A COMPARISON OF PROCEDURES FOR ESTIMATING RETURNS TO RESEARCH USING PRODUCTION FUNCTIONS

The production function approach has been one of the two main ex-post procedures used to estimate the rate of return to agricultural research. A critical part of estimating the marginal internal rate of return (MIRR) is the procedure adopted to spread the benefits of research through time. Past studies using this approach have given only brief consideration to this computational procedure. The objective in this study was to review the different computational procedures used and, then, using cross-section production function estimates for U.S. agriculture, determine whether the MIRR estimates are sensitive to the computational procedure used. The results from this comparison indicate a large range in the estimates. The implication, then, is that careful consideration should be given to the choice of computational procedure, both when undertaking such a study and when comparing the results of different studies.     

FRONTIER PRODUCTION FUNCTIONS AND THE MEASUREMENT OF TECHNICAL EFFICIENCY

A measure of relative producer performance is often useful for policy purposes and the concept of economic efficiency provides a theoretical basis for such a measure. Yet several authors argue that the concept of efficiency and conventional efficiency measures are meaningless for the evaluation of real-world performance. This paper examines some of the issues and argues that producers' performance may be measured using the concept of technical efficiency. Alternative technical efficiency measures are examined including those of Timmer (1971) and Kopp (1981). A frontier production function is estimated for a cross-section of North West farms and these two measures are computed under various assumptions on the fixity of agricultural inputs.     

THE CALCULATION OF RATES OF RETURN ON AGRICULTURAL RESEARCH FROM PRODUCTION FUNCTIONS

A general framework is described whereby, using production functions, the rate of return on additional agricultural R & D can be calculated. This enables existing procedures to be critically reviewed. Illustrative results are given which indicate that the rates of return found in previous studies tend to be overestimates. It is also pointed out that these studies usually refer to well in the past, when the level of the agricultural research investment was generally lower and rates of return consequently larger than might now be expected. It is, however, concluded that the production-function approach needs extension and refinement, and better values of key parameters determined, before it could be used quantitatively as a determinant of research policy.     

ECONOMIES OF SIZE REVISITED

Empirical and theoretical investigations as to how firms evolve in size have been of interest to economists, agricultural economists and policymakers for decades. While returns to size have been frequently estimated, measurement has been carried out using a wide range of methodological approaches. This paper offers a critique and discussion of the conceptual and methodological issues surrounding the measurement of size economies.     

DYNAMIC INTERRELATED DEMAND FUNCTIONS FOR FACTORS OF PRODUCTION AND THE AGGREGATE PRODUCTION FUNCTION IN UNITED KINGDOM AGRICULTURE

Taking the price situation as given in product and factor markets, a non-linear differential equation model of gross output, employment, capital accumulation, and gross input for united Kingdom agriculture is derived by incorporating internal adjustment cost functions into the representative decision-maker's objective function, and estimated using a discrete approximation. The results are consistent with efficient use of resources, but further incentives for capital investment and a greater exodus of labour could upset this. Adjustment costs as estimated account for 2.6 per cent of the value of output; those associated with net investment for 1.8 per cent, and those associated with employment and gross input for 0.57 and 0.23 per cent respectively.     

ESTIMATION OF A PRODUCTION FRONTIER MODEL: WITH APPLICATION TO THE PASTORAL ZONE OF EASTERN AUSTRALIA

This paper considers a statistical model for a production frontier that is consistent with the traditional (nonstochastic) definition of a production function given in microeconomic theory. Limiting cases of the model are the familiar average production function and an envelope production function. Maximum-likelihood estimators for the parameters of the model are defined. The three related models are applied in the estimation of a production frontier for the Pastoral Zone of Eastern Australia with use of data from the Australian Grazing Industry Survey.     

A FURTHER NOTE ON THE MEASUREMENT OF EFFICIENCY AND ECONOMIES OF FARM SIZE

Efficiency has a precise meaning in the case of the optimally conditions associated with the perfectly competitive norm. However, the efficiency concept loses a precise meaning and much of its usefulness under real world conditions of uncertainty and costly information since efficiency is inescapably evaluative and cannot be defined and measured independently of the goals and knowledge of the decision maker. Similarly, the concept ‘economies of size’ is shown to lose its normative significance when specialised resources and other unique aspects of the firm are taken into account. Although the economist has no objective procedure by which to measure the efficiency of entrepreneurial activity, it is argued that in the real world of uncertainty and disequilibrium, there is always scope for entrepreneurial activity in the sense of unexploited profit opportunities.     

MEASURING TECHNICAL EFFICIENCY FROM PRODUCTION FUNCTIONS: SOME FURTHER ESTIMATES

The concept of economic and technical efficiency is fundamental to agricultural policy-making, and Russell and Young (1983) in this Journal provide a recent addition to the literature for British agriculture. They estimate technical efficiency for a cross-section of farms in the North-West of England for the year 1977/8. However, such measures for a single year may be influenced by particular events in that year. This paper considers some further estimates of farm efficiency but for the longer, four-year period 1974/5 to 1977/8. Three measures of technical efficiency are estimated, two using econometric techniques and one using linear programming methods. It is found that there are low correlations between these different measures of technical efficiency both over time and at one point in time. This casts doubt on the usefulness of measuring efficiency using cross-section (single period) survey data.     

THE EFFECT OF FERTILISER ON RISK: A HETEROSCEDASTIC PRODUCTION FUNCTION WITH MEASURABLE STOCHASTIC INPUTS

The sources of production risk are many and diverse in nature. Estimating risk as a black box, without explicit recognition of its sources, can lead to inferior estimates of optimal inputs under risk aversion. In this paper, a method is presented for estimating production functions with measurable stochastic inputs and for generating the parameters of the probability distributions of yield for various environments and input levels. Based on this method, it appears that moderate risk aversion can account for a 6.7 per cent to 16.7 per cent reduction in nitrogen use (relative to the risk-neutral solution) for selected rice producing areas of the Philippines. Estimating optimal inputs without environment specific information about the sources of risk leads to large errors. This underscores the value of collecting information about the sources of risk and of exercising caution when such information is not available.     

BEEF PRODUCTION FUNCTIONS FROM SAMPLE FARMS IN NOVA SCOTIA*

The beef production function of different enterprises has been estimated for the sample farms in Nova Scotia. The returns to scale and marginal productivity of resources are derived from the production functions. It indicates decreasing returns to scale and the low marginal productivities of grain, labor, and variable costs for all enterprises. Grain and hay are the most important feeds for beef production. Many beef farms in the province produce more roughage than grain. The marginal rate of substitution of hay for grain is diminishing. Beef farmers can produce equal amounts of product with different combinations of the two feeds. The results provide the possibility of finding the least-cost combination of inputs. This study has specified the optimum input levels under different prices of inputs. It will help beef farmers to allocate their resources properly in order to maximize profits. Les fonctions de production de boeuf de différentes entreprises ont été eslimées à partir de fermes selectionées en Nouvelle-Ecosse. Les économies ?échelle et la productivté marginale des ressources sont dérivées des fonctions de production. On retrouve dans toutes les entreprises des économies ?échelle décroissantes et une faille productivity marginale du grain, du travail et des couts variables. Le grain el le foin constituent la plus importanle source ?alimentation dans la production de boeuf. Plusieurs fermes ?élevage de boef produisent plus de fourrage que de grain. Le laux marginal de substitution du foin pour le grain va en diminuant. Les éleveurs de boeuf peuvent produire des quantités egales par des combinaisons différentes de ces deux aliments. Les résultats ptrmettent de déterminer la combinaison la moins coûteuse pour la consommation des aliments, Cette étude a détérmine les niveaux optime de consommation selon les différents prix des aliments. Elle aidera les producteurs de boeuf à distribuer adéquatement les aliments afin de maximiser les profits.     

COORDINATING PRODUCTION AND DISPOSAL OF COMMODITY STOCKPILES WITH APPLICATION TO AUSTRALIA'S WOOL INDUSTRY

Following the dismantling of a price-support program, a central bureaucracy is left with a commodity stockpile to dispose. It happened with wheat and feed grains in the U.S. in 1986 and wool in Australia in 1991. It soon may happen in Europe with grains, manufactured dairy products and other commodities which have supported prices. Obvious policies include privatising the stockpile, disposing of the stockpile by a central bureaucracy and quarantining the stockpile from the market. Each policy imposes constraints on disposal based, perhaps, on judgments of political acceptability to producers and government. In this article, optimal rules for production and disposal are derived and solved and a new policy is proposed. Then the model is applied to the disposal of Australia's wool stockpile. Results show that centralised disposal will almost always be preferred to privatisation of the stockpile. Centralised disposal is also preferred to quarantining the stockpile if interest rates are high, but quarantining is preferred if interest rates are low. Centralised disposal and quarantining are not optimal, however. Optimal production and disposal combines the efficiency of privatisation with the market power of centralised disposal. To achieve this, the property rights to the stockpile can be redefined using payment-in-kind certificates and individual transferable entitlements. The payment-in-kind certificates assign ownership of the stockpile to individual producers who then make both production and disposal decisions. The individual transferable entitlements allow the industry to produce efficiently and extend market power from the central bureaucracy to producers. For the Australian wool stockpile, optimal production and disposal would benefit the industry by an estimated $2.7 billion.     

ECONOMIES OF THROUGHPUT AND TRANSPORT BOTTLENECKS IN GRAIN DISTRIBUTION SYSTEMS

In this paper, a model is presented which shows the relationship between country grain storage costs and transport bottlenecks that exist in the harvest period. It is shown that transport bottlenecks limit the amount of grain that can be transported from receival points in the peak receival period. This constraint means that the cost of operating country receival points is high because the turnover of storage capacity is limited. However, system costs can be reduced by focusing the peak transport task at sites that are less intensive users of scare transport capacity. This allows more grain to be transported out of the system in the peak period, decreasing the need for costly long term storage at country sites. In the longer term, differences in the intensity of transport use means that optimal levels of investment in storage capacity (relative to grain receivals) will differ between sites. Relatively more storage should be constructed at sites that are intensive users of transport capacity (eg. those sites that are furthest from the port). Less storage capacity is needed at sites that are less intensive users of transport because a large depot-to-port transport task will be concentrated at these sites in the peak period.     

ANOTHER LOOK AT ECONOMIES OF SIZE IN CATTLE FEEDING*

This article is an outgrowth of a study that failed to find any economies of size in total cost of feeding cattle. It examines a number of cattle feeding studies that reportedly found economies of size and explains why the author is not willing to accept their findings. This article is not concerned with the external economies of size that may or may not exist in cattle feeding Cet article est le résultat ?une recherche qui n'a pas réussit à trouver de grands économics dans le prix total de ?engraissement de bétail. II examine un certain nombre ?étude sur ?engraissement de bétail que rapporterent (dit-on) de grands economies el il explique aussi pourquoi ?auleur n'est pas prêt à accepter leurs conclusions. Cet article ne se concerne pas avec les economies de grandeur extérieur quipeuvent ou nepeuventpas exister dans ?engraissement du bétail.     

INVESTMENT IN PRACTICE: WITH SPECIAL REFERENCE TO GRANT-AIDED PRODUCTION OF CROPS UNDER GLASS

A pilot study of investment was made on twenty glasshouse-crop holdings in Kent on which action had been taken under the Horticulture Improvement Scheme. Attention was given to behavioural aspects as well as to financial results, in the expectation that large discrete investments would provide knowledge of investment practice. Most growers in the sample were found not to make a prior evaluation of new investment or to be concerned with its economic efficiency. They paid more attention to technical matters and their own relative eficiency (their comparative standing within the industry). All growers in a financial sub-sample of nine increased their annual revenue by investment, but the proportionate aggregate increase was very little greater than that in the aggregate value of fixed assets created. In the latest year of the post-investment period, the average return per invested-half this investment being two to three years old-was shown by accounts to be less than 10 per cent. The economic test of rate of return on added capital is shown to be impracticable. It is postulated that major investments may not provide forecast cash flows as quickly or as fully as frequently anticipated. Past forecasts must often have been made without empirical knowledge of post-investment situations.     

A PRINCIPLE COMPONENT ANALYSIS OF INPUTS IN A PRODUCTION FUNCTION

A production function fitted on data for 232 production regions of the South African Agriculture, yielded negative signs for the land and machinery inputs. The inputs were then transformed into standardised orthogonal variates. A production function was derived from the orthogonal variates by dropping components that contributed little to the resource variation. The t-values in the latter function showed a substantial improvement on that of the first function, and the machinery input turned positive. A component analysis on all the input factors, including farm income, indicates that farmers pay a premium for extensive farming land which is not reflected in their income. This may be attributed to more leisure time enjoyed by livestock farmers, or more satisfaction derived from this type of farming.     

SUPPLY CONTROL WITH LIMITED INFORMATION: AN ECONOMETRIC STUDY OF TOBACCO PRODUCTION IN GREECE

In the absence of explicit data that would facilitate a direct measure of the variable degree of control over exportable tobacco in Greece, a statistical measure was devised for it corresponding to the probability that control did adversely affect production in a particular year. This was measured by simulating the supply equations from the free market period over the control period and relating the discrepancies to the standard errors of the simulated values. The period 1948–1980 was re-analysed using this control variable jointly with lagged prices as supplementary ‘independent’ variables. The best estimate of the long-run price elasticity is considered to be near 3 but falls below 2 with a normal degree of control. The normal long-run effect of control on production was near 30%. Other effects of considerable importance were the level of the rural population, weather and trend. The analysis required the use of several sophisticated econometric techniques including Schmidt's formula for the error of a cumulative projection.