Example – Autoregressive Agricultural Supply Model

An acreage supply equation taken from Helmberger and Chavas.

At = 3.2269 + 28.8638 FPS t – 45.4827 FPC t + 0.8993 A t-1 – 0.1166 I t – 5.6696 B t

(6.21) (4.29) (19.99) (4.24) (3.66)

where

At = acreage planted to soybeans (million acres) in year t,

FPS t = average soybean futures contract price for the harvest contract during planting
weighted by (or divided by) an index of soybean production costs,
FPC t = average corn futures contract price for the harvest contract during planting
weighted by an index of corn production costs,
It = acreage diverted from production as required by farm policy programs,
Bt = dummy variable for the years farm policy programs were not in effect.

t-Statistics are in parentheses. The R-squared for the model is 98%. The average acreage for the
sample was 52 million acres and the average weighted soybean futures contract price was
0.8414. The data are annual from 1961-1991.

• What do the results of each coefficient say? What is the economic interpretation and the
statistical significance?

All variables are significant at the 5% level. The t-statistics are greater than 1.96.

A one unit increase/decrease in the FPS variable results in 28.8638 million acre
increase/decrease in soybean plantings, cet par. This is the own-price effect.

A one unit increase/decrease in the FPC variable results in 45.4827 million acre
decrease/increase in soybean plantings, cet par. Corn and soybeans are substitutes in production.

A one million acre increase/decrease in soybean plantings the previous year results in 0.8993
million acre increase/decrease in soybean plantings this year, cet par.

A one unit increase/decrease in the policy variable results in 0.1166 million acre
decrease/increase in soybean plantings, cet par.

And when farm policy programs were not effect, 5.6696 million acre fewer soybean acres were
planted, cet par.

1
• Calculate the short-run and long-run own-price elasticities.

SR: %ΔQ/%ΔP = (MQ/MP)(P/Q) = (β) (0.8414/52) = (28.8638)(0.8414/52) = +0.4670

At = … + β xt + … + γ At-1 + …
in the long-run At = At-1
At – γ At-1 = … + β xt + …
(1 – γ) A = … + β xt + …
A = … + β / (1 – γ) xt + …

LR: %ΔQ/%ΔP = (MQ/MP)(P/Q) = [β/(1 – γ)] (0.8414/52) =

[28.8638/(1 - 0.8993)](0.8414/52) = +4.6379

• What does this model say about soybean producer price expectations?

Combination of rational expectations and adaptive expectations or partial adjustment …

RE from the futures price variables.

AE or PA from the lagged dependent variables. But the lagged dependent variable may be due
to institutional constraints – crop rotation constraints or other policy constraints – as opposed to
expectations based. We cannot design a test to tell…