Annex I


3. Impact of supply based factors

The levels of food production and supply are determined by a number of natural, human and
economic factors such as land, labour, weather conditions, technology, inputs available,
labour and input costs, market conditions, decisions of farmers and traders, etc. The shape
and the position of the production/supply curve as shown in our model are the result of the
combined effects of all these factors.

The production/supply curve originates at the level of subsistence production 'spr' in Figure
A-1. Subsistence production contributes to overall food supplies. For reasons of simplicity,
the volume of subsistence production is here assumed to be independent from market prices
(an assumption which definitely does not hold completely true in practice). Major factors
determining the level of subsistence production are the needs of the farmers' families as well
as the production resources available to them (land, labour, inputs), the intensity of resource
use, the technology applied, and, of course, the natural and weather conditions. In years of
good harvest, the production/supply curve (including the volume of subsistence production)
will shift to the right, in bad years to the left.

The production volume beyond subsistence production (to the right of 'spr' in Fig. A-1) enters
the market and is determined by additional economic parameters such as the price of crops
and production inputs, input and crop marketing, infrastructure, credit etc. The supply
response of agriculture to price changes represents a core issue for the assessment of policy
impacts on food production and supply. It centres around the question of how farmers react to
changing input or output prices. Some important features of this issue are addressed in Box
A-I.

Empirical studies on agricultural supply response for different crops and regions arrive at
very diversified and partly conflicting results. Estimated individual crop elasticities vary from
below zero (negative response) to more than one (high response), with median values of
individual short-run elasticities likely to be in the range of zero to one-third (low response)
and of long-run elasticities in the range of one- to two-thirds (moderate response). Aggregate
supply response tends to be significantly below the direct response for individual crops. In a
poor agro-climatic subregion in India, the individual (short-run, one year) supply elasticity
ranged from 0.25 to 0.77 for the main crop sorghum, while the calculated supply elasticity for
all agricultural output (aggregate elasticity) was in the range of 0.05 to 0.09 (Binswanger
1989).

Although it is almost impossible in practice to state the exact value of agricultural supply
response to changing economic variables, the direction and to a certain degree, the intensity
of the impact of certain parameter changes can be assessed. Such parameter changes could
be the explicit objective or implicit consequence of certain policy measures. Price
changes may occur due to an explicit food price policy or as a consequence of macro-
economic and structural adjustment policies (e.g. currency devaluation, market and price
deregulation).


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