Abstract
This paper conducts a comprehensive analysis of the agricultural sector’s resource allocation and production decisions. This paper uses the differential systems with quasi-fixity to evaluate the complete agricultural production system, which examines the input and output linkages in terms of elasticities. The differential systems are estimated using the maximum likelihood estimation technique based on the two-step profit-maximizing procedure in theory. The results reveal that livestock production requires more intermediate inputs, but crop production depends on all the inputs, such as labor, capital, and intermediate inputs. In addition, the results show that input demand is inelastic, indicating that the agricultural sector has little flexibility in adjusting the demand for inputs in response to changes in input prices. Substitutable relationships among labor, capital, and intermediate inputs exist, which may reduce the pressures on production costs when input prices rise. Regarding the quasi-fixed input, land expansion changes the composition of labor and intermediate inputs, showing that the agricultural sector reduces the intensive margin when it pursues the extensive margin. Furthermore, the results show that agricultural supply is not very responsive to the respective price changes. Along with the inelastic output supply, there exist substitutable relationships between livestock and crop supply, showing that relative price changes can alter output composition in supply. The agricultural sector also reallocates more land areas into crop production rather than livestock production.
Highlights
According to the Food and Agriculture Organization (FAO), the food price index increased by about 121%, from 91.1 in 2000 to 171.6 in 2018, hitting 229.9 in 2011
The differential input demand system was estimated by dropping the equation for intermediate inputs, while the differential output supply system was estimated by dropping the equation for crop outputs
The estimation results of the input demand system showed that livestock production required more intermediate inputs, but crop production depended on all the inputs, such as labor, capital, and intermediate inputs
Summary
According to the Food and Agriculture Organization (FAO), the food price index increased by about 121%, from 91.1 in 2000 to 171.6 in 2018, hitting 229.9 in 2011. The surge in food prices has raised concerns about the issues of food security and hunger because high food prices negatively affect low-income consumers in developing and developed countries. The increased food prices could threaten food security, thereby reducing food accessibility and could increase hunger, causing inadequate nutritional outcomes [1,2,3,4,5,6,7,8,9,10]. Given that a rise in agricultural commodity prices translates into an increase in food prices, the current high food prices are attributable to a combination of shocks to the supply and demand systems in the agricultural sector. While rising production costs and slowing growth in agricultural production have put pressures on agricultural commodity prices, growing demand for agricultural commodities and biofuels have reinforced high price levels [11,12,13,14,15]
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