Defining the Commodity System

Every economic activity is unique in some way. In the farm sector, for example, commodity choices, land quality, and input use patterns are almost never identical for any two farms. Although it is possible to develop a different production model for every farm, such exercises are impractical because of limits on the resources available for research. They are also of no use to policy-makers, because the design of separate policies for each farm is impossible. Instead, decisions affect broad categories of farmers, defined in terms of geographic location, com-modity produced, and technologies. Since no two farmers are affected in exactly the same way by a particular policy action, policy-makers usu-ally base decisions on the average impact of the policy on some particu-lar group of farmers.

Development of a list of potential representative systems and subse-quent reduction of the list to a manageable number are thus the initial tasks in the construction of a PAM. The selection of commodity systems full range of variation in costs, returns, and policy response, the initial sets of representative systems should be too large rather than too small.

Box 8.1 illustrates the system identification and selection process for wheat in Portugal.

The representative commodity system includes more than just a farm-level production activity. Consideration of farm-level costs and returns would be sufficient to evaluate the efficiency and competitiveness of production for home consumption. But interest is more often directed to production for a domestic or foreign market that is geographically distinct from the farm. Selection of a representative market destination means that post-farm costs must be included in evaluation of the sys-tem. Furthermore, the more critical policy issues and incentive effects may be entailed in the post-farm activities. Critical constraints to in-creased farm production may be less related to farm technologies and farm policies, but instead a consequence of ineffective or excessively costly marketing activities. Policy analysis of post-farm activities then becomes more important than analysis of the farm level activity.

Activity selection is also dictated by the requirements of social evalua-tion. The domestically produced product must be comparable to a com-modity available in international markets. For example, both wheat flour and wheat grain are available in world markets. As a result, analysts of representative wheat systems may choose to ignore flour processing altogether and emphasize system variations in wheat pro-duction, transportation, and storage activities. Alternatively, analytical interest might focus on wheat flour processing. The farm production activity could be omitted, and flour production systems could represent variations in processing technologies, transportation, and storage. In this example, wheat becomes a tradable input for the processing ac-tivity; its domestic market price reflects the miller's costs, and its social value is represented by the world market price plus the social costs of delivery to the mill.