Structural adjustments in agriculture under different price conditions

Summary In this contribution the effects of varying price conditions on the agricultural adjustment process are analysed. The areas of investigation include: — full-time farms: To what extent will the output, land and capital of representative farms have to grow under different exogenous conditions to attain a given income goal, and is the necessary growth feasible? — stagnating farms: What are the income consequences for farms with fixed production capacities, and at what rate will they have to reduce their family labour input to attain a given income goal? — sectoral adjustment: What is the effect of a limited growth rate of sectoral output upon the remaining number of full-time farms? The proposed model concentrates on the main determinants and interdependencies of farm growth which are represented by the following aggregated variables: The initial resources of land, labour and capital; their productivity growth; the trend of output and input prices and the required income growth. The production function which provides the framework for the model is of the Leontief-type with coefficients which are constant or vary over time. The calculations are based on farm sample data, published in the Agrarberichte, which are representative of full-time agriculture in Germany. The parameters are derived from time series data for the last ten years. The analysis of the production data justifies the hypothesis of constant coefficients for variable inputs and real assets and decreasing coefficients over time for land and labour. The following conclusions are drawn from the model: 1. Changes in the terms of trade for agricultural products have a very important influence on farm growth compared to the other determinants. 2. The possibilities of agricultural price policy are rather constrained. On the one hand, a fall in the real prices of agricultural products in excess of 1.5 to 2% a year inhibits the possibilities of farm growth and modernisation, while, on the other hand, constant or increasing real prices might not provide sufficient incentive to the migration of farm labour and the progress of structural change.