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An econometric analysis of the demand for selected agricultural inputs in Oregon Public Deposited

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  • The objective of this study is to analyze empirically the demand structure for the following important farm production inputs in Oregon: hired labor, chemical fertilizer, farm machinery, repairs and operating costs of motor vehicles and other machinery designated as "machinery supplies," purchased feed and miscellaneous inputs. Twenty-year data (1950-69 except 1951-70 for hired labor) were analyzed with the aid of simple equation least-squares multiple regression techniques for all inputs. In addition, a simultaneous-equation model is applied to hired labor data. The demand for each input is predicted through 1975. This study indicates that hired farm labor employment depends heavily upon wage rates. Contrary to earlier national and regional studies, the short-run demand for hired farm labor in Oregon during 1951-70 was found to be elastic, -1.2 to -1.5 and -1.5 to -2.6 in the single-equation and the simultaneous-equation demand models respectively. This implies that if farm wage rates rise, the number of workers employed declines in greater proportion than the wage rate rise. Conversely, if wage rates fall the number of workers employed will increase disproportionately. The number of hired workers employed on Oregon farms declined by 40.6 percent (37 thousand to 22 thousand) between 1950 and 1970. A further 25 percent decline is projected by 1975. The demand for fertilizer and purchased feed are comparable in many ways. The demand for each is inelastic (-0.45 and -0.58) in the short-run, and moderately elastic (-1.05 to -1.35) in the long-run. The adjustment coefficient, which indicates the percent of the required adjustment that can be made in one year in feed or fertilizer purchases, in both cases are about the same--around 0.50. However, profitability of livestock enterprises as an independent variable (RL subscript [t]) is statistically significant in the demand equation for purchased feed, but profitability of farming as a variable (R subscript [t]) is not significant in the fertilizer models. Furthermore, fertilizer purchases continued to increase in spite of static or slightly decreasing crop prices. Although the input price variable is statistically significant in the demand models for both fertilizer and purchased feed, decreasing fertilizer prices have probably contributed heavily to the increase in the use of fertilizers in Oregon. If the past declining trend in the "real" price of fertilizer continues and other relationships do not change materially, there will be a 43 percent (381.8 thousand tons to 547.5 thousand tons) greater consumption of fertilizer in Oregon over the next six years. Based on past experience, such an increase is undoubtedly within the capability of the fertilizer industry to meet the requirement. The expenditure for purchased feed is projected to be 9 percent greater in 1975 than in 1969 in terms of constant 1957-59 dollars. The increase becomes 25 percent when expressed in terms of what feed prices are expected to be in 1975 dollars. Unavailability of data on annual capital outlay for the purchase of machinery and equipment by Oregon farmers is a serious problem in the estimation of the demand structure for farm machinery. However, annual inventories of machinery and equipment on Oregon farms is used as a substitute variable. The analysis indicates the demand for machinery and equipment inventories to be inelastic. The demand for "machinery supplies", a variable with considerable complementarity with machinery and equipment inventory, was also found to be inelastic. A 10 percent increase in the price of farm machinery or price of "machinery supplies" is associated with a 4.5 percent decrease in the total machinery and equipment inventory, and a 6.3 percent decrease in "machinery supplies" purchased. The estimated elasticities may be biased due to high multi-collinearity problems in their demand models. However, the prediction ability of these models is undoubtedly good. It is expected that there will be a $32 million increase (1957-59 dollars) in the value of machinery inventories on Oregon farms by 1975 over the 1969 level. The increase is $104 million in 1975 dollars. The expenditure for repairs and operating costs of motor vehicles and other machinery (machinery supplies) are expected to be fairly constant during this period in terms of 1957-59 dollars. This peculiarity of increasing inventory of machinery and equipment in 1957-59 dollars and a constant expenditure for "machinery supplies" is judged to be due to the fact that the machinery inventory effect and the price effect seem to cancel out and maintain the constant expenditure for "machinery supplies." Prices of "machinery supplies" have tended to decline over the period of the study. The projection of expenditure for "machinery supplies" in terms of current dollars indicates a 12 percent increase by 1975 which is wholly accounted for by expected inflationary tendencies in the economy. In contrast to chemical fertilizer, purchased feeds, machinery and equipment inventories and "machinery supplies," miscellaneous inputs (interest, electricity, veterinary supplies and services, etc.) has a very high elastic demand. Due to the evidence of there being two distinct trends in expenditures for miscellaneous inputs, the data were analyzed on the basis of the two periods. The dummy variable approach developed by Damodar Gujarati fails to reject the null hypothesis of the discontinuity in the demand curve for miscellaneous inputs during the 1950-69 period at the 5 percent test level. The mean price elasticity of demand was found to be -1.22 for the period 1950-57 and -4.28 for the period 1958-69. Such a high elasticity is probably due to a strong complementarity between miscellaneous inputs and the increasing total agricultural plant size, and the substitution effect due to gradually falling relative prices of miscellaneous inputs. A 23 percent increase (1957-59 dollars) in expenditure for miscellaneous inputs is projected by 1975 compared to 1969. The increase in terms of 1975 dollars amounts to 46 percent: from $72.8 million to $106.4 million. It is anticipated that the information regarding the demand structure for farm production input factors discussed in this study will be useful to people involved in farm labor policy-making, and decision making in farm supply business firms, credit agencies and farming businesses in planning for the extension of their volume of operations in the next few years. The future demand for these farm inputs, among other factors, will largely depend on the trend of their "real" or relative prices. The projected amount of expenditures for these inputs in current dollars will be modified by any changes in the extent of inflationary tendencies in the economy.
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