Measuring Foreign Supply Response to Changes in U.S. Prices: An Argentine Example

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1986-05-01
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Westhoff, Patrick
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Center for Agricultural and Rural Development

The Center for Agricultural and Rural Development (CARD) conducts innovative public policy and economic research on agricultural, environmental, and food issues. CARD uniquely combines academic excellence with engagement and anticipatory thinking to inform and benefit society.

CARD researchers develop and apply economic theory, quantitative methods, and interdisciplinary approaches to create relevant knowledge. Communication efforts target state and federal policymakers; the research community; agricultural, food, and environmental groups; individual decision-makers; and international audiences.

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The paper proposes a method to measure foreign supply response to changes in U.S. prices and applies the method to Argentine field crops. Argentine export taxes and marketing margins are endogenized, and price transmission elasticities are calculated. Total area harvested is a function of weighted farm prices, and crop shares are a function of relative prices.

One important concern during the course of debate on the 1985 Farm Bill was how farmers in other countries were likely to respond to changes in U.S. Policies. Those arguing for policies which would reduce commodity prices contended that lower prices would be a major disincentive to foreign production. On the other hand, those favoring price-increasing policies contended that little additional foreign production was likely to result from higher prices.

This paper will outline a method to measure foreign supply response to changes in U.S. commodity prices, and the approach will be applied to the case of Argentine field crops. It will be argued that the proper measurement of foreign supply response requires consideration of the likely response o foreign governments, traders and farmers to changes in world prices. The model developed here links U.s. and Argentine farm prices, and allows for cross-commodity effects.

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Wed Jan 01 00:00:00 UTC 1986
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