International Bank for Reconstruction and Development Development Research Center Discussion Papers No. 8 AGRICULTURE AND THE ENERGY CRISIS: A CASE STUDY IN MEXICO J.H. Duloy, P.B.R. Hazell, and R.D. Norto. August 1974 NOTE: Discussion Papers are preliminary materials circulated to stimuiate discussion and critical comment. References in publication to Discussion Papers should be cleared with the author(s) to protect the tentative character of tkese papers. ABSTRACT AGRICULTURE AND THE ENERGY CRISIS: A CASE STUDY IN MEXICO A general equilibrium model of Mexican a g r i c u l t u r e is s6lved to evaluate t h e impacts on t h e sector of higher c o s t s of agrochemicals and machinery operations and higher world market prices. It is found t h a t a g r i c u l t u r a l production declines and aggregate s e c t o r incomes increase, but t h a t t h e sector income d i s t r i b u t i o n becomes more skewed and coasumer welfare declines. Key words: a g r i c u l t u r e , ep c g y , Mexico, general equilibrium, income d i s t r i b u t i o n , l i n e a r programming. F.evi s e d August, 1974 AGRIClJLTURE AND THE EXERGY CRISIS: A CASE STUDY I N NEXICO J . H . Duloy, P.B.R. Hazell, and R.D. Norton I n recent years, the world has experienced s u b s t a n t i a l p r i c e increases f o r v i r t u a l l y a l l primary commodities. Agricultural producers i n p a t t i c u l a r have confronted a d r a s t i c a l l y changed s i t u a t i o n . On the cost s i d e , the increases i n world o i l p r i c e s have raised t h e c o s t s of agrochemicals, by a s much a s three- fold, and the higher f u e l p r i c e s have affected the costs of operating a g r i c u l t u r a l machinery. On t h e o u t p u t s i d e , many world market p r i c e s a r e now much higher than two y e a r s ago, and r e l a t i v e prices have a l s o changed markedly, s o t h a t farmers may be revising t h e i r patterns of crop diversification. In developing economies, where a g r i c u l t u r e t y p i c a l l y a c c o u n t s for o l a r g e r share of national product, t-hesn impacts may be q u i t e s i g n i f i c a n t . I n p a r t i c u l a r , s u b s t a n t i a l changes can be expected not only i n farm production and p r i c e s , but a l s o i n domestic food consu~aptian, i n t e r n a t i o n a l a g r i c u l t u r a l trade, r u r a l empfoyment, and t h e l e v e l s and d i s t r i b u t i o n of farm income. It is difficult to anticipate what these e f f e c t s w i l l be, not only i n t h e i r numerical magnitudes but even, i n many cases, i n the directions oL change involved. Historical experience E I provides l i t t l e guidance because similar magnitudes of o i l p r i c e increases * The authors a r e meabers of the Development ~ e s e a r c hCenter o f the World Bank, Washington, D.C. The World Bank does not n e c e s s a r f l y coflcur with the views expressed i n t h i s paper. Computational assistance was provided by MBlathi Parthasarathy and Mar.b de C a s t r o Silva. The authors a r e g r a t e f u l t o Bela Balassa f o r helpful crzti- cioms o f an e a r l i e r d r a f t . have not been experienced before. The only rigorous and consistent way to attack the prcblem is through a general equilibrium analysis, which would allow f u l l account t o be takeL)of the many i n t e r a c t i o n s involved among relevant economic variables, particularly on the market side. We have undertaken such an a n a l y s i s f o r Mexico u t i l i z i n g an existing and c u r r e n t l y operational model of the a g r i c u l t u r a l sector. Our r e s u l t s shov t h a t i n the aggregate r e a l a g r i c u l ~ u r a ls e c t o r incomes may a c t u a l l y increase as a r e s u l t of the o i l c o s t increases, but that the income d i s t r i b u t i o n within the s e c t o r is l i k e l y t o become more unequal. It is the nonagricultural part of the economy which w i l l suffer most of the burden of change through s u b s t a n t i a l increases i n food p r i c e s - Farm incomes tend t o increase f o r two reasons: because the export p r i c e s a r e higher and because, with reldtively i n e l a s t i c demand schedules, reduced supplies on the domestic market generate higher farm incomes. These two e f f e c t s more than ofcset the higher c o s t s of production. Rural -* employment a l s o w i l l increase somewhat owing t o labor- capital s u b s t i t u t i o n caused by the increases i n the costs of operating a g r i c u l t u r a l machinery. *Description of the Hodel i a - 1 The existing a g r i c u l t u r a l model f o r Mexico, called C h , is a l i n e a r programming model which encompasses the supply, domestic and imported, and a l l demands - domestic and export - f o r 32 short cycle crops. It does not include livestock, forestry or l o n ~ c y c l ccrops. On the domestic supply s i d e , the model is b u i l t up from regional sub-models, which a r e linked through a national market s t r u c t u r e and by some comnon resource constraints. Chac is a s t a t i c equilibrium model and provides a p e r f e c t competition s o l u t i o n f o r a l l product markets, t r e a t i n g both p r i c e s and 2 q u a n t i t i e s a s endogenous v a r i a b l e s . Price- responsive demand s t r u c t u r e s a r e included, and t h e a b j e c t i v e function which guarantees the competitive e q u i l i - brium is t h e sum over a l l markets of producer and consumer s u r p l u s e s . For t h i s study, a v e r s i o n of Chac was used which is s p e c i f i e d a t p r e d i c t e d 1976 l e v e l s of technology, market demand schedules and resource c o n s t r a i n t s , b u t with a l l monetary v a l u e s expressed i n 1968 p r i c e s . The 1976 technology l e v e l s were predicted by e x t r a p o l a t i o n of p a s t trends on y i e l d s p e r h e c t a r e and input use, b u t t h e r e a r e technological a l t e r n a t i v e s which permit s u b s t i t u t i o n on the input s i d e . Harket demand schedules were s h i f t e d forward i n time in accordance with expected growth r a t e s of population and per c a p i t a income. I n c l u s i o n of the demand s t r u c t u r e permits a n a l y s i s of both aggre- g a t e and r e l a t i v e p r i c e changes i n domestic product markets, as consequences of t h e exogenous changes i n i n p u t c o s t s and export p r i c e s . The demand s t r u c t u r e comprises a s e t of l i n e a r domestic demand functions f o r 16 commodity groups (see Table 2 ) . These groups a r e assumed t o be demand independent, b u t l i n e a r s u b s t i t u t i o n is allowed among products w i t h i n each group a t r a t e s fixed by 1968 r e l a t i v e p r i c e s . Export and impost p o s s i b i l i - I E t i e s a r e a l s o allowed a t fixed world p r i c e s , b u t a r e constrained by q u o t a s and other_markcting r e s t r i c t i o n s where r e l e v a n t . - * ' .% - Tlie production s e t of t h i s version of Chac comprises n i n e t e e n r e g i o n a l Submodels representing a I o t n l of 5.1 m i l l i o n farms. - Each sub- model is constructed with one t o f o ~ l r" r e p r e s e n t a t i v e farms," s o t h a t over- 3 a l l Chat is based on twenty- nine representative farms. The farms a r e thought t o be s u f f i c i e n t l y homogencor~swithin each group t h a t t h i s procedure is rinlikely to lead t o any serious aggregation bins problems. The e x i s t i n g - 4 - r e s u l t s on model validation indeed show l i t t l e evidence of aggregation b i a s Model a c t i v i t i e s prolplde f o r the production of relevant crops i n each reglon with a choice of up t o three mechanization l e v e l s (involving a l t e r n a t i v e mixes of mules, labor and machines) and up to four planting dates per crop i n each location. Crop i n t e n s i t y i n water, f e r t i l i z e r , and other inputs also varies across representative farms, as a r e f l e c t i o n of basic differences i n s o i l s and climate, so t h a t v i a s p a t i a l rearrangement of cropping patterns further input s u b s t i t u t i o n is potssible i n the aggregate. There a r e , i n a l l , more than 2300 a l t e r n a t i v e production a c t i v i t i e s . For corn, for example, the implicit supply function is quite complex, inasmuch a s it is based on the more than 200 points represented by production a c t i v i t i e s . It also responds to variations i n the prices of other crops which compete for the same resources i n each locality. S e t s of labor a c t i v i t i e s provide f l e x i b i l i t y i n selecting seasonal combinations of family and hired day labor. Family labor is charged a reservation wage which has been estimzted f o r Mexico a t 30% t o 50% of the market wage f o r hired labor [ 4 ] . Purchasing a c t i v i t i e s provide f o r p e r f e c t l y L . , e l a s t i c supplies of short- term c r e d i t , f e r t i l i z e r s , improved seeds, and the - services of d r a f t animals and mashinery. I r r i g a t i o n water is both priced and bounded a t l e v e l s of p h y s i c d a v a i l a b i l i t y , so that i n most cases the - * economic r e n t accruing t o the urn of water i n the model exceeds its - administered price. Land constraints a r e monthly f o r each submodel. Chac has already been used t o estimate capital- labor s u b s t l t u t i o i ~ parameters 121. The numerical specifications of a l t e r n a t i v e degrees of mechanization i n the node1 a r e grounded i n d e t a i l e d studies of farm- level data, and t h i s combined with the scope for s h i f t s i n cropping p a t t e r n s probably rcdkes i t a r e l a t i v e l y good instrument f o r analyzing f a c t o r substitution. However, i t is l e s s well suited f o r studying the impacts of f e r t i l i z a t i o n pricing. I n i r r i g a t e d submodels, t h e model contains j u s t one f e r t i l i z a t i o n l e v e l per crop and per representative farm - t h e observed base-year l e v e l . I n the non- irrigated submodels, there a r e two f e r t i l i z a - d 4 t i o n a l t e r n a t i v e s per cro?. Hence the response t o variations i n t h e 5 f e r t i l i z e r cost is largely confined t o changing the crop mix. Some other l i m i t a t i o n s of Chac f o r t h i s analysis a r e as follows: a ) Since Chac is a s t a t i c equilibrium model, i t only p r e d i c t s the new equilibrium l e v e l s of production and p r i c e s which would eventually be achieved for a specified s e t of values of the exogenous variables. It does not therefore enable predictions f o r s p e c i f i c calendar years, nor say anytking about temporary market d i s e q u i l i b r i a that a r e bounG t o . f a r i s e a s farmzrs seek t o adjust t o new r e l a t i v e p r i c e and cost r a t i o s . Nevertheless, coaparison of a l t e r n a t i v e- p o t e n t i a l equilibrium s t a t e s i s llelpful for polGy - rS formation. B J1 by The madel was i n i t i a l l y tested and v e r i f i e d f o r elfa ability a t 1968 price and cost r a t i o s . Tt is c e r t a i n t h a t the r e l i a b i l i t y of the r e s u l t s w i l l decrease the more r a d i c a l the changes i n price and cost r a t i o s f r o 3 1568 levels. c) Chac encompasses only the annual cropping part of Mexican 6 agriculture. These limitations a r i s e because the "model was b u i l t f o r r a t h e r - d i f f e r e n t purposes than the present need, and they could be overcome only through a considerable e f f o r t t o c o l l e c t new information and r e s t r u c t u r e the model. Any method of analysis must be based on simplifying assumptions, no matter how formal o r informal the technique, and the assumptions behind Chac do nDt seem too unreasonable given the comprehensiveness of the model (and the speed w&th which r e s u l t s can be obtained by using i t ! ) . The major advantage offered by Chac is t h a t , i t incorporates r e l a t i v e price movements and the response of production t o those movemekts i n its simulation of sector reactions t o exogenous changes. Experimental Assumptions about the Exogenous Variables The model was f i r s t solved with predicted 1976 levels of techno- logy, resource constraints, and demand schedules, with a l l monetary values expressed i n 1968 prices. This yielded a base solution, case A i n t h e tables, from which t o measure changes. Five experimental solutions were then defined to capture various aspects of the e n q g y c r i s i s . 'The f i r s t three, cases B, C ,and D , represent different assumptions about the degree of increase i n exogenous c o s t s and export prices, a s compared t o 1968 r e l a t i v e prices. - E The cost changes r e f l e o t i n part three different l e v e l s of f u e l cost increases but also increases i n the non-fuel component of agrochemical and machinery inputs. The export price increases r e f l e c t the cutbacks i n world production associated with the f e r t i l i z e r and machinery cost increases, 7 but no changes were made i n the r e l a t i v e p r i c e s of vegetable exports from M1wir.0 t o the U.S.A. Import prices were a l s o increased a t r a t e s comparable t o t h e expor: p r i c e increases, thus implying the same percentage p r i c e d i f f e r e n t i a l s , but increasing absolute d i f f e r e n t i a l s t o r e f l e c t greater transportation c o s t s . Constraints on export a c t i v i t i e s were maintained a t predicted 1976 l e v e l s for solutions B and C, but i n solution D it was assumed t h a t world t r a d e deficit:; would allow unlimited export p o s s i b i l i t i e s f o r wheat, r i c e , maize, sorghum a 2nd cotton f i b e r and seed, and t h a t Mexican sugar export quotas would be increased by 25%. On t h e import side, i n cases A, B and C, t h e model allows the p o s s i b i l i t y of unlimited imports of some crops but r e s t r i c t s t h e imports of a few key crops i n which the Mexican government wishes t o maintain s e l f - 8 sufficiency. However, i n case D it was f e l t t h a t the contraction of domestic supply may be so strong a s t o render autarkic p o l i c i e s untenable, so the import bounds were removed f o r t h a t case, with the r e s u l t a n t irnporta- tion of some basic foods, a s discussed below. So defined, cases 8 , C and D represent a l t e r n a t i v e possible s e t s of external circumstances which Mexican a g r i c u l t u r e may have t o :ace a s a * I I r e s u l t of the world energy c r i s i s . For estimating the t o t a l impact of the c r i s i s , it is useful to group the exogenous changes i n t h i s way. However, t o b e t t e r understand the r o l e of each v a r i a b l e , it is useful t o define additional cases which focus on the exogenous changes one Gy one. Case E I includes only the increased c o s t s of agrochemicals aad machinery operation, without any changes i n export o r import p r i c e s . Case F is i d e n t i c a l with D except t h a t autarkic import policies a r e retained; it was defined t o e x p l o r e t h e q u a n t i t a t i v e impact of r e s t r i c t i v e import p o l i c i e s . Thus, w h i l e c a s e s 8, C, and D a r e designed t o r e p r e s e n t p o s s i b l e s t a t e s o f t h e w o r l d , c a s e s E dnd F a r e a r t i f i c i a l examples t o h e l p i d e n t i f y n o r e p r e c i s e l y t h e c o n t r i b u - t i o n s of p a r t i c u l a r f:,ctors. T a b l e 1: ASSUMPTIONS DEFINING ALTEILUATIVE SOLUTIONS OF CHAC ( p r i c e s expressed as i n d e x e s ; 1968 l e v e l = 100) S o l u t i o n Agrochemical c o s t s 100 150 225 300 300 300 V a r i a b l e machinery c o s t s 100 125 160 200 2CX3 200 Export p r i c e f o r : Sugar 100 200 250 250 100 250 Whea t LOO 100 150 200 100 200 Rice 100 100 125 1 5 0 100 150 Ma! z e 100 100 125 150 100 150 Sorghum 100 100 125 150 100 150 Cotton F i b e r 100 190 170 200 100 2C0 Cotton Seed 100 100 100 200 100 200 I t Key i n ~ p o r t sbounded? Yes Yes Yes No Yes Yes Export bounds loosened? NO No No Yes No Yes * - - .. The & e s u l t s o f t h e s e s o l u t i o n s a-ct p r e s e n t e d i n t h e f o l l o w i n g sc%l:tions, f i r s t a t t h e n a t i o n a l l e v e l and then a t t h e r e g i o n a l l e v e l . The nurtcir i c a l r e s u l t s s h o u l ~ ln o t be taken t o o l i t e r a l l y , b u t t h e b a s i c q u a l i t a - t i v e outcomes and t h e o r d e r s of magnitudes a p p e a r t o b e p l a u s i b l e . Xesults a t the National Lel!el The r e s u l t s a t the national l e v e l Lre summarized i n Tables 2 through 5. As Table 2 shows, there is a very d e f i n i t e s u b s t i t u t i o n of labor (and d r a f t animal power) f o r machinery a s f u e l costs increase. Employment is a l ~ a y shigher than i n the base solution, and i n cases D and F the incrercent over the base solution is about 330,000 man-years of employment each year. Given t h a t the t y p i c a l job i n Mexican egri- 9 culture does not imply f u l l time work, t h i s represents between 600,000 and 700,000 additional jobs per year. A s expected, use of agrochemicals ( f e r t i l i z e r s plus pesticides) is cut back i n the world of the energy c r i s i s , by as much as 22x when costs i:icrease but export prices a r e unchanged, and by 12% when t h e export prices increase along with costs. The s e c t o r ' s nominal income r i s e s progressively with t h e cost increases, t o a point where it is 50% higher i n case D than i n case A. There a r e two reasons for t h i s . F i r s t , the exogenous increases i n export prices and s a l e s prospects lead t o important increases i n revenue. Exports account f o r 17% of t o t a l sector revenue i n solution A, and f o r 20%, 22%, and 119% i n solutions B, C and D, respectively. Second; the c o s t increases nffcct sector production l e v e l s negatively which, given, the generally - i n e l a s t i c demand s t r u c t u r e facing agriqglture, gives r i s e t o increases i n * L producers' n e t revenue. !i comparison of solutions D and E shows t h a t the - * output-and- price e f f e c t lncreases s e c t o r income by 13% and t h e exports by 1 0 another 37% . The importance of the r e l a t i v e l y i n e l a s t i c domestic demand s truc- turc is i l l u s t r a t e d by case E, which contains the cost increases but for purposes of i l l u s t r a t i o n assumes no export/inport price increasss. In that case, a quautun: index of production f a l l s by s l i g h t l y more than 4% b u t the p r i c index increases by 39%. (Owing t o index number problems, t h e domestic demand s t r u c t u r e s a r e not q u i t e a s i n e l a s t i c a s thecz figures imply.) The n e t impact of these changes is a 25% increase i n the s e c t o r ' s gross revenue and a 13% increase i n nominal n e t incomes. The higher domestic p r i c e s a l s o induce somewhat of a diversion of products away from export markets i n case E, bur i n the other cases the higher export prices induce a diversion i n the opposite direction. The output- and- price e f f e c t s increase disproportionately a s the costs increase - a s the s e c t o r ' s adjustment p o s s i b i l i t i e s diminish. The i n i t i a l c o s t increases (solution B) a r e largely countered by s u b s t i t u t i o n of labor and mules f o r machinery, and by switching t o crops which require l e s s f e r t i i i z e r . However, with the l a r g e r cost increases i n s o l u t i o n s C and D, and with more limited additional adjustment p o s s i b i l i t i e s , production f o r the domestic market is a l s o cut back, e f f e c t i v e l y forcing domestic p r i c e s to s u f f i c i e n t levels t o cover costs. The changes i n production i n percentage terms a r e not a s g r e a t a s the changes i n prices and sector incomes. However, a s show1 l a t e r i n t a b l e 4 the production l e v e l s change more f o r some individual crops. In t h e aggregate, there a r e two opposing e f f e c t s c : production: the disincc . t f v e of c o s t r u increases, and the incentive of !~igherexport prices. A comparison of cases C and D i n t a b l e 2 shows t h a t i t is hard t o predict a p r i o r i whish e f f e c t w i l l '3 - - domi na t e . i .g l ~ egroup which s u f f e r s most from the energy crisl.&s the con- I sumerr;. Low income farmers lose ground i n r e l a t i v e terms, as is discussed i n the succeeding section on regional r e s u l t s , but consumers a r e made worse off in absolute terns. They consume l e s s and that which they consume is more expensive. As c o s t s and export prices increase (solutions B, C , 5 ) consumer welfare declines by iZ, 9%, and 164, respectively, a s measured by Table 2: NATIONAL EFFECTS Base S o l u t i o n P e r c e n t a g e ~ e v e l s Changes f r o m Base F - e w d ~ Sector Income (Ten M i l l i o n Pesos) 2060 + 1 +23 +50 +I3 Sector Gross ~evenue' (Ten Million Pesos) 2994 + 4 +18 +2? +25 Sector Production Index 100 -1.1 -5.2 -5.1 -4-2 Machincry Use (Thousand Months) 1061 -10 -41 -55 -64 Mule Use (Thousand Mon~hs) 8276 +11 +54 +?4 +a3 Chemical Use (Ten Million Pesos) 3707 -- 5 -13 -12 -22 Employment (Thousand Man Years) 2349 -c 2 + 7 +14 +12 Index of Consuner Welfare 100 - - 2 - 9 -16 -13 Vnlue of Exports (Ten M i l l i o n Pe,os) 507 +23 +53 +214 -25 P r i c e Index f o r Sector Output 100 +12 +26 +60 +39 * Domestic Consunption by tht: Denland Croups (thou. tons) : Khca t/Maize C h l l l!e s Sugar Cane ~~ans/~ice/Potatoes/Chickpcas Toma toes gnions/Corlic Ct~curnbers Swec t potatoes Lima Beans Forage Crops Malt Barley Cotton Fiber O i l Seeds Peanuts F r u i t s + Cross revenue is c a l c u l a t e d a t endogenous p r i c e s ; t h e r e f o r e it is not a quantum index of production. ,-,..-- - i~ P ,n,,,,* J - - c - A . . . - + l n - A 4 m n n r C - a r n n r t a - 12 - the sum of consumer surplus over a l l markets. With solution D cost l e v e l s but vithout the ez;?sr..':d exports (solution E ) , consumers a r e somewhat b e t t e r o f f : losing 13% instead of 16A i n welfare terins. Farm household food consumption is a l s o included 'I the t o t a l domestic consumption - Chac does not deduct family food requ:irercents from t o t a l production but e s s e n t i a l l y values them a t market p r i c e s - hence farmers a l s o lose a s consumers, and t h i s l o s s is t o be o f f s e t against t h e gain in nominal sector income. Farm consumption actually aclcounts f o r about 40% of the national c.onsumption of fqod products, and a f t e r allowing for foreign trade and non-food consunp tion, the a c t u a l values of farm food consumption i n solutions A, B, C and D a r e 995, 996, 1105 and 1002 ten million pesos respectively. The t o t a l farm expenditure on foods is thus seen to remain v i r t u a l l y constant, the quantity consumed being reduced to o f f s e t price increases. A s a more d i r e c t measure of producers' welfare, wc have calculated the sum of ~ r o d u c e r s 'surplus plus 40%of consumers' surplus over a l l markets. Taking solution A a s the base, t h i s measure of prod~ceru' welfare changes by -I%,+2% and +8% i n solutions B, C and D L rcspcctivcly . These r e s u l t s suggest that i n aggregate, the farmers of Nexico -- r w i l l a c t u a l l y gair. from s u b s t a n t i a l increases i n the costs of agrochenicals - r? - n ~ dmachinery operations. They w i l l gain substantially i n tgols of nomirlal farn t incomes, but much l e s s so i n terms of o v e r a l l welfare. Other r u r a l f a m i l i e s will a l s o gain through increases employment opportunities a s labor is substituted f o r machinery. The r e a l brunt of the adjustment burden is borne by the non- agricultural sector through increased food prices and reduced consumption l ~ v e l s . A s t h e lower p a r t of Table 2 shows, i n q u a n t i t y terms consumption of v i r t u a l l y a l l commodity groups is reduced i n c a s e D a s compared v i t h c a s e A. S o l u t i o n F is e f f e c t i v e l y a t e s t of t h e s e l f - s u f f i c i e n c y p o l i c y f o r b a s i c foods. R e c a l l t h a t it is i d e n t i c a l t o s o l u t i o n D except t h a t F r e t a i n s t h e import r e s t r i c t i o n s . Under t h i s assumption, farmers are made even b e t t e r o f f and consumers even worse o f f . Allowing imports h a s t h e e f f e c t of p l a c i n g a p r i c e c e i l i n g on domestic markets, and hence farmers gain a t t h e expense of consumers when t h i s c e i l i n g is removed. A s Tab12 3 shows, the p r i n c i p a l commodity t o be imported under a f r e e r tirade p o l i c y is corn; t h i s is c o n s i s t e n t with t h e comparative advantage cal.culations worked o u t f o r a l l crops i n [ 5 ] . Essential1:-, imported c o r n r e p l a c e s t h a t amount which is c u l t i v a t e d under i r r i g a t i o n . Within Mexico, t h e compara- 11 t i v e advantage i n corn production l i e s w i t h non- irrigated a r e a s . Tables 4 and 5 i l l u s t r a t e some of t h e production and p r i c e e f f e c t s f o r i n d i v i d u a l crops. Given t h e g e n e r a l l y p r i c e - i n e l a stic n a t u r e of demand, t h e p r i c e responses tend t o be .proportionately g r e a t e r than &he q u a n t i t y respolir,er;. Soluf-ion D shows n s i ~ n i f i c n n ts u b s t i t u t i o n of wheat f o r corn (Teblr 4 ) when i m 6 r t p o s s i b t l i t l e ! ; Rrc opened up. The reaeonls For t h e .r 15 - producers' g a i n s a ~ consumers' l o s s e s i n aggregate terms cnn be s e e n q u i t e d concretely i n the %imulated market price reactions (Table 5). I n s o l u t i o n D , b e n n ~a r e up 46% i n p r i c e , corn up 1+0%,trmntoes up 15%, an~dwheat up 12 9-%, a l l ~ e l n t i v et o the g e n e r a l p r i c e index. Table 3: EFFECT ON EXPORTS AND IMPORTS FOR IMPORTLNT CHOPS (Levels traded in thousand tons) - Solution 1IEXPORTS Beans Cantaloupes Chi llies Cotton Fiber Sorghum Strawberries Sugar Wheat Tom.1 toes ~afflower/Sesame/Linseed Total Value of Exports (ten million pesos) Maize . Rice Soybeans Oats Total Value of Imports (ten million pesos) Table 4: EFFECTS CN NATIONAL PRODUCTION LEVELS FOR SELECTED CROPS (quantity indexes) - Solution - Crop A B C D E F Corn 100 99 94 68 91 86 Wheat 100 98 102 133 94 119 Beans 100 100 90 86 86 86 Sugar cane 100 100 100 101 79 99 Cotton (raw) Sorghum Tomatoes 1C.j 100 100 94 100 94 Rice 100 99.7 96 92 9 1 92 C h i l l i e s (green and dry) 100 100 98 87 96 86 ~ Safflower 100 100.4 99 92 104 88 Cantaloiipe 100 100 100 100 100 100 Onions 100, 103 100 98 98 98 Chickpeas 100 100 92 185 88 169 Table 5: EFFECTS ON DOMESTIC PRICE LEVELS, SELECTED CROPS (Indexes) S o l u t i o n - Crop A B C D E F Corn 100 112 1 3 1 140 148 158 Wheat 109 115 134 198 154 1 9 8 Beans 100 116 127 146 143 1 4 8 Sugarcane 100 107 118 133 113 146 Cotton (raw) 100 113 124 243 138 243 Sorghum Tomat o e s Rice C h i l l i e s (green) Safflower Can tnloupe Onions Chickpeas 100 97 78 130 * 86 117 - -- -- - W et u r n now t o examine some of t h e d i s t r i b u t i o n a l e f f e c t s of the gaino i n t h c a g r i c u l t u r a l s e c t o r a s portrayed i n t h e model r e s u l t s at the .? regional l e v e l s . Regional R e s u l t s Of the nineteen submodels i n Choc, f i v e have been s e l e c t e d to i l l u s t r a t e the r e g i o n a l impacts o f the energy c r i s i s . Each is r e p r e s e n t a t i v e of a c e r t a i n type of a g r i c u l t u r e i n Mexico: two r e p r e s e n t i r r i g a t e d zones, two r e p r e s e n t temperate r a i n f e d a r e a s , and one r e p r e s e n t s t r o p i c a l a g r i c u l t u r e . Table 6 shows some s a l i e n t d e t a i l s of s o l u t i o n D f o r a l l f i v e submodels, and Tables 7 through 11 g i v e more information on each submodel. The submodels were s e l e c t e d f o r t h e i r d i v e r s i t y . With a n a v e r a g e annual n e t income per farm of 27,447 pesos, t h e farmers of t h e Rio Yaqui d i s t r i c t are among t h e top f i v e percent i n t h e Mexican r u r a l income d i s t r i - bution. A t t h e o t h e r extreme, t h e r a i n f e d farms i n t h e s t a t e s of Mexico and i Tlaxcala belong t o t h e lowest twenty- five percent: t h e i r average annual farm income is 1,139 pesos. The t r o p i c a l farms i n t h e s t a t e s of Tabasco and 1 3 Veracruz a r e n o t much b e t t e r o f f . The i r r i g a t e d farms i n E l B a j i o are more productive per h e c t a r e than those i n Rio Yaqui, b u t they a r e sufficient:ly s m a l l e r i n s i z e t h a t t h e i r farm income l e v e l s a r e lower. The non- irrigated p a r t of El Bajio is one of t h e more productive r a i n f e d zones i n t h e c o u n t r y . Table 6 makes i t c l e a r t h a t t h e r i c h e r farmers g a i n more from tile energy c r i s i s . The r a i n f e d El Bojio farms and t h e t r o p i c a l fal-ms g a i n 1 a b s o l u t e l y , b u t at a l e s s e r r a t e , and t h e poorest r a i n f e d farms a c t u a l l y - - s l i p i n ;ibsolute terms. These income d i s t r i b u t i o n e f f e c t s a r e accentuated even more if allowance is made f o r t h e increased c o s t of family food - - i corir;:imp tloli. * - .E 'fie main reason f o r these d i s p a r i t i e s i n impact is that the farmers w i t i l i r r i g a t i o n have n more d i v e r s i f i e d p o r t f o l i o of c r o p s and hence a r c more a b l e t o take advantage of s h i f t i n g r e l a t i v e p r i c e s by a l t e r i n g t h e i r cropping p a t t e r n . I n Rio Yaqui, f o r example, i n comparing solution D with solution A the following cropping pattern s h i f t s occurred i n response t o tile corresponding r e l a t i v e price changes: % change i n hectares % change i n market Crop harvested p r i c e Wheat +93 +4 6 Cotton Corn Barley h'hile the prices of a l l crops increased, the crop mix s!iifted strongly toward those which went up most. In the E l Bajio i r r i g a t e d zone, che same s o r t of phenomenon occurred over a somewhat d i f f e r e n t s e t of crops. Command of water implies greater f l e x i b i l i t y i n production choices, and t h i s f l e x i b i l i t y is important for successful adaptation to changed circumstances. Among other things, the regional tabulations a l s o show t h a t general r e s u l t s a t the sector level do not always hold i n t h e c i s e of each . I region. While employment is higher i n case D than case A i n t h e aggregate, i t is lower i n Rio Yaqui, owing t o the s h i f t out of a more llibor intensive - '9 - crop (corn) into a more c a p i t o l intensive crop (wheat). A s nothe her example, f e r t i l i z e r use actual& goes up a s the cost r i s e s i n the E l 3ajio rainfed I submodels. (Table 9). This is e n t i r e l y a t t r i b u t a b l e to a s : ~ i f ti n t o a r e l a t i v ? l y f e r t i l i z e r intensive crop, beans. I n t h i s case, interregional comparative advantage on the output s i d e , i n the face of s h i f t i n g r e l a t i v e crop prices, outweighed considerations of higher input costs. Jn the Tlnxcala-Hexico submodel, the mule-machinery Tab3e 6: BASIC REGIONAL RESULTS, SOLUTIONS A AND D' Submodel l'rrigated on-frri g ated - Vat i a b l e E l Bajfo Rlo Yaqui E l Rajfo Tlaxcala T r o p i c a l -Mexico - Solution A n e t income/ farm (pesos) 17,455 27,447 3,878 1,139 1,96'7 Solution D % change r e l a t i v e t o s o l u t i o n A, f o r : income employment mule use +486 0 0 -t78 + I. machinery use -100 + 9 - 2 -96 C) chemical use - 8 + 3 + 2 -61 -12: -Notes on submodel coverage: The submodels a r e defined f u l l y i n Bassoco and Rend611 [ 3 ] . definitions a r e s u m r i z c d here and refrrence is made to their submodel numbering system [3, pp. 344-3451. (1) El Bajfo i r r i g a t e d : submodel No. 10, o f f i c i a l i r r i g a t i o n d i s t r i c t s of A l t o Rlo Lerma and La Begofla, l y i n g mostly i n h e s t a t e of Guanajuato, i n t h e c e n t r a l plateau. ' C ( 2 ) Rlo Ynqui: submodel No. 1, o f f i c i a l T r r i g n r i o n d i s - t r i c t of thc same name i n the s t a t e of ono or;, northwestern blcxico. '2 L - ( 3 ) Ei Bajfo non-irrigated: submodels NOS? 8 and 9, t h e a r e a . surrounding t h e i r r i g a t i o n d i s t r i c t s o z N t o Rfo Lenna and La Begofia. (4) Tlaxcala-Mexico: submodel No. 14, t h e r a i n f e d a r e a s l y i n g at more than 200') meters of e l e v a t i o n and r e c e i v i n g 600- 800 mm. of annual r a i n f a l l (includes small p o r t i o n s of Hidalgo and some o t h e r s t a t e s ) . ( 5 ) Tropical: submodel No. 18, t h e landa l y i n g at l e a s than 500 meters e l e v a t i o n and receiving more than 1500 =.of annual r a i n f a l l - mostly t h e s t a t e s of Tabasco and Veracruz. - 20 - s h i f t is evidence of a s h i f t toward more labor- intensive techn~lques, b u t t h e r e is also a reduction of output caused by higher production costs. The o u t p u t e f f e c t more than o f f s e t s t h e s u b s t i t u t i o n e f f e c t , s o t h a t t h e n e t change i n employment is negative. I n t h e t r o p i c a l submodel, t h e r e is an icprovement i n income l e v e l s , although n o t a s s t r o n g l y a s i n t h e i r r i g a t e d submodels. I n s p i t e of t h e expanded sugar quota of c a s e D, t o t a l sugar production d e c l i n e s because (a) the reduction i n d o u e s t i c s a l e s has a pronounced e f f e c t and (b) t h e s u g a r producers of o t h e r t r o p i c a l zones appear t o c a p t u r e more of th.e increment i n t h e quota due t o i n t e r r e g i o n a l comparative advantage. Employinent moves i r r e g u l a r l y over c a s e s B, C , D, and E, a s a f u n c t i o n of i r r e g u l a r s h i f t s among crops of d i f f e r i n g labor i n t e n s i t i e s . We do not suggest t h a t these regional r e s u l t s be taken l i t e r a l l y - Chac is probably more r e l i a b l e a t t h e aggregate l e v e l than a t t h e l o c a l l e v e l - but they do seem persuasive f o r Mexican a g r i c u l t u r e on two p o i n t s : t h e widening of income d i s p a r i t i e s as a consequence of t h e energy c r i s i s , and the impossibility of applying sector- wide generalizations t o s p e c i f i c l o c a l i t i e s . 4 To conclude on a n a p p r o p r i a t e l y s p e c u l a t i v e note, WE would l i k e t o point o u t some l i k e l y i m p l i c a t i o n s of t h e r e g i o n a l r e s u l t s f o r t h e Tlaxcala- - - Mexico submodel. The average form s i z e t h e r e permits narginol amounts of, i crop s a l e s a f t e r s a t i g f y i n g family consumption requirements, b u t on t h e @ole m *' these farmers o p e r a t e b n extremely t h i n p r o f i t margins. Many of them caram the bulk of t h e i r income by seasonal migration t o Mexico C i t y t o work a s l a b o r e r s and s t r e e t vendors. Permanent out- migration t o t h e c i t y is a l s o higher i n t h i s zone than i n any other. The submodet r e s u l t s suggest t h a t the increased c o s t s of production stemming from the energy c r i s i s , however small i n absolute value, a r e l i k e l y t o s i g n i f i c a n t l y reduce t h e i r income from cultivation. Hence it is q u i t e l i k e l y t h a t t h e i r tendency t o &grate i n search of work, both seasonally and permanently, w i l l be noticeably reinforced. A by-product of the energy crisis therefore may be a f u r t h e r swelling of t h e population i n the low-income, migrant sections of Mexico City. Table 7: EFFECTS ON AVERAGE IRRIGATED FARM I N EL BAJIO (CE:IVAL PLATCAU) ------------- -. - Value i n Percentage Changes from Base Solution . Base Solution - Variable A B C D E -- 1 t Net Farm Income (Pesos) 17,455 +12 + 17 + 70 + 26 Total Employment (Man Years) 1.9 0 + 1 3 + 6 + 1 2 Mule Use (Days) 35 + 4 +434 +486 +486 Machinery Use (Days) 11 - 1 - 76 -100 - 99 Chemical Use (Pesos) 415 0 - 3 - 8 - 4 ------------------------------.---------------------------------------------- 1 Alfalfa (ha) 1.48 0 0 0 I O Garlic (ha) 0.08 0 - 13 - 13 - 13 Onions (ha) 0.10 0 0 0 0 Barley (ha) 0.92 0 - 7 0 + 2 3 - 5 2 Green C h i l l i e s(ha) ' 0.04 1 0 0 0 -100 Lima Deans (ha) - - - - 1.30 0 48 -100 64 ToatlCoes (ha) 0 0 0 0 / i 'CornZ(ha) 5.03 0.13 0 + l i - 4 + l o - J, - N L I t Total Crops (ha) 9.28 0 - 7 - 1 4 - 9 L - Number of Farms: 23,687. Hectares per Farm: 7.9 t Includes double cropping. -Table - 8: EFFECTS ON P.VhKAGE IRRIGATED FARM I N R I O YAQUI DISTRICT (STATE OF SONORA) Value i n 1 Percentage Changes from Base S o l u t i o n Base Solution I I Variable c I A 3 N e t Farm Income (Pesos) T o t a l Employment (Man Years) Mule Use (Days) Machinery U s e (Days) Chemical Use (Pesos) Cotton (ha) Barley (ha) Corn (ha) Wheot (ha) t T o t a l Crops (ha) * Number of Farms: 13,049 Hectare8 per Farm: 15.7 * Absolute l e v e l under s o l u t i o n E: 78 days. t Includes double cropping. T a b l e 9 : EFFECTS ON AVEFUGE RAINFED FARM I N EL BhJIO (CENTRAL PLAT AU) Value i n P e r c e n t a g e Changes f r o m Rase S o l u t i o n Base S o l u t i o n V a r i a b l e 'I Ket Farm Income ( p e s o s ) T o t a l Employment (man y e a r s ) Mule Use ( d a y s ) i Machinery Uze ( d a y s ) Chernici~lUse ( p e s o s ) 1I~'aiis (ha. ) (:h ickpeas ( h a . ) i t I'ut.11 Crops (ha. ) r N r l m t ~ c r o: Farms: 41,!t32 tIectnre:i per Farm: - 8.8 t I n c l # d e s d o u b l e c r o p p i n g . . Table 10: EFFECTS ON AVERAGE RAINFED FARM I N THE STATES OF TLAiiCAM ILYD EIEXICO (CENTRAL PLATEAU) v Value i n Percentage Changes from Base Solution Base Solution Variable Net Farm ~ncome (pesosj Total Empl-opent (man years) Mule Use (clays) I Machinery U s e (days) Chemical Use peso^) ---------------- Corn (ha.) Potatoes (ha.) I Total Crops (ha. ) . . j u m ~ e rof Farms: - 261,593 i !ectares per Farm: 4.45 Table 11: EFFECTS ON AVERAGE TROPICAL FARM I N THE STATES OF TABASCO AND VERACRUZ - Value i n Percentage Changes from Base Solution Base Solution - Variable B C n E Net Farm Income (Pesoa) Total Employment (Man Years) Mule U s e (Days) Machinery (Days) Chemical Use (Pesos) Rice (ha) Sugar (ha) Corn (ha) Total Crops (ha.) Number of Farms: 364.i92 - L Hectares per Farm: *-1.0 - -Footnotes -- C'nac, nanled a f t e r t h e Mayan r a i n god, was coqstrricted j o i n t l y by tlhe Eevelopnent Research Center and t h e S e c r e t a r i a d e l a P r e s i d e n c i a , Xexico. A complete d e s c r i p t i o n of s h e model can b e found i n Duloy and Norton [4] and Bassoco and Rendon [3]. Chac is now a c t i v e l y used i n t h e formation of c u r r e n t a g r i c u l t u r a l p o l i c y i n Mexico; an i l l u s t r a t i v e set of t h e planning r e s u l t s is presented i n Bassoco and Norton [2]. I n t h e I.Ie,.ican planning v e r s i o n of t h e model [2], t h e p e r f e c t compe- t i t i o n assumption is modified f o r s u b s i s t e n c e producing a r e a s , where a f l e x i b l e minimum consumption c o n s t r a i n t is introduced which permits s a t i s f ~ c t i o nof b a s i c consumption needs e i t h e r through own production o r through purchase from t h e market. I f t h e latter course is Followed, a p e n a l t y is paid which r e f l e c t s commercial margins, market imperfections, and seasonal p r i c e f l u c t u a t i o n s . Again, t h e o p e r a t i o n a l Mexican v e r s i o n d i f f e r s s l i g h t l y , having twenty submodels and thirty- one r e p r e s e n t a t i v e farms. The d i f f e r e n c e a r i s e s from a farm s i z e d i s a g g r e g a t i o n f o r one r e g i o n i n t h e Mexican v e r s i o n . I t was hoped t o include i n Chac more p o i n t s on f e r t i l i z e r response f u n c t i o n s , but shccr l a c k of information a t t h e f i e l d l e v e l prevented doing so. Changes i n t h c cropping p a t t e r n s a t t h e submodel l e v e l do n o t n e c e s s a r i l y imply changes i n t h e a g g r e g a t e , f o r compensating s p a t i a l s h i f t s can occur. F e r t i l i z a t i o n r a t e s do d i f f e r by l o c a t i o n f o r t h e same crop, s o t h a t such compensating s p a t i a l s h i f t s could be a p l a u s i b l e response t o f e r t i l i z e r p r i c e changes. More p r e c i s e l y , i t covers t h e 3 1 major annual c r o p s p l u s sugar cane and a l f a l f a . I E ,.,rou5i:tst t h e t e x t , t h e phrase " r e a l ~ r i c e s "means r e l a t i v e p r i c e s 1 1 expressed i n t h e framework of 1968 p r i c e s . Thus, i n t h e f i r s t round of changes, i t is assumed t h a t p r i c e s of f e r t i l i z e r , f u e l , and sonle e x p o r t s went up r e l a t i v e t o t 3 e o v e r a l l M k i c a n p r i c e index, b u t t h a t vegetable export p r i c e s d i d n o t . Of courge, t h e model is used t o - -* e s t i m a t e r e a l changes i n o t h e r p r i c e s i n ;he 2nd through n t h rounds. ! Throughout t h e l a . t e 1950's and 1 9 6 0 t s , Mexico s u c c e s s f u l l y maintaioed a "no-import p o l i c y ' t f o r a g r i c u l t u r a l goods, b u t production d i f f i c u l - t i e s made necessary s u b s t a n t i a l imports of corn, wheat and sorghum i n 1970-73. The p o l i c y makers a r e a t t e m p t i n g t o s t i m u l a t e production cf these c r o p s enough t o be a b l e t o r e t u r n t o t h e h i s t o r i c z l patLern of s e l f - s u f f i c i e n c y , s o c a s e s A through C a r e based on t h e a s s u c p t i o n t h a t those a t t e m p t s w i l l be s u c c e s s f u l . 4 9 Faraers without i r r i g a t i o n normally spend Less -5an s i x months a y e a r i n t h e i r f i e l d s , and l a n d l e s s l a b o r e r s may work as l i t t l e a s on" c r two mo~.thsof t h e year. See [2] cnd [ 5 ] f o r e s t i m a t e s of t h e s e a s o n a l employment curves i n Mexican a g r i c u l t u r e . Estimates o f s e ctor- wide c a p i t a l - l a b o r s u b s t i t u t i o n e l a s t i c i t i e s a r e a l s o given i n [2]. The two e f f e c t s may not be s t r i c t l y a d d i t i v e , as t h e sentence i n t h e t e x t implies. l 1 Table 3 shows a n extreme r e s u l t i n s o l u t i o n E: t h e e l i m i n a t i o n of sugar e x p o r t s . This is t h e c a s e where chemical and v a r i a b l e machinery c o s t s a r e up three- fold and two- fold r e s p e c t i v e l y , b u t export p r i c e s a r e unchanged. I n t h i s s i t u a t i o n , e v i d e n t l y sugar producers a r e caught i n a cost- price squeeze and, i n Chac, opt: t o supply only t h e domestic market, where p r i c e s a r e r i s i n g . Of c o u r s e t h i s model r e s u l t should o n l y be taken a s i n d i c a t i v e o f a d i r e c t i o n of change, b u t i t does suggest t l , a t higher world o r quota s u g a r p r i c e s a r e q u i t e important t o Mexican sugar producers g i v e n t h e energy c r i s i s . The r e s u l t may not b e s o far- fetched i n l i g h t o f t h e d i f f i c u l t i e s i n t h e Mexican sugar i n d u s t r y i n t h e p a s t two y e a r s ; t h e P r e s i d e n t himself has c a l l e d f o r replacement of o u t m d e l e d processing machinery and f o r o t h e r measures t o improve l a b o r p r o d u c t i v i t y i n t h e i n d u s t r y . l 2 O f course, a g r i c u l t u r a l p r i c e i n c r e a s e s of t h e s e magnitudes would be l i k e l y t o f a n g e n e r a l i n f l a t i o n , s o t h a t u l t i m a t e l y t h e s e p r i c e s would not be s o h i g h r e l a t i v e t o t h e o v e r a l l p r i c e index. Hcwever, t o analyze t h a t sequence o f r e a c t i o n s i n a problem of t h e theory of i n f l a t i o n and beyond t h e scope of t h i s e x e r c i s e . Although t h e r e l a t i v e p r i c e i n c r e a s e s r e p o r t e d here may be d i l u t e d by g e n e r a l i n f l a t i o n , i t is u s e f u l t o analyze them i f o n l y t o understand t h e magnitude of one of the p r i n c i p a l causes of g e n e r a l i n f l a t i o n . ' In the c a s e of t h e t r o p i c s , t h e s e f i g u r e s g i v e a somewhat misleading piccure of t h e farm o p e r a t i o n , Eor t h e t y p i c a l farm t h e r e incl-udes s u b s t a n t i a l amounts of i i v e s t p c k and/or t r e e c r o p s , and Chac i n c l u d e s n e i t h e r . Elsewhere i n t h e country, t h e farms tend t o b e more c g e a r l y -- d i f f e r e n t i a t e d i n t o e i t h e r l i v e s t o c k ranches o r annual- crop f a r & w i t h only marginal amounts o f l i v e s t o c k and t r e e crops. w !F - I REFERENCES [ I ] Bassoco, L.M., J . H . Duloy, R.D. Norton, and D.L. Winkelmann, "A Programming Model of an Agricultural ~ i s t r i c t , "Ch. IV.4 i n L.M. Goreux and A.S. Planne, eds., Multi- level Planning: Case Studies i n Mexico, North-Holland Publishing Company, 1973. [2] Bassoco, L.M. and R.D. Norton, "A Quantitative Agricultural Planning Methodology , I 1 paper presented t o t h e V I International Inlput-Output Conference, Vienna, April, 1974. [3] Bassoco, L.M., and T. ~ e n d h n ,"The Technology Set and Data Base f o r Chac," Ch. IV.2 i n Goreux and llanne (1973). [ 4 ] Dvloy, J.H., and R.D. Norton, "Chac: A Programming Model of Mexican Agriculture," Zh. I V . l i n Goreux and lianne (1973). (51 Duloy, J .H., and R.D. Norton, "Chac Results: Economic Alternatives f o r Mexican Agriculture," Ch. LV.3 i n Goreux and Manne (1973).