The impact of cereal prices and policy on crop rotations and supply response

The impact of cereal prices on rotational decisions and farm-level and industry cereal supply is considered. It is argued that with the voluntary 50 per cent set-aside option for cereal producers, there is a large financial incentive to adopt a 50 per cent set-aside cropping plan as cereal prices fall below an individual producer's 'indifference' price. For a typical 210-hectare UK combinable crop farm, adopting a 50 per cent set-aside cropping plan is optimal when the price of cereals is below 62pounds/tonne ((98.50 Euro/tonne). If widely adopted, 50 per cent set-aside will lead to a substantial fall in the supply of cereals and would lead the industry supply curve for cereals to move leftward and become more elastic over a certain price range. The level of reduced cereal supply will be greater than would be predicted from an estimate of industry level supply response that ignored rotational and farm-level financial incentives.