An analysis of the interdependence of costs and prices and their effects on the agricultural sector

Abstract

In recent years the agricultural sector in New Zealand has been faced with rising input prices and apart from the commodity price booms in the 1973 and 1974 seasons, prices received have been insufficient to maintain an adequate level of reinvestible net farm income. This has resulted in static levels of agricultural output which from the nation's point of view is undesirable. Agricultural exports provide 80 percent of the country's overseas exchange, the bulk of which is used to purchase essential inputs for the secondary and tertiary sectors which are the principal sources of employment and domestic income. The existence of a viable agricultural sector is a pre-requisite to New Zealand's economic well-being, but at present low export prices have not been compensated for by an increased volume of pastoral exports, which coupled with rising import prices, has compounded the country's balance of payments difficulties.

To examine the impact of inflation on farm costs and prices received by farmers, a modified 24 sector inter-industry price model was used to quantify the effects of changes in wage rates and import prices on farm costs and prices received - the cost-price push. The effects of changes in export prices on farm costs, the export-demand pull, were also examined.

For the agricultural sector as a whole the model estimated that for a 10 percent general wage order the terms of exchange would move against the farm sector by 5 percent, while for a similar rise in import prices there was a 2 percent deterioration.

The major problem inherent in the use of the inter-industry technique is the assumption of constant coefficients. To test whether the estimates derived from a set of 1964-65 base coefficients would still be applicable, the model simulated a series of costs and prices for the period 1965 to 1973. Where possible these were verified against independent estimates such as the New Zealand Meat and Wool Boards' Economic Service index of prices paid by sheep farmers. On the whole the model estimates proved to be satisfactory, although over the last 3 years analysed the structural changes in the Dairy Industry became evident with the divergence of the model estimates from the independent series.

The broad assumption was made that wage rates and import prices were independent and the model was used to estimate the relative influences of wage rates and import prices on farm costs. These estimates were then used to determine the components of the net income transfer from the farm to the non-farm sector by way of higher priced inputs. In 1973 it was estimated that , relative to the 1965 base year, the income transfer associated with farm inputs for all sheep and dairy farms amounted to $172 million.

The model developed is considered to be a useful policy tool and it is suggested that its scope could be considerably widened by incorporating it with the conventional Leontief model which determines the levels of industrial output necessary to satisfy given levels of demand. However, the immediate problem facing users of the price model is to establish a more recent base and, from an agricultural policy point of view, the Department of Statistics' 44 sector matrix for 1965-66 would form an adequate basis to produce an updated matrix.