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Supply response parameters in New Zealand agriculture : a literature search

Wood-Belton, Mary
Lattimore, Ralph G.
Discussion Paper
Fields of Research
Over the last twenty years there have been a number of studies carried out of agricultural supply response in New Zealand. The parameters estimated in these studies are an essential ingredient in a wide variety of policy and forecasting studies. One example of such work is the study currently being carried out at the O.E.C.D. (Organisation for Economic Cooperation and Development) to examine the medium term impacts of multilateral adjustments in agricultural protection policies. Of necessity these studies involve the simultaneous examination of changes in production, consumption and trade for a number of countries for a range of major agricultural commodities. The countries include the E.E.C., United States, Japan, other Western European countries, Canada, Australia and New Zealand. The O.E.C.D. has developed a framework with which to carry out the analysis. From New Zealand's perspective the major products involved include beef, wool, sheepmeats, dairy products and grain. These are generally exportable products as far as New Zealand is concerned. If protection in these products was reduced by importing regions, domestic prices around the world would be reduced because export supply functions from countries like New Zealand are elastic. The responsiveness of New Zealand's export supply in turn, depends upon the elasticities of New Zealand's domestic supply and demand. These are complex relationships that have important time, regional and quality dimensions. There are limits, however, to the extent to which these dimensions will be incorporated into the multi country, multi product model. The analysis will explore the impacts of trade policy changes from a medium term perspective. For this reason, the review of past studies focuses on medium term supply response parameters. The approach being used by the O.E.C.D. adopts an overall perspective of the agricultural sector in each country involved. This aggregate view of the sector is still a partial equilibrium approach in that factor and product market relationships with the rest of the economy are not included in a detailed fashion. Nevertheless, the aggregate sector view does require that the supply response parameters are consistent in the sense that they respect intermediate usage of agricultural products between subsectors within agriculture and that the total output supply response respects the supply response of primary factors. The first set of relationships is particularly important in countries where a high proportion of grain output is fed to livestock. The second is important where the availability of land and land sowing technology are major constraints in the medium term. Most previous supply response studies in New Zealand have been done on commodity lines and encompass a limited set of possible products. In surveying this literature there is a concern that response parameters selected may be biased in relation to the sector wide model which underpins the O.E.C.D. framework. One approach that can be used to overcome this problem is to select parameters from individual studies subject to overall sector restraints imposed by economic theory. Zeitsch (1985) has surveyed these restrictions on supply elasticities. In the case of New Zealand, it is not appropriate to assume that the supply of farm land and land saving technology is fixed and so the homogeneity condition derived from Diewert (1974) is not used in this survey. Furthermore, grain production and feeding is not a major activity for dairy, beef and sheep production. The second section of this report and Appendix 1 consists of the review of selected past studies at the national level. The third section contains a selection of these parameters for medium term policy forecasting purposes.