Micro-econometric models for analysing capital adjustment on Dutch pig farms

Research output: Thesisinternal PhD, WU


<p>Farmers operate their business in a dynamic environment. Fluctuating prices, evolving agricultural and environmental policies, technological change and increasing consumer demands for product quality (e.g. with respect to environmental friendly production methods, animal welfare and food safety) frequently require adjustment of production and input levels on individual farms. Quantities of variable production factors like animal feed or pesticides can usually be adjusted easily together with changing production levels. Quantities of labour, capital and land however, are less easy to adjust. Instantaneous adjustment may be impossible or imply (high) costs of adjustment. In the long run, quantities of these quasi-fixed factors can be adjusted at lower costs of adjustment.</p><p>The Dutch pig sector is an interesting case for studying adjustment of quasi-fixed factors. Increases in the average farm size, accompanied by an ongoing specialisation, implied considerable adjustments for individual farms. Moreover, environmental legislation has had a significant impact on pig production, providing another reason to study adjustment behaviour of Dutch pig farms.</p><p>Understanding the process of adjustment of quasi-fixed factors is important for a number of reasons. First, it shows how farmers reorganise their production in the long run as a reaction to changes in the economic environment, e.g. a decrease in output prices. Second, understanding adjustment of quasi-fixed factors may explain farmers' entry and exit decisions. Third, knowledge about long run adjustment processes at the farm level can be used in economic models to simulate long-term effects of agricultural and environmental policies on individual farms.</p><p>The objective of this thesis is to study capital adjustment at individual pig farms in the Netherlands, taking farm-specific characteristics into account. In order to study this process, micro-economic models are constructed and estimated. From this broad objective, four specific objectives are defined and worked out in individual chapters.</p><p>In chapter two the relation between unobserved farm-specific effects, accounting for differences in management, and quasi-fixed factors (e.g. capital) is investigated for specialised pig breeding farms for the period 1980-1996. Managerial ability is often seen as a major determinant in pig production and as an important source of farm heterogeneity. Technical skills and skills in organising the production process, which are both considered to be elements of an aggregate management variable, not only have a direct impact on production and profits, but also interact with other production factors. In order to investigate the relation between the farm-specific effects and quasi-fixed factors, a system of output supply and input demand equations is estimated using the Hausman-Taylor panel data estimator. This estimator has a number of advantages over other estimation methods and allows for performing tests on correlation of different sets of explanatory variables with the farm-specific effects, thereby yielding insight in the unobserved management variable and its relation to quasi-fixed factors in pig production. Testing indicates that farm-specific effects in a system of output supply and input demand equations for Dutch pig breeding farms are correlated with buildings and machinery and installations. Therefore, it can be concluded that differences in management are related to different quantities of these capital goods. Results indicate that pig farms with good management have more buildings and machinery than pig farms with poor management. Although the correlation between management and the quantity of capital does not imply a direct causal relationship, it can be inferred that either good management is a major determinant in capital investment or that a large capital base enables a pig farmer to improve upon its management skills.</p><p>Although farmers cannot adjust the quantities of the quasi-fixed factors in the short run, sometimes they utilise only part of the available quantities. For example when supply quotas are introduced and the restricted quota quantities are well below the optimal production levels, farmers may be forced to reduce the utilisation of the available quasi-fixed factors in the short run. Chapter three develops a theoretical model to analyse the short-run effects of factor under-utilisation on the shadow price of production and the shadow price of supply quotas. In the theoretical model it is shown that ignoring under-utilisation leads to overestimation of the shadow prices of quota rights. The model is used to simulate prices of pig rights for pig breeding farms introduced by the 1998 pig sector restructuring law with and without taking factor under-utilisation into account. Simulation results show that ignoring factor under-utilisation in this case overestimates quota prices on average by approximately 24%. For the Dutch government buying out pig production rights, overestimation of the price of pig production rights leads to budget costs that are too high. Taking under-utilisation into account implies that compensation for bought out production rights should be lower. With tradable quotas, factor under-utilisation implies that farmers are less willing to buy additional pig production rights.</p><p>Where chapter three considers the utilisation of available quasi-fixed factors in the short-run, chapter four explicitly looks at adjustment of quantities of buildings and machinery. An investment model for Dutch pig farmers is specified and estimated for buildings and machinery. This investment model integrates two existing investment theories, i.e. fixed asset theory and adjustment cost theory, in one coherent framework. Fixed asset theory states that thresholds exists for investment, thus providing a theoretical motivation for observed zero investments. Adjustment cost theory motivates spreading of investments over time by posing that farms incur increasing costs in adjusting their capital stocks. In the model it is assumed that farmers have different thresholds for investment. Alternative specifications for the adjustment cost functions of buildings and machinery are tested for. Writing the investment problem as a long-run optimisation problem, optimality conditions are derived and estimated for different investment regimes. Estimation and testing results indicate that adjustment costs are important determinants in investment for buildings but not for machinery. This implies that when farmers adjust the stock of machinery, this adjustment is instantaneous. Furthermore, testing indicates that joint farm-specific parameters, which include farm-specific thresholds for investment and other farm-specific effects, are present in the optimality conditions for investment. However, these farm-specific investment thresholds cannot be calculated since they cannot be separated from other elements in the joint farm-specific parameters.</p><p>Quantitative restrictions on production may not only lead to lower utilisation of capital in the short run as discussed before, they may also reduce investment in the long run. Consequences of lower investments are that innovation is reduced, deteriorating the long-run productivity of the sector and that investments contributing to the solution of the manure problem are lower. Using the investment model developed in chapter four, chapter five tests for the impact of manure production rights on capital investment of Dutch pig farms for the period 1987-1996. Manure production rights were introduced in 1987. Given the close relationship between pig production and manure production, a system of manure production rights also implies a constraint on pig production. However, thus far it is not well understood whether investments were reduced by this implicit output constraint or not. In the theoretical model it is shown that a constraint on production implies a reduction in investment. A testing procedure, based on a GMM structural break test, is developed and implemented. The results provide evidence for a negative impact of manure production rights on investment after 1987. Lower investments in the period after 1987 may have weakened the future viability of the pig sector.</p><p>Chapter six summarises the main conclusions and discusses two main aspects of this thesis, i.e. theories of long-run adjustment of quasi-fixed factors and taking farm heterogeneity into account using panel data techniques. This chapter ends with suggestions for future research.</p>
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • Wageningen University
  • Oskam, A.J., Promotor, External person
  • Oude Lansink, Alfons, Promotor
  • Peerlings, Jack, Promotor
Award date22 Jun 2001
Place of PublicationS.l.
Print ISBNs9789058084477
Publication statusPublished - 2001


  • pig farming
  • pigs
  • farm management
  • factors of production
  • capital
  • investment
  • econometric models
  • netherlands

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