Supply Response in the Australian Sheep Industry: A Profit Function Approach*

Abstract

A ustralia n Bureau of Agricultural and Reso ti rce Econo m icx Canberra, ACT 2601Profit function models for the three major regions in which the Australian sheep industry operates are specified and estimated. The supply response elasticity estimates are made using a normalised quadratic functional form and time series cross-sectional data. Elasticity estimates, together with their confidence intervals, are presented for the pastoral, wheat-sheep and high rainfall zones. In general, the supply response elasticity estimates derived in this study are lower than those previously reported for studies in which little or no account has been taken of the multi-product nature of Australian agriculture.

Regional Agricultural Production Systems: Estimates for Western Australia

“…The paper presents a disaggregated production model for WA agriculture, estimated adopting the profit function approach. Notes: FW, Fisher and Wall (1990); VDP, Vincent, Dixon and Powell (1980); MLV, McKay, Lawrence and Vlastuin (1983). The estimates in these studies correspond to agriculture of Australia as a whole or to a selected agricultural zone or region, and are based on different models as well as time periods.…”

“…Although long recognized in theory, joint-production in agriculture is widely appreciated in empirical modeling only in recent years (e.g. see for Australia, Vincent et al, 1980;McKay et al, 1982McKay et al, , 1983Adams, 1987;Wall and Fisher, 1987;Lawrence and Zeitsch, 1989;Fisher and Wall, 1990;Coelli, 1996; and for overseas, Weaver, 1983;Ball, 1988;Moschini, 1988;Shumway et al, 1988;Polson and Shumway, 1992).…”

“…However, two major limitations of this approach are that: (i) it is based on the restrictive assumption that individual inputs are non-specific to individual outputs so that no input has a comparative advantage in the production of any particular output (McKay et al, 1983); and (ii) apart from being a trivial case, it forces production to be a joint supply process, not just a multiple-output process (Livernois and Ryan, 1989). The alternative approach, which allows for flexible production relationships, is based neatly on the theory of duality whereby a second-order approximation to the true (although unspecified) profit function is specified and estimated (McKay et al, 1982(McKay et al, , 1983Wall and Fisher, 1987;Lawrence and Zeitsch, 1989;Fisher and Wall, 1990;Coelli, 1996). In the latter case, the flexible functional forms commonly chosen to specify the joint production in Australian agriculture include normalized quadratic (proposed by Lau, 1974Lau, , 1976a; also see Diewert and Wales, 1987) and transcendental logarithmic (propounded by Christensen et al, 1973;Diewert, 1974) function.…”

Potential demand for hedging by Australian wheat producers

“…Ten studies reporting estimates of elasticities of supply of wheat with respect to own price were reviewed and divided into two groups loosely termed`more rigorous' and`less rigorous'. Of the ®ve studies in the`more rigorous' group, Vincent, Dixon andPowell (1980), McKay, Lawrence andVlastuin (1982), Fisher and Wall (1990) and Johnson, Powell and Dixon (1990) had supply elasticities that were clustered in a range between 0.46 and 0.77. The mean of this cluster was 0.60 which was used as the basis for calculation of c in our model.…”

Estimation of Australian Wool and Lamb Production Technologies under Uncertainty: An Error‐Components Approach

“…Quadratic utility has been criticized on the grounds that it implies increasing absolute risk aversion (Arrow, Pratt), while the assumption that profits are normal has been criticized by Newbery and Stiglitz. These limitations to the primal and E-V approaches have prompted us to reassess the applied duality approach in the presence of risk. Unfortunately, most applied duality models of agricultural supply response ignore uncertainty altogether (e.g., Clark and Youngblood;Fisher and Wall;Fulginiti and Perrin;McKay, Lawrence, and Vlastuin (1983); Ray; Shumway; Shumway and Alexander; Weaver). One reason for this is that duality theory has been regarded as problematic in the presence of risk.…”