Economic incentives for land use change: evidence from Lantapan

Ian Coxhead & Bayou Demeke

University of Wisconsin

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Farmers and markets in uplands

• Previous assumption: ‘semi-subsistence’ production– Upland farmers beyond reach of markets & policies

• Implication: direct intervention needed for dev’t or conservation – Projects, command/control approaches to w/shed mgt

• But non-market strategies now lag behind reality of commercialized ag.

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Sales as percent of major crops,Lantapan, 1994

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Corn Sugarcane Coffee Potato Cabbage Chn Cabb. Beans

Source: SANREM data

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-94

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97

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Pes

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Lantapan

Agora

Yellow corn prices, Lantapan farm gate and Agora wholesale market, Cag. de Oro (SANREM data)

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Implications of commercialization

• Land values, and land use decisions depend on commercial considerations rather than household needs

• Greater ‘reach’ of market interventions such as price and trade policies

• Market-based policies are cheaper and more efficient than direct interventions– They affect all commercial farmers, not just those in

one project area

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Philippine upland ag. devel. policy

• Direct and sectoral interventions:– Early (1950s): support for ‘land to the landless’ programs

– Later (1970s+): commodity support through R&D, extension, ‘high value crops’ programs

– Price stabilization efforts (corn, palay) through NFA

• Trade policies– Vegetable import restrictions: cabbage, potato bans;

binding WTO tariffs @ 100% (David 2003)

– Rising protection for corn and sugar producers -- in spite of WTO accession.

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Trends in nominal protection rates for corn and sugar (%)

Crop1970-

791980-

841985-

891990-

941995-2000

Corn 24 26 67 76 87

Sugar 5 42 154 81 106

Source: David 2003, Table 6.7.

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Corn: Nominal Protection Rate (per cent)

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40

60

80

100

120

140

160

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: ISPPS

Yellow corn

White corn

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Implications of upland ag. devel. policies

• In Lantapan, highest rates of crop area growth between 1960 and late 1980s were in corn and sugarcane

• Vegetable production (esp. cabbage and potato) became important crops after 1960s– As source of income, less so as percent of land area

• Thus: agricultural intensification in upland areas– Were in-migrants to Lantapan “pushed” by poverty

elsewhere, or “pulled” by policy biases for upland crops?

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Environment-economy interactions

• Commercial ag. expansion at expense of watershed functions– Expansion involves deforestation, shorter fallows

– Unaccounted externalities (siltation, water pollution, unstable stream flows)

• Conservation programs and ag. development policies may be mutually contradictory– Watershed function is threatened mainly by expansion

of protected and ‘high value’ crops

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Spatial heterogeneity

• Ag. practices, responses to ‘shocks’, and watershed function implications may differ by location– In Lantapan, upper vs. lower watershed farms:

• Lower watershed: corn with sugarcane

• Upper watershed: corn with coffee, vegetables

• Upper watershed: greater expansion, different demographics (e.g. labor mobility?)

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A model of upland land use decisions

• Farmers assumed to maximize profits from ag.production, subject to constraints, e.g. availability of family labor

• Total land area of the farm (A) is a choice: Ni ≤ At - 1 + A

– where Ni is area planted to crop i, At-1 is lagged area, A is year-on-year area change

• Land allocation by crop (Ni) is also a choice

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Model solution

• Optimal land use and farm area choices depend on crop prices, input prices, family labor, household characteristics, and agro-ecological characteristics– Location in the watershed (e.g. altitude) is important

• We can distinguish separate ‘decision units’ by location for purposes of linking to environmental analyses

• We parameterize the model using Lantapan farm survey data from 1994 - 2002

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Different crops require different input mixesEstimated cost shares (%) of inputs by crop

Land Labor Fertilizer

Corn 41 31 6

Veg 22 61 19

Coffee 34 42 8

Source: production function estimates

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Policy ‘shocks’ will have differential effects by crop

• Higher corn or coffee prices will promote greater relative increases in total farm land area

• Higher vegetable prices will promote intensification (fert. & chem. intensity)

• Rising fertilizer prices will reduce vegetable area and use of chemicals

• Non-farm employment growth will reduce vegetable production faster than other crops– But may also discourage soil cons measures (Rola and

Coxhead 2002)

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Lantapan land use change, per farm 1994-2002

Source: SANREM survey data

YEAR Location Corn (ha) Veg (ha) Planted area1994 Upper 0.99 0.26 1.861996 0.61 0.16 1.051998 0.81 0.27 1.212000 1.05 0.05 1.282002 0.69 0.29 1.171994 Lower 1.97 0.01 3.581996 1.51 0.01 2.761998 1.25 0.03 2.542000 1.01 0.01 2.042002 0.90 0.19 2.47

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Estimated price elasticities of land use and farm area change

Variable Corn areaVegetable

areaTotal planted

area

Corn price 0.38 -0.76 0.01

Veg. price -0.66 0.98 0.11

Var. of corn price

-1.31 0.86 -1.32

Var. of veg. price

0.69 -0.74 0.50

Source: Coxhead, Shively and Shuai 2002

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Price changes and predicted land use changes

Year Location Ch. Pv Ch. Pc Ch. Nc Ch. Nv Ch. A1996 Upper -0.15 1.34 0.09 -0.15 -0.081998 5.78 -0.60 -0.50 0.31 -0.072000 -5.16 1.13 0.48 -0.36 0.002002 0.18 0.08 -0.01 0.08 0.111996 Lower -0.15 1.34 0.09 -0.15 -0.081998 5.78 -0.60 -0.50 0.28 -0.112000 -5.16 1.13 0.48 -0.30 0.092002 0.18 0.08 -0.01 0.10 0.13

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Predicted contribution of corn price changesto land use and farm area

Year Location CORN VEG AREA1996 Upper 87.08 55.05 -1.031998 7.27 11.72 0.492000 14.12 18.86 -149.232002 -43.69 -5.31 0.041996 Lower 87.08 55.44 -1.051998 7.27 12.77 0.332000 14.13 23.00 0.762002 -43.53 -4.57 0.04

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Next steps

• Georeferenced plots (2004) will permit more accurate linking of economic and environmental data in Lantapan

• Some other potentially important extensions of this research….

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Indirect impacts of macroeconomic policies

• 1970s-1990s, persistent exchange rate over-valuation and heavy industry protection– Was a “tax” on all agriculture, reducing profitability

– Depressed wage growth by taxing labor-intensive industries, thus accelerating migration to uplands

• From mid-1990s (WTO), industry protection has fallen sharply– Stimulus to growth of export-oriented upland crops (e.g.

banana)

– L-intensive industry growth pushes up wages

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Farm wages by location, Lantapan 1994-2002(pesos/day)

Year Location Av. farm wage1994 Upper 421996 671998 882000 992002 1181994 Lower 471996 681998 862000 1102002 157

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Further implementation of WTO reforms

• Reducing Philippine ag. protectionism will diminish pressures on all upland watersheds– Quantifying effects will require additional data and

resources

• Reducing US/EU domestic farm subsidies will have opposite land use effects!– Higher world prices --> incentives to expand area

– Need to quantify effects of world prices on Philippine prices

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Property rights and taxation issues

• Ag. expansion in upper watershed is contingent on land availability– Enforcement of buffer zone restrictions limits

expansion

– Institutional mechanisms for this?

• Environmental impacts of farming differ by location as well as crop and technology– Current ag. land tax laws, using capitalized income

approach, can in principle be adjusted for these factors

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Revisit upland development and conservation strategies

• Mix of price and quantity policies is justified

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Why do farmers specialize or diversify?

• Diversification is a risk-reducing strategy• Specialization may reflect constraints, e.g. managerial

skills for vegetable production• Could diversification also reflect benefits of

biodiversity? – Crop rotations, fallowing maintain biodiversity

– Could this have measurable productivity effects, through economies of scope?

– Farm vs. watershed-scale policy issues in biodiversity protection

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Thank you