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Abstract
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.