Testing for structure in a multi-product industry with price expectations : the Canadian cattle industry

The aim of this research is to develop a theoretical profit maximizing model of a cow-calf farm and then to determine and to estimate empirically the dynamic short run supply response and investment behaviour of cattle producers. The theory of duality is used here to provide a consistent model of the cow-calf industry. The model is consistent in that the estimated equations are derived from the profit maximizing farm model. A comparative static analysis is carried out to determine short run supply response of cow-calf farmers. (Past studies have argued the existence of negative short run supply elasticities.) In this model, the sign of the short run elasticity of cattle supply depends on three factors: i) the technological structure of the industry; ii) the substitution possibilities between production today and production tomorrow; and iii) farmers' expectations of cattle prices. Consequently, a short run negative supply elasticity in the cow-calf industry is not a prediction from economic theory. Rather the sign of the elasticity is unknown and will depend on price expectations of producers. The estimated coefficients of the profit function are used to test for certain characteristics of the underlying transformation function. It is determined that the technological structure of cow-calf production in western Canada is defined by a non-homothetic, non-homogeneous transformation function subject to decreasing returns to scale and joint production between crops and cattle. Other characteristics of the cow-calf industry are determined by calculating elasticities of choice. These elasticities conform to all a priori expectations with output supply functions having non-negative slopes, derived input demand functions having non-postive slopes, and a substitute relationship predicted between cattle supply and end-of-period inventory demand. The total elasticity of cattle supply is also calculated. This elasticity measure takes account not only of the effect of cattle price fluctuations, but also the effect of changing expectations of cattle prices on cattle supply. It is determined that accounting for adjustments in expectations of cattle prices caused by changes in current cattle prices will always decrease the elasticity of cattle supply. However, there is no evidence to indicate that this tendency is significantly strong enough to decrease short run elasticities of cattle supply to zero or less.Arts, Faculty ofVancouver School of EconomicsGraduat