Measuring Foreign Supply Response to Changes in U.S. Prices: An Argentine Example

Patrick C. Westhoff
May 1986  [86-WP 9]

The paper proposes a method to measure foreign supply response to changes in U.S. prices and applies the method to Argentine field crops. Argentine export taxes and marketing margins are endogenized, and price transmission elasticities are calculated. Total area harvested is a function of weighted farm prices, and crop shares are a function of relative prices.

One important concern during the course of debate on the 1985 Farm Bill was how farmers in other countries were likely to respond to changes in U.S. Policies. Those arguing for policies which would reduce commodity prices contended that lower prices would be a major disincentive to foreign production. On the other hand, those favoring price-increasing policies contended that little additional foreign production was likely to result from higher prices.

This paper will outline a method to measure foreign supply response to changes in U.S. commodity prices, and the approach will be applied to the case of Argentine field crops. It will be argued that the proper measurement of foreign supply response requires consideration of the likely response o foreign governments, traders and farmers to changes in world prices. The model developed here links U.s. and Argentine farm prices, and allows for cross-commodity effects.

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