An Econometric model for the Finnish egg industry

Markku Nevala

doi:10.23986/afsci.71928

Abstract

An econometric model for the Finnish egg industry was derived in this study to provide information concerning the impact of alternative price policies on the development of the egg industry for price policy analyses. The basic model specified in this study is an eight-equation model including distributed lag formulations and consisting of three different blocks. The basic assumption behind the model specification is that the price levels of eggs are mainly determined by the target price level (set up by the government) and the domestic market situation. Producers are assumed to respond to changes in the producer price of eggs and in the other factors influencing the profitability of egg production. The basic model was estimated on the basis of semiannual observations from period 1956-70. In addition, the stability of the coefficients of production equations in the model over the years was tested by using the stepwise regression method. The structure of the basic model was evaluated by means of deterministic simulations to gain some idea of the model’s ability to simulate the actual development of the egg industry. Both historical simulations and ex-post forecast simulations were conducted and the »goodness of fit» was tested by the use of Theil’s inequality coefficients and graphical examinations. The basic model was also used for analyzing the price policy pursued by the government in period 1956-70 in order to illustrate the type of analyses that can be conducted by the basic model. An alternative policy mix consisting of the target price system for maintaining the domestic market balance and the direct payment scheme for attaining the income target of producers was defined. Given the assumptions made in this study this policy mix would have been a more effective policy tool from the standpoint of society for attaining the policy goals than the target price system as implemented in that period. Similar conclusions can be also drawn from the results of the ex-post price policy simulations, in which the target price level was assumed to be used for adjusting the domestic egg production gradually to the domestic consumption. Also in this alternative the government was assumed to bear the burden of attaining the income target of producers in the system by the use of direct payments. However, we must point out that results depend on the assumptions necessary for computations of this type.

Highlights

IntroductionBackground to the Problem According to the total accounts of agriculture the value of annual egg production in Finland at the producer price level has somewhat more than quadrupled during the last two decades: from some 70 mil
Even though the structure of the basic model seems assessed on the basis of the test values computed in estimation stage to be rather plausible and even though many alternative specifications were tested, we cannot without further tests be certain, whether this model structure is a good instrument for assessing alternative price policy directions
We can evaluate the comparative effectiveness of policy alternatives I—3 and the actual policy in period 1971—74 by exploring the net savings to society associated with adopting hypothesized policy alternatives I—3 instead of the actual price policy, and which are presented in Tables 7.1 and 7.2

Summary

Introduction

Background to the Problem According to the total accounts of agriculture the value of annual egg production in Finland at the producer price level has somewhat more than quadrupled during the last two decades: from some 70 mil. Fmk in 1974.1 The growth in the total value is due to the fact that both the production volume and producer price of eggs has approximately doubled during this period. This kind of development has increased the relative importance of eggs within the agricultural production. Eggs accounted for some six percent of the total value of agricultural production in 1974, while the corresponding proportion in 1956 was some four percent

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Conclusion