Elasticity Subgroup: Response to Requests and Queries from Last Meeting

1. Elasticity Subgroup:Response to Requests and Queries from Last Meeting

2. Issues/Questions • Address/respond to issues raised in presentation by Steve Berry (yield response to price) • Should unmanaged land be added to the CET function model structure and if so, how? • Look at issue of Armington trade elasticities in GTAP and the effect on LUC results. • Discuss/determine which time frame is represented by various elasticity values – is the model consistently looking at a short, medium, or long run response • Considerations on the range of elasticity values to use in sensitivity analyses

3. Steve Berry’s Issues • Substantial weight should be put on a GTAP run that assumes zero net yield growth. • There is some intellectual argument for higher yield elasticities, and some weight might also be put on GTAP runs that assume moderate yield gains. • Roberts and Schlenker find no evidence of a strong price-yield response • Keeney and Hertel’s average value of 0.25 based on authors who did not account for simultaneous equations bias in their estimates

4. Suppose price-yield elasticity in short-run is 0.15 • 10% anticipated price increase would lead to a 1.5% increase in yield • 20% anticipated price increase should lead to a 3.0% yield increase • Should we be able to pick out this yield change amid weather impacts?

5. Kansas Wheat Yield Fluctuations

6. U.S. Wheat Yield Fluctuations

7. U.S. Soybean Yield Fluctuations

8. Price vs Weather • If a short-run positive price-yield relationship exists, to find it and measure it would require • A good model of how weather affects yield • A good model of what price farmer’s use in deciding on inputs • Cross-nation comparisons need farmers in each country responding to the same prices with the same choice sets available

9. Medium-Run Analysis • Higher sustained prices should increase weather adjusted yield trends. • Have U.S. yield trends increased since 2006? • If so, is this attributable to high prices or a better supply of technology? • How to differentiate?

10. Roberts and Schlenker (Cited by Berry) • Prices are highly serially correlated while yields are not • But we know that weather variations are mostly independent across time and are much larger than any reasonable short-run yield response to price • Prices are set in a world market for crops, but the cross-country spatial correlation of yields is low. • If there exists a price-yield response, then countries responding to the same price signal both adjust yields

11. In three of the cross-country comparisons, China is used from 1961 to 2007

12. China’s agriculture • Isolated from world markets before the 1980s • Slow integration since then • Complex system of tariffs and tax differentials need to be accounted for to find out real price transmission

13. Reasons for Positive Price-Yield Response • Farmers can control yields to some extent through choice: • Scout for pests? Control any found pests? • Test for soil fertility and adjust fertilizer rates? • Which seed variety to plant? • Which field to devote to which crop? • Farmers trade off costs of taking action against the value of higher average yield. The likelihood that the value of higher yield exceeds cost depends on the level of output price. • Difficulty arises in measuring relationship between price and yield because we do not measure farmer actions • Difficult to conduct cross-section analysis because farmers in different regions face essentially the same price.

14. Short vs Long-Run • Roberts and Schlenker’s analysis give short run (one year) total supply elasticities: 0.08 to 0.13 • Long-run supply elasticities will be much larger • Cross-section analysis suggests forest supply elasticities will be quite large (0.25 to 0.52 with regional values as high as 1.5) • Thus long-run elasticities likely consistent with a long-run yield elasticity of 0.25 particularly if double-cropping is accounted for

15. Reliance on Natural Experiments • Change in farm policy • EU CAP reform phased in over many years lower intervention prices • U.S. tobacco policy • China free market reforms gave incentive to intensify production

16. U.S. Movement Away from Paying for Tobacco Yields Dropped Yields by 12%

17. Problem with Schlenker and Roberts • Wanted to rule out price yield correlations because they used yield shocks to correct for simultaneity bias in their supply and demand analysis • If a small price yield relationship exists, then their method of finding it has low power

18. Simultaneous Equations Bias • Cannot tell from data on price and quantity which is the demand curve and which is the supply curve • Need to trace out a supply curve with movements of the demand curve • Steve Berry is correct. • But Huang and Khanna (2010) correct for simultaneous equations bias and find a positive price-yield relationship.

19. Should unmanaged land be added to the CET function model structure and if so, how? • GTAP includes unmanaged forest land that is accessible to supply timber but no inaccessible timberland • Could add inaccessible land in the future if important in estimating the amount of land converted to cropland • But only a small fraction of convertable land was actually converted in GTAP runs • Would it make a difference?

20. Look at issue of Armington trade elasticities in GTAP and the effect on LUC results • Armingtontrade elasticities were estimated by Hertel et al. (2004) • Almost any short-run trade flow analysis will indicate stickiness in trade flows • FAPRI has no country-to-country trade flows • Solves for a single world price • Difference between FAPRI and GTAP really a function of underlying model • How else would it make sense for FAPRI to have a single world price? • GTAP based on estimated trade elasticities • If you use GTAP, should use the best esitmates of these trade elasticities

21. Elasticity Time Frame • Medium (3 – 5 year) to long-run (5 to 10 year) elasticities are being used • CET transformation elasticity based on five year data intervals • Crop yield elasticity of 0.25 likely more consistent with longer than one-year response to higher prices • Net primary productivity shows yield potential of land after investments have been made

22. Considerations on the range of elasticity values to use in sensitivity analyses • Elasticity of price yield • Zero is not consistent with reality of how farmers make decisions (otherwise the costs of yield improvements infinitely large in long run) • Large elasticity not apparent in any data • 0.25 is likely too high if double cropping were allowed by GTAP (but it is not) • This elasticity likely varies a lot across countries and crops • If 0.25 central point, use 0.1 to 0.4? (Likely misses reality on both ends in the long run)

23. Considerations on the range of elasticity values to use in sensitivity analyses • Elasticity of area expansion • Varies across countries already • Unlikely that systematic upward or downward bias exists (if so then it should be incorporated into the model) • No basis for either increasing or decreasing model estimates for each AEZ by the same amount

24. Considerations on the range of elasticity values to use in sensitivity analyses • Elasticity of land transformation • Current value is calibrated to U.S. data • Likely not the best estimate for countries with either higher or lower land availability • Best to give spatial variability to this parameter, but lack of data makes this quite difficult • Increasing or decreasing it by 0.1 reveals how the model uses this parameter, but it gives no additional insight into how the world will actually respond to crop price increases