Social Profitability

The second row of the accounting matrix utilizes social prices, as indicated in Table 2.1. These valuations measure comparative advantage or efficiency in the agricultural commodity system. Efficient outcomes are achieved when an economy's resources are used in activities that create the highest levels of output and income. Social profits, H, are an efficiency measure because outputs, E, and inputs, F + G, are valued in prices that reflect scarcity values or social opportunity costs. Social profits, like the private analogue, are the difference between revenues and costs, all measured in social prices-H = (E - F - G).

For outputs (E) and inputs (F) that are traded internationally, the appropriate social valuations are given by world prices-cif import prices for goods or services that are imported or fob export prices for exportables. World prices represent the government's choice to permit consumers and producers to import, export, or produce goods or services domestically; the social value of additional domestic output is thus the foreign exchange saved by reducing imports or earned by expanding exports (for each unit of production, the cif import or fob export price). Because of global output fluctuations or distorting policies abroad, the appropriate world prices might not be those that prevail during the base year chosen for the study. Instead, expected long-run values serve as social valuations for tradable outputs and inputs.

The services provided by domestic factors of production-labor, capital, and land-do not have world prices because the markets for these services are considered to be domestic. The social valuation of each factor service is found by estimation of the net income forgone because the factor is not employed in its best alternative use. This approach requires the commodity systems under analysis to be excluded from social factor price determination. For example, if land is planted to wheat, it cannot grow barley during the identical crop season; the social opportunity cost of the land for the wheat system is thus the net income lost because the land cannot produce barley. Similarly, the labor and capital used to produce wheat cannot simultaneously provide services elsewhere in agriculture or in other sectors of the economy. Their social opportunity costs are measured by the net income given up because alternative activities are deprived of the labor and capital services applied to wheat production.

The practice of social valuation of domestic factors begins with a distinction between mobile and fixed factors of production. Mobile factors, usually capital and labor, are factors that can move from agriculture to other sectors of the economy, such as industry, services, and energy. For mobile factors, prices are determined by aggregate supply and demand forces. Because alternative uses for these factors are available throughout the economy, the social values of capital and labor are determined at a national level, not solely within the agricultural sector. Actual wage rates for labor and rates of return to capital investment are therefore affected by a host of policies, some of which may distort factor prices directly. An enforced and binding minimum-wage law, for example, raises the market wage above what it would have been in the absence of policy and causes observed wages to be higher than the social opportunity cost of labor. But indirect effects can also be important. Distortions of output prices cause different activities to expand or contract, altering in turn the demand and prices of mobile domestic factors.

Fixed, or immobile, factors of production are the factors whose private or social opportunity costs are determined within a particular sector of the economy. The value of agricultural land, for example, is usually determined only by the land's worth in growing alternative crops. Because land is immobile, its value is not directly affected by events in the industrial and service sectors of the economy. But the social opportunity cost of farmland is sometimes difficult to estimate. Within any agroclimatic zone, complete specialization in the most profitable crop is rarely observed. Instead, farmers prefer rotations or intercropping systems that reduce risks of income losses from price variability, yield losses, and pest and disease infestation. Therefore, the social opportunity cost of the land is not accurately approximated by the net profitabilities of a single best alternative crop; instead, it is measured by some weighted average of the social profits accruing from the set of crops planted. Because the correct weights and social profits associated with each crop in the set are generally not known, it is convenient in assessing farming activities to reinterpret crop profits as rents to land and other fixed factors (for example, management and the ability to bear risk) per hectare of land used. This reinterpretation includes private (and social) returns to land as parts of D (and H). Profitability per hectare is then interpreted as the ability of a farming activity to cover its long-run variable costs, in either private or social prices or as a return to fixed factors such as land, management skill, and water resources.