Output Transfers

An output transfer, I, is defined as the difference between the actual market price of a commodity produced by an agricultural system, A, and the efficiency valuation for that commodity, E. If the system has more than one output, the matrix entries A, E, and I will be made up of the sum of market prices, efficiency prices, and output transfers for all outputs. However, since the actual analysis is constructed on a commodity-by-commodity basis, this discussion assumes that only one output is produced. In most countries agricultural outputs enter into international trade in the absence of trade-distorting policies. For these tradables the appropriate efficiency valuation is given by the world price (fob export or cif import).

The lack of participation in international trade does not in itself mean that the output is nontradable; when a government effectively bans imports of a commodity, no trade will be observed. But this absence of trade is the direct result of the distorting policy. Because most agricultural outputs are internationally tradable, this discussion focuses on tradable commodities. In practice, whether a commodity is tradable or nontradable is an important empirical question. Entries into the E box of the matrix, the social valuations, are thus either comparable world prices for tradable outputs or marginal social costs for nontradable outputs.

Divergences, which cause private valuations to depart from their social counterparts, are always the result of either distorting policies or market failures. Governments can, at least in principle, enact efficient policies that correct the inefficiency influences of market failures. This effort is observed only rarely, because failures in output markets are difficult to identify empirically and are thought to be fairly unimportant (on the basis of sketchy evidence), especially in the context of more pressing economic and social concerns. As a practical matter, therefore, in most contexts the measured effects of divergences in output markets are attributed solely to distorting policy.

Governments choose between two principal policy instruments-trade restrictions and taxes or subsidies-if they want private prices to differ from social values set by world prices. If a government wishes the private price to be above the world price for imported goods (as illustrated in Box 12.1), its policy-makers can either restrict international trade or levy a tax on all production, domestic and imported. Alternatively, if the desire is to lower domestic prices of importables relative to cif import prices, the government has only one choice-to subsidize imports with payments from the treasury. The opposite results apply to exportable outputs.

If all agricultural systems under study have identical outputs, the analyst can compare their output transfers simply by contrasting the absolute sizes of the entries in I for all PAMs within or across countries. For example, the output transfer for one wheat system in Portugal can be compared with that of another wheat system in Mexico-if both systems produce only wheat grain and wheat straw. One needs only an appropriate exchange rate to convert both PAM results to a single currency. However, a comparison of the output transfer for a wheat system with that for a corn system requires construction of a ratio to compare the unlike products. This ratio is the nominal protection coefficient on tradable outputs (NPCO), defined as the private price divided by the comparable world price. If there is a single product in the system, the NPCO is given by the ratio of two PAM output entries, A / E. When more than one output is produced, the average NPCO for all products is found by the adding up of all outputs in private prices and then in social prices and by the formation of a ratio of these two sums. This procedure is illustrated in Box 12.1.