Masters Theses

Date of Award

12-2005

Degree Type

Thesis

Degree Name

Master of Science

Major

Agricultural Economics

Major Professor

Roland Roberts

Committee Members

James Larson, Ernest Bazen

Abstract

The hay industry in Tennessee closely resembles a perfectly competitive market. There are no substantial barriers to market entry and farmers can freely exit if they so choose. A large number of firms and consumers (livestock producers and equine operators) exist. Hay is a fairly homogeneous product; although hay varieties are not identical, in many livestock production situations they are close substitutes. Producers are price takers in the market.

Currently, more information is needed regarding Tennessee hay supply and price response. The objectives of this study were: 1) to determine the factors that influence Tennessee hay acreage and yield, 2) to quantify acreage and yield response to prices and other factors, 3) to determine the factors that influence Tennessee hay prices, and 4) to quantify hay price response to the quantity of hay and other factors. To accomplish these objectives, a recursive model of supply and price response was constructed. Acreage and yield elasticities and price flexibilities were estimated from the model's coefficients.

A ratio of lagged hay price to lagged wheat price, lagged hay acreage, and a time trend significantly impacted hay acreage. Hay yield responded to growing season rainfall, harvest season rainfall, lagged hay yield, and a time trend. Predetermined hay production, soybean meal price, per capita income, and a time trend significantly impacted Tennessee hay price.

Elasticities calculated from these results indicated that Tennessee hay producers respond weakly to own and substitute crop prices. This weak response may occur because many hay producers are also cattle producers that harvest their own hay in an effort to guarantee themselves a reliable supply of roughage to last their herds throughout the winter months. They may be willing to give up potentially higher profits from a production alternative to avoid the risk of feed shortages for their cattle. This integration of hay and cattle production could explain why the acreage elasticity for lagged wheat price is small. Land in Middle and East Tennessee is less suited for row crop production as opposed to land in Western Tennessee. Fewer production substitutes for farmers in the middle and eastern parts of the state could explain a low acreage and yield elasticity for lagged own price. Row crop production may be a more suitable alternative for West Tennessee hay producers. The insignificance of lagged fescue seed price and ammonium nitrate price suggest that farmers do not respond to these input prices.

A weak responsiveness to prices by hay producers indicates that they may not attempt to purely maximize profit, but may be driven by other motivations, as well. Instead of profit maximizers, they may be utility maximizers who derive utility from a rural lifestyle, a psychological connection to the land, an aversion of risk with regard to a stable roughage source, and/or other objectives.

With the exception of income, calculated flexibilities suggested that price responds weakly to economic factors. A strong response of hay price to income was reasonable to expect; an increase in real per capita income would result in more purchasing power for a typical household. As purchasing power becomes greater, one could expect that beef consumption would also increase since beef is considered a normal good. This increased beef consumption would lead to an increased demand for roughage and grain feed. A weak response of hay price to predetermined hay production can also be explained by many hay producers performing a dual role as livestock producers. These farmers may be able to produce hay at a lower cost than market price, or they may be willing to forgo the potential cost savings of buying hay from an outside source to avoid feed shortages for their cattle. Lastly, hay price seemed to be relatively unresponsive to prices of other feed options.

The study is an aid to those interested in hay producer and consumer behavior and can be used to formulate future forage and other agricultural-related policies.

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