The influence of stochastic shocks, the macro-economy and policy on the agricultural system

Abstract

The food and agricultural system is often affected by external events beyond control. These include: (1) stochastic shocks, such as weather extremes or transportation system disruptions; (2) fluctuations in the state of the macro-economy, such as changes in income growth and inflation rates and (3) variations in government policy, such as the creation or dissolution of grain reserve programmes. This paper systematically analyses the effects of these influences using a multivariate dynamic, reduced-form transfer function model of the food and agricultural system. Simulation results show that stochastic shocks and changes in macro-economic variables have a substantial impact on food prices and consumption, farm prices and production, as well as on net farm income. In addition, government programmes are shown to have realised their design goals of enhancing net farm income and supporting agricultural commodity prices.