Concerns about the impact of modern agriculture on the environment have in recent years led to an interest in supporting the development of organic farming. In addition to environmental benefits, the aim is to encourage the provision of other “multifunctional” properties of organic farming such as rural amenities and rural development that are spillover benefit additional to the supply of food. In this paper we further develop an existing dynamic general equilibrium model of the Danish economy to specifically incorporate organic farming. In the model and input-output data each primary agricultural sector and each secondary food industry has been split into two separate industries: one producing organic products, the other producing conventional products. The substitution nests in private consumption have also been altered to emphasise the pair wise substitution between organic and conventional products. One of the most important regulations regarding organic production concerns the conversion period, that is the period where the farmer starts to use organic production methods until the farmland and the production are considered organic. Currently organic production methods have to be used for two years before the land and production are considered organic. To introduce this regulation into the model we develop a theory that describes the dynamic time path of land allocation. Agricultural land is treated explicitly as a stock. For each land-using industry there is a stock accumulation relationship for land, and an explicit modeling of the rate of stock accumulation (i.e., of land investment). We assume that land is industry specific, with land rentals adjusting to ensure that land supply equals land demand for each industry. Once the decision has been made to transform land for conventional production into land for organic production, a period of two years must pass before the land being transformed can be used for organic production. During that time, the land is counted as land of the organic industry, but it can only produce the conventional product. To handle this rule, we make each organic sector a multiproduct sector producing, in fixed proportion, a conventional product and an organic product. The proportion is endogenously determined according to the ratio of conventional land being transformed into organic land to total land in the sector. We use the developed model to illustrate the working of our theory by constructing a long term forecast for the development of the Danish economy. Moreover we simulate the effect of the recent agreed 2003 reform of the common agricultural policy.
Global Trade Analysis Project: 2004 Conference Paper, 2004
Main Research Area:
7th Annual Conference on Global Economic Analysis, 2004
Center for Global Trade Analysis, Purdue University