Determination of Own Price Elasticities and Cost

Table 6.1 presents the own price elasticities, the cost shares of variable inputs, and the resulting supply elasticities with respect to the price of variable inputs.

Own price elasticities used in TURKSIM are between 0.22 for tea and 1.73 for several vegetables. Underlying sources and assumptions for the determination of own price elasticities are listed per product below.

Cereals: Elasticities for wheat are long run elasticities taken from the FAO World Food Model (WFM) and are roughly in line with estimates from KASNAKOGLU and GURKAN (1986), BAYANER and HALLAM (1996), and KOC et al. (1998) as well as with elasticities from the SWOPSIM database (USDA, 2002). For barley, the own price elasticity of yield is taken from the FAO WFM.

The fact that it is somewhat above the elasticity of yield for wheat is in conformance with estimates from BAYANER and HALLAM. The long run price elasticity of area allocation reported by FAO, however, is 0.71 which is significantly above that for wheat. This ratio of the elasticity of barley area being significantly above that of wheat is not confirmed by estimates of KASNAKOGLU and GURKAN, BAYANER (1996), and KOC et al. Therefore the elasticity of barley area is assumed to be at 0.45, only about 15 percent above that of the area in common wheat. The same approach is applied for corn, where FAO reports an area elasticity of 0.52.

Pulses: BAYANER and HALLAM estimate price elasticities of yield to between 0.56 (lentils) and 0.21 (dry beans), about two to five times those of wheat and barley. BAYANER finds high price elasticities of supply for chickpeas and lentils (around 4.5) but a much lower elasticity for dry beans (0.43). Experts in Turkey believe the price elasticity of area allocation to be relatively low, as rotational considerations are a major factor in determining the area of pulses. For this study the price elasticities of yield are set at 0.24 (twice the yield elasticity of wheat), and the price elasticities of area are set at 0.45, the same level as cereals.

Tobacco: BAYANER and HALLAM find the elasticity of yield being at the same level as for barley. This ratio is also applied for this study. The area elasticity applied in this study is calculated based on an output elasticity being 30 percent below the 1.34 estimated by KASNAKOGLU and GURKAN. This is because alternative estimates (BAYANER) are considerably lower.

Table 6.1: Own Price Elasticities, Cost Shares of Variable Inputs, and the Resulting Supply Elasticities with Respect to the Variable

Input Prices

Product el_arpl,pl el_yipl el_supplypl, pl

Chickpeas 0.50 0.24 0.86 0.35 -0.30

Dry beans 0.50 0.24 0.86 0.35 -0.30

Lentils 0.50 0.24 0.86 0.35 -0.30

Tobacco 0.70 0.14 0.94 0.60 -0.56

Sugar 0.70 0.14 0.94 0.60 -0.56

Cotton 0.47 0.19 0.75 0.60 -0.45

Sunflower seed 0.62 0.16 0.88 0.35 -0.31

Soybeans 0.50 0.17 0.76 0.35 -0.26

Vegetables and fruits

Onions 0.70 0.14 0.94 0.60 -0.56

Potatoes 0.70 0.14 0.94 0.60 -0.56

Table tomatoes 1.10 0.30 1.73 0.70 -1.21

Tomato paste 1.10 0.30 1.73 0.70 -1.21

Melon 0.90 0.30 1.47 0.70 -1.03

Cucumbers 1.10 0.30 1.73 0.70 -1.21

Peppers 1.10 0.30 1.73 0.70 -1.21

Mandarins 0.50 0.20 0.80 0.70 -0.56

Hazelnuts 0.20 0.20 0.44 0.70 -0.31

Table grapes 0.30 0.20 0.56 0.70 -0.39

Sultanas 0.30 0.20 0.56 0.70 -0.39

Tea 0.16 0.05 0.22 0.70 -0.15

Sources: Own compilation; various sources, see text.

Sugar: KASNAKOGLU and GURKAN, and KOC et al. report estimates of the price elasticity of area and yield. But none of these studies discuss the fact that sugar production in Turkey is limited by quotas and the observed price/quantity

combinations may therefore not be on the supply curve in years of binding quotas. Therefore, for this study supply elasticities for sugar are assumed to be the same as for tobacco.

Cotton: BAYANER and HALLAM find the elasticity of yield being 36 percent above that for barley. This ratio is also applied in this study. The area elasticity applied in this study is taken from estimates performed by KOC et al.

Sunflower seed: The elasticity of area is taken from the FAO WFM and is supported by an estimate of KOC et al. The elasticity of yield reported by FAO is 0.77, KOC et al. report 0.47 whereas BAYANER and HALLAM report 0.105, 10 percent above the elasticity of yield reported for barley. For this analysis it is assumed that the elasticity of yield for sunflower seed is 14 percent above that of barley, or 0.16.

Soybeans: The area and yield elasticities applied in the FAO WFM are 0.29 and 0.36, respectively. The resulting elasticity of output is 0.75. As it seems illogical that the elasticity of area would be so much lower than that for other products, for this study the elasticities of yield and area are adjusted, keeping the elasticity of output constant.

Potatoes and onions: The supply response of potatoes and onions in Turkey seems to be relatively inelastic if one looks at existing estimates. ALTUNDAG and GÜNES (1992) estimate supply elasticities of 0.158 and 0.196, respectively.

BAYANER finds the elasticity of supply with respect to gross return at 1.17 for potatoes and 0.37 for onions (compared to elasticities around 2.5 for wheat and barley). BAYANER and HALLAM report elasticities of yield being about 44 percent of that of barley in the case of onions, and 36 percent of that of barley in the case of potatoes. However, experts in Turkey are convinced that these low elasticities do not reflect supply response adequately. The overall view is that supply response of potatoes and onions is relatively elastic in Turkey, at least comparable to sugarbeet. For this study therefore the same supply elasticities as for sugarbeet are assumed for potatoes and onions.

Vegetables and fruits: No elasticity estimates for these products were available when this study was prepared. People knowing the sector well confirm that supply elasticities are high, at "around 1.5," or "significantly above 1 but below 2." The fact that it is relatively easy to shift additional area to fruit and vegetables from other crops, and that fruit and vegetable farmers are more market oriented than farmers on average, supports the view of high supply elasticities. Also labor supply in Turkey is elastic and labor in fruit and vegetable production can be easily increased if prices rise. All this supports the assumption of an elastic fruit and vegetable supply. The supply elasticity for

vegetables is therefore assumed to be at 1.73, 1.1 for area and 0.3 for yield. The supply elasticity for melons is assumed to be somewhat lower (1.43), due to the large area already covered. For fruit the supply elasticity is assumed to be much lower (0.8), as farmers are less flexible in planting new trees than in shifting land to vegetables. For olives, grapes, and hazelnuts the supply elasticity is assumed to be even lower (0.56, 0.56, and 0.44, respectively). This is because of the special climatic requirements and, in the case of olives, the long time period required before young trees bear fruit.

Tea: No elasticity estimate for tea was available when this study was prepared.

Some factors speak in favor of the assumption of relatively low supply elasticities. The area where tea is grown is geographically limited. The quality of tea, traditionally grown in mountainous areas on the eastern Black Sea coast, declines if it is grown on flat land. Quality reasons limit yield, as quality is higher if the harvest is at an earlier growth stage. Faced with declining prices, producers have few alternatives to shift to other products. For these reasons, the elasticity of area is assumed to be 0.16, the elasticity of yield 0.05.

The share of variable cost in total production cost is assumed to be between 0.35 for cereals, pulses, and oilseeds; and 0.7 for fruit and vegetables. The reason for this differentiation is the extent of variable input use (e.g. fertilizer and pesticides), which is much higher for fruits and vegetables, and the extent of paid nonfamily labor, also much higher in fruit and vegetable production. The resulting elasticities of supply with respect to input prices are roughly approximated by multiplying the cost share by the own price elasticity and are between -0.15 and -1.21.⁵⁰