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Rigid_growth

Rigid growth characteristic of demand for oil in China’s

agro-production

Lihong Wang and Zhihong Tian

College of Economics and Management,China Agricultural University,

Beijing,People’s Republic of China

Abstract

Purpose –The demand for oil in agricultural production increases continuously with the world oil price soaring,re?ecting a rigid growth characteristic,but there are no clear reasons for this.The purpose of this paper is to assess the essential reasons of this issue in theoretical and empirical perspectives.

Design/methodology/approach –The paper develops the model of derived demand for petroleum in agro-production;analyzes the effect on agricultural labor-machinery due to the changes in relative price of input factors;and reveals the reasons for the rigid growth of the demand for farm diesel;as well as estimates the substitution of agricultural machine for labor.

Findings –The results indicate that the rigid growth characteristic of the demand for farm diesel is due to the adjustment of the product and factor markets;and the most important reason is the changes in structure of the agro-production inputs caused by the relative soaring price of agricultural labor-machinery.

Practical implications –The government should attach importance to its impact on farmers and take effective measures to insure the stable development of agricultural production.

Originality/value –This research investigates the main reasons for the rigid growth characteristic of demand for oil in China’s agro-production from a novelty perspective.The proposed conceptual model is unique,it analyzes the substitution of agricultural mechanical for labor from the perspective of changes in relative price,and selects the two level constant elasticity substitution production functions to estimate the substitution of agricultural machinery for labor.Keywords Economic growth,Petroleum,Oil industry,China Paper type Research paper

1.Introduction

The relationship between agricultural production and petroleum is very close.Oil agriculture changed the path of world agricultural development,and pushed the agricultural production to a new development stage,so that the crop production growth rate exceeded the population growth rate,which declared the Malthus prediction bankrupt.However,oil agriculture is a high-input and high-yield agricultural development pattern.Based on fossil energy sources,oil agriculture adopts agricultural machinery and agrochemicals massively.This development mode not only consumes a large amount of oil resources,but also causes serious environmental pollution.It draws both consumers and researchers’attention.There has been a considerable amount of

The current issue and full text archive of this journal is available at https://www.doczj.com/doc/6516032205.html,/1756-137X.htm

JEL classi?cation –O13,J43,C33

The comments of Honghua Chen,Guifeng Liu and especially Xian Xin,Bozhong Su and the anonymous referee were helpful in the revision of this paper.

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China Agricultural Economic Review

Vol.1No.3,2009

pp.327-341

q Emerald Group Publishing Limited

1756-137X

DOI 10.1108/17561370910958891

research focusing on the“growth limit”of agricultural economy.There were two main popular points of view:on the one hand,researchers focused exclusively on the means of reducing agricultural oil consumption(Liang,1987;Xia,1987;Gan,1992;Fan and Wang,2006);and on the other hand,scholars investigated the oil-dependency of agriculture.They analyzed the structure of agricultural input in view of energy,and they concentrated on the ratio of energy output-input of a speci?c area and crop (Cleveland,1995;Thakur and Makan,1997;Burhan et al.,2004;Inbrahin et al.,2005). Researchers made energy conversion based on various crop production and speci?c areas to analyze energy consumption and the ef?ciency of energy in agricultural production.They found that agricultural production depended on oil in various channels(Burhan et al.,2004;Wen,1985;Li et al.,1989;Chen,1991).

In the twenty-?rst century,oil price?uctuated remarkably and kept at a high level for a long period.Diesel prices in China increased many times with the world oil price soaring.The oil price rising had great negative impacts on economic development (Steven and John,2001;Arjaree and Subhes,2005;Li,1993;Yu et al.,2002;Chen,2005).

Similarly,it induced negative effects on agricultural production and farmers’living standards.There is a long-run co-integration relationship between oil and diesel price (Wang and Tian,2007).At the same time,diesel is the direct channel in which agricultural production consumes oil.Faced with world oil price soaring,rational farmers should reduce the quantity of petroleum products consumption.But,there is still an obvious growing trend in the demand for farm diesel,chemical fertilizer, agriculture plastics and other oil products in Chinese agricultural production.Oil price soaring does not lead to a corresponding reduction in farm diesel consumption;in other words,the demand for diesel in agricultural production shows a growth characteristic with the oil price shocks(Figure1).

Nonetheless,there is not a clear interpretation for the reasons why the demand for farm diesel keeps on growing while the oil price rises sharply at home and abroad.This paper aims to assess the essential reasons for this issue from theoretical and empirical perspectives.To explore these issues in more detail,this paper is based on the theory of

Figure1.

Diesel prices(P)and the quantity of agricultural diesel consumption(Q

)

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Source: China Agricultural Statistical Yearbook (1994-2006); web site of US Department of Energy and Ministry of Commerce of the PRC

Q (million ton)

(

)

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the derived demand for factors,in virtue of the Hicks-Hayami-Vernon induction of technology innovation theory and two level constant elasticity substitution (CES)production function.

2.Theoretical framework

2.1Oil price and agricultural diesel consumption

The author observes the changes in the demand for farm diesel after oil price rising from the perspective of market equilibrium.The equilibrium quantity of diesel demand is determined by the interaction of supply and demand for diesel (Figure 2).In the agricultural oil market,the supply curve of diesel is essentially determined by its producer,and impacted greatly by oil price.By contrast,the factors which impact the demand are more active,hence,the agricultural oil market equilibrium is mostly determined by the changes in the demand for diesel,which include the quantity change induced by diesel price and the changes in demand caused by the other factors.

In general,oil price rising leads to reduction in the demand for diesel,the reduced quantity of diesel is determined by the steepness of diesel demand curve.Well,the slope of the agricultural diesel demand curve is determined complementarily by farm diesel,agricultural machinery operations,as well as the acreages of agricultural machinery operations.

The demand for farm diesel is derived,and shows the nature of indirect and combination.On the one hand,the demand for diesel is derived by production,subordinated to the objectives of maximizing pro?ts of farmers and therefore subject to the price of agricultural products and the development of rural economic and other factors;on the other hand,there is a close combination between the demand for agricultural diesel and the agricultural machinery demand,and under certain conditions,the two variables are complementary.By making a regression analysis of the comprehensive agricultural mechanization level and the quantity of agricultural

Figure 2.

Changes in agricultural diesel supply and demand

Q 1D 1

D 2

S 1

S 2

P 1

E 2

P 2

Q 2

E 1

Notes: P and Q represent diesel price and consumption quantity respectively; E 1 and E 2 are the equilibrium points before and after the oil price changes; in this process, the equilibrium price rises from P 1 to P 2, the equilibrium quantity rises from Q 1 to Q 2

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diesel consumption,the results suggest that there is a positive correlation between the diesel consumption and the comprehensive agricultural mechanization level[1].Therefore,agricultural diesel consumption per hectare and the agricultural mechanization level have the same changing trend.Table I re?ects the relationships between China’s agricultural diesel consumption and agricultural machinery operating level in 2006.It indicates that the higher the level of machinery operating,the more diesel consumption per hectare.

Furthermore,it has a ?xed proportion coef?cient between farm machinery usage and agricultural diesel consumption.How much diesel will be consumed by agricultural machinery operating per hectare,is a complex technical issue which depends on the performance of operating machinery,the conditions of agricultural machinery operating and the level of operation according to the principles of agricultural machinery operating.Along with the agricultural machinery manufacturing development,machinery performance is constantly improved,and the consumption of engine fuel has a downward trend,but the reduced quantity is so

Regions Diesel consumption per hectare (kg/hectares)

Level of machinery operating (%)

Beijing 321.0046.41Tianjin 299.8658.86Hebei 573.1057.19Shanxi

258.9137.87Iner Mongolia 148.7556.54Liaoning 230.9748.93Jilin

204.6329.60Heilongjiang 132.1180.44Shanghai 260.5939.19Jiangsu 195.7160.08Zhejiang 328.4728.79Anhui 126.8747.56Fujian 288.6814.08Jiangxi 173.4935.93Shandong 796.8758.30Henan 186.5553.74Hubei 200.7426.07Hunan

157.2127.66Guangdong 147.8221.53Guangxi 149.9610.76Hainan 161.3513.90Chongqing 95.8810.01Sichuan 116.3410.62Guizhou 68.32 3.01Yunnan 77.20 4.27Xizang ––Shanxi 157.4033.79Gansu 227.4423.88Qinghai 177.8341.29Ningxia 226.8536.75Xinjiang

106.29

70.60

Source:China Statistical Year Book (2007)

Table I.

The level of machinery operating and diesel consumption per hectare (2006)

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small that the diesel consumption of agricultural machinery operating per hectare is almost stable in long run.

There are several other economic variables that play an important role in the rigid growth characteristic of the demand for agricultural diesel,such as the market prices of agricultural products,prices and quantity of related input factors,and so on (Figure 3).Assume that there are only agricultural labor force (L )and agricultural machinery inputs (M )in agricultural production.Outputs (y )is a function of labor and machinery,written as y ?f (L ,M ).According to the ?xed proportion between the operations of agricultural machinery (M )and the volume of agricultural diesel consumption (Z ),the relationship between the two variables is expressed as the function Z ?g (M ),it is strictly increasing,and meets the ?rst order homogeneity,hence,its inverse function can be written as M ?g 21eZ T,and the agricultural production function can be written as follows:

y ?f L ;g 21eZ Tàá:

e1T

Formula (1)expresses the compound relationships between the agricultural production and input of farm diesel.

Assume the agricultural production cost function is:

c P L ;P M ;y àá

?min P L ￡L tP M ￡M e2Twhere P L is the wage of agricultural labor,and P M is the price of agricultural

machinery.Formula (2)is continuous and strictly increasing,and meets all of the properties of the cost function.

As we all know that the agricultural machinery operations costs include the charge of diesel consumption and the relation of the diesel price,and the price of agricultural machinery operations can be de?ned as follows:

Figure 3.

Demand curve for

agricultural diesel,taking

agricultural products price,agricultural labor and their wages into

account

P Z

P Z 2

P Z 1

E 1

D 0(L 0,p 0,P L 0)

D 2(L 1 ,p 1,P L 1)

Notes: P z and Z are the price and volume of agricultural diesel, L is the agricultural labor, p is the agricultural products price, D is agricultural diesel demand curve; the figure shows that the demand equilibrium of agricultural diesel moves from E 1 to E 2, when P Z , p , L , P L0 changes at the same time

D 1(L 1,p 0,P L 1)

D 3(L 2,p 1,P L 1)

E 2

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P M ?P M P Z

e3T

where P Z is the diesel price.The function is strictly increasing,and meets ?rst order homogeneity.

Furthermore,assume that the farmers are rational producers,who engage in agricultural production in pursuit of pro?t maximization.The pro?ts function of agricultural production can be written as follows:

p p ;P L ;P M ;L ;M àá?max p f L ;g 21eZ Tàá2P L L 2P M P Z ￡g 21

s :t :f L ;g 21eZ Tàá

$y *e4T

where p is the vector of agricultural products prices,and y *is the optimal yield.If the vector has outcomes within (L ,M )@0,formula (4)must meet the ?rst-order conditions for optimization:

?f L *;M *àá=?L ?f L *;M *àá=?M ?P L P M :e5TAccording to the duality of the production function and factors conditional demand function,we can obtain the M and L derived demand function:

M ?M p ;P L ;P M ;y àá

L ?L p ;P L ;P M ;y

e6TM ?M p ;P L ;P M ;y à

;

L ?L p ;P L ;P M ;y :

e7T

In accordance with formula (7),the relationship between agricultural machinery operating volume and diesel consumption,we can get the agricultural diesel conditional demand function under the conditions for optimization in agricultural production:

Z ?g M P Z ;p ;P L ;P M ;y àáàá

:e8TThe determinants of the demand for agricultural diesel can be concluded from formula (8).

First,are the changes in P L /P M .If the aggregate agricultural outputs (y )are ?xed,farmers’production decision would be affected by the prices of the agricultural labor (P L )and the agricultural machinery (P M ).If P L /P M goes up,the substitution of machinery for labor will increase,the agricultural labor input will reduce and the machinery input will increase,followed by the quantity of demand for agricultural diesel increasing.

Second,is the substitution ability of the farm machinery for labor.In certain technical conditions,when the relative prices of the agricultural production factors change,the marginal production ratio would also change,which is decided by the farmers’optimal production decision,that induces changes in the proportion of the factors input.The substitution ability of the agricultural machinery for labor decides how much the agricultural machinery inputs M will increase,and also how much the agricultural diesel demand curve will shift when the relative price rises.

Third,are the prices of agricultural products.When we study the changes in the demand for the input factors,it is necessary to consider the agricultural product

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market and factor market at the same time.The rising prices of agricultural products indicates that there is a much higher demand for both crop quantity and quality.As we all know that the product prices of agricultural products and the marginal product of agricultural labor are the marginal revenue of the agricultural production,when labor is greater than the marginal value of labor,that is,the marginal cost of agricultural labor is more than the marginal return,the rational farmers should thus reduce the input of labor,and increase agricultural machinery operations,in a perfect competition factor market and product market.As a result,the demand for agricultural diesel would increase.

Fourth,is the farmers’income.The income level of farmers is increasing with the rapid economic development,which promotes the increase of farmers’production inputs.At the same time,the demand for agricultural diesel would also increase following agricultural labor and machinery input increasing.

2.2Key reasons for the rigid growth in agricultural diesel demand

The relative price and the substitution ability of factors play a decisive role in the changes in the demand for agricultural diesel.Thus,it is necessary to explore the substitution of agricultural mechanical for labor in theory and practice,when discussing the key reasons for the rigid growth characteristic of the demand for agricultural diesel. In this paper,the authors analyze the unilateral substitution of agricultural labor and mechanical from the perspective of changes in relative price,based on the hypothesis of the induced technological innovation developed by Hicks-Hayami-Vernon.

The hypothesis states that agricultural technological progress is a dynamic re?ection of the changes in the resource endowment and the growth in demand. Technological progress will promote the more abundant and relatively cheaper factor used in production,and as a result,the relative scarcity factor will be substituted. In agricultural production,changes in price of factors lead to machinery substitution for labor(or the reverse),and the speed and scale of the substitution depends on the ratio of agricultural machinery operating cost and the wages of the agricultural labor[2].

The wage of Chinese agricultural labor is increasing with economic development and the cost of agricultural machinery manufacture is decreasing with technological progress.Taking the situations in2005and1988for example,the nominal wage of rural labor force in China in2005is nearly four times as much as that of in1988.The agricultural products price index in2005is2.77times as much as that of in1988,the machinery operation price index increased by1.15times,and the chemical fertilizer price index increased by1.65times.

The ratio of the relative marginal products between labor and land is the most important index for representing the rises of the relative price of the agricultural labor force.In the production process,the relative price of the two factors is equal to their relative marginal products.According to the concept of the marginal products,we?nd that the labor employment per hectare is the marginal product of labor(Table II). Comparing the labor employment per hectare of China’s staple crops production in 1995-2005,it can be found that there is a great decline in labor employment in national staple crops production.It indicates that the agricultural labor price is on the rise in China.

Along with economic development,the migrant farmer workers increase continuously and the level of wages of the farmer workers in the city rise,which

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leads to an increase in the shadow wage of agricultural labors,and the scarcity of the effective agricultural labor force will emerge.Since most migrant farmer workers are engaged in the labor-intensive and relatively low-technology sectors,such as manufacturing and construction,the authors contrast the wages of workers engaged in various sectors to re?ect the shadow wage of the agricultural labor (Table III).

We can get the wages of migrant farmer workers from existing studies.Taking Shandong Province for example,the average net income per capita of farmers in 1994is 1,320Yuan,that is,their monthly net income per capita is 110Yuan.The average annual wage of workers in Shandong Province is 4,338Yuan,or monthly average wage per capita is 362Yuan (Li,2003).The wages of migrant farmer workers in China,mainly concentrate between 400and 800Yuan,accounting for 40percent of the investigated people;the number of migrant farmer workers whose monthly wages are 800-1,000Yuan,accounts for 12.6percent of the total number of investigated people (Li,2007).A large number of rural laborers are entering into industry and the services sectors due to rapid economic developments and the soaring of the relative price of agricultural labor.The amount of the labor force in agriculture,forestry,animal husbandry and ?shery in China has had a downward trend since the 1980s (Table IV),and there has been an accelerated one since 2000.

Year Paddy Wheat Maize Oil plants Corn 1978571.50460.50466.50496.50907.501985328.50217.50244.50316.50643.501988316.50202.50247.50306.00613.501990309.00210.00259.50318.00664.501995285.00190.50240.00279.00625.502000219.00118.50186.00213.00436.502001211.50142.50186.00213.00450.002002199.50139.50175.50189.00438.002003196.50135.00169.50190.50406.502004177.75121.50149.55170.55369.452005170.85118.65142.35163.65372.902006

155.55

105.15

129.82

156.00

263.10

Source:Compilation of China’s agricultural products cost-bene?t (1979-2007)

Table II.

The staple crops

employment per hectare in China (1978-2006,labor-days per ha)

Sector

2003200420052006National 14,04016,02418,36421,001Agricultural

6,9697,6118,3099,430Mining and quarrying 13,68216,87420,62624,335Manufacturing 12,49614,03315,75717,966Timbering

11,47812,77014,33816,406Transportation,post and telecommunications 15,97318,38121,35224,623Wholesale and retail

10,93912,92315,24117,736Wholesale and retail trade and catering services 11,08312,53513,85715,206Resident service and other services 12,900

14,152

16,642

18,935

Source:China Statistical Year Book (2007)

Table III.

Average wage of staff and workers by sector in China (2003-2006,Yuan)

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Effective labor in agriculture becomes scarcer day by day with the rising of the relative price of agricultural labor.Alternative technology is needed to eliminate a choking point of agriculture development.In view of economic development and technological progress,agriculture mechanization is the direction of modern agriculture development.It is an inevitable tendency of input structural change that machinery replaces labor in agricultural production.The authors analyze the substitutive relationship between labor and machinery,including wheat,maize,cotton,paddy and oil plants in 1990-2006.The results show that there is a strictly negative correlation between agricultural machinery operations and labor force in the production process of the staple agricultural products,that is to say,there is a substitution between the two variables (Table V).

3.Empirical models and data

Changes in the relative price of labor and machinery lead to the changes in the proportion of input factors,which means that the cost curve c eP L ;P M ;y Twill rotate,and the long-run production function y ?f eL ;g 21eZ TTwill also shift.From the

Year Labor (million persons)

Changes (%)198530,351.50 1.82199033,336.40 2.76199134,186.30 2.55199234,037.0020.44199333,258.2022.29199432,690.3021.71199532,334.5021.09199632,260.4020.23199732,677.90 1.29199832,626.4020.16199932,911.760.87200032,797.5020.35200132,451.0121.06200231,990.5821.42200331,259.6322.28200430,596.0022.122005

29,975.50

22.03

Source:China Statistical Year Book (2007)

Table IV.

Amount of the labor force in China’s agricultural

(1980-2005)

Products Coef?cient t -value Wheat 21.8024.83Maize 22.5326.25Cotton 20.6827.85Paddy 23.06210.77Oil plants

21.02

28.19

Source:Compilation of China’s agricultural products cost-bene?t (1991-2007)

Table V.

Regression results of labor and the mechanical input in China’s staple

crop

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perspective of the production function,this paper measures the elasticity of substitution for input factors,and analyzes the substitution ability of machinery and labor,in order to explore the reasons for the rigid growth characteristic of the demand for diesel in agricultural production.

Production function has been developed from the Cobb-Douglas production function to translog production function and three-level CES production function since 1928(Li,1992;Chen and Chen,1993).In the ?eld of agricultural production research,the production function is mainly used to measure the contribution rate of the factors input to the agricultural products output,output elasticity and the impact of technological progress on agricultural production (Lin,1994;Wang and Wu,2006).This paper loosens the presumption of “the unitary elasticity of agricultural production input factors,”adopts the two-level CES production function which assumes that the substitution elasticity of machinery for labor,fertilizer for other substances are different,and develops the two level CES wheat production function.The ?rst-level equations of the two-level CES agricultural production function are given as follows:

Y ML ?àa 1M 2r 1tà12a 1áL 2r 1

á2e1=r 1T

e9TY FA ?àa 2F 2r 2tà

12a 2áA 2r 2á2e1=r 2Te10Twhere L is labor,M is machinery,F is fertilizer and A is other input materials,Y

is the crop output,Y ML is the aggregate labor input,Y FA is the aggregate land input,a i is the distribution coef?cient,and r I is the substitution coef?cient,0,a i ,1;21,r i ,1.

The crop yield (Y )can be expressed as follows:

Y ?B bY 2r ML te12b TY 2r FA àá2em =r T

e11Twhere B is the effective coef?cient,b is the distribution coef?cient,and r i is the

substitution coef?cient.

There are two approaches to estimate the two-level CES production function (Li,1992),one is indirect estimation by using the marginal productivity of the conditions for yield maximization.Hayami (2000)used this method to estimate agricultural production of all countries in the world.The shortcomings of this method are the strict assumptions,which are far away from reality in most cases.The other method is to unwrap the two-level CES production function using Taylor series,and to linearize production function by substitute variables,?nally,estimating directly by OLS,the data available,and its assumptions are also relatively wide,thus this method is more practical.Since there is the similar characteristic of machinery substitution for labor among wheat,maize,paddy,cotton,oil plants as well as other staple crop production process,the substitution of machinery and labor of wheat production is therefore in the middle level,and its historical data are relatively complete.This paper thus chooses wheat production function as representation.The variables in the model include wheat yield per hectare and per hectare of the input factors,including labor,machinery and chemical fertilizers.Data are from “the Compilation of China’s agricultural products cost-bene?t”(1989-2006),and the price index is from the Price Yearbook in China (1989-2006).

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Since there is signi?cant difference in climates and soil conditions among the various provinces and cities as well as the autonomous regions,the wheat planted acreage in various provinces in2005show that Henan and Shandong provinces are wheat-producing provinces.However,the wheat planted acreages are very small in Hainan,Fujian,Guangdong,Jilin,Guangxi,Jiangxi,Liaoning,Shanghai.The growth of wheat yield depends on the machinery technology advancement(Wang and Wu,2006). Therefore,if we miss the provinces’data whose agricultural mechanization level is low, the impacts on the empirical results would be little.According to that idea,this paper includes21provinces with355of the data.

The authors deal with the previous data of the agricultural production price index based on the1988price to eliminate the in?ation of the cost of fertilizers,agricultural machinery operating and other material factors.

4.Estimated results and discussion

The speci?c estimated results are expressed in Table VI.The estimated results from Model1to Model3used data from1988-2005,1988-1996,1997-2005separately.The results suggest that there is a good?tting of the model;adjusted R2equals0.99,and within the inspected variables,the parameters in the model are consistent with the expectation,and the coef?cients are with statistical signi?cance[3].

According to the results of Model1,we can get the distribution coef?cient and substitution coef?cient,and hence we can write the estimated equations as follows:

^Y ML ?0:54M20:21t0:46L20:21

àá2e1=0:21T

e12T

^Y FA ?0:29F22:07t0:71A20:27

àá2e1=2:07T

e13T

^Y?33:470:79Y20:23

ML t0:21Y20:23

2e0:69=0:23T

e14T

where^Y ML;^Y FA;^Y are the estimated values.Formulae(12)and(13)are the estimated ?rst-level CES production function.According to the properties of the two-level CES

Variables

Model1Model2Model3

Coef?cients t-value Coef?cients t-value Coef?cients t-value

Log L0.11 4.270.15 6.560.05 2.44 Log F0.3912.010.39 5.460.4110.92 Log M0.09 6.620.12 3.980.09 6.60 Log A0.10 4.330.040.490.10 3.99 log(M/L)20.01 2.700.01 2.410.01 2.53 log(F/A)20.089.080.08 1.730.088.92 log(F/L)20.02 1.36––––DI20.3526.2920.5325.6320.2724.43 C 3.5139.93 3.6127.93 3.6232.62

Adjusted R20.990.990.99

Effective sample355176179

Notes:The authors have made a serial correlation test.The results show that the residual models are not auto-correlation

Table VI. Estimates results of the two level CES wheat

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production function,we can calculate the elasticity of substitution of farm machinery for labor,h ML ?0:83,fertilizer for other input cost,h FA ?0:32,and labor for land h ?0.81.

Elasticity of substitution is the proportional change in the ratio of the two inputs due to the change in the relative price ratio of the two inputs.What we are interested in is the response of the ratio of factors M /L to the change in the relative price P L =P M eP Z T.According to the condition of the equilibrium of the agricultural producers,the elasticity of substitution is:

s LM ?

d eM =L T=eM =L T

d eP L =P M eP Z TT=eP L =P M eP Z TT

e15T

The empirical results suggest that if there is a 1percent change in the relative price P L =P M eP Z T,the change will be 0.83percent of M /L [4].In other words,the mechanized operating will be a great proportion substitution for labor when the price of labor has become more expensive,and the cost curve will have a large rotation,forming a strong driving force to promote a large amount of agricultural diesel consumption.In addition,the agricultural diesel demand curve Z ?g eM eP Z ;p ;P L ;P M ;y TTshifts to the right greatly (Figure 2).Also the equilibrium quantity of the demand for diesel agricultural increases eventually in agriculture-oil market.

China’s economy will continue to grow rapidly in the long run,and rural labor will continue to migrate signi?cantly out of rural and agricultural production from the current economic development situation.China’s comprehensive agricultural mechanization level reached 39.29percent[5]in 2006,compared with the level of 2005,which saw an increase of 3.36percent.Therefore,there remains a strong impetus for promoting the demand for agricultural diesel in China’s agricultural production,and the consumption of farm diesel will also show the rigid growth characteristic.5.Conclusion

The rigid growth characteristic of the demand for oil in China’s agricultural production is determined by several economic variables together.These variables can be divided into two groups,one is the oil price which affects the demand for diesel,and the degree is determined by the slope of the demand curve.The other includes the price of the related factors and their input quantities,as well as the prices of agricultural products and level of farmers’income.These variables are the main reasons that promote the shift in the demand for agricultural diesel curve.

The price elasticity of the demand for oil in agriculture production determines the quantity decrease in the demand for agricultural diesel.According to the ?xed input proportion between agricultural machinery and diesel,and the one-way substitution for the two factors,it can be deduced that price elasticity is very small.

The substitution for the agricultural machinery and labor is one-way.China’s rural nominal wage rose by nearly four times as much as that of 1988;the ratio of marginal product of agricultural land and marginal product of agricultural labor declined,which suggests that the relative price of agricultural labor keeps on rising.The increasing rates of wage in the secondary industries and service sectors are much greater than that of agricultural labor,which re?ects that the opportunity cost of agricultural labor continues to increase.The effective agricultural labor force gradually transfers into non-agricultural industry,and the number of the agricultural labor force has been

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quickly diminishing since2000,which decides the substitution direction and the changes in input structural of agricultural production.The increasing of the agricultural machinery operations induces the growth of demand for agricultural diesel.

The empirical results of the two-level CES production function indicate that the elasticity of substitution of the agricultural machinery for labor is0.83,which means that when the agricultural labor becomes more expensive,mechanized operations will substitute labor in a great proportion,forming a strong driving power to impulse the consumption of diesel in China’s agricultural production.

That the demand for diesel agricultural production growth re?ects a rigid growth characteristic,is owed to the relative price of agricultural labor,volume of machinery operating,prices of agricultural products,income level of farmers and so on.These economic variables drive an increase in the quantity of the demand for agricultural diesel,and the rising effect is greater than the diminishing effects.Therefore,it is the substantial rising of the relative price of agricultural labor and machinery that promotes the changes in the input structure of agricultural production.

The rigid growth characteristic of the demand for agricultural diesel results in the dif?culty of making an input decision in accordance with the oil market price;and the rising of the diesel price leads to the rigid growth of the agricultural machinery operating cost.However,without any diversion,farmers can only suffer the ultimate aftermath of diesel price soaring.

There is a special signi?cance for insuring the diesel supply and stability of agricultural diesel price to protect the farmers’enthusiasm on growing grains,and to insure national food security.On the basis of fully considering the rigid growth characteristic of the demand for diesel in agricultural production,the urgent tasks for the government are to:take measures to safeguard the supply of agricultural diesel and protect the price of agricultural diesel;explore a long-term and stable agricultural diesel protection policy;provide?scal funds in supporting the ef?ciency of agricultural machinery research and development;encourage farmers to adopt ef?cient energy-saving machinery;popularize the new agricultural practices such as tillage-free technology;and speed up research and development on diesel alternatives,a new driving force for the agriculture.

Notes

1.It is statistically signi?cant at the5percent level.

2.At present,the mobility of labor and land in China does not have the conditions for a“perfect

competitive market”of induced technological innovation mechanism,but the choice of agricultural technology is still in line with the induced technological innovation theory developed by Hicks-Hayami-Vernon(Lin,1999).

3.One of the characteristics of the two-level CES production function is that it is sensitive to the

sample,and the researcher will get different substitution coef?cients with different samples, furthermore,the statistical test value will be more signi?cant through expending the sample.

What concerns the article is the relationship between the agricultural labor and machinery, so this result is acceptable.

4.The result is bigger than the result estimated by Hayami(2000).There may be two reasons.

First,the two-level CES function itself is sensitive to data.Hayami(2000)adopted the 100-year time-series data,because of the data limitation in China,this article only adopts

Demand for oil

in China’s agro-production

339

18years of data;second,China’s agricultural modernization is at a speci?c path of rapid growth selected by this model.Therefore,the changes in the factors input ratio of agriculture machinery-labor is bigger than the changes in the relative prices of machinery and labor.

5.Resources:China’s Agricultural Mechanization Statistical Yearbook ,200

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