Agricultural input expenditures have not been widely incorporated in most partialequilibrium models. Thus, investigating the effect of economic policies and otherexogenous factors on the agricultural sector will produce only a partial analysis, since thesimultaneous impact of these factors on input expenditures is excluded. This study,therefore, extends the existing partial equilibrium multi-market model of the SouthAfrican agricultural sector (BFAP model) by incorporating agricultural input expenditure.Thus, the analysis of the impact of economic policies on the agricultural sector, whichwas limited only on the gross income (production, area planted and prices), has now beenextended to assess their effects on input expenditures, gross value added and net farmingincome of the sector. In addition, the analysis is further extended to evaluate the financialand economic position of the agricultural sector by investigating the implications of thepolicies on the asset and debt values of the sector.
The comparative result obtained from the shocks of a crude oil and world fertiliser pricerise shows that due to the inclusion of the recursive effect from the output to input side ofthe sector and vice versa and endogenising input costs, the effect of the shock on grossvalue added and net farming income converges slowly and cyclically in the recursively linked model, compared to the unlinked model, in which the effect abruptly halts after asingle year. Thus, the recursively linked integrated model replicates the dynamicsexperienced by the agricultural sector better than the recursively unlinked integratedmodel.
In addition, the endogenisation of domestic input costs on the integrated model allows acomprehensive analysis of the effect of macroeconomic variables on the agriculturalsector by considering their impact on both outputs and inputs. Thus, using the recursivelylinked model, a fifty percent devaluation of exchange rate is assessed. The result showedthat a depreciation of exchange rate resulted in a net benefit for the sector, as the gainfrom enhancing agricultural income outweighs the rise in expenditure. Excluding thesimultaneous impact on input expenditure would have overestimated the benefit bylooking only at its effect on gross income.
The integrated model was also used to project a baseline for the South Africanagricultural sectors main aggregate variables for the medium term (2010-2015) under thestatus quo of policy assumptions and forecast values of exogenous variables. Thebaseline projections of the gross income, intermediate input expenditure and gross valueadded show a modest average annual growth rate during the baseline period. The netfarming income, however, depicts a relatively lower growth due to the general modestrise in agricultural gross income compared with total input expenditure. Based on theprojected values of main aggregate variables, several financial and economicperformance indicators for the agricultural sector are also projected. In general, theeconomic performance indicators of the sector, measured by the net return on the sectorsinvestment and equity, show good performance when compared with the average cost ofborrowing during the baseline period.
Thus, this study shows that integrating input expenditure in a multi-market output modelby recursively linking both sides and endogenising domestic input costs would improvethe result of the standard partial equilibrium by generating projections for several keyaggregate variables, providing the net effect of economic policies on the agricultural sector and replicating the dynamics of the agricultural sector better than models that havefew/no input components or that assess the effects separately and ignore the recursivelinkage. Thus, this study provides a powerful modelling tool to be used by policy makersto comprehensively investigate the net effects of economic policies on the agriculturalsector and to answer several what if questions.
© 2010 University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria.
Please cite as follows:
Gebrehiwet, YF 2010, Modelling agricultural input expenditure in a multi-market modelling framework, DCom thesis, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-05302011-133503/ >
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