Supply and Demand Shocks and the Growth of the Brazilian Agriculture

In the last decades the Brazilian agriculture had a strong growth. Our hypothesis is that most of that growth may be attributed to two general factors, which may conveniently be related to two types of shocks acting upon agriculture: demand-related and technological supply-related shocks. Demand shocks are originated both from domestic economy but also from external markets. We use Blanchard & Quah (1989) type of methodology to test the relative importance of supply and demand shocks on Brazilian agricultural growth. Our results indicate that supply and demand shocks have permanent effects upon agricultural output and prices. We estimate that the agricultural output growth in Brazil is attributed in large proportion to yield increases. We argue that integration to international markets was essential to assure the profitability of continuous use of new technology that led to yield improvements. This is why exchange rate plays a key role in explaining the performance of the Brazilian agriculture. We anticipate that, if investments in science and technology are maintained and international integration expanded, Brazil will be able to substantially increase its supply of agricultural products both domestically and in foreign markets