metadata: authors: 0: author: O'Mara,Gerald T.
count: Mexico,United States
docna: 0: docna: Analyzing the effects of U.S. agricultural
            policy on Mexican agricultural markets using the MEXAGMKTS model
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Crops and Crop Management Systems,Livestock and Animal Husbandry,Food & Nutrition Policy,International Trade and Trade Rules,Food Security
teratopic: International Economics and Trade
abstracts: cdata!: This paper uses results from simulations
            of the FAIRMODEL, USAGMKTS, and MEXAGMKTS models to analyze
            the effects of changes in U.S. agricultural policy on
            Mexican agricultural markets.  The author concludes that
            under a scenario of trade liberalization for Mexico, Mexican
            agricultural production, prices, and trade are quite
            sensitive to agricultural policy changes in the U.S.  The
            genesis of the research project was the perception that
            agricultural policies in Mexico (and many other countries)
            are often second best responses to the negative side effects
            of broad economic policies aimed primarily at macroeconomic
            and international trade objectives.  The paper also
            discusses the role of agriculture in Mexican economic
            policy, and MEXAGMKTS, FAIR and USAGMKTS models.  The paper
            includes an analysis of the sensitivity of Mexican
            agricultural markets to U.S. agricultural policy and a brief
            summary of the implications of the results.
geo_reg_key: 119228,517191
repnme: repnme: Analyzing the effects of U.S. agricultural
            policy on Mexican agricultural markets using the MEXAGMKTS model
display_title: Analyzing the effects of U.S.
            agricultural policy on Mexican agricultural markets using
            the MEXAGMKTS model
listing_relative_url: /research/1990/07/700231/analyzing-effects-agricultural-policy-mexican-agricultural-markets-using-mexagmkts-model
topicv3: Agriculture and Food Security m1326205 435,Crop Production m1326627 174,Agricultural Policies m1326884 170,Trade m1326924 698,Livestock m1504490 4024
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: Policy, Research & Ect Affairs
no_of_pages: 29
author_keys: 0: author_key: 769084
model_extractions: **Policy, Research, and External Affairs**

**Agricultural Policies**

WPS 447

- This paper a product of the Agricu!tural Policies Division, Agriculture and Rural Development - Departmcnt is part of a larger ef'fort in PRE to uniderstand the dcpendence of' domestic agricultural markets on domestic macroeconomic policy and the macroeconomic and trade policies of major trading partners, Copies are available free from the World Banki, I1 818 Hi SLreet NW, Washington DC 20433. Please contact Cicely Spooner, room N8-035, extension 30464 (23 pages **with** tables).

O'Mara uses results from simulations of the FAIRMODEL, USAGMKTS, and MEXAGMKTS models to analyze the ef'fects of changes in U.S. agricultural policy on Mixica agricultural markets.

changes of 10 to 15 percent in the border prices Mexico fices.

'TIh extent of such chaniges depends on the state **of'ttlC** agricultural sectors and macrocconomics in the United States and the rest of thez Aorld. Anld t he magnitude and direction otf the Mexican response depends on the state of' macrocconomy and agricultural sector.

lie concludes that under a scenario oi' tradc liberalization for Mlexico, Mcxican agricullul.ll production, prices, and(l trade are (quite scnsitiN ciexico's to agricultural policv changes in the IUnilte States.

'I'ihe abiliL\ to disceni thle efect.i of a given porlicV **Chlnge** in thle United States, although di fliculi. **would** be **of'** signii cant **value** to **N\lexi** - caln polic; mlakers under trae(c liberalization.

Plausible changes inl S. agricultural variables (ot' I) perccent. sa\ ) indicatc possible The' **PRE \korking Palw'r** S.irics **i!** K **-i%s** i .';& **of** of **oirk** uc ',rk **17r .i 111** W **,k** slloi\ . **Rc.s.c;r! ht. in Exter-ial** AffairsConfpni .. Anoto Ltp . cti th. ri c . s .1t. .t ti;.c p nrins out (;io **LO** I\ . .n T)recnt:iiins arc I.ss than futll\ **I]shuiC** Thce flndin~,: Int.rprct.ttlotu .uin~ ~>L ncIu'vrs r l<. tlccp.pr in .;.r o nt rl.Q<'iri1 rcp.rc<nt ff'-ic.il Banki pnlic!
# Analyzing the Effects of U.S. Agricultural Policy on Mexican Agricultural Markets Using the MEXAGMKTS Model

# by Gerald T. O'Mara

# Table of Contents

|I.|Introduction|1|
|---|---|---|
|II.|The Strategic<br>Role of Agriculture<br>in Mexican<br>Econ<br>.zic Policy|2|
|III.|MEXAGMKTS<br>Model Structure|3|
|IV.|The FAIRMODEL|a|
|V.|The USAGMKTS Model|9|
|VI.|Experiments<br>to Estimate<br>the Sensitivity<br>of Prices,<br>Production,<br>and Traded<br>Quantities<br>in Mexican<br>Agricultural<br>Markets<br>to U.S. Agricultural<br>Policy|10|
|Summ|ary<br>of Analysis<br>of Mexican Responses<br>to U.S.<br>Agricultural<br>Policy|22|
|Refere|nces|23|
# ANALYZING THE EFFECTS OF U.S. AGRICULTURAL POUCY ON MEXICAN AGRICULTURAL MARKETS USING THE **MEXAGMKTS** MODEL

## I hntroductlon

This paper describes the results of simulating the effects of U.S. agricultural policy on Mexican agricultural markets using the MEXAGMKTS model. The genesis of the research project of which this paper Is an output was the perception that agricultural pollcies In Mexico (and many other countries) are often second best responses to the negative side effects of broad economic pollcids aimed prwmarily at macroeconomic and international trade objectives.

The model MEXAGMKTS Is a member of a set of Interlinked models at macroeconomic and sectoral markets levels of Mexico and the U.S. (and enough specification of the rest of the world to close the system). The modeling of U.S. agricultural pollcles and markets is discussed In a companion paper by Just (1989a). The effects of U.S. macroeconomic pollcy variables on U.S. macroeconomic varlables were simulated by use of the FAIRMODEL of the U.S. macroeconomy (Fair, 1984). Using counterfactual simulatlons of the FAIRMODEL, Just (1989b) analyzed the effects of U.S. macroeconomic policies on U.S. agricultural markets. Using the Just model for counterfactual simulations of U.S. agricultural pollcy, tnis paper analyzes the effects on Mexican agricultural markets of changes In U.S. policy. Thus, results from simulations of the FAIRMODEL and the USAGMKTS model of Just are used in simulating the effects of U.S. policies on Mexican agricultural markets. In the rest of this paper, the next section discusses the role of agriculture In Mexican economic policy of recent decades. The succeeding sections descrlbe the MEXAGMKTS, FAIR and USAGMKTS models. ;oliowing these descriptlons Is the analysis of the sensitivity of Mexican
- 2 -

agricultural markets to U. S. agricultural policy and a brief summary of the implications of the results.

# 11 The Strategic Role of Agriculture In Mexlean Economic PolICy

Prlor to describing the model MEXAGMKTS, some background discussion of the role of agriculture in Mexican economic pollcy will be useful In placing the subsequent discussion of agricultural policies in appropriate context.

For almost forty years, the maJor thrust of Mexican policy toward agriculture has been to keep the terms at which agriculture trades with the rest of the economy favorable to urban consumers. This policy of cheap food to city dwellers was essentially aimed at stabilizing the real wage cost of blue collar workers and civil servants at a relatively low level. Such a pollcy facilitated Import substituting industrlalization and promoted peaceful Industrial labor relations. However, a sustained import substituting policy Insulates the economy from external competitlon, losing the stimulus toward cost reduction and market diversificatlon that trade provides. Similarly, a sustalned pro-urban bias tends to Induce excessive urbanization, as the bloated size and heavy pollution of Mexico City attest. The cornerstone of the policy creating the urban-Industrlal complex in Mexico has been the use of pricing of food commodities to stabilize the real Incomes of urban workers. The maJor safety net for the small farmer and rural workers has been migration (to the cities or the U.S.) and emigrant remittances to relatives left behind. The system of essentially fIxed producer and consumer prices for basic foods Imposed the necessity of government supply adjustment as quantity control Instrument to manage
-3-

disequillbrla In food and feed grain markets. The system works as follows: In the fall when major crops are harvested, the predominant public agency In food supply operations, CONASUPO, can estimate with some accuracy the supply available from domestic productlon over the next year. Combining this information with estimates of food deinand at existing prices produces an estimate of excess supply or demand, and hence an indication' of the quantities to offer for export or to order for Import. Any errors In the Initial estimates of surplus or shortage (at existing prices) can be met by varying the leve' cf government held Inventories. Slnce the system provides no Incentive for private Investmnents in storage facilities or the holding of Inventorles, and even though trade In basic foods is ro longer a government monopoly, the g-wernment supply adjustment mechanism Is still an essential part of the food distributio;. system.

# Ill MEXAGWKTS Model Structure

The objective of this model Is to provide a simulatlon tool at the disaggregated level of Individual agricultural commodity markets that will permit experiments exploring the effect on those markets of policies at the domestic macroeconomic or international (i.e., trading partner) macroeconomic and sectoral levels. The effects are to be transmitted by changes In variables that are specified as exogenous determinants of quantitles demanded or supplied. In turn, the values of these linkage variables are determined In upstream models In an experimental framework of recurslve causation. The structure of this framework Is given In Flgure 1. Note that MEXAGMKTS recelves values of linkage variables from both the Mexican macroeconomic and the US (and rest of the world) agricultural markets models.
# 3A

Firura 1: Schemati of Pattern of Kajor **Interactions** Hypothesized **as an Analytical** Framevork <!-- Start of picture text --> KACROECONOMIC MACROECONOMIC<br>MODEL MODtL<br>OF OF<br>KEXICO UNITED STATES<br>AGRICULTURAL AGPRICULTURAL<br>COMMODITY AND COMMODITY<br>FACTOR MARKETS MARKETS<br>OF KEXICO OF US<br>DISACGUGATED<br>AGRICULTURAL<br>CoNNODITY<br>NMAKTS.<br>REST OF THE WORLD<br><!-- End of picture text -->
Model design specifies the Interaction of markets for several Important food/feed crops with markets for representative livestock commodities. Inputs are the prlmary factors of labor and capital and the Intermediate Inputs of fertilizer and feed crop con,modities. Land Is omitted from the specification through the use of supply functlons whose key arguments are price variables. This approach Is taken since the set of markets modeled does not Include the markets for all agricultural commodities and important substitution relationships between factor Inputs, especlally land, exist between the markets modeled and those omitted. In addition, the supply of agricultural labor Is linked to markets for unskilled labor natIonwide (and even Internationally). Thus, the wage of labor is a key linkage variable whose value Is determined in the Mexican macroeconomic model.

Functional Spec ificatlon of MEXAGMKTS This section presents a functional specification of tne model. A detailed specification of Individual equatlons complete wlth parameter estimates Is given In O'Mara and lngco (1 P39'. The specification starts with baslc Index sets and continues with descriptlons of variables and equations:
**Index** Sets Symbol Description Set Members c Food/Fred Crops /maize, sorghun'., soybeans/ I Factor Inputs /capital, labor, fertilizer/ a Animal Stocks /cattle, pigs, brollers, layers/ I Livestock Comm. /beef, pork, poultry, eggs, milk/ Variables Name Description PR(c) Production of crop c FD(c) Animal feed demand, crop c HD(c) Human food demand, crop c GSADJ(c) Government is.upiy adjustment, crop c RPG(c) Real price guarantee, crop c RBP(c) Real border price, crop c PCC(c) Per capita human consumption, crop c P(i) Real price of factor I PCON Per capita human consumption, all commoditles POF Index of the relative price of food POP Populatlon of Mexico INV(a) Stocks In Mexico of animal type a INVUS(a) Stocks in US of animal type a QP(D) Production of livestock commodity I PCL(I) Per capita consumption, I!vestock commodity<sup>I</sup> NEXP(I) Net exports, livestock commodity I PP(I) Real producer price, Mexico, livestock<sup>comm. I</sup> PPUS(I) Real producer price in US, livestock<sup>comm. I</sup> RP(I) Real consumer price, Mexico, livestock<sup>comm. I</sup> PTORT Real consumer price, Mexico, maize tortillas

The variables P(l), PCON and POF are<sup>llnkage variables from the Mexican</sup> macroeconomic model; and the variables<sup>RBP(c), INVUS(a) and PPUS(I) are linkage varlables</sup> from the US (and rest of the world) agricultural<sup>markets model. The varla! les RPG(c) are</sup> agricultural policy variables, while the variables P(l)<sup>and NEXP(I) may also be policy</sup> variables. The variable POP Is exogenous. All other variables are endogenous.
- Equatlons Number Type Functional Specification 3 Crop production PR(c) - PR(RPG(c), P(l)) 3 Animal feed demand FD(c) - FD(RPG(c), INV(a)) 1 Human food demand HD(c) - HDDPOP*PCC(PTORT,PCON,POF)J 3 Gov't supply adJ. QSADJ(c) - FD(c) + HD(c) - L[PR(c)] 4 Animal Stock Demand INV(a) - INV(RPG(c),P(l),PP(l), L EINV(a)])

- 5 Livestock comm. prod QP(O) O QP(PP(i),RPG(c),P(i), INV(a),L(QP(I)],Tlme)

- 5 Per cap cons, Ivstk PCL(i) - PCL(RP(I),POF,PCON, commodity I L(PCL(i)1)

- 1 Net exports, Ivstk NEXP(I) . NEXP(PPUS(I),INVUS(I)) commodity I

- 2 Consumer Price,lvstk **RP(I)** RP(PP(l), L[RP(i)]) commodity I

- 5 Market clearing, OP(I' - NEXP(I) - POP*PCL(i) lvstk commodity I

- 1 Consumer price of PTORT - PTORTtRPG(CmaIze`)] tortillas
The thirty-three equations listed solve for thirty-three endogenous varlables. Consumer prices are determined as a functlon of producer pricos for only two Ilvestock commoditles, beef and pork. For all other livestock commodities, a time serles of producer prices was not available. In these cases, the market clea&ing equation solves for a consumer price. The notation L[.] Indlcates a lagged value of the variable sh:wn inside the brackets.

Model parameters were estimated using multivarlate linear regresslon methods (OLS and 2SLS) using data from the Mexican Ministry of Agriculture and Water Resources (on crop and livestock production, prices, stocks, Imports and exports), the Mexican Central Bank (price indices), Ministry of Programming and Budgeting (natlonal accounts), the Mexican National Institute of Statistics and Geography, and the Foreign Agricultural Service of the US Department of Agriculture.

The economic Interprstatlon of model equations Is straightforward. The crop productlon equatlons are econometric supply functlons which specify crop supply as a function of output and Input prices. The feed demand equations specify food demands as a functlon of crop price guarantees and animal stocks. Human crop demand (for malze) Is specified as the product of population and per capita demand, where the latter Is determined by total per capita consumption, relr e price index for food, and the r etall price of tortillas, which Is a function of the price guarantee for maize. The supply adjustment equations determine the quantities of Imports or exports required to sustain the fixed guarantee. In brief, the equations relating to fle3ld crops embody the government supply adjustment process for market equilibration described above.
- 8 -

The livestock oriented equations are direct applications of microeconomic theory. Animal stocks are specified as a function of producer prices for livestock commoditles, crop price guarantees, Input prices and lagged stocks. Productlon of livestock commodities Is specifled as a functlon cf producer prices, feed crop price guarantees, animal stocks and lagged productlon. Per capita consumption of livestock commodities Is determined by consumer prices for livestock commodities, total per capita consumption, reative price for food and lagged per capita consumption of the livestock commodity. Nex exports of livestock commoditles are specified as a funcl:ton of producer prices and animal stocks In the US. Market clearing for livestock cormoditles Is accomplished by determning the price which equates quantity demanded with quantity supplied.

# IV The FAIMC;'-

The FAIRMODEL of the U.S. macroecono,ny contains 128 equations In total, wlth 30 stochastic equatlons and 98 Identitles. The model consists of six sectors: household, firm, Yinancial, tederal government, state atnd local government and foreign. It is designed to simulate a variety of alternative lJ.S. macroeconomic policy scenarlos. The FAIRMODEL is described in detail in Fair (1984). In the scheme of Figure 1, the FAIRMODEL generates solution values of llnkage variables that are transferred to a Mexican macroeconomic model and the USAGMKTS model. For the analysis presented In this paper, lack of an adequate macroeconomic model for Mexico means that the path of effects from U.S. macropolicy vla the Mexican macroeconomy to Mexican agricultural markets does not exist. Instead, linkage variables from the Mexican macroeconomy to MEXAGMKTS are fixed at
historically observed levels. However, the path from U.S. macropollcy via U.S. agricultural markets does exist and Is the subject of analysis. Note, however, that this path of U.S. macropolicy Impacts on Mexican agricultural markets through Its effect on U.S. agricultural markets. An analysis of the effects of U.S. macropollcy on U.S. agriculture using llnkage variab!es from the FAIRMODEL to the USAGMKTS model is given In Just (1989b). Briefly, Just generates elasticity responses by computing the effects on USAGMKTS variables of one percent changes in base case levels of the following U.S. macropolicy instruments: Treasury bill rate, government expenditure, personai Income tax rate and the federal deficit.

# V The USAGMKTS **Model**

The Jus3t model (1989a) of U.S. agricultural markets, USAGMKTS, Is similar to MEXAGMKT in structure as one would expect given that both models were designed to be complementary components of an interlinKed family of models. However,the USAGMKTS model (and the FAIRMODEL) are quarterly models, whereas MEXAGMKTS Is necessarily annual owing to the weaker data base for Mexico. Thus, USAGMKTS has nine crop supply equations (for feedgrains and soybeans), twelve crop demand equatlons (for feedgrains and soybeans), ten livestock supply equatlons (for cattle, hogs and broilers), nine livestock demand equations (for beef, pork and broiler chicken) and one dollar exchange rate (trade-weighted) equation for a total of 41 equatlons and endogenous varlables. To model the complexity of U.S. agricultural policies, Just defines sixteen exogenous policy variables. To model the effect of macroeconomic policies on U.S. agricultural variables, he needs only five varlables from the FAIRMODEL -- overall GNP deflator, tMirty-day
- 10 -

Treasury bill rate, disposable income, the federal deficit and the GNP deflator for nonfarm sales. Just (1989a) simulates with USAGMKTS the effects of three kinds of agricultural policy change: 1) changes of plus and minus ten percent In price supports for feed grains, 2) changes of plus and minus ten percent in both price supports aid target prices for feed grains and 3) a reduction of ten percent In the acreage Jiverslon requirement for feed grain program participants. These experkients show that these agricultural policy Instruments have substantial effects on U.S. agricultural prices. Plausible U.S. policy adjustments such as the abovementloned changes can cau3e world market prices to change by 10 to 15 percent depending on the current state of the U.S. agricultural economy.

VI Experknents to Esthkate the Sensitivity of Prices, Production and Traded Quantities In Mexican Agricultural Markets to U.S. Agricuttural Pollcy For analytical clarity, It Is useful to study Mexican agricultural markets using two polar modes of operation: 1) markets wlth decoupled linkages to world prices and quantity adjustment by the government, i.e., the Mexican policy choice of recent decades, and 2) markets open to trade at world prices. As one would expect, simulation of the historical policy choice, decoupled markets, shows no direct response whatever on Mexican agricultural markets In response to the U.S. agricultural policy changes described in sectlon V. Of course, to the extent that U.S. pollcy changes affect world prices, there will be an Indirect effech. on the budget of the Mexican government due to the effect of changed prices on the foreign exchange value of the trading needed by the government to achieve supply adjustments on domestic markets Including any adjustments of Mexican
- 11 -

support prnies induced In order to control the budgetary cost of trading operations. However, policy adjustments by the Mexican government are essentially dominated by political corsiderations; and, therefore, are exogenous to the analysis of the economic function of agricultural markets.

The more Interesting polar case is pollcy choice of direct llnkage<sup>t</sup> o world markets In order tc improve the efficlency of Mexican agriculture by confronting Mexican farmers with border prices that reflect social opportunity costs of supply and thereby Inducing them to produce the commodities In which Mexico has competitive advantage. This course has been urged upon Mexico by bilateral and multilateral lenders, and the Mexican governmeit has been moving Its policy In the direction of liberalization of Its trade In agricultural commodities. Elsewhere (in O'Mara and Ingco (1989)), the experiment consisting ot dropDing the system of guarantee (i.e., support) prices for maize, sorghum and soybeans and letting the world market determine domestic prices for these commodities was simulated over the years 1974-85. In the present paper, the model MEXAGMKTS Is similarly altered so as to cor,front Mexican producers wlth world prices; but In this instance, the base case solutlon includes solution values of linkage variables transferred from the USAGMKTS model, which Implicitly reflect base case solution values of linkage varlables transferred the FAIRMODEL to the USAGMKTS model for the time periods, 198182 and 1984-85. The year 1983 Is excluded from the analysis owing to the disruption of U.S. agricultural markets by the one year experiment with the Payment-in-Kind (PIK) program. Since the USAGMKTS and FAIRMODEL were designed to capture medium term policy responses, the simulation experiments were restricted to two year Intervals. Glven the lag In agricultural productlon response, the first year effects largely show how markets
- 12 -

respond while holding production fixed, while the second year suggests how markets respond when production Is free to change.

Policies are changed from the base case In the USAGMKTS model as follows:

- I Changes of plus and minus 10 percent In support price for feed grains.

- 11 Changes of plus and minus 10 percent In both price supports and target prices for feed grains.

liI A decrease of 10 percent in the acreage diverslon requirement for feed grain program participants.

Note that a support price establishes the level at which the government Is wiling to buy all of an agricultural commodity offered for sale to It; a target price defines tie base from which the sale price Is subtracted to determine the subsidy received by a participant; and required diversion acreage Is the minimum acreage (expressed as a percentage) of a participating farmer's acreage Included In the feed grain program. Participants recelve a specifled dollar subsidy for each diverted acre above a specifled minimum required for program participation.

For each policy adjustment case, the difference between solution values of endogenous variables from the policy adjustment and base case values are summarized
- 13 -

as arc elasticitles which Indlcate the percentage response to a given percentage change In the level of a U.S. pollcy instrument. In order to compute the elasticities for a common time period, the quarterly results of the USAGMKTS model are converted to annual averages prlor to computation of the elasticitles.

Please note that the elasticities computed from these experiments are general equilibrium elasticitles rather than partial equilibrium elasticities since they summarize responses that reflect all adjustments In related markets. This statement has one qualification, however; any adjustments In Mexico due to policy changes In the U.S. that are transmitted by means of effects on macrovarlables of the Mexican economy are neglected In this analysis due to the lack of an adequate macroeconomic model of the Mexican economy similar to the FAIRMODEL for the U.S. economy. Thus, for all simulation experlments reported here, values of linkage variables from the Mexican macroeconomy are set at historically observed levels. In addition, the U.S. agricultural pollcy adjustment experiments were simulated holding the values of the macroeconomic variables transferred fron the FAIRMODEL to USAGMKTS model at the average of their values In the macroeconomic scenarlos reported In Just ( 1989b) In Qrder to avoid effects due to macropolicy variation and yet not condition the results on any given macropolicy specification.

The elasticity estimates of the responses of prices, productlon and traded quantities In Mexican feed grain, soybeans and livestock markets to U.S. agricultural policy change under Mexican trade liberalization are reported in tables 1 through 4, with tables 1 and 2 reporting results from 1981-82 and tables 3 and 4 reporting results from 1984-
- 14 -

85. In each of the tables, the estimates shown for changes In support prices or support and target prices are averages of the response by a given variable to plus and minus ten percent changes.

The 1981-82 results for productlon and prices given In Table 1 show strong responsiveness of maize and sorghum production to U.S. policy with maize production in the first year Increasing 3.3 percent In response to a 10 percent Increase In U.S. support prices alone or to a parallel ten percent Increase In support and target prices and sorghum production decreasing 2.5 percent In response to the same increases. The Induced change In soybean productlon is -1.2 to -1.4 percent. These effects are due to acreage substitution In favor of malze and against sorghum and soybeans.

In contrast to the greater response for foodgrains In the second year reported by Just (1989a), the MEXAGMKTS model results show a declining response In the second year. This difference In pattern of response may reflect the practice In Mexico of announcing guarantee prices before the start of the maln crop season In order to influence planting decisions. This could result In a pattern of a larger production response In the first year for an annual model when behavioral relatlons are estimated using historical data gathered under a different pollcy regime.

Support for this Interpretatlon of the pattern of response by crops Is provided by the elasticity estimates for livestock prices given In table 1, which show a pattern of significant Increases In the second year In accord wlth the pattern also reported by Just
- 15 -

TABLE 1: E _asctie of **Respons of Major** Meacan **AQIlixrk** r, and Prices to USAgulcAa Poicy **Chuge** 198t12 Trade Lberalizatlon **Scenario**

|COMMODlrY|US AG<br>Average of Plus<br>& Minus 10% Changes<br>Price Support|!IOuLmURAL POLICY INSTRU<br>Average of Plus<br>& Minus 10% Changes<br>Support&Target Price|4ENTS<br>10 Percent<br>Reducton of<br>Diversion|
|---|---|---|---|
|FIRST YEAR||||
|Maize Prod<br>Sorghum Prod<br>Soybeans Prod<br>Beef Price<br>Pork Price<br>Broiler Price|323<br>-246<br>-.145<br>517<br>022<br>.179|328<br>-251<br>-115<br>531<br>.043<br>.182|- 002<br>005<br>- 022<br>020<br>- 005<br>007|
|SECOND YEAR||||
|Maize Prod<br>Sorghum Prod<br>Soybeans Prod<br>Beef Price<br>Pork Price<br>|213<br>-041<br>-.010<br>.845<br>.172<br>|216<br>-104<br>131<br>.881<br>264<br>|013<br>.054<br>-122<br>081<br>-052<br>|
|Broiler Price|582|591|069|
- 16 -

for livestock prices. Unlike the crops, livestock commodities have not been supported with guarantee prices In Mexico; hence, historical behavioral responses would have been generated by market prices subject to stochastic varlation. Also, the Mexican livestock elasticities are of the same sign and about the same magnitude as the corresponding elasticities computed by Just for U.S. livestock price responses.

Also in accord wlth the findings of Just for the U.S., Mexican prices and production responded very weakly to a 10 percent reduction In required acreage diversion In 198182. Just ascribes the weak responses to a low participation rate (an average of 16%) In the foodgrain program at that time, resulting In only a small Increase In crop acreage due to a reduction in required diversion.

The elasticity estimates for Mexican agricultural trade In response to U.S. agricultural policy changes shown In table 2 suggest a strong response of feedgraln imports to changes In support and target prices In the U.S. Thus, In response to 10 percent Increases in either support prices or support and target prices, maize Imports decrease by 8 percent In the first year and 7 percent In the second, while sorghum Imports decrease by 1 percent In the first year and then increase by 5 percent in the second. In contrast, soybean Imports and beef exports show little response. A ten percent reduction In required diversion produces very weak responses by all traded commodities in the first year and quIte small responses In the second. The reasons advanced earlier for this effect of a diversion reduction clearly apply here also.
- 17 -

TABLE 2: Elaslu **d Respofof Mxdci A** ExpoWi' **hnpof to** US Agba" **Poky Ch 196162** Trode Uthereion Scorio

||LUSAG|RICULTURAL<br>POLICY INSTRU|MENTS|
|---|---|---|---|
|COMMODITY|Average of Plus<br>& Minus 10% Changes,<br>Price Support|Average of Plus<br>& Minus 10% Changes,<br>Support & Target Price|10 Percent<br>Reduction of<br>Diversion|
|FRRST<br>YEAR||||
|Maize Imports<br>Sorghum Imports<br>Soybeans Imports<br>BeefExports|.807<br>-.108<br>.011<br>.000|.810<br>_- toe_<br>.004<br>000|.020<br>-004<br>004<br>.000|
|SECOND YEAR||||
|Maize Imports<br>|- 697<br>|* 700<br>|.041<br>|
|Sorghum Imports<br>|.475<br>|.492<br>|-.070<br>|
|Soybeans Imports<br>|046<br>|-029<br>|058<br>|
|Beef Export|001|.001|.002|
- 18 -

The corresponding results from the simulations of responses to U.S. agricultural pollcy changes for the years 1984 and 1985 are presented In tables 3 and 4. In contrast to 1981-82, the responses to a 10 percent Increase In either feedgrain support prices or support and target prices Is weaker or more negative, with maize production Increasing by 0.4 percent and sorghum productlon decreasing by 6.4 percent In the first year and then increasing by 0.9 percent and decreasing by 6.4 percent respectively In the second year. The difference In response between 1984-85 and the earlier period Is explained by changes from 1981-82 levels In both the Mexican macroeconomy and In world feedgrain prices. Thus, In 1984-85, per capita Incomes in Mexico were decreased by 15 percent from the 1981 level (due to the well known Mexican debt crlsis and the macropollcy adjustment response to the crisis) and border real prices for malze and sorghum were down by 10 and 16 percent respectively. The lower Incomes reduced per capita demand for livestock products and hence demand for feedgrains, despite the lower real prices. However, In Mexico maize Is also an Important foodgraln, albelt an Inferior one. Hence, lower incomes stimulated shl s In human consumption In favor of maize offsetting the reduction In feedgrain demand for malze and resulting In a positive production elasticity. The lack of a similar demand for d!rect human consumption of sorghum produced the strong negative production elasticities shown. The strongly positive soybean production elasticities shown in table 3 (over 5 percent In both years) reflect a re atively constant real price and substitution of soybeans for feedgrains In farmer productlon plans.

The elasticities of livestock price response to a 10 percent increase In support or support and target prices are comparable In sign and magnitude to those for the 198182 period although the underlying explanation Is more compllcated,l.e., reductions In per
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TABLE 3: Easfls Of **ut** _A_ **Major Medcan** **_Adc"W_** _Mwkpr_ Wlhh Rs ifoducUof & Pcs So merct vPoky Chige 19S4-5 **Trmde UberatonSci**

||US AGR<br>Average of Plus|ICULTURAL<br>POUCY INSTRUM<br>Average of Plus|ENTS<br>10 Percent<br>|
|---|---|---|---|
|COMMODITY|<br>& Minus 10% Changes,<br>Price Support|<br>& Minus 10% Changes,<br>SupportvTarget Price|Reduction of<br>Diversion|
|FIRST YEAR||||
|Maize Prod<br>Sorghum Prod<br>Soybean Prod<br>Bef Price<br>Pork Price<br>Broiler Price|.043<br>-642<br>.559<br>.463<br>056<br>.265|030<br>-645<br>.570<br>.487<br>.179<br>266|009<br>-236<br>205<br>.160<br>.037<br>.101|
|SECOND YEAR||||
|Maize Prod<br>Sorghum Prod<br>Soybean Prod<br>Beef Price<br>Pork Price<br>Broiler Price|091<br>-.636<br>.515<br>.825<br>576<br>.447|093<br>-640<br>534<br>893<br>1 279<br>.452|051<br>-376<br>303<br>394<br>-.255<br>265|
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capita demand due to lower Incomes offset the effects of lower real prices for feedgralns.

Perhaps the major difference between tables 1 and 3 Is the significant quantitative Increase In responses to a ten percent reduction in the acreage divfrsion requirement for feedgra!n program participants, particularly In the second year. Just (1989a) reports that the much higher level of feedgrain program participatlon In 1984-85, an average of 59 percent, Is responsible for the much enhanced response of U.S. agriculture to a reduction In diversion requirements. It Is the enhanced supply response In the U.S. that Impacts on world prices and hence on Mexican agriculture under trade liberalization. In other respects, the e!asticity responses to a diversion reduction fo,:ow the pattern set by the responses to other pollcy changes In 1984-85.

Turning to the Mexican trade responses to U.S. agricultural policy change for 1984-85 of table 4, the signs and magnitudes of the elasticitles are similar to those for 198182 with two exceptions: 1) very large positive trade elasticitles for maize with respect to Increases In support prices or support and target prices and 2) significant Increases In the magnitude of responses to a reductlon In diversion requirement. The first exception reflects a sharp decrease in feed demand for maize In 1984 due to the impact of a dummy variable that Is a proxy for a government supply shock that resulted historically In net maize exports for that year. This effect Is quite probably an artifact of model construction that should not exist under trade liberalizatlon. The second exceptlon is simply due to greater feedgrain program participation In the U.S. In 1984-85.
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TABLE **4: ElulcIU d Reppr** of **Md xdcu ADgftsd Eqxawo** F-RO **fo US OArvw#w qaiI** **_W_** PoTyChg W4 **Trade Ubeaa|frt Soene,**

|COMMODITY|US AG<br>Average of Plus<br>& Minus 10% Changs,<br>Price Support|RCULIJRUAL<br>POLICY**INSTrUM**<br>Avorage of Plus<br>& Minus 10% Changes,<br>Support & Targot Price|**ENTS**<br>10 Percent<br>Raducton of<br>Diversion|
|---|---|---|---|
|**FIRST YEAR**||||
|Maize Imports<br>Sorghum Imports<br>Soybean Imports<br>Beef Expors|7.119<br>0.145<br>0.020<br>0.000|6.854<br>40.146<br>4.009<br>0.000|2.517<br>-0.052<br>0.022<br>0000|
|SECOND YEAR||||
|Maize Imports<br>Sorghum Impors<br>Soybean Impors<br>BeefExports|-4.488<br>0.183<br>-0.151<br>0.001|4.459<br>0.183<br>40.235<br>0.001|-0284<br>0.042<br>0.006<br>0.001|
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# Summary of Analysis of Mexican Responses to U.S. Agricultural Policy

The lesson from the preceding analysis may be qulckly encapsulated by noting that the evidence suggests that Mexican agricultural production, prices and trade are quite sensitive to agricultural policy changes In the U.S. under a trade llberalizatlon scenarlo. Plausible changes In the levels of U.S. agricultural policy varlables, I.e., ten percent, when simulated Indicate that changes of ten to fifteen percent In the border prices facing Mexico are quite possible. However, the extent of such changes depends on the state of the U.S. and rest of the world agricultural sectors and macroeconomles. In turn, the magnitude and even the direction of the Mexican response depends on the state of the Mexican macroeconomy and agricultural sector. Although difficult, the ability to discern the effects of a given policy change In the U.S. would be of signifIcant value to pollcymakers In Mexico under a trade liberalization policy regime.