Income Growth and International Meat Consumption

Transcription

1 Income Growth and International Meat Consumption Ted C. Schroeder Andrew P. Barkley Kathi C. Schroeder ABSTRACT. With technological adoption and trade liberalization, per capita incomes have grown rapidly in industrialized countries. Income growth has resulted in increased per capita meat consumption. Projecting future meat consumption requires quantifying the relationship between per capita income and meat consumption. This study estimates the relationship between income growth and meat consumption using data from 32 countries. Beef, pork, poultry, and lamb income elasticities declined at different rates as income levels increased. High income countries have experienced relatively constant per capita meat consumption. Low income counmes with low income growth have had stagnant meat consumption. Low income countries with growing incomes have experienced increasing meat consumption. Countries such as China characterized by relatively large income growth and moderate population growth have experienced large increases in total meat consumption. [Article copies available from The Haworth Document Delivery Service: ] As economic development has taken place and global trade has liberalized, changes in consumption and commodity demand have occurred. Meat consumption is particularly responsive to increases in income. Income growth is expected to result in increases in both the quantity of food Ted C. Schoeder and Andrew P. Barkley are Associate Professors and Kathi C. Schroeder is a Graduate Research Assistant, all with the Department of Agricultural Economics, Kansas State University. Helpful suggestions from James Mintert, Gary Brester, and two anonymous journal reviewers are appreciated Journal of International Food & Agribusiness Mmketing, Vol. 7(3) 1995 O 1995 by The Haworth Press, Inc. All rights reserved. I5

2 I6 Journal of International Food & Agribusiness Marketing consumed (calories) and the quality (nutrition and taste preference) of diet. At lower income levels, this suggests increased consumption of normal goods such as meat products. However, income growth in higher income countries may not result in increased meat consumption or could even decrease per capita meat consumption if healthier, palatable substitutes are available. The objective of this paper is to quantify the relationship between per capita income levels and the quantity of meat consumed for a diverse group of countries.' In particular, per capita consumption of beef, pork, poultry, and mutton (lamb and goat) is examined over a 16-year period ( ) across 32 countrie~.~ These countries are characterized by a wide range of meat consumption levels and income growth levels. Growth in total meat consumption by country is also examined relative to population growth. As incomes of individuals grow, consumption of meat proteins typically increases. Evidence of this for 32 selected countries in our sample is illustrated in Figure 1. With a few exceptions, a strong positive relationship existed between per capita meat consumption and per capita gross domestic product (GDP) in In 1988, the U.S. had both the highest per capita income and the highest level of per capita meat consumption of the selected counmes. On the other extreme, the Philippines, Korea, Thailand, China, and Turkey each had per capita GDP equal to roughly one- -.- FIGURE 1. Real GDP and Total Meat Consumption by Country, 1988 B 120- CL 4 loo- 9 - c U) ' C m- Argentina Hungary Yug lavia '=Portugal So#$#~'a Spain I3eqenmark Australia Real GDP ($1000/capita 1985 = 100) Canada ~ l & ~ 8 ~ d:h#f!?,itzerlan, Fid%dden Japan U.S. Phil~~~~&k$Orea Thailand

3 Scizroeder, Barkley, and Schroeder 17 fourth that of the U.S. and per capita meat consumption about one-sixth the U.S. Hungary was an interesting exception to the general relationship, with a relatively low per capita income level but per capita total meat consumption similar to that of the U.S. Roughly 80% of Hungary's meat consumption is pork Japan, on the other hand, had a relatively high per capita income level, but low meat consumption. This could be partially due to eflective meat import restrictions in place during 1988 (Wahl, Hayes, and Williams 1991). Understanding how changes in income affect meat consumption and which countries have potential for income growth is critical for identification of likely meat consumption growth regions. In addition, in determining which countries have the greatest potential for increased imports of either meat or feed grains, total meat consumption pattems must also be examined together with per capita consumption. CONCEPTUAL MODEL Demand for meat is a function of meat prices and income. Demand studies often estimate and report single elasticity estimates, although data variability may lead one to suspect differing elasticities across different income levels for example. This suggests that to be meaningful, elasticities should be estimated without assuming them constant across consumers from different income stature. The model used here allows for varying income elasticities across consumers in countries having disparate income levels. The relationship between income levels and meat consumption is examined using two analytical techniques. First, single-equation demand models are estimated for each commodity, allowing for nonlinear changes in income elasticities across income levels. Second, growth rates in aggregate per capita consumption of he four meats (beef, pork, poultry, and lamb) combined are compared with per capita income growth by country. Total meat consumption is also examined to provide information regarding potential changes in demand for meat. Income elasticities for most goods decline as income rises (Tomek and Robinson 1981). In addition, at certain income levels some goods, including specific meat products, may even switch from being normal to inferior goods. To anticipate future consumption patterns in countries with disparate income levels requires understanding the income elasticities of these countries for each product. To determine the relationship between income levels and income elasticities for meat products, four demand equations for beef, pork, poultry, and lamb, are estimated Several approaches can be used to model demand. Demand systems

4 18 Journal of I~fernational Food & Agribrrsiness Markering (e.g., Almost Ideal Demand, Rotterdam, etc.) are appealing because they allow for flexible functional forms and crossequation theoretical restrictions (e.g., symmetry). A demand system could be estimated for each country separately as in a recent study by Capps et al. (1994). However, with only 15 years of annual data, degrees of freedom constrain this approach for the data employed in this study. Pollak and Wales (1987) developed a method to pool international consumption data across countries to increase degrees of freedom for demand system estimation. However, a problem in this study is a lack of complete data for the system. That is, if a country does not consume a particular product in the system, then!hat country cannot be included in the entire system (i.e., price data are sparse or missing and consumption data are nonexistent). Numerous countries in the sample used here do not consume one or more of the four commodities (beef, pork, poultry, or lamb) and/or do not have adequate price data. The pooled system approach would result in deleting the entire country from Ule demand analysis. To alleviate data problems associated with estimation of demand systems, single-equation demand models were estimated for each commodity as follows: where i and h refer to meat commodity (beef, pork, poultry, or lamb), j refers to country, t refers to year, Q is per capita consumption (Ibs.). P is price (U.S. $/lb.), and INC is per capita income (U.S. $/capita). All price and income data are deflated to 1985 constant dollars by using the consumer price index for each country. Parameters /lo,... ByZ are elasticities to be estimated. The squared lninc variable is included in equation (1) to allow income elasticity to vary by income level (as opposed to being constant). The income elasticity is calculated as: Because meat commodities are expected to be nonnal goods and income elasticity is expected to decline with increasing income levels, parameter sign expectations are: The demand equations specified above assume constant price elasticities across countries. Several studies have shown that this assumption may not

5 Schroeder, Barkley, and Schroeder 19 be appropriate (e.g., Pollak and Wales (1987); Capps et al. (1994)). To test the sensitivity of the income elasticity results to the assumption of constant price elasticities across countries, the demand equations were reestimated allowing price elasticities to vary by counhy. The estimated income elasticities were similar under both model specifications. To forecast future meat consumption, it is critical to determine which countries are likely candidates for increased meat consumption in the future. This can be accomplished on a per capita basis, if population growth estimates are known, or consumption levels can be examined directly in aggregate. A comparison of growth rates in income and per capita meat consumption provides information on economic growth by country and meat consumption growth. Countries with low initial income, but high income growth rates are expected to have high per capita meat consumption growth rates. Countries with low income growth are expected to have low per capita meat consumption growth. Higher income countries may have per capita meat consumption levels that were high throughout the period and thus exhibit little growth in per capita meat consumption even with income growth. Of course, product mix changes from lower to higher quality meat products with income growth. To anticipate total meat consumption, and thus market potential, both per capita income levels and population must be considered together. To examine this, the relationships between total meat consumption growth, population growth, and per capita meat consumption growth are examined. Combining per capita income growth with population growth helps to identify potential markets for meat commodities. DATA Data on population and per capita consumption of beef, pork, poultry, and lamb for 32 countries were collected from the U.S. Department of Agriculture. Real per capita gross domestic product (GDP) data (1985 = 100) were collected from the Penn World Table Mark 5 (Summers and Heston 1991) for the 32 countries. Per capita GDP was used to measure per capita income. The 32 countries for which meat consumption and income were available are reported in Figure 1. Consumption and population data were available for these countries from 1975 through Income data were available only through 1988.~ Price data are considerably more difficult to obtain than consumption or income data for most of the included countries. High-income countries such as the U.S. and Canada have readily available, and relatively reliable commodity price data. However, most of the countries in this sample do

6 20 Jolirnal of lrirernatiorial Food & Agribusiness Marketing not publish price data. Therefore, price. data were estimated by using the volume-weighted average import and export price of each commodity for each respective country. These data were obtained from Trade Yearbooks of the United Nations Food and Agriculture Organization. Price data from all nations were collected from this source for consistency. Prices were deflated to 1985 constant U.S. dollars using the Consumer Price Index for each country published in International Financial Statistics. Ten of the 32 countries in Figure 1 were not used in the demand estimations because of insufficient price data (Argentina, Brazil, Finland, Hungary, India, Mexico, Thailand, Turkey, Venezuela, and Yugoslavia). A few countries did not have complete data on every variable for the entire 14-year period. This resulted in a different number of observations for each demand equation estimated. RESULTS Ordinary least squares estimates of the demand equations for beef, pork, poultry, and lamb are reported in Table 1. Tests for multiplicalive heteroskedasticity were significant at the 0.10 level only in the pork equation. Therefore, none of he equations were corrected for this condition. The beef and pork equations perform well, with R-squares of 0.71 and 0.69, respectively. The poultry equation has lower explanatory power wilh an R-square of The lamb equation has the lowest explanatory power with an R-square of only Why the explanatory power of the lamb model is poor relative to the others is not clear. Lamb includes goat consumption making this a heterogeneous commodity. Ln addition, lamb consumption is related to ethnic and cultural practices. For example, Australia, a relatively high income country, has high per capita lamb consumption even though most consumers in high income countries are more likely to consume beef or pork according to our model results. Most high income countries consume much more beef than lamb. The demand elasticities are generally consistent with expectations. Own-price elasticities are negative and significant (with the exception of the lamb own-price elasticity that is not statistically different from zero). Cross-price elasticities are generally positive and significant indicating substitutes. Exceptions include poultry being a compliment to pork, and beef estimated to be a compliment of both poultry and lamb. These meats are not likely compliments to most consumers. These results may be related to the quality of the price data available. Income and income squared are both highly signif~cant with the expected signs for each meat

7 Schroeder, Barkley, and Schroeder TABLE 1. Meat Demand Estimates for 22 Nations, Dependent Variable Independent In Beef In Pork In Poulby In Lamb Variable Quantity Quantity Quantity Quantity In Beef Price - 1.H2' ' (- 7.74) (1.54) (-3.45) (-3.38) In Pork Price In Poultry Price 0.353' ' ' (2.73) ( -5.33) ( ) (1.73) In Lamb Price In Income (In Income) - Squared ' ' ' (-5.12) (-3.02) (-4.87) (-6.37) Intercept Equation F ' ' 35.36' 10.29' Observations 'Indicates significantly different lrom zero at the 0.05 level. T-statistics are reported in parentheses. commodity. The income parameter estimates were not sensitive to the assumption of constant cross-country price elasticities. The estimated income elasticities for each of the four commodities as income level changes are illustrated in Figure 2. These income elasticity estimates are derived from the demand equations presented in Table 1 and essentially represent income elasticities across countries having different income levels. This graph exhibits several important results. First, for countries with lower income levels, all four meat commodities are strong normal goods with income elasticities ranging from around 1 for pork to

8 22 Jotirnal of lnlernalional Food & Agribusiness Marketing FIGURE 2. lncome Elasticities with Varying Income Levels: Beef, Pork, Poultry, and Lamb - c - Pork Real GDP ($/capita 1985 = 100) over 3 for lamb. As income levels increase, the elasticities decline. The lamb income elasticity declines most rapidly, becoming negative at an income of about $6000 per capita. Purcell(1989) estimated income to be an insignificant determinant of lamb demand in the U.S. Poultry becomes an inferior good at income levels of approximately $13,000 per capita. Eales and Umevehr (1988) found whole birds to be inferior, but chicken parts to be normal goods. Beef has the highest income elasticity of the four commodities for all but the lowest income countries. Income elasticity for pork is the most stable of all four meat commodities, equal to approximately 1 for the poorest countries to roughly 0.4 for higher income levels. Note that these income elasticities do not necessarily hold for any particular counmy, rather they represent the average across several countries over a range in income level. Nonetheless, income levels clearly have significant influence on both the quantity and type of meat products consumed. To anticipate future meat demand, it is important to determine which countries are likely to increase meat consumption and which have leveled off in terms of per capita meat consumption. Figure 3 illustrates the relationship between per capita income (GDP) growth and total meat consumption growth for the 32 countries. Based on per capita income and

9 Sclrroeder, Barkley, and Schroeder 23 FIGURE 3. Average Per Capita Real GDP and Meat Consumption Growth Rates by Country, C d 8 Is r e 2 6 s 4 5 O Real GDP Growth Rate (%) meat consumption growth during the period, Korea, China, Thailand, and Japan exhibit the largest percentage increases in meat consumption. These results are consistent with Capps et al. (1994); Sasaki (1993); Wahl, Hayes, and Williams (1991); and Wahl, Hayes, and Johnson (1992). If these countries sustain per capita income growth, then meat consumption is also likely to continue to increase. This is particularly true for China, Korea, and Thailand, countries whose per capita meat consumption and income levels were both relatively low in 1988 (Figure I). This suggests that countries that have low incomes but high levels of income growth are most likely to increase per capita meat consumption over time. On the other extreme, countries like South Africa, Venezuela, and Turkey with low incomes and low levels of economic growth have not been characterized by increased per capita meat consumption. Countries that have relatively high income levels, even Ulough they may have continued economic growth, such as the U.S., Canada, Australia, and Switzerland may have reached their maximum level of per capita meat consumption. That is, in these relatively rich countries additional income is spent by reallocating meat consumption toward normal meat products (Figure 2)

10 24 Journal of International Food & Agribusiness Marketing and away from inferior products, not by increasing per capita meat consumption. Figure 4 illustrates this point over the period. The U.S. has had relatively stable per capita meat consumption even with increasing income levels. South Africa has had low income growth and per capita meat consumption has declined. China has had sustained income growth and per capita meat consumption growth has followed. To determine which countries have large market potential, total meat consumption growth is compared with population growth in Figure 5. Countries such as South Africa and Venezuela had relatively high population growth rates of around 2% but they also had about the same total meat consumption growth. These countries have not experienced growth in per capita meat consumption (see Figure 3), but they have experienced moderate total consumption growth as a result of growing populations. As reported in Table 2, this is a result of no income growth in these countries over this time period. Other countries such as Korea, China, and Thailand have experienced large total meat consumption growth rates of 8% to 10% (Figure 5) associated with high income growth. As illustrated in Figure 6, these three countries had the three highest rates of per capita real income growth during 1975 through 1990 of the 32 countries. Figure 6 helps FIGURE 4. Per Capita GDP and Meat Consumption: United States, South Africa, and China, South Africa 50 China Year -+ Real GDP U.S. - Meat Consumption -e- Real GDP China * Real GDP S. Africa

11 Schroeder, Barkley, and Schroeder 25 FIGURE 5. Total Meat Consumption and Population Growth Rates, Average Annual Population Growth Rate (%) identify directly which countries have had combined income and population growth. Figure 7 illustrates total meat consumption over time for the countries that have experienced the largest growth rate in meat consumption. Mexico, a country with moderate per capita meat consumption growth of 1.069% (Table 2) is included because of the recent interest in this country associated with the North American Free Trade Agreement. China clearly has experienced the most sigmficant increase in total meat consumption of any of the countries considered. This is in large part a result of an annual average 1.3% increase in population and a 6.5% increase in per capita income. These increases contributed to an annual average 8.9% increase in total meat consumption and a 7.5% increase in per capita meat consumption. Japan exhibits the next highest level of meat consumption in total, but the total level is well below that of China. LJMITATIONS Several caveats to this analysis are in order. First, results rely on data that are less than perfect. Per capita income data are assigned a quality

12 26 Journal of International Food &Agribusiness Marketing TABLE 2. Average Annual Growth Ratesfor Meat Consumption, Population, and Real GDP, by Country, Per Capita Total Meat Real Per Meat Cons. Consumption Population Capita GDP Counby Growth Growth Growth Growth Argentina Australia Austria Belgium Brazil Canada China Denmark Finland France Germany Greece Hungary India Ireland Italy Japan Korea Mexico Netherlands Philippines Portugal South Africa Spain Sweden Switzerland Thailand Turkey U.K. U.S. Venezuela Yugoslavia 'Growth rate lor GDP is from 1975 through 1988.

13 Schroeder, Barkley, and Schroeder 27 FIGURE 6. Average Per Capita Real GDP and Population Growth Rates, Korea Thailand Argentina Mexico South Africa Venezuela Average Annual Population Growth Rate (%) FIGURE 7. Total Meat Consumption, Selected Countries, Year -+ China +- Japan +- Korea + India -+ Mexico * Thailand

14 Journal of fnrernational Food & Agribusiness Marketing code by Summers and Heston (1991) that ranges from A for highest reliability to F for poorest quality. Nine of the 32 countries examined had quality ratings of a C and one country, China, had a D for a rating. Seven (Argentina, Brazil, India, Mexico, Thailand, Turkey, and Venezuela) of these nine countries were not used in the demand equation estimations because of other missing data. Price data, as noted earlier, are quite difficult to locate for most of the countries examined. The weighted composite of import and export prices may not accurately reflect prices paid by consumers for meat products consumed. Despite potentially weak price data, the demand equation parameters were generally consistent with theoretical expectations. Simultaneity may be present between prices and consumption of these products on an annual basis. However, to effectively deal with this issue requires quality instruments that do not exist for most of these counuies. Biases associated with simultaneity therefore are not easily eliminated. Finally, fish and marine products are not considered in this analysis; again lack of sufficient data for all of the countries considered is the problem. To the extent that these products are close substitutes for beef, pork, poultry, or lamb, results could change with inclusion of fish and seafood. CONCLUSIONS AND IMPLICATIONS As developing countries experience per capita economic growth, meat consumption is likely to grow. Beef, pork, poultry, and lamb are all strong normal goods for Low income nations. As income levels increase, income elasticities for these meat products decline. At higher income levels lamb and poultry appear to become inferior. On average, consumers in high income nations typically do not increase per capita meat consumption when income grows. These individuals are already at full consumption levels of meat products. Countries characterized by consumers with relatively low per capita income, but high income growth, are also likely to have high per capita meat consumption growth. Korea, China, Thailand, and Japan are examples of countries that exhibit these characteristics. Total meat consumption has grown most rapidly in China where relatively high population growth combined with very high relative income growth has induced large growth in meat consumption. If these nations continue to experience rapid meat consumption increases, then they must either have (1) increase domestic meat production or (2) increase meat imports. Increasing domestic meat production will require an increase in feed grain production or feed grain imports. Al-

15 Schroeder, Barkley, and Schroeder 29 though former Soviet countries were not included in the data set, this is consistent with conclusions of Hayes, Kumi, and Johnson (1993) which project increased imports of corn and soybeans to support increased meat production in Soviet countries under reform. Demand for feed grains under either scenario appears likely to grow in countries experiencing income growth and this demand will be even greater if population growth is also occurring. NOTES 1. Meat here refers only to beef, pork, poultry, and mutton (lamb and goat). In many countries, fish and marine products are important sources of protein that may substitute for other meats. Lack of adequate data prevented the inclusion of fish and seafood consumption in this analysis. 2. The choice of time period and countries are dictated by data availability. Consumption data are generally the least limiting factor, whereas, price and income data are more limiting. 3. Updates of the income data are due to be published soon. These updates are to include data through They will be incorporated into the present analysis as soon as they are publicly available. REFERENCES Capps, O., Jr., R. Tsai, R. Kirby, and G.W. Williams. (1994). "A Comparison of Demands for Meat Products in the Pacific Rim Region" Jourrlal of Agricttlhtral andresource Economics 19: Eales, J.S. and L. Unnevehr. (1988). "Demand for Beef and Chicken: Separability and Structural Change." American Journal of Agriculhtral Economics. 70: Hayes, D.J., A. Kumi, and S.R. Johnson "Trade Impacts of Soviet Reform: A Heckscher-Ohlin-Vanek Approach." In proceedings of NCR-134 Conference on Applied Commodity Price Analysis, Forecasting. and Market Risk Management, Chicago, Illinois, 1993, pp International Monetary Fund Ir~rernatio~tal Firzancial Statistics. Various issues, Poll& R.A. and T.J. Wales. (1987). "Pooling International Consumption Data" Review of Economics and Slatistics 69:90-9. Purcell, W.D. "Analysis of Demand for Beef, Pork, Lamb, and Broilers: Implications for the Future." Research Bulletin 1-89, Blacksburg, Viginia: Research Institute on Livestock Pricing, July Sasaki, K. (1993). "The Structure of Food Demand in Japan: An Application of the Rotterdam System" Agribusiness 9:

16 30 Journal of International Food & Agribusiness Marketing Summers, R. and A. Heston. (1991). "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, " Quarterly Journal of Economics 106: Tomek, W.G. and K.L. Robinson. Agricultural Product Prices. Ithaca: Cornell University Press. Second edition United Nations. Food and Agriculture Organization of the United Nations. FA0 Trade Yearbook. Various issues, U.S. Depaiment of Agriculture. Foreign Agricultural Service. World Livestock Situation. Various issues, Wahl, T.I., D.J. Hayes, and S.R. Johnson. (1992). "Impacts of Liberalizing the Japanese Pork Market." Journal of Agricultural and Resource Economics 17: Wahl, T.I., D.J. Hayes, and G.W. Williams. (1991). "Dynamic Adjustment in the Japanese Livestock Industry Under Beef Import Liberalization" American Journal of Agriciclhtral Economics 73: HAWORTH JOURNALS ARE AVAILABLE ON MICROFORM All Haworth Journals ore available in either microfiche or microfilm from The Haworth Press. inc. Microfiche and microfilms are ovaliable to hardcopy subscribers at the lower "Individual" subscription rate. Other microform subscribers may purchase microfiche or microform at the "library" subscription rate. Microfilm specifications: 35mm: diazo or silver. Microfiche specifications: 105mm x 184mm (4' x 6'); reduction ratio: 24X: nonsiiver (diazo) positive polarity. Microform are mailed upon completion of each volume. For further information, contact Linda Frink. Microform Contact, The Haworth Press. lnc.. 10 Alice Street. Blnghamton, NY ; Te6 (800) (ext. 328); Fax: (607) : -Mall: getinfoohaworth.com Orders for microform may also be placed with University Microfilms international, 300 North Zeeb Road. Ann Arbor. Mi 48106; Tei: (303)