This study attempts to find empirical support for one or both of the above reasons for declining food budget shares. Estimates of a deflated-income AIDS model of food demand are compared to estimates of the corresponding nominal-income AIDS model with respect to their implications for declining farm value shares.Consumer Food Demand, farm value shares, market power, Demand and Price Analysis,

Reed, Albert J.

English

Research Papers in Economics

AIDS Model Estimates of Food Demand and the Decline in Farm Value Shares 
 
 
Albert  J. Reed 
The Economic Research Service of 
The United States Department of Agriculture 
jareed@ers.usda.gov 
 
 
 
 
Poster prepared for presentation at the Agricultural & Applied Economics Association’s 2011 
AAEA & NAREA Joing Annual Meeting, Pittsburgh, Pennsylvania, July 24-26, 2011. 
 
 
 
 
The views expressed herein are those of the author and not necessarily those of the Economic 
Research Service  
Introduction 
There are two main reasons given for the decline in the farm value shares. One claim is that the  
growth in consumer income, income disparity and trends in household characteristics have 
driven the demand for food marketing services and has lead to efficient resource adjustment, 
consolidation and concentration in the US food system. According to this view income, income 
disparity and the changing characteristics of the consumer are largely responsible for the decline 
in the farmer’s share of the consumer food dollar (Kinsey and Senauer; US Senate). Another 
claim is that consolidation and concentration in the US food system facilitates the exercise of 
market power. Market power could imply that food prices would be higher and farm prices 
would be lower than the prices realized in competitive markets. According to this view, market 
power in the US food sector is largely responsible for declining farm value shares (US Senate). 
Distinguishing between these claims could help formulate food and agricultural policies that 
benefit consumers, food producers and farmers.   
 
Objective 
 
This study attempts to find empirical support for one or both of the above reasons for declining 
food budget shares. Estimates of a deflated-income AIDS model of food demand are compared 
to estimates of the corresponding nominal-income AIDS model with respect to their implications 
for declining farm value shares.  
 
  
  
 Methodology    
 
I apply two sets of market AIDS model estimates to food at home expenditure data obtained 
from the Consumer Expenditure Survey from 1980-2008. Each set of estimates provide 
predictions on expenditure-based and farm-quantity-based budget shares for food at home. The 
first set of estimates pertains to the nominal AIDS model and the second set pertains to the 
deflated AIDS. The nominal AIDS maintains that characteristics are uniformly distributed across 
households and constant over time. The deflated AIDS allows characteristics to vary across 
households and change over time.   
 
AIDS model estimates that support the claim that income, income disparity and household 
characteristics are largely responsible for the long run decline in farm value shares would exhibit  
 
  A positive income elasticity of food marketing services  
 
Estimates that support the claim that market power is largely responsible for the general decline 
in farm value shares would be characterized by  
 
  A negative income elasticity of food marketing services  
  
 
 
 
 
 
 
     Figure 1.  Farm value share since 1950 
.15
.20
.25
.30
.35
.40
.45
.50
50 55 60 65 70 75 80 85 90 95 00 05
Year
F
a
r
m
 
v
a
l
u
e
 
s
h
a
r
e
 
 Source: ERS, market basket index of farm value share    
 
Figure 2.  Farm value shares equal the product of the farm-to-food price ratio and 
the farm-to-expenditure-based budget share ratio   
-.4
-.3
-.2
-.1
.0
.1
.2
.3
.4
.5
1980 1985 1990 1995 2000 2005
B
l
o
g
 
(
1
9
9
3
=
0
)
Year
A
 
  A= farm-to-expenditure-based budget share ratio 
      B = farm-to-food price ratio Two Key Equations 
 
Income Elasticity of Farm Value Share =  
 
Income Elasticity of Market Clearing Farm Price  
 
-   Income Elasticity of Market Clearing Retail Price 
 
-  Income Elasticity of Food Marketing Services   
 
 
 
 
Income Elasticity of Food Marketing Services =  
 
 Income Elasticity of Food Demand  
 
-   Income Elasticity of Farm Quantity  
 
Table 1. Deflated and Nominal AIDS model estimates of income elasticities   
     
 
                 Income elasticity of: 
 
     Consumer  Food Marketing       Farm Value 
   Demand  Services  Share 
Beef      
  Deflated AIDS  2.537     1.667    -1.231 
  Nominal AIDS  -1.006  -1.839    2.276 
 
Pork   
  Deflated AIDS    1.617    0.674    -0.127 
  Nominal AIDS  -0.238  -1.158    1.705 
 
Poultry      
  Deflated AIDS  0.888     0.083    0.268 
  Nominal AIDS  0.422  -0.364    0.715 
 
Dairy   
  Deflated AIDS    2.039     1.384    -1.266 
  Nominal AIDS  -0.171  -0.818    0.937 
   
Fruit&Veg   
  Deflated AIDS  1.616     1.380    -1.317 
  Nominal AIDS  -0.088  -0.358    0.421 
   
Food at Home 
  Deflated AIDS
a   1.832    1.227     -0.997 
  Nominal AIDS
a    -0.245   -0.837    1.067 
         
___________ 
a The estimates are expenditure-share-weighted averages (evaluated at the sample mean) of industry 
income elasticities. The income elasticities of farm-value shares incorporate the estimates of the demand 
shift elasticities of farm and retail pricesand the income elasticities of demand used to construct the 
demand shift variables. The estimates are reported in Tables 3 and Appendix Table 1 of Wohlgenant and 
Haidacher (1989).  Implications 
 
When applied to Consumer Food Expenditure data, the deflated AIDS model estimates yield 
imply positive income elasticities of food demand and positive income elasticities of food 
marketing services. In theory the deflated AIDS accounts for trends in the distribution of income 
and in the demographics across households. Thus the deflated AIDS model estimates imply that 
by accounting for these trends, rising household incomes have raised the demand for food 
marketing services in at-home-farm-based foods and have contributed to the observed decline in 
farm value shares. In contrast the nominal AIDS model estimates yield negative income 
elasticities of food demand and food marketing services. This suggests that as incomes have 
risen consumers demand less marketing services in at home foods which would have contributed 
to increasing rather than the observed decreasing farm value shares. Therefore the nominal 
model estimates provide empirical support for the view that market power and captive supplies 
have been largely responsible for declining farm value shares. Further research along the lines of 
Lewbel (1991) could be implemented prior to demand system estimation in an attempt to 
determine which model is supported by the data.    
References 
Kinsey, J. and B. Senauer. 1996. “Consumer Trends and Changing Food Retailing Formats.” 
American Journal of Agricultural Economics, 78:1187-1191. 
Lewbel, A. 1991. “The Rank of Demand Systems: theory and Nonparametric Estimation.” 
Econometrica. 59:3:711-730.    
U.S. Senate. Hearing before a Subcommittee of the Committee on Appropriations, May 17 2001.  
Wohlgenant, M.K. and R.C. Haidacher 1989. “Retail to Farm Price Linkage of a Complete 
Demand System of Food Commodities.”  Technical Bulletin No. 1775, US Department 
of Agriculture, Washington, DC.  
 
 
 
 
 
 
 
 
 
 
 

AIDS Model Estimates of Food Demand and the Decline in Farm Value Shares

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics