Government price policy, output price uncertainty and measurement of agricultural productivity

This research examines the effects of government price policies on agricultural productivity and its measurement under price uncertainty. A link is established between productivity and price policy through producers' price expectations and risk attitudes. For risk averse farmers with non-constant returns to scale technology, government price policy affects price expectations and production plans, and therefore scale efficiencies. The first part of the research develops a model explaining prices of commodities, accounting for government price policy variables, to estimate the first two moments of a probability distribution for prices. In the second part, a cost-supply system derived from farmers' expected utility maximization is then constructed. Cost efficiency changes are measured and decomposed into two components: (1) changes due to technology improvement, and (2) changes in scale efficiency due to variations in price expectations and variance-covariances. Finally, the effects of price policies on productivity are evaluated.; A two-output (corn and soybean) three-input (labor capital and intermediate input) cost system of equations derived from cost minimizations is estimated using data from records of central Illinois grain farms. Results show that cost efficiency improves in most sample time period (at an average rate of 3.3% per year from 1948 to 1989). The technical change has a major contribution to the productivity growth (average rate of 2.8% for the small farm, 5.4% for the large farm). The risk component of scale efficiency changes, resulting from variation in expected prices, contributes an average rate of 0.25% to the total productivity growth.; Expected corn price is strongly affected by corn support price. Expected soybean price is mainly affected by its previous year's market price. The variations of the previous year's soybean market price contribute a major part of its expected price variance in magnitude. Nevertheless, changes in the support prices of corn and soybeans increase price variances of both crops. In addition to relatively small scale efficiency changes in this data set (at an average rate of 0.7%), the small estimates of risk attitude coefficient (R1 = 0.000050, R2 = 0.000096) capture a smaller portion of that growth resulting from price variance-covariance changes caused by government price policies. Evaluated at sample means, the elasticities of the risk components with respect to corn and soybean support price changes are 0.16 and 0.50. These numbers indicate that the effects of a small change of the support price on productivity may be negligible.