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The Economic Impact of Loss of the Beef Export Market Due to Mad Cow Disease: National and Regional Analysis

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.

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The Economic Impact of Loss of the Beef Export Market Due to Mad Cow Disease: National and Regional Analysis

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  1. 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

  2. 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

  3. 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

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

  5. Value of U.S. Beef Exports

  6. 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

  7. 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

  8. 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

  9. 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)

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. Scenario 1 Results Impact on the U.S. Beef and Cattle Industries

  16. 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

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

  18. Scenario 1 Results Impact on the Cattle and Beef Industry(returns to labor –the wage bill- $m.)

  19. Scenario 1 Results Impact on the Cattle and Beef Industry(returns to capital - $m.)

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. The Economic Impact of Loss of the Beef Export Market Due to Mad Cow Disease: National and RegionalAnalysis For GAMS code contact: David Holland, holland@wsu.edu

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