Capital Formation, Technical Change, and Profitability in Prairie Agriculture Report as inadecuate




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This report comprises a number of related components focussed on the role of capital andcapital formation in production, productivity and competitiveness in Canadian agriculture,concentrating on the Prairie region of Western Canada in the period 1970 to the early 1990s. Thereport includes the analysis of investment flows and capital stocks data, problems in measuringproductivity, and an assessment of the relative roles of technological change and economies ofscale in estimated productivity growth. In addition to the nature and extent of technical change,other features of the structure of production technology are analyzed by estimation of a translogcost function.Input mix and investment data indicate an important increment in investment, resulting ina larger machinery stock in the 1970s and a modest increment in the stocks of capital related toagricultural land and buildings. Changes in the input mix result from the initial post-warsubstitution of capital for labour and an eventual rising share of materials inputs including agrichemicals.The land input appears to change little and slowly. Land related investment andrepairs also show a slow but steady growth over the period. In the 1980s, the labour share slowlyrises, reversing its previous downward trend. The important increase in capital-relatedinvestments, particularly machinery, in the 1970s is followed by a considerable drop in the1980s. Dis-investment appears to be taking place in the late 1980s and early 1990s. However,productivity and total output do not appear to be shrinking, and productive capacity does notappear to have been seriously affected in the short run by the lower levels of investment in the1980s.Cost function parameters, elasticities of derived demand for inputs, and Allen partialelasticities of input substitution are estimated in the report. Results indicate an increasingly rigidproduction structure in the 1970s and early 1980s, lower elasticities of derived input demand andreduced input substitution. Such trends suggest that technology in prairie farming was becominga technological package. This trend was modestly reversed in the late 1980s when a slowlychanging input mix resulted from reduced use of chemicals and machinery. These changes maybe related to changing economic conditions which generally favoured cost reduction as opposedto output expansion. The relatively slow response indicates the persistence of rigidities. It is notyet clear whether slightly lessened rigidity is the start of a new trend or only temporary. Testingfunctional properties of the cost function indicates rejection of homotheticity, of constant returnto scale, and of Hicks neutrality.The index number methodology for the empirical measurement of agriculturalproductivity is analyzed. A major problem is measurement of durable capital items.Aggregation or indexing procedures is another important conceptual issue. Given the conceptualsuperiority of flexible indexes we would recommend that Divisia-based or chained Fisherindexing be employed rather than traditional indexes such as the Laspeyres or Paasche. Ourcalculations suggest there is little practical difference in productivity estimates based on theTornqvist-Theil approximation to the Divisia index as opposed to the Fisher ideal chainedindex. Total factor productivity, terms of trade and return to costs ratios are estimated. Althoughproductivity growth nearly fully compensated for adverse movements in the terms of trade for prairie agriculture over the entire postwar period from 1948 to 1991, it was much less effective indoing so in the 1980s and profitability deteriorated.The evidence suggests that the farming system in Western Canada has been experiencingimportant transformations in the last two decades in our period of study. In terms of the structureof production technology, our fmdings indicate non-homotheticity, biased technical change, anda more important role for economies of scale. For productivity measurements, the use of flexibleforms, such as Divisia or Fisher Chained procedures, is preferred. The agricultural system,having achieved a new ceiling in investment in the 1970s, went through a process of adjustmentsand correction in the second half of the 1980s. There was a reduction in the annual level ofinvestments and a shrinkage in the capital stock, mostly due to a decline in farm machinery.Given technical change and data problems, it is difficult to say if the level of investmentprevailing at the end of the period was sufficient to compensate for actual capital depreciation.Future data availability and further research may provide a more definite answer.

Subject(s): Agribusiness

Land Economics/Use

Research and Development/Tech Change/Emerging Technologies

Issue Date: 1995

Publication Type: Report

PURL Identifier: http://purl.umn.edu/232400

Total Pages: 57

Series Statement: Project Report

95-09

Record appears in: University of Alberta > Department of Resource Economics and Environmental Sociology (REES) > Project Report Series





Author: Veeman, T.S. ; Fantino, A.A. ; Peng, Y.

Source: http://ageconsearch.umn.edu/record/232400?ln=en







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