Toward the design of a pig sector model for Vietnam

1. Toward the design of a pig sector model for Vietnam Nicholas Minot International Food Policy Research Institute Presented at the Mid-term Evaluation Workshop for the project “Competitiveness of small-scale pig producers in an adjusting Vietnam market” 7 April 2009, CAP/IPSARD, Hanoi, Vietnam

2. Outline of presentation • Background on pig sector • Objectives of model • Characteristics of economic models • Toward the design of a pig sector model • Type of model • Commodities • Regions • Data and software requirements • Conclusions and next steps

3. Background of pig sector in Vietnam • Pig production • Large proportion of rural Vietnamese households grow pigs • Some commercial farm households • A few large-scale pig farms ,esp in south • Contract farming exists but is rare • Marketing • Rural areas – small farms sell locally, large supply cities • Urban areas – mix of temp neighborhood markets, permanent open markets, and supermarkets • Pork consumption • Pork is dominant form of meat consumed in Vietnam • Growing per capita consumption due to income growth & urbanization • Concern about safety, preference for fresh meat • Most buy fresh from traditional markets, but growing demand for processed and chilled pork at modern retail outlets, esp in urban areas and in South

4. Objectives of the model • Improve understanding of transformation of pig sector • How will rising income & urbanization affect pig demand, markets, and pig producers, particularly small-scale producers • Examine alternatives paths • How would alternative policies, institutions, and technologies influence evolution of pig sector • Develop capacity • Improve capacity of CAP/IPSARD to develop and use policy simulation models

5. Characteristics of economic models Economic model: a set of mathematical equations designed to represent the supply and demand for different goods and services. External factors such as technology, world markets, weather, and income growth Model equations and relationships Outcomes of variables of interest: production, consumption, trade, prices, and income

6. Agricultural sector models – special features • Low value/bulk ratios - Cost of transport is high relative to price of commodities  spatial variation in prices • Substitutability - High degree of substitutability in production and consumption  Markets are more closely linked to each other than in many non-agricultural sectors. • Perishability - Most agricultural products are perishable, More seasonal variation in prices, more concern about food safety issues • Impact on poverty.- In developing countries, poverty is usually concentrated in rural areas  agricultural policy politically sensitive, influenced by poverty-reduction goals

7. Agricultural sector models – Uses • What is the effect of an import tariff on feed on domestic livestock prices and farm income? • How will government procurement programs and distribution of food aid affect food markets in different regions? • What will be the effect of new technologyon prices, output, and farm income? • How will rising income orchanges in world prices influence consumer demand, prices, and trade in selected commodities?

8. Agricultural sector models - Qualifications • Agricultural sector models cannot predict the future – they merely tell us the logical consequences of our assumptions • Agricultural sector models are better at modeling homogeneous goods with competitive markets. More difficult to model heterogeneous goods with uncompetitive markets • Modeling structural and institutional changes is more difficult, requires more information or more assumptions

9. Toward the design of a pig sector model for Vietnam: Issues • General equilibrium vs partial equilibrium? • Equilibrium vs optimization? • Deterministic vs stochastic? • Spatial vs non-spatial? • How to address time dimension? • Which regions? • Which commodities • How to address distribution?

10. Toward the design of a pig sector model for Vietnam • General equilibrium vs partial equilibrium? • General equilibrium includes all sectors of the economy and income is determined in the model • Partial equilibrium focuses on one commodity or sector • GE not necessary in this case • Equilibrium vs optimization? • Optimization tries to maximize a variable • Equilibrium tries to satisfy all equations • Goal to understand market – equilibrium more suitable • Deterministic vs stochastic? • Stochastic for analyzing impact of random variables such as weather • Deterministic does not include random variables • Not focusing on risk or weather, so deterministic model is appropriate

11. Toward the design of a pig sector model for Vietnam • Spatial vs non-spatial? • Spatial allows direction of flow to be endogenous • Non-spatial assumes direction of flow • Spatial models somewhat more complicated but probably justified in this case • How to address time dimension? • Static model compares two situations • Dynamic model traces changes over time • Because of interest in changes due to income growth, dynamic recursive model may be needed • Trace results of income growth & urbanization over 10-20 years

12. Toward the design of a pig sector model for Vietnam • Which regions? • North, Center, South too aggregated • 62 provinces too disaggregated • 8 regions and possibly Hanoi & HCMC • Which commodities? • Types of pigs • Traditional breed pigs • Exotic breed pigs • Sows? • Piglets? • Maize • Other feeds? • Other livestock types?

13. Data and software requirements for pig sector model: Data • Production and consumption of each commodity in each region • Inter-regional and international trade • Prices of each commodity in each region • Transportation costs for each commodity between each pair of regions • Conversion ratios (maizepig, sows piglets, etc) • Supply and demand elasticities • Effect of income growth and urbanization on demand for different types of pork and different retail outlets • Effect of changing retail demand on income of different types of pig producers

14. Data and software requirements for pig sector model: Software • Excel is sufficient for simple models • All equations are linear • No inequalities (non-spatial model) • Specialized modeling software (e.g. GAMS) needed in most cases • Pig sector model will be programmed in GAMS • Allows non-linear equations • Allows inequalities (for spatial models

15. Conclusions & next step • Pig sector model will be • Partial equilibrium model • Recursive dynamic • Spatial model with 8 regions • Focused on pig and feed sector • Written in GAMS • Next steps • Compiling necessary data and parameters • Trip by CAP staff to IFPRI for model development • Preliminary simulations and feedback from sector experts • Finalization of model and report