# Online Appendix - American Economic Association 2016-06-20¢ Online Appendix Contents...

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### Transcript of Online Appendix - American Economic Association 2016-06-20¢ Online Appendix Contents...

Identifying Supply and Demand Elasticities of Agricultural

Commodities: Implications for the US Ethanol Mandate

Michael J. Roberts♣ and Wolfram Schlenker♠

Online Appendix

Contents

A1Model A1 A1.1 Validity of ωt as Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . A1 A1.2 Price Effect in Muti-crop System . . . . . . . . . . . . . . . . . . . . . . . . A2

A2Data Appendix A3 A2.1 Agricultural Production Data . . . . . . . . . . . . . . . . . . . . . . . . . . A3 A2.2 Weather Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A4 A2.3 Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A5 A2.4 Ethanol Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A5

A3FAO Data - Additional Results A18

A4FAS Data A24

A5Sensitivity Checks A30

♣ Department of Agricultural and Resource Economics, North Carolina State University, Box 8109, Raleigh,

NC. Email: michael roberts@ncsu.edu. ♠ School of International and Public Affairs, Columbia University, 420 West 118th Street, New York, NY

10027. Email: wolfram.schlenker@columbia.edu.

A1 Model

A1.1 Validity of ωt as Instrument

Our baseline model uses log yield deviations ξcit for crops c in country i and year t. We

are fitting crop-and-country specific time trends gci(t) in regressions of log yields ycit, i.e.,

ycit = gci(t) + ξcit.The annual shock ωt is a weighted average of all shocks. The weights ρcit

depend on predicted yields ŷcit = e gci(t)+

σ2

2 (where σ2 is the estimated variance of the error

terms), growing area acit, and the caloric content of one production unit of crop c, κc.

ωt =

∑

c

∑

i ξ̂cit × ŷcit × acit × κc∑ c

∑

i ŷcit × acit × κc = ∑

c

∑

i

ξ̂citρcit

ρcit = ŷcit × acit × κc

∑

c

∑

i ŷcit × acit × κc

Here we show that ωt is exogenous despite the endogeneity of ρcit, given:

(i) E[ξcit] = 0, which is true by construction of the shocks

(ii) ξcit is exogenous, which is otherwise assumed and defended in the text

(iii) ξcit is independent of the weight ρcit, which may be a stronger assumption, but follows

if yield shocks follow from weather experienced after planting decisions are made.

Assumption (iii) is testable: when we regress country-and-crop specific weights ρcit on

the shocks ξcit, the p-value is never below 0.69 regardless whether we use FAO or FAS

data and whether we include country-by-crop specific fixed effects or not.

A valid instruments requires that ut is orthogonal to ωt, or COV (ut, ωt) = 0. We have

COV (ut, ωt) = COV

(

ut, ∑

c

∑

i

ξcitρcit

)

= E

[

ut ∑

c

∑

i

ξcitρcit

]

− E [ut] ︸ ︷︷ ︸

=0

E

[ ∑

c

∑

i

ξcitρcit

]

= E

[ ∑

c

∑

i

ξcit

]

E

[ ∑

c

∑

i

utρcit

]

= 0

A1

The second line uses the definition of the covariance, the third line use the fact that ξcit is

exogenous (orthogonal to ut) and independent of ρcit. Finally, the fourth line uses E[ξcit] = 0.

A1.2 Price Effect in Muti-crop System

In the main paper we estimate the effect of new biofuel demand on price using a model that

aggregates the four major food commodities based on caloric content. Here we present the

algebra for modeling price effects on n commodities. Denote the log demand for commodity

i by qi, the log price by pi, and the elasticity of demand for commodity i with respect to

price of commodity j as βd,ij. We have:

q1

q2 ...

qn

︸ ︷︷ ︸

q

=

αd,1

αd,2 ...

αd,n

︸ ︷︷ ︸

αd

+

βd,11 βd,12 . . . βd,1n

βd,21 βd,22 . . . βd,2n ...

... . . .

...

βd,n1 βd,n2 . . . βd,nn

︸ ︷︷ ︸

βd

p1

p2 ...

pn

︸ ︷︷ ︸

p

= αd + βdp

Similar, the supply system is given by:

q1

q2 ...

qn

︸ ︷︷ ︸

q

=

αs,1

αs,2 ...

αs,n

︸ ︷︷ ︸

αs

+

βs,11 βs,12 . . . βs,1n

βs,21 βs,22 . . . βs,2n ...

... . . .

...

βs,n1 βs,n2 . . . βs,nn

︸ ︷︷ ︸

βs

p1

p2 ...

pn

︸ ︷︷ ︸

p

= αs + βsp

The equilibrium is given by equating demand and supply

αd + βdp = αs + βsp ⇔ [αd −αs] = [βs − βd]p

And hence the equilibrium prices are

p = [βs − βd] −1 [αd −αs]

If biofuels shift out the demand by ∆αd,1 for commodity 1, the resulting effect on equilibrium

prices is

∆p = [βs − βd] −1 [∆αd,1 0 . . . 0]

′

A2

Note that all prices adjust, even though the demand for only one commodity increases

because the prices are linked through cross-price elasticities. Uncertainty of the estimate

is derived by drawing one million random draws from the estimated joint distribution of

the βd,ij and βs,ij, inverting the matrix [βs − βd] −1, and derive the predicted price increase

[βs − βd] −1 [∆αd,1 0 . . . 0]

′ for each commodity on each draw.

If there is just one commodity, this simplifies to the baseline case: ∆p = ∆αd,1

βs,11−βd,11 .

A2 Data Appendix

A2.1 Agricultural Production Data

Yield data for the four staple commodities, maize, rice, soybeans, and wheat, were obtained

from two data sources. The baseline model uses data from the Food and Agriculture Or-

ganization (FAO) of the United Nations (http://faostat.fao.org/) for the years 1961-2010.

The data include production, area harvested, yields (ratio of total production divided by

area harvested), and stock variation (change in inventories) for each of the four key crops.

Production and area are assigned to the calendar year given by FAO. Demand is annual

production plus the change in inventory, which is given by the negative of the “Stock Varia-

tion” variable in the FAO data. The last variable is only available until 2007, so the baseline

regression uses data for the 47 years from 1961 to 2007. Since most regressions include one

lag of yield shocks, those using FAO data generally have 46 observations.

In a sensitivity check, we use data from the Foreign Agricultural Service (FAS) by the

United States Department of Agriculture (http://http://www.fas.usda.gov/) that has data

for 1961-2010 for all variables, including stocks. FAS reports production for marketing years,

i.e., the 12-month period between the last harvest and the next harvest, when the amount

produced is being sold. To be consistent with the FAO data, we assign production data to

calendar years based on the year when the marketing year starts. We adjust the year for

Argentina maize and Romanian soybeans, as they seem to be off by one year. Consumption

quantities are set equal to production plus the inventory levels at the beginning of the

marketing year minus inventory levels at the end of the marketing year, which are given in

the data.

The FAS data does not provide production data for soybeans before 1964, so we manu-

ally fill in production numbers from USDA. Soybeans were a small share of overall calorie

production at that time, and the US produced a dominant share of global production, so the

omitted countries should have little influence. The FAS data does not give an estimate for

A3

the world total. Instead we simply sum the numbers for all countries in the data to get the

total production of all major producers. Since the FAS data does exclude countries that are

not major producers, consumption estimates tend to be smaller than production estimates.

We model yields in each country that on average account for at least 0.5% of global

production and sum the remaining countries as “Rest of the World.” Countries that produce

at least 0.5% of any of the four commodities are given in Tables A1 and A2. The geographic

location of these countries is shown in the bottom panels of Figures A1-A4. Individual yield

observations in our baseline model using FAO data as well as time trends using restricted

cubic spline with 3 knots are sh

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