Inflation, capital markets and the supply of beef

This paper puts forward an explanation for the negative elasticity of supply of beef found in many LDC's. As is explained by Jarvis (1974), the elasticity of supply of beef may be negative in the short run due to the dual role of cattle as both a capital and a consumption good. But in some LDC's, and especially in Latin America, one may find a long-run negative association between slaughter and prices, that cannot be explained by assuming shocks to slaughter are causing changes in prices. It is no coincidence that Jarvis' hypothesis itself was developed to explain developments in Argentina, a country with chronic high inflation. The paper argues that this long-run relationship cannot be explained by the Jarvis hypothesis, and offers an alternative hypothesis based on the demand for cattle as a hedge against inflation. The long-run negative association between slaughter and prices has been found in high inflation countries. High inflation combined with excessive regulation of capital markets cause the well known phenomenon of desintermediation. It is argued here that cattle plays a role in the inflation hedged portfolio that is then demanded. Therefore, with imperfect capital markets the supply of beef is affected by the demand for cattle as an asset, and this demand, in turn, is affected by inflation. This paper will only attempt to prove the link between imperfect capital markets and the supply of beef. The way inflation in a repressed capital market leads to an imperfect capital market is not addressed here, for reasons of brevity. The paper will develop a model that in the context of imperfect capital markets results in a negative elasticity of supply. The model will then be tested with Uruguayan data. Uruguayan data are very adequate to test the hypothesis because they cover both a period without inflation and a period of high inflation. The results support that cattle was used as an alternative to money holdings when inflation signified a big tax on the latter. Inflation therefore affected the demand for cattle, or, conversely, the supply of beef.


Issue Date:
1993-08
Publication Type:
Journal Article
Record Identifier:
http://ageconsearch.umn.edu/record/173193
PURL Identifier:
http://purl.umn.edu/173193
Published in:
Agricultural Economics: The Journal of the International Association of Agricultural Economists, Volume 09, Issue 2
Page range:
145-154
Total Pages:
10




 Record created 2017-04-01, last modified 2018-01-22

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