Case of inelastic demand for agricultural commodities

The price of internationally traded agricultural commodities, such as corn and cotton, is determined according to international demand and supply. Neglecting transportation costs and quality differences, the assumption of price-taking behavior is appropriate for most regions in the world. Yet, there are likely to be situations where commodities, especially food staples, are primarily produced for local consumption within a region. This may occur in regions with high transportation cost to major markets or low degrees of integration to the global economy for other reasons. These regions are not likely to be served by monopolistic seed companies but, rather, by small companies or direct provision of seeds by public extension programs. When GMVs are introduced in these situations, then the output price effect may be significant.

Suppose the demand for output at location j is Xj = Z^/J.j, where Pj is output price in region j. The initial equilibrium with traditional variety j consists of acreage A-, output A?}-, and price J?. These values are determined solving simultaneously the equilibrium condition in the output market, = D in inverse demand); the equilibrium condition in the land market PjMcj, and the production function X° =

Suppose GMVs are sold by small seed companies (or distributed by extension programs) at price V-. Let be output price under competition when GMVj is introduced. The equilibrium conditions in this case determine output price P™1, total output X"'\ total acreage //,., and acreage with GMVp Af.

A procedure that can yield the equilibrium value consists of using the formulas we developed to obtain A"a, Ap and X'f for cases of fixed output prices for a range of plausible values of P"1. Pf" will clear the output market, so that PJX = D~x[x"f^ is the equilibrium output price. The equilibrium price Pf also establishes acreage level A® solved from

P^MPj^A^ J = Mcj, which is the amount of land that would have been utilized if the initial price was Pi"1. Since the GMVs are assumed to increase yield, it can be shown that their adoption (even partially) will increase supply and, with negatively sloped demand, P™ <P°, which implies that A® < A°. Thus, in the case of partial adoption, when the total acreage A1 = A°, adoption of GMV¡will reduce acreage. There may be cases of reduced acreage even in cases of full adoption.

The reduction in output price associated with the introduction of GMVj will lead to increases in consumer surplus, denoted by ACS™, xf

The change in net social benefit becomes

NCbf = ACS™ + Pfxf - P°X°j - AjWj - [A] - A°j]McJj - F}

While consumers will gain from the introduction of GMVj, the impact on farmers is mixed. They produce more, yet receive a lower price. They may plant fewer acres but have to pay a technology fee.

The case with inelastic demand suggests that the introduction of GMVs to a location by the public sector may raise social welfare, reduce farmed acreage (and thus may improve environmental conditions), and improve consumer well-being but not necessarily help farmers.

The analysis of the impact of introducing a generic GMV is similar to that of introducing a modified local variety to location j. The generic variety, with its lower yield effect, will have less of an impact on output prices and may lead to a smaller reduction in acreage. Its introduction may benefit farmers more than the introduction of GMVj and, thus, the introduction of a GMVj will benefit consumers more. The likelihood of introducing GMVj increases, the smaller the fixed costs to modify variety j and the variable cost to produce GMVj seeds.

The analysis of the public sector-led scenario is useful to provide some intuition about the private monopoly case, when demand for output is negatively sloped. Private companies that introduce new GMVs globally are aware of the output price effect of the new innovation and its impact on their sales and revenue. We do not analyze the choices formally here but, rather, compare the outcomes when technology is provided by an idealized public sector that maximizes global welfare, versus when it is provided by a monopolist. Under the monopoly, we expect low rates of adoption and, thus, lower aggregate output, and a higher output price. The profit of the monopolist is likely to be less than the aggregate social welfare that also includes consumer and farmer surplus. Thus, the monopolist will not introduce GMVs in some cases where they would have been introduced by the public sector. Furthermore, since generic varieties have a lower yield effect and lower fixed costs, the monopolist is more likely to introduce the generic varieties than modify local ones.

The decision of whether or not to introduce a GMV at a location depends both on expected productivity gains as well as the fixed costs of introduction. Reduction in the costs of introduction, due to improved efficiency of the breeding sector or a decrease in the regulatory costs, is likely to increase introduction of GMVs in general and modified local varieties in particular. In some cases, there may be substantial costs to the public sector to introduce the technologies because of domestic capacity limitations. Then, the private sector may introduce a GMV, even though the private benefits are smaller than the public benefits. In other situations, low private benefit and high costs of introduction by the public sector may prevent the introduction of a GMV to a region. In these situations, if the public benefits of the GMV are sufficiently high, it may be introduced eventually as a result of policies that will enhance the capacity of the public sector and reduce its technology introduction costs.

0 0

Post a comment