Economic incentives for land use change: evidence from Lantapan Ian Coxhead & Bayou Demeke University of Wisconsin

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2 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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4 Yellow corn prices, Lantapan farm gate and Agora wholesale market, Cag. de Oro (SANREM data)

5 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

6 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 100% (David 2003) –Rising protection for corn and sugar producers -- in spite of WTO accession.

7 Trends in nominal protection rates for corn and sugar (%) Crop Corn Sugar Source: David 2003, Table 6.7.

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9 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?

10 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

11 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?)

12 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:  N i ≤ A t  A –where N i is area planted to crop i, A t-1 is lagged area,  A is year-on-year area change Land allocation by crop (N i ) is also a choice

13 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

14 Different crops require different input mixes Estimated cost shares (%) of inputs by crop LandLaborFertilizer Corn41316 Veg Coffee34428 Source: production function estimates

15 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)

16 Lantapan land use change, per farm Source: SANREM survey data

17 Estimated price elasticities of land use and farm area change VariableCorn areaVegetable area Total planted area Corn price Veg. price Var. of corn price Var. of veg. price Source: Coxhead, Shively and Shuai 2002

18 Price changes and predicted land use changes

19 Predicted contribution of corn price changes to land use and farm area

20 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….

21 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

22 Farm wages by location, Lantapan (pesos/day)

23 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

24 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

25 Revisit upland development and conservation strategies Mix of price and quantity policies is justified

26 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

27 Thank you