle, hogs and milk. Once the model has been estimated, it is solved using the Gauss-Seidel algorithm. This model was used to investigate the potential impacts of (1) alternative growth rates for aggregate demand on agriculture, (2) the payment-in-kind (PIK) program, and (3) holding milk payments constant in real terms. Simulated results indicated a positive relationship between total farm assets and the growth of the economy. Net farm income, however, was negatively affected due to adverse shifts in the prices farmers pay relative to those they receive. Simulation results analyzing the PIK program showed that the high participation rate in the 1983 crop year will reduce government stocks substantially, which should keep prices low. If the program is extended through 1984 and participation remains high, government stocks would decrease to their minimum acceptable levels which will place strong upward pressure on prices and net income. Finally, this study showed that the price support level for milk was set too high in 1980 and will government stocks to reach record high levels by 1984. It was also shown that if the price support had been frozen in 1979, it would have still taken three to four years before government stocks could be absorbed by domestic demand.