SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS
JULY, 1973
THE USE OF EXTRANEOUS INFORMATION IN THE
DEVELOPMENT OF A POLICY SIMULATION MODEL
DaiyllE. Ray
A number of highly aggregated policy simulation
models have been developed for the U.S. agricultural
sector. While these models are useful in providing
broad-stroke sketches of the effects of alternative
farm policies, they have been criticized for their lack
of commodity detail. Individuals, organizations and
congressmen from a cattle producing state, as an
example, are more interested in the impact of a
changed agricultural policy on cattle prices and
incomes than its effect on the income of all farmers.
The reason most often given for not disaggregating by
commodity groups is the researcher’s reluctance to
quantify opportunities for substitution among
commodities in production and consumption.
However, there may be more agreement on the
relative magnitudes of supply and demand elasticities
for individual commodities than the price elasticities
of supply and demand for all farm output. Hence, a
disaggregated model may distort reality much less
than a highly aggregated model and at the same time
provide detail on indirect effects of proposed policies
that is so often sought by policy makers.
Considerable information is available on direct
and cross demand elasticities for agricultural
commodities. The degree of methodological
sophistication ranges from monocausal least squares
estimates to elaborate models that provide large
matrixes of direct and cross demand elasticities such
as developed by Brandow [3] and more recently by
California researchers [9]. While the repertoire of
direct and especially cross supply elasticities for
specific commodities is much smaller, estimates are
available for a number of crops.
In addition to the price response parameters,
nonprice related shifts in commodity supplies and
demands must also be quantified in the development
of a simulation model. The United States Department
of Agriculture periodically projects commodity
requirements and supplies for a number of years into
the future. The considered judgment of commodity
speciahsts is used in conjunction with sophisticated
and naive models to analyze and project supply and
demand levels for each commodity in an equilibrium
framework. These projections are presumably
superior to piecemeal or highly aggregated projections
made by individual model builders. Estimates for
years prior to the projection period can be made by
interpolating between the last actual observation on
the variable and the projected level for the future
date which in this study is 1980.
The objective of this study is to develop a
partially disaggregated policy simulation model based
on supply and demand elasticities synthesized from
previous studies and USDA supply and demand
projections for 1980. Commodity groups included in
the model are feed grains, wheat, soybeans, cotton,
cattle and calves, hogs, sheep and lambs, chickens,
turkeys, eggs and milk. The resulting model is used to
estimate the impacts of alternative agricultural policy
programs on an individual commodity production,
price and income levels and on total farm incomes.
The results of a free market policy are presented in
this paper.
MODEL DEVELOPMENT
The projected commodity supply and
distribution levels reflect the influence of two major
sets of variables; changes in supply and demand
shifters and changes in relative prices. Changes in
population, national income, consumer preferences
and technology are largely independent of happenings
in the agricultural sector. Given the values of the
shifters, it is the interaction of supply and demand
Daryll E. Ray is assistant professor of agricultural economics at Oklahoma State University.
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