Transcript Untitled [agribusiness

The Economic Impact
of Loss of the Beef
Export Market Due to
Mad Cow Disease:
National and Regional
Analysis
David Holland, Leroy Stodick,
Stephen Devadoss and
Joydeep Ghosh
2004
Introduction
• US Department of Agriculture announced on
Dec. 23, 2003 that Bovine Spongiform
Encephalopathy (Mad Cow Disease) had been
diagnosed in a WA state dairy cow
• The US is a major exporter of beef and related
products. Reports suggest approximately a
90% decline in beef exports to foreign
countries. Major foreign markets are Japan,
Korea, Mexico and Canada
• US demand for beef remains strong
Introduction
• US beef industry worth $70 billion in 2003
(retail level)
• Cattle and beef industries account for
0.4% of the US economy (GDP)
• Economic impacts will be spread across
cattle ranchers, cattle feeders, beef
processors and retailers
U.S. Production And Exports Of Beef
And Related Products
Year
1999
Total Production
(million pounds)
26,387
Total Exports
(million pounds)
2,417 (9.15%)
2000
26,776
2,516 (9.39%)
2001
26,102
2,270 (8.69%)
2002
27,089
2,447 (9.03%)
2003
26,296
2,658 (10.11%)
Value of U.S. Beef Exports
2002
($ billion)
2.58
First ten months of
2003
($ billion)
2.66
Beef variety
meats
Tallow
0.61
0.60
0.34
0.32
Total
3.53
3.58
Item
Beef
Introduction
• In response to the discovery of Mad Cow
Disease in the U.S., the average retail
beef price in the US declined by about 9%
between Dec. ’03 and Jan. ’04
• Average cattle price in the US fell by
about 7% between Dec. ’03 and Jan. ’04
• After several months beef prices returned
to pre-Dec. ’03 levels
Objectives
• To study the economic impact of loss of
the beef export market on the U.S.
economy using a computable general
equilibrium (CGE) model
• To combine national price effects into
regional economic impact analysis
Data and Model Construction
• Year 2000 US and Washington inputoutput data from the IMPLAN database
• U.S. and Washington SAM Produced from
26 CGE files generated by IMPLAN
• GAMS code to convert 26 CGE files to
U.S. SAM available from author
• GAMS code to parameterize CGE model
from SAM and to solve resulting model
available from author
Economic Theory and CGE Models
• CGE models are multi-sector models of
the economy
• Based on Walrasian GE theory
• Modeler specifies functional forms for the
behavior of economic agents
• Parameters are ‘calibrated’ using data
from the Social Accounting Matrix (SAM)
Theory
• Producers are assumed to be profit
maximizers
 Choose production levels and
purchases of inputs on the basis of
prices
 Sell on the domestic market or the
export market based on relative prices
• Similarly, composition of domestic supply
depends on the relative prices of
domestic products and imports
Theory
• Households are assumed to maximize
utility
 Choose consumption levels based on
income and prices
• Endogenous determination of regional
equilibrium prices (factor, commodity,
and exchange rate) to clear the factor,
product, and foreign exchange markets
Theory
• These CGE models are comparative static
models of the economy
• Economy is assumed to react to the
economic shock and return to a new
equilibrium
• The shock in this analysis is assumed
changes in export demand for beef
• In other simulations we have assumed
changes in export and household
demand
Model
• Constant elasticity of substitution (CES)
production function (Producer behavior)
• Stone-Geary utility function – LES preferences
(Consumer behavior)
• Armington function on the import side
 Substitution between US-produced goods
and ROW imports
 Substitution between Washington produced
goods and RUS and ROW imports
Simulation
Scenario Description
• 90% decline in foreign exports of U.S
Beef and related products. No shift in
household demand for beef
• All other parameters and exogenous
variables assumed unchanged
• Model is short-run with capital assumed
fixed by sector and labor assumed mobile
with a market clearing flexible wage
Scenario 1 Results
Impact on the U.S. Beef and Cattle Industries
Sector
Output (quantity of sales)
(% Change)
Ranch and Range Cattle
-6.68
Feedlot Cattle
-6.60
Meatpacking
-6.20
Scenario 1 Results
Impact on the U.S. Economy
Sector
Meatpacking
U.S. Consumer Price
(% Change)
U.S. Producer Price
(% Change)
-1.75
-5.78
Ranch & Ranch Cattle
-7.18
Feedlot Cattle
-8.44
•
Relatively larger decrease in producer price due to lower
export price
• Producer price is a function of domestic price and export
price
Scenario 1 Results
Impact on the Cattle and Beef Industry
(value of output (sales)- $m=million.)
Sector
Ranch Cattle
Base
13,133.11
Counterfactual
11,398.48
Output
Loss
1,734.63
Range Cattle
6,870.50
5,923.17
947.33
Feedlot Cattle
20,211.20
17,283.02
2,928.18
Meatpacking
59,952.33
52,980.78
6,971.55
Total
100,167.64
87,585.45
12,581.69
Scenario 1 Results
Impact on the Cattle and Beef Industry
(returns to labor –the wage bill- $m.)
Sector
Ranch Cattle
Base
888.34
Counterfactual
682.40
Income Loss
(labor)
205.94
Range Cattle
494.85
385.19
109.66
Feedlot Cattle
698.74
471.29
227.45
Meatpacking
4,908.64
4,518.28
390.36
Total
6,990.57
6,057.16
933.41
Scenario 1 Results
Impact on the Cattle and Beef Industry
(returns to capital - $m.)
Sector
Ranch Cattle
Base
2,475.63
Counterfactual
1,896.58
Income
Loss (capital)
579.05
Range Cattle
1,297.56
1,007.42
290.14
Feedlot
Cattle
3,311.78
2,224.85
1,086.93
792.29
728.66
63.63
7,877.26
5,857.51
2,019.75
Meatpacking
Total
The Impact Story
• With the loss of the Beef export market
formerly exported beef supply is pushed to the
Domestic (U.S.) market.
• The consumer price of beef declines by 1-2
percent and quantity consumed increases by
roughly 1 percent (ceteris paribus)
• Assuming that U.S. beef is free from BSE, U.S.
households are better off (lower prices and
more consumption) in the short run
The Impact Story
• The producer price of beef falls by roughly 5
percent
• The Value of Sales in U.S. cattle and beef
industries falls by roughly 13 percent of
baseline sales
• Labor is released from the cattle and beef
industries according to mobility assumption
and the wage bill falls in those industries
• Capital is fixed by sector, but rental rate of
capital falls
The Impact Story
• Income in U.S. cattle and beef industries
(returns to labor and capital) falls by roughly
20% of baseline income
• Beef and cattle producers are hurt but
households and other industries that use beef
as an input are helped by lower beef prices
assuming no change in demand for those
products
Implications for Regional Analysis
•
•
•
•
Price effects from policy simulations using national model
can be easily linked into regional models for more
accurate regional impact analysis
For example, national price effects from the loss of the
beef export market were incorporated into the regional
model for Washington state
The loss of the beef export market in Washington is then
simulated along with changes in the U.S. composite price
as the baseline cattle and beef price import price to
Washington
The result is more accurate regional impact analysis,
because information of price effects at the national level
determine the new rest of the U.S. commodity import
prices in the regional model
Implications for Regional Analysis
• The
construction of regional and national
general equilibrium models using GAMS and
IMPLAN data can be very quick and routine
• Go to author’s web page to obtain the
necessary GAMS code
The Economic Impact
of Loss of the Beef
Export Market Due to
Mad Cow Disease:
National and Regional
Analysis
For GAMS code contact:
David Holland,
[email protected]