Export Demand Elasticity Estimation for Major U.S. Crops
Reimer, Jeffrey J., Zheng, Xiaojuan, Gehlhar, Mark J., Journal of Agricultural and Applied Economics
Elevated prices for major U.S. commodities have renewed interest in the price sensitivity of foreign demand facing the United States. Although the elasticity of foreign demand plays an important role in discussions of U.S. farm policy, it is also a parameter that is much debated with the majority of studies in this area published over 20 years ago. We provide new estimates of the elasticity of export demand for U.S. corn, soybeans, and wheat using updated data and empirical techniques. Our estimates are useful for practical policy analysis as well as for researchers seeking to parameterize large-scale simulation models.
Key Words: agricultural trade, demand, exports
JEL Classifications: F14, Q17, Q18
The elasticity of export demand held for U.S. agricultural products is critical for understanding the impacts of changes in farm policy (Gardiner and Dixit, 1987; Carter and Gardiner, 1988). In the past, this elasticity has been called an "elusive but highly important parameter (that) has been neglected too long" (Tweeten, 1977). This description remains relevant today. In this study we define the price elasticity of export demand as the percentage change in exports associated with a 1% increase in the U.S.' internal price. Export demand refers to the summation of all importer excess demand functions less the summation of other exporters' excess supply functions. If export demand is elastic, then U.S. exports may fall dramatically if the U.S. introduces policies such as the ethanol mandate and land retirement programs that are likely to support its commodity prices. If export demand is inelastic, on the other hand, such policies could actually serve to strengthen U.S. export revenues.
The magnitude of the elasticity of export demand has long been debated and continues to be in need of a firmer empirical foundation (Magee, 1975; Gardiner and Dixit, 1987; Carter and Gardiner, 1988; Miller and Paarlberg, 2001). Different groups of agricultural policy researchers have very different understandings of the magnitude of export elasticities, which in turn conditions agricultural policy analysis. Within the U.S. Department of Agriculture (USDA), the view on the size of the elasticity of demand for U.S. crop exports has changed over the last several decades. In the 1970s the prevailing view may have been that export demands are inelastic, whereas in the 1980s, they may have been viewed as relatively elastic. During the 1985 farm bill debate, for example, it was assumed that export demand elasticities for U.S. farm products were greater than unity in absolute values (i.e., elastic). Based on this assumption, the loan rates for wheat, feed grains, soybeans, cotton, and rice were lowered on the premise that lower loan rates would lead to a decline in export prices and an increase in the volume and value of U.S. exports of these commodities (Devadoss and Meyers, 1990). At present, the elasticity of demand for U.S. crop exports may be viewed as being inelastic, that is, closer to the perception of the 1970s (Paarlberg, 2009).
In this study we attempt to resolve this issue by bringing new econometric evidence to bear on the elasticity of demand for U.S. exports of three major crops: com, soybeans, and wheat. Our primary objective is to provide both short-run and long-run estimates of the export demand elasticity facing U.S. producers of com, soybeans, and wheat. Secondary objectives are to understand how these elasticities may have changed over the last three decades and to reconcile some of the disparate results that are currently in the literature. The long-run estimates will tell us how much export demand will contract in the long run (e.g., after more than 1 year) if there is a 1% increase in price today. The elasticities are partially influenced by changes in exchange rates, global market structure, policy, technological change, and commodity differentiation. Although any of these may influence the degree of international price competition and buyer behavior, detailed analysis of these underlying factors is beyond the scope of this study. …