David Holland, Leroy Stodick, Stephen Devadoss and Joydeep Ghosh 2004

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

Year

Total Production

(million pounds)

Total Exports

(million pounds)

1999 26,387 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%)

U.S. Production And Exports Of Beef And Related Products

Value of U.S. Beef Exports

Item2002

($ billion)

First ten months of 2003

($ billion)

Beef 2.58 2.66

Beef variety meats

0.61 0.60

Tallow 0.34 0.32

Total 3.53 3.58

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 input-output 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

• Relatively larger decrease in producer price due to lower export price

• Producer price is a function of domestic price and export price

SectorU.S. Consumer Price

(% Change)U.S. Producer Price

(% Change)

Meatpacking -1.75 -5.78

Ranch & Ranch Cattle

-7.18

Feedlot Cattle -8.44

Scenario 1 Results Impact on the Cattle and Beef Industry(value of output (sales)- $m=million.)

Sector Base CounterfactualOutputLoss

Ranch Cattle 13,133.11 11,398.48 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 Base CounterfactualIncome Loss

(labor)

Ranch Cattle 888.34 682.40 205.94

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 Base CounterfactualIncome

Loss (capital)

Ranch Cattle 2,475.63 1,896.58 579.05

Range Cattle 1,297.56 1,007.42 290.14

Feedlot Cattle

3,311.78 2,224.85 1,086.93

Meatpacking 792.29 728.66 63.63

Total 7,877.26 5,857.51 2,019.75

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 RegionalAnalysis

For GAMS code contact:

David Holland, [email protected]