Transcript Pre-Event Supply and Demand

The UK BSE/FMD Experience and Challenges of
Re-Establishing Domestic Markets
David A. Bessler
Texas A&M University
September 22, 2008
The research described herein was supported by FAZD Center at
Texas A&M and Bruce McCarl, Yanhong Jin, Levan Elbakidze and
Aviral Chopra.
All errors are the author’s responsibility.
1
Outline of Presentation
(I) Econ 101: Demand and Supply.
a. Reduction in International Trade.
b. Changes in Domestic Supply and Demand.
(II) Questions On Substitution in Demand for Meat Products.
(III) BSE 1989, BSE 1996 and FMD 2001– Empirical Evidence on
Behavior of Prices.
(IV) Aggregate Effects – Agriculture, Agribusiness, Consumers,
Government.
2
Retail Level Supply and Demand Before and After Loss
of International Markets with No Mandatory Slaughter
Ex Ante Supply
Ex Post Supply
Price
P1
P2
Ex Ante Demand
Ex Post Demand
Q1 Q2
Quantity
3
Interpretation of the Previous Slide
With no mandatory supply reduction a loss
in markets due to health event (like FMD
or BSE) in the domestic herd will result in
lower prices domestically.
4
Post-Event Retail Supply and Demand if International
Export Trade is Prohibited And Supply is Reduced by
Animal Slaughter
Reduced Supply
Price
Supply Before Event
P1
Total Demand Before Event
P2
Demand After the Event
Q2
Q1
Quantity
5
Interpretation of the Previous Slide
• If international export trade is prohibited and
supply is reduced by animal slaughter, price and
quantity changes depend on how large the
slaughter is relative to loss in demand.
• Without looking at the data, we cannot say, a
priori, whether prices will increase or decrease
from prohibition of exports and animal slaughter.
• The relevant question is: which is larger,
decrease in demand or size of animal slaughter?
6
Post-Event Retail Supply and Demand If Shifts in Supply are
Larger than Shifts in Demand
Post-Event Supply
Price
Supply Before Event
P2
P1
Total Demand Before Event
Post-Event
Demand
Q2
Q1
Quantity
7
Post-Event Retail Supply and Demand If Shifts in Demand are
Much Larger than Shifts in Supply
Post-Event Supply
Price
Supply Before Event
P1
Total Demand Before Event
P2
Post-Event Demand
Q2
Q1
Quantity
8
Interpretation of the Previous Two Slides
• Without looking at the data, Econ 101
doesn’t give precise predictions about how
market price will respond to discovery to
an animal health event.
• Of course common sense may tell us that
shifts in demand will be large relative to
shifts in supply, but perhaps not!
9
Farm-Level Demand
• Consumers rarely buy directly from farmers/producers.
• Farmers/Producers sell to marketing service providers
(“middlemen”), who process, store, transport, and
otherwise add utility, and who sell to the consumer.
• Farm-Level demand is thus “derived” from retail-level
demand.
• Without re-doing each of the previous graphs, but now at
the farm (producer) level, let me just say a similar set of
graphs apply at the producer level.
10
Relative Shifts and Slopes of Curves (Lines)
are Fundamental to Assessments of
Ultimate Effects
• The graphs given above are merely indicative of
effects.
• Slopes on each of the demand and supply lines
may not be constant through time.
• Shifts in lines determine relative size of changes
in price and quantity.
11
Substitution in Demand
• The previous analysis has been with respect to one
commodity (say beef or pork) or its farm level component
(cattle or pigs).
• When we moved (shifted) the demand curve in toward
the origin due to health concerns, we are implicitly
saying consumers will substitute other products.
• That is, if demand for beef falls, presumably consumers
are substituting out of beef and into other products; e.g.
poultry, non-meat protein, or non-UK beef (imports of
non-UK meat protein), etc.
12
Indictors of How Big These Shifts in Supply
and Demand Might Be
• Relative size of animal slaughter.
• Size of export markets for alternative products.
• Size of imports of meat products.
13
2001 Number of Animals Slaughtered for FMD Control
by Type and Percentage of Herd-Type
(Source: Thompson, D. et.al. DEFRA, Whithall Place, London, UK)
Animal Type
Slaughtered
for Disease
Control
Slaughtered
for Welfare
Total
Slaughtered
Approximate
Percent
Slaughtered
Cattle
594,000
169,000
763,000
6.8%
Sheep
3,334,000
1,586,000
4,920,000
11.6%
Pigs
145,000
287,000
432,000
6.7%
14
Previous Slide: What Did We See?
Sheep slaughter due to the FMD event was
proportionately larger (11.6%) than was slaughter on
cattle and pigs (6.8% and 6.7% respectively).
Why might this fact be important?
It may predict that prices for sheep may not fall as fast as
those for pigs and cattle because of greater proportional
slaughter for sheep.
But wait! What about demand?
15
UK Animal and Animal Products Exported to
European Union 1999-2000
(Source Peter Midmore, Institute of Rural Studies, University of Wales, Aberystwyth)
Animal
Type
1999
Exports
to EU
(‘000
tonnes)
1999
% of UK
Animal
Output
1999
Farm
Gate
Value
(£
Million)
2000
Exports
to EU
(‘000
tonnes)
2000
% of UK
Animal
Output
2000
Farm
Gate
Value
(£
Million)
Cattle
and
calves
10
1.5%
30.3
9
1.3%
25.6
Sheep
and
Lambs
153
38.0%
380.0
124
31.8%
249.8
2.6%
20.3
9
4.2%
34.9
Pigs and 6
Pig Meat
Milk, Butter and Cheese Not Included
16
What Did We See in the Previous Slide?
Sheep exports from the UK to Europe are proportionately larger
(~35% of quantity produced) than cattle and pig exports to the UK
(~ 1.4% of production and ~3.4%, respectively).
Why might this fact be important?
While sheep slaughter due to the event was greater, proportionately
than that for cattle and pigs, the sheep industry also (presumably)
lost greater share of the market. So the ultimate effects of controls
on supply (slaughter) and demand (loss in exports markets) may not
be clear.
But wait again!
What about substitution among meat products?
17
Ceteris Paribus
All of the previous graphs are constructed under
the assumption of Ceteris Paribus (all other
things held constant).
Of course the world doesn’t stop for anyone or at
least any academic.
18
To investigate how actual prices behaved in the United
Kingdom we investigate price declines in a neighborhood
of three real events:
-- The 1989 discovery of BSE in the UK cattle
herd. This was not linked to human health.
-- The 1996 discovery of BSE and the association of
BSE with human health.
-- The 2001 discovery of FMD in the British pig crop and
subsequent transfer to lamb and cattle.
19
• We fit a vector auto-regression on farm-level,
wholesale level and retail–level price data
measured weekly on cattle, sheep, pigs and poultry.
• We forecasted future prices using only information
known before the event was known to the market
and contrast these forecasted prices with actual
prices over the subsequent 24 months.
• Our interest is in assessing the differential effect (if
any) the three major meat events had on prices.
20
DATA
• Data provided by Department of Environmental Food
and Rural Affairs (DEFRA), United Kingdom (UK).
• Consists of Real Daily prices at the Producer Level
– Cattle
– Lamb
– Pigs
– Poultry
• Period : January 1985 to December 2002.
21
Compare Actual Prices with Forecasted
Prices
Build a VAR Model on Prices of Cattle,
Pigs, Sheep and Poultry.
Forecast depends on only information
known before discovery.
Out interest is observing whether the
forecast lies above or below what actually
occurred.
22
C
a
t
1
1
0
1
1
t
5
1
0
5
1
0
0
9
5
9
0
8
5
l
e
2
2
1
1
S
5
2
0
7
5
h
0
r
1
P i
3
e
e
9
9
p
1
1
1
2
0
1
1
0
1
0
0
9
0
P P
9
r o
c
g e
P
r
i
c
e
9
2
0
9
6
i
0
8
1
2
P
i u
2
3
6
2
6
1
6
0
5
9
5
8
5
7
5
6
5
5
c l
1
e t
9
r
9
1
1
y
9
P
r
i
9
9
2
c
e
5
0
5
0
1
2
5
1
0
0
5
1
9
9
1
1
9
4
9
2
1
9
9
1
1
Figure 4. Forecasted Prices and Realized Prices (pence per kilogram) of Livestock Products over the
Period November 1989 – October 1991.
Key: ------ Forecasted Prices based on information known before November 1989
_____ Realized (Actual) Prices
23
What Did We See in the Previous Slide?
For the 1989 BSE event cattle prices actually were above
what they were forecast4ed to be based on information
known just before the BSE event was known to the
public.
Sheep and Poultry were actually below what they were
forecasted to be before the event.
Generally the 1989 BSE event had no lasting affect on
cattle market prices.
24
C
a
t
1
2
0
1
5
0
1
1
5
1
4
0
1
1
0
1
3
0
1
0
5
1
2
0
1
0
0
1
1
0
9
5
1
0
0
9
0
9
0
8
5
8
0
1
2
t
5
1
4
S
5
h
0
0
3
5
0
3
0
0
2
5
9
e
0
4
l
e
9
e
1
P
6
9
p
r
1
9
PP
6
P i
7
r o
6
i u
i c
0
6
6
4
6
2
6
0
5
8
5
6
5
4
5
2
g e
1
9
c l
e t
1
9
P
9
1
6
r
r
9
i
9
y
c
e
r
i
7
P
c
e
0
2
0
0
1
5
0
1
9
9
1
6
9
9
7
9
1 6
9
9
7
Figure 5. Forecasted Prices and Realized Prices (pence per kilogram) of Livestock Products over the Period March
1996 – March 1998.
Key: ------ Forecasted Prices based on information known before February 2001
_____ Realized (Actual) Prices
25
What Did We See in the Previous Slide?
For the BSE event cattle prices declined
and never recovered.
Other prices were generally above their
pre-event forecasted levels.
26
1
0
C
a
0
t
.
9
7
.
5
9
5
.
0
9
2
.
5
9
0
.
0
8
7
.
5
.
0
8
2
.
5
S
0
h
0
2
7
5
2
5
0
2
2
5
2
0
0
1
7
5
1
5
l
e
P
r
1
1
P i
i c
0
1
0
5
1
0
0
9
5
9
0
8
5
8
0
7
5
7
0
g e
P
r
i
c
e
r
i
5
8
3
t
0
2
0
0
e
e
p
2
1
0
0
4
0
PP
9
0
0
2
1
0
r o
.
i u
5
4
9
.
0
4
8
.
5
4
8
.
0
4
7
.
5
4
7
.
0
4
6
.
5
4
6
.
0
.
5
4
2
2
5
0
2
2
0
c l
e t
2
0
0
2
1
r
0
0
0
y
2
1
2
P
0
0
c
e
2
Figure 6. Forecasted Prices and Realized Prices (pence per kilogram) of Livestock Products over the Period February
2001 – February 2003.
Key: ------ Forecasted Prices based on information known before February 2001
_____ Realized (Actual) Prices
27
What Did We See in the Previous Slide?
.
For the FMD event when markets re-opened prices were
above their pre-event forecasted levels.
Speaking colloquially, one might initially think poultry
producers and retailers had “no dog in either the BSE or
FMD fight.” Poultry is not affected directly by FMD, or
BSE for that matter, but we see (through, perhaps, protein
substitutions) that prices are not un-touched by these
events.
28
Summary
• We see market prices actually did adjust to lost markets.
These adjustments occurred almost immediately.
• Consumers did not move away from affected meat
products in the 1989 BSE and the 2001 FMD events
(evidence the poultry results – retail poultry prices fell to
compete with increased quantities of beef, lamb and
pork).
• When compared to 1996 BSE event, the 2001FMD and
1989 BSE events losses for commodity producers seem
transitory rather than permanent.
• Perhaps the linking the 1996 BSE event to human health
and death was the reason cattle prices never recovered
after the 1996 BSE event.
29
Some Additional Thoughts
• Markets can and do take care of adjustments
once the public is assured of the safety of the
food product.
• Deeper analysis of welfare gains and losses
requires more detailed information.
• I’ve not covered the additional consideration of
tourism. Arguably, the short-run effects of FMD
on tourism may have been greater than the
above mentioned effects on agriculture (see
Scott, et,al Jo. Rural Studies 2004).
30
Thank You
31