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Rising Fuel Prices and the Potential of Input Substitution in US Corn Production

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Authors Contact InformationOsei-Agyeman Yeboah Department of Agribusiness, Applied Economics & Agriscience EducationVictor ofori-Boadu Department of Agribusiness, Applied Economics & Agriscience EducationHunt, Lester, 1986, Energy and capital: Substitutes or complements? A note on the importance of testing for non-neutral technical progress, Applied Economics 18, 729-735.Saicheua, Supavud, 1987, Input substitution in Thailand's manufacturing sector: Implications for energy policy, Energy Economics 9, 55-63.Thompson, Henry, 1994, Do oil tariffs lower wages? Open Economies Review 5, 191-202.Thompson, Peter and Timothy Taylor, 1995, The capital-energy substitutability debate: A new look, Review of Economics & Statistics 77, 565-569.Rising Fuel Prices and the Potential of Input Substitution in US Corn ProductionAuthors Contact InformationHenry Thompson Department of Agricultural Economics &Rural SociologyAuburn University309 Comer HallAuburn., AL 36849Tel: (334) 844-2910Fax: (334) 844-5639Email: [email protected] Yeboah Department of Agribusiness, Applied Economics & Agriscience Education N.C A&T State UniversityA-25 C.H. Moore Agricultural Research Facility. 1601 E. Market St. Greensboro, NC 27411 Phone (336) 344 - 7056Fax (336) 344 - [email protected] ofori-Boadu Department of Agribusiness, Applied Economics & Agriscience Education N.C A&T State UniversityA-29 C.H. Moore Agricultural Research Facility. 1601 E. Market St. Greensboro, NC 27411 Phone (336) 256-2259Fax (336) 344 - [email protected]. Energy prices are projected to continue a slow increase over the coming decades as reserves of oil are depleted. The economy will adjust to rising energy prices and the degree of substitution between energy, capital, and labor will determine output and factor price changes. This is a proposal to examine the potential output and factor price adjustments to a doubling of energy prices, focusing on core agricultural commodities.Selected Symposium Paper for the AAEA Annual Meetings, Long Beach, CA. July 23-26, 2006.There is no doubt that rising diesel prices will play a role in agricultural production decisions over the coming years. Outcomes of energy policies often hinge on energy substitution but there is little consensus on energy substitution. As classic examples, Berndt and Wood (1975) find energy a substitutefor labor but a complement with capital while Griffin and Gregory (1976) find energy a substitute for both labor and capital in US manufacturing. The present paper estimates energy substitution in US corn production from 1975 to 2004 in a translog cost function. Cross price elasticities describe the adjustment in capital, labor, energy, and fertilizer inputs to the price of energy as well as the adjustment in energy input to the other factor prices. The goal is to arrive at some idea of the potential to substitute other inputs for energy as energy prices rise over the coming decades. Energy substitution The economics of substitution is based on the microeconomics of production. Allen (1938) remains a fundamental source along with Varian (1984) and Takayama (1993). Beattie and Taylor (1985) and Chambers (1988) provide excellent introductions to applied production analysis. Ferguson and Pfouts (1962) and Berndt and Christensen (1973) develop the theoretical background of applied substitution. Sato and Koizumi (1973) clearly develop the link between Allen relative and cross price elasticities. Atkinson (1975) develops the revenue shares of productive factors. Estimates of energy substitution are sensitive to the industries and regions of study. Cameron and Schwartz (1980), Field and Gerbenstein (1980), and Denny, Fuss and Waverman (1981) find differences in estimated energy substitution across industries and countries. Walton (1981) finds differences in substitution across US industries and perhaps regions. Burney and Al-Matrouk (1996) find substitution between energy and capital in electricity generation and water production in Kuwait. Caloghiro, Mourelatos, and Thompson (1997) find electricity a weak substitute for capital and labor inGreek manufacturing during the 1980s, implying electricity subsidies lowered the demand for capital and labor. Bamett, Reutter, and Thompson (1998) show that electricity is a weak substitute for both capital and labor in major Alabama industries and note that regulatory constraints are binding due to inelastic electricity demand. Kemfert (1998) reports that aggregate energy, capital, and labor are substitutes in German manufacturing. Mahmud (2000) finds very little substitution between energy and other inputs but weak substitution between electricity and gas in Pakistani manufacturing.Chang (1994) finds little difference between translog and constant elasticity production functionsin Taiwanese manufacturing and reports that energy and capital are substitutes. Yi (2000) finds substitution varies across translog and Leontief production functions in Swedish manufacturing industries. Urga and Walters (2003) show that function specification has an effect on estimates of substitution, reporting that coal and oil are substitutes in US industry. Kuper and van Soest (2003) showthat the time period affects estimates of substitution. Aggregation distorts the estimates of substitution. Clark, Hofler, and Thompson (1988) use separability tests to show that “labor” in US manufacturing has no fewer than nine distinct skill groups. Separability is an issue because energy and capital might appear unrelated but capital could be a complement for electricity and a substitute for fuel oil. The estimated substitution elasticity involving an aggregate is not necessarily an average of the disaggregated inputs. Input substitution in agricultural productionThe production function portrays the relationship between an input and output. There are numerous input-output relationships in agriculture because the rates at which inputs are transformed intooutputs will vary among soil types, animals, technologies, rain fall amounts, and so on. Several of these production functions each have quite different characteristics. One of these, the Leontief, has the property that a decrease in the utilization of any input implies that output will fall, no matter what happens to the utilization of other inputs. However, it has been long observed that decreased utilizationof one input may be compensated for increase


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