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



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Rising Fuel Prices and the Potential of Input Substitution in US Corn Production Authors Contact Information Henry Thompson Department of Agricultural Economics Rural Sociology Auburn University 309 Comer Hall Auburn AL 36849 Tel 334 844 2910 Fax 334 844 5639 Email thomps1 auburn edu Osei Agyeman Yeboah Department of Agribusiness Applied Economics Agriscience Education N C A T State University A 25 C H Moore Agricultural Research 1601 E Market St Greensboro NC Phone 336 344 7056 Fax 336 344 7658 E mail Facility 27411 oyeboah ncat edu Victor ofori Boadu Facility 27411 Department of Agribusiness Applied Economics Agriscience Education N C A T State University A 29 C H Moore Agricultural Research 1601 E Market St Greensboro NC Phone 336 256 2259 Fax 336 344 7658 E mail voboadu ncat edu Abstract 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 substitute for 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 in Greek 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 functions in 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 show that 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 production The 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 into outputs 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 utilization of one input may be compensated for increase utilization of another input One example is the production of field crops where the introduction of and increased utilization of herbicides and pesticides greatly decreased the amount of labor that must be devoted to tending the crop in the form of for example weeding As early as 1820 30 Von Thuenen perhaps the first modern applied economist was collecting evidence from his farming operation in Germany that suggested this ability of one input to compensate for another was significant Based on his observations Von Thuenen postulated what has come to be known as the principle of substitutability Chambers 1994 suggests in short this principle implies that it is possible to produce a constant output level with variety of input combinations The importance of input substitutability has led to the definition of various elasticities of substitution providing unit free measures of the substitutability


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