The consumption-real exchange rate anomaly: nontraded goods and distribution services

An empirical analysis of risk sensitivity of supply response is attempted here for seven major field crops in California over a twenty-two year period 1949–70. Two distinct types of risk sensitivity are evidenced by the empirical trend e.g., for crops like alfalfa, sugarbeets and sorghum, where short run adjustment factors are important, the year-to-year acreage changes reflect the negative impact of price and returns risk very strongly. For other crops like rice and barley, where long run factors of adjustment are important, the impact of price changes rather than the variance of prices or returns are more important. This pattern of risk sensitivity has important economic implications for welfare gains resulting from price support and stabilization policies pursued by the federal government.