Academic journal article Journal of Agricultural and Applied Economics

Dynamic Adjustment of U.S. Agriculture to Energy Price Changes

Academic journal article Journal of Agricultural and Applied Economics

Dynamic Adjustment of U.S. Agriculture to Energy Price Changes

Article excerpt

Energy prices increased significantly following the first energy price shock of 1973. Agricultural producers found few short run substitution possibilities as relative factor prices changed. Inelastic demands resulted in total expenditures on energy inputs that have closely followed energy price changes over time. A dynamic cost function model is estimated to derive short and long run adjustments within U.S. agriculture between 1948 and 2002 to changes in relative input prices. The objective is to measure the degree of farm responsiveness to energy price changes and if this responsiveness has changed over time. Findings support inelastic demands for all farm inputs. Statistical results support moderate increases in responses to energy and other input price changes in the 1980s. However, demands for all inputs remain inelastic in both the short and long run. Estimation of share equations associated with a dynamic cost function indicates that factor adjustment to input price changes are essentially complete within 1 year.

Key Words: dynamic cost function, energy prices, U.S. agriculture

JEL Classifications: Q11, Q41

Energy markets are important to agriculture. Energy prices affect agricultural production costs directly through fuel and energy use and indirectly through the employment of farm inputs such as fertilizers and chemicals that rely on energy in their manufacturing. Total U.S. direct farm expenditures on fuels and energy totaled $11.4 billion in 2004, comprising 8.4% of purchased inputs (U.S. Department of Agriculture, Economic Research Service (USDA ERS), Farm Income Dataset). Fertilizer, lime, and pesticide expenditures amounted to $19.9 billion, or 14.7% of total intermediate input expenses. The combined purchases of these energy-intensive manufactured inputs exceeded $32 billion in 2004, or about 23% of all purchased inputs.

The demand for direct energy inputs is price inelastic (Miranowski, 2005). Consequently, when energy prices increase, shocks may be absorbed by farmers having limited opportunities to substitute other factors as relative prices change. Total real farm expenditures on energy-related inputs have thus closely followed fuel and energy price changes from 1948 to 2005 (Figure 1). Nominal energy prices were stable during the 1950s and 1960s, though real prices declined over the period. Real expenditures were stable over this period, with increases through the mid 1960s perhaps associated with rapid mechanization of farm production in response to increases in the cost of labor relative to other inputs (Gardner, 2002). However, prices and volatility increased substantially following the first energy price shock of 1973. Nominal fuel and power prices increased 486% from 1972 to 1981 (U.S. Department of Commerce, Bureau of Labor Statistics, 2004), while U.S. farm expenditures on fuels and power increased 415% over the same 10 years (USDA ERS, Farm Income Dataset, 2004). The correlation between annual prices and expenditures was 0.98 over these 10 years, lending descriptive support to Heady 's estimate in 1978 that a 200% increase in energy prices would reduce energy use in agriculture by only 4% (Heady, 1984).

The purpose of this research is to measure responses to changing energy prices in U.S. agriculture. Given significant changes in energy markets since the first price shock of the early 1970s, we seek econometric support for possible changes in both input use and factor substitution possibilities over the past 50 years. A dynamic dual cost function is used to determine the rate of adjustment to factor price changes in U.S. agriculture and to identify if changes in factor use over the 1948-2002 time period have occurred.

Time series analysis strongly supports a structural break in energy markets coincident with the 1973 oil shocks resulting from supply disruptions associated with the 1973 Yom Kippur War and subsequent cessation of oil shipments by Arab countries of the Organization of the Petroleum Exporting Countries to countries supporting Israel in that conflict (Perron, 1989). …

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