AbstractThis chapter explores land use decisions made by farmers in the upper Manupali watershed, Philippines. A panel of farm-level data (1994-2002) is used to quantify responses to economic shocks, and thereby to understand the leverage that policies affecting agricultural prices can be expected to exert in upland areas. It is shown that output prices have a clear and unambiguous effect on demand for agricultural land: higher crop prices lead to area expansion, other things being equal, and to intensification of production on existing farms. Given that upper-watershed production is more land-intensive than in lower areas for the same crops, market or policy shocks that raise prices of maize or vegetables (i.e. that turn the terms of trade in favour of upland agriculture) result in reduced fallow and the greater pressure for deforestation.