The Effect of Agricultural Commodities Prices Increase on Farmers' Income - An Empirical Study Based on VAR Model

[Abstract]Over the past few years, Chinese agricultural commodities prices have fluctuated violently, which affected the people's lives, as well as farmers' income. The article, based on the VAR model and using the data from 1979 to 2010, analyzes the effect of agricultural commodities price increase on farmers' income, and finds that price fluctuations of agricultural commodities influence farmers' income remarkably. The increase in agricultural commodities prices will initially increase farmers' income, and then decrease them. Therefore, only stabilizing agricultural commodities price can ensure that farmers' income will increase steadily.[Keywords] agricultural commodities price; farmers' income; VAR model; impulse response function; agriculture industrializationIntroductionIn recent years, agricultural commodities price experienced the phenomenon of "roller coaster" fluctuation. Learned from the national agricultural commodities wholesale market information network, the price of garlic, which gained the name "garlic you hard" because of the skyrocketing price, has fallen gradually since 2011. In December 2011, the average wholesale price of garlic was 3.27 yuan/kg, dropping 65.4% compared with the price of 9.45 yuan/kg in the same period in 2010. Since the middle of February 2012, onion prices have continued to rise. On March 18, the price of onions rose 80%, compared to the same period last year, and a new round of rising prices of agricultural commodities is brewing. Experience has shown that agricultural commodities prices and farmers' income are closely related. Farmers' income is the core of the "agriculture, rural areas and farmers" problems; therefore, studying the relationship between agricultural commodities prices and farmers' income has a very important significance.Many economists have analyzed the price fluctuations of agricultural commodities. Early literature was mainly from the supply perspective, among which the supply response model was the most influential. The model applied the dynamic analysis method to the supply of agricultural commodities analysis, assuming the farmer did not respond to the last price, but the expected price, which depended on the last price to a certain extent (Nerlove, 1956). This theory has inspired the upsurge of national research on the agricultural supply response, especially on the response to price for farmers in developing countries. There was also some literature studying the prices of agricultural commodities from the demand perspective, such as the spatial price equilibrium model, which was one of the classic theories (Fox, 1953).With the accelerating pace of world integration and industrialization, the impact and influence of external factors on the prices of agricultural commodities have been focused on. Macroeconomic policies, especially the monetary policy, could have a direct or indirect impact on agricultural prices and volatility levels (Lapp & Smith, 1992), and the non-neutrality assumption of money could also cause food price overshoot (Frankel, 1982).There have been some debates on the relationship between the price of agricultural commodities and farmers' income. Some experts believed that the rise of agricultural prices would increase farmers 'income (such as Wen & Wen, 1997; Levin, et al., 2003; Shi, et al., 2009), but some experts denied it, as a price increase would increase the cost of agricultural commodities, and therefore, decrease the farmers' income (Chen & Lv, 1997); prices of agricultural commodities could not become the explained variable of the farmers' income (Zhang, & Liu, 2008); agricultural prices had less effect on the farmers' income in the steady period of agricultural commodities, while the sharp rise in prices of agricultural commodities would greatly restrict the rapid increase of farmers' income (Guo & Ma, 2007).From the above research, there is no unified conclusion on the relationship between the agricultural commodities price and farmers' income. …