AN ECONOMIC INVESTIGATION INTO INFLATION PASSTHROUGH TO THE FARM SECTOR

The purpose of this study is to estimate the impact of general inflation on prices paid and received by farmers. Specific objectives are: (1) to test the hypothesis that the farm commodity domestic demand function at the farm level is homogeneous of degree zero in price and income; and (2), conditional on not rejecting the hypothesis in (1), to test the hypothesis that general inflation changes the ratio of prices received to prices paid by farmers because of impacts unevenly on prices and income in the demand function versus the supply function for farm output. Empirical results provided no basis to reject the hypothesis that economic functions determining demand for output at the farm level are homogenous of degree zero in income and prices. A truly general increment in overall price level appears to increase nominal prices received and farm demand in proportion to the general price level but leaves real farm demand and hence real demand price unchanged. This hypothesis could not be rejected based on the domestic components of demand for farm output examined in this study. Given demand and supply functions homogeneous of degree zero in all prices and income, the second hypothesis that general inflation impacts evenly on all prices and income was rejected for the 1963-77 period. In that period, national inflation moved upward the supply curve through prices paid by farmers proportionately more than it moved upward the demand curve and prices received by farmers, contributing to a cost-price squeeze.