A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

Transcription

1 Reort 3 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector R E P O RT S E R I E S N o. 3, N o ve m b e r O n - Fa r m Fo o d Sa f e ty a n d E n vi r o n me n ta l Fa r m Pla n s : I de n ti f yi n g a n d Cla s s i f yi n g B e n e f i ts a n d Co s ts

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3 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector by Bruno Larue Jean-Philie Gervais Jill E. Hobbs William A. Kerr Richard Gray reared for Agriculture and Agri-Food Canada November 2005

4 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector November 2005 Research and Analysis Directorate Strategic Research Agriculture and Agri-Food Canada ACKNOWLEDGEMENTS We gratefully acknoledge the considerable hel e received from Martin Pelletier, Louis Ménard and Marie-Ève Gaboury of the Union des Producteurs Agricoles (UPA), Richelle Fortin, Danielle Pettigre and François Boutin of the Fédération des Producteurs de Porcs du Québec (FPPQ) and Claude Roy from the Ministère de l Agriculture, des Pêches et de l Alimentation du Québec (MAPAQ). The vies exressed in the reort are those of the authors and do not necessarily reresent the vies of the aforementioned individuals or their organizations. Her Majesty the Queen in Right of Canada, 2005 Any olicy vies, hether exlicitly stated, inferred or interreted from the contents of this ublication, should not be reresented as reflecting the vies of Agriculture and Agri-Food Canada (AAFC). AAFC does not control the availability of Internet eb sites featured in this reort. Therefore, it does not take resonsibility for severed hyerlinks or discontinued eb ages mentioned herein. Links to these eb sites are rovided solely for the convenience of users. AAFC does not endorse these sites, nor is it resonsible for the accuracy, the currency or the reliability of the content. Users should be aare that information offered by sites other than those of the Government of Canada are not subject to the Official Languages Act. More information on the On-Farm Food Safety and Environmental Farm Plans series is available on the Internet at.agr.gc.ca/sb/rad-dra. Publication RE ISBN Catalogue A38-3/ E-PDF Project r Aussi disonible en français sous le titre : «ÉVALUATION QUALITATIVE DES AVANTAGES ET DES COÛTS DES PROGRAMMES DE SALUBRITÉ DES ALIMENTS À LA FERME ET DES PLANS ENVIRONNEMENTAUX DES FERMES DANS LE SECTEUR DU PORC»

5 T ABLE OF CONTENTS Foreord... ix Executive summary... xi Chater 1 Introduction... 1 Chater 2 Chater 3 On-farm food safety initiatives in the ork sector... 7 Identifying the benefits and costs of on-farm food safety Chater 4 Environmental farm lans Chater 5 Conclusions Bibliograhy Aendix A Technical aendix Aendix B Glossary of terms and list of abbreviations A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector iii

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7 L IST OF FIGURES Figure 1: On-farm food safety stes... 8 Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Annual hog roduction in Quebec, Ontario and Alberta... 9 Monthly ork exorts in Quebec, Ontario and Alberta Monthly hog exorts in Quebec, Ontario and Alberta Weekly rices generated by Quebec s three marketing mechanisms beteen 1996 and Exort unit values for Quebec, Ontario and Alberta Figure 7: Initial market equilibrium in the ork sector Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: An increase in unit-cost of roduction on hog farms An increase in unit-cost of roduction on hog farms hen exorts of live hogs are not rofitable HACCP-induced decrease in roduction costs at the farm and rocessing levels HACCP-induced increase in the foreign demand for farm and rocessed roducts OFFS-induced increase in consumers demand for rocessed roducts A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector v

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9 L IST OF TABLES Table 1: Imlementation rogress in Canada of the CQA TM.. xii Table 2: Table 3: Potential demand-side benefits of OFFS in hog roduction... Potential suly-side benefits of OFFS in hog roduction Table 4: Potential rivate costs of OFFS in hog roduction.. 22 Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Benefits and costs of alternative OFFS for the ork industry Potential rivate demand-side benefits of environmental farm lans in hog roduction Potential suly-side rivate benefits of environmental farm lans in hog roduction Potential rivate costs of environmental farm lans in hog roduction Institutional comarisons of the benefits and costs of environmental farm lans for the ork industry Summary of arameters emloyed in the numerical simulation Table 11: Summary of the simulation results xiii A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector vii

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11 Foreord As consumers become more sohisticated and discerning in their food urchases, Canadian agriculture and agri-food roduction is changing to meet the challenge. Suly chains have been formed that secifically address food safety, food quality, and environmental concerns. Even the farm gate is reassessing the ay it does business. Industry initiatives are looking at the feasibility, and in many instances are already in the rocess, of imlementing on-farm food safety rograms (OFFS) and environmental farm lans (EFP). The Agricultural Policy Frameork (APF) recognizes the imortance of food safety and environmental concerns for the future groth of the agriculture and agri-food sector. For this urose, Agriculture and Agri-Food Canada (AAFC) has commissioned a series of six reorts to develo a concetual frameork to strengthen our understanding of the benefit and cost imlications OFFS and EFP ill have across the agri-food chain 1. The concetual frameork rovides a systematic aroach for organizing and ulling together stakeholders and government ongoing ork in determining ho best to imlement on-farm food safety and environmental lanning. The reorts also rovide reliminary qualitative alications of the concetual frameork to the Canadian ork, beef, grain and dairy sectors. This third reort in the series On-Farm Food Safety and Environmental Farm Plans: Identifying and Classifying Benefits and Costs details the assessment for the Canadian ork sector. In articular, it focuses on the hog industries in Quebec, Ontario and Alberta. The full list of reorts in the series On-Farm Food Safety and Environmental Farm Plans: Identifying and Classifying Benefits and Costs is as follos: Reort 1: Reort 2: Overvie of the Develoment and Alications of a Concetual Frameork for Analyzing Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans by J.E. Hobbs, J-P. Gervais, R. Gray, W.A. Kerr, B. Larue and C. Wasylyniuk On-Farm Food Safety and Environmental Farm Plans: A Concetual Frameork for Identifying and Classifying Benefits and Costs by J.E. Hobbs, J-P. Gervais, R. Gray, W.A. Kerr and B. Larue 1. The bulk of the analysis for this study as comleted in March 2003, rior to the discovery of bovine songiform encehaloathy (BSE) in a single beef co in Alberta, and the subsequent closure of the U.S. and other countries borders to all Canadian live ruminant and ruminant meat and meat roduct exorts. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector ix

12 Reort 3: Reort 4: Reort 5: Reort 6: A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector by B. Larue, J-P. Gervais, J.E. Hobbs, W.A. Kerr, and R. Gray A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Beef Sector by W.A. Kerr, C. Wasylyniuk, J.E. Hobbs, J-P. Gervais, R. Gray and B. Larue A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Grain Sector by R. Gray, M. Ferguson, B. Martin, J.E. Hobbs, W.A. Kerr, B. Larue and J-P. Gervais A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Dairy Sector by J-P. Gervais, B. Larue, J.E. Hobbs, W.A. Kerr and R. Gray x A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

13 Executive summary This reort deals ith the otential benefits and costs associated ith OFFS and EFP in the Canadian ork sector. The OFFS in the ork sector is the Canadian Quality Assurance TM rogram (CQA). Introduced in Aril 1998, it is a national quality assurance rogram designed to minimize (or eliminate) all otential risks and to assure a high quality and safe ork suly for domestic and international consumtion. The national Environmental Management System (EMS) initiative in the Canadian ork industry establishes a voluntary national standard for hog roduction. The Canadian Pork Council (CPC) initiated develoment of the EMS standard in July The CPC mandated the Canadian Standards Association (CSA) to guide the industry through the rocess of develoing the standard. The CSA has brought together ork roducers, federal and rovincial deartments, universities, and environmental rotection grous from across Canada to suort a consensus-based standard for the Canadian ork industry. This reort rovides an analysis of the main benefits and costs associated ith OFFS and EFP for the Quebec, Ontario and Alberta ork industries. Differences in rovincial hog marketing mechanisms, roduction and trade atterns are taken into account in the analysis. Enrolment in the CQA and validation of roducers vary from one rovince to another. Yet it is already ossible to identify some benefits and costs. Producers believe that OFFS in the form of the CQA are required to rotect market shares in traditional markets (U.S. and Jaan) and to enetrate ne ones. Hoever, the exectation is that comletion of CQA certification is not likely to bring about rice remiums. The CQA could become an instrument of market enetration in foreign markets if Canadian ork is cometing against other foreign suliers that have not established OFFS. Mandatory training sessions through the CQA can increase the overall roductivity of hog roducers and loer the average cost of roduction. EFP in the hog industry have long been needed. Comrehensive environmental lans encouraging better ractices must be imlemented in conjunction ith enforceable erformance standards to revent economic losses and environmental degradation. Similarly to the CQA, benefits of the EMS initiative are more in terms of not losing established market shares rather than in terms of rice remiums. Producers have more to lose than any other grou along the marketing chain from negative ress about environmental roblems as retailers and, to a lesser extent, rocessors can rely on substitution beteen roducts/inuts to mitigate losses. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector xi

14 Aggregate market imacts folloing the CQA and the EMS initiatives are likely to be modest. This is not to say that these rograms do not have real imacts on the financial and economic variables affecting the bottom line of roducers, rocessors and retailers. Hoever, as the technical analysis in Aendix A illustrates, these rograms have a multitude of offsetting effects that are not likely to imact much on market equilibria. At the roducer level, a key factor ill be the effect of the CQA and the EMS on the cost structure of hog farms. Will otential efficiency gains outeigh additional costs imosed by CQA and EMS validation? At this stage, it can be conjectured that there ill be a modest economic gain to roducers. The most imortant imlication of the CQA and the EMS has to do ith the rotection and groth of market shares in ork. As such, these initiatives should contribute to the sustainable develoment of the ork industry across Canada. xii A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

15 Chater 1 Introduction Food safety, food quality and environmental concerns have become issues in the domestic market and in exort markets for many Canadian agri-food roducts. A large number of industryled and ublic sector initiatives are attemting to resond to these rising concerns. While these initiatives can be solely reactive, it is hoed that the changes being ut in lace can imrove the cometitive advantage of individual Canadian agri-food industries and the Canadian agri-food industry as a hole. Besides the ositive effect on rofitability, there may be other benefits that accrue to society from initiatives that enhance food safety and imrove the environmental sustainability of agricultural roduction. The APF, endorsed by the Government of Canada and most rovincial governments, stresses food safety and environmental steardshi as among the to riorities for guaranteeing a strong future for Canadian agriculture. The APF considers the imlementation of Hazard Analysis Critical Control Point (HACCP)-like OFFS and the imlementation of EFP vital in ensuring that Canada continues to be a orld leader in the agri-food industry. This is the third reort in a series dealing ith the assessment of otential benefits and costs associated ith roosed OFFS and EFP initiatives for Canadian agriculture. The objective of this third reort is to rovide a broad reliminary assessment for the Canadian ork sector. An analysis of regional differences in on-farm food safety and environmental initiatives is made. The analysis focuses on the Quebec, Ontario and Alberta hog industries. This reort is structured in five sections. The remainder of this section outlines the benefit-cost frameork develoed and used in this research roject. Section 2 rovides some background information on the OFFS initiatives in the ork sector, as ell as on roduction and trade flos. Section 3 resents the analysis of OFFS in the ork sector. Section 4 discusses EFP. Conclusions are resented in Section 5. The technical material is consigned to Aendix A. A glossary of key technical terms and a list of abbreviations can be found in Aendix B. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 1

16 2Chater The benefit-cost frameork 2 Any roosed change in the ay a firm, or an industry, oerates needs to be assessed before a decision can be made regarding its desirability. It does not matter if this change arises in resonse to an oortunity identified by the firm s management, from a change in market conditions (such as a recession) or a change in the regulatory environment ithin hich the firm oerates. If the roosed change is determined to be detrimental to a firm s rofits, then alternatives can be exlored or a decision made to exit from the industry. Assessments may be straightforard and as simle as back of the enveloe calculations. In many cases, hoever, there may be a large number of factors that enter into the assessment of a roosed change and a more formal structure is needed to organize those factors to ensure comleteness and to allo ositive and negative factors to be eighed. Often the interaction among factors is comlex, making it imossible to arrive at a correct assessment through informal means. One of the most longstanding and thoroughly develoed aids to formal decision-making is benefit-cost analysis, and it has been emloyed in this study. The benefit-cost aroach has a number of advantages for decision-making in comlex situations. It can be undertaken ith differing degrees of sohistication and rigour. Tyically, the use of the benefit-cost frameork starts ith a relatively simle exercise that catalogues the various exected outcomes that may arise from a roosed change in the ay firms or industries oerate. Outcomes are sorted into benefits and costs. This catalogue is tyically very broad and not all of the listed outcomes may be alicable to each firm or industry. This broad aroach is undertaken to ensure comleteness. Once the catalogue is comlete, the next stage surveys those ho ork in the firm(s) to assess the imortance of each ossible outcome. This allos the imortant benefits and costs to be identified so that further efforts can be concentrated on the key decision variables. In many cases, once this stage is reached no further analysis is required because the broad outlines of the decision are obvious. If the result is not clear, the use of the frameork can be deeened to increase the transarency of the decision. If necessary, monetary values of key benefits and costs can be obtained. This is often exensive requiring sohisticated estimation techniques and secialised rofessionals. There is a clear research resources question regarding the value of imroving the information ertaining to decision-making relative to the costs of obtaining the information. The imortant oint, hoever, is that the consistent frameork is caable of organizing increasingly sohisticated ieces of information. Since many of the changes in the ay firms or industries oerate ill have outcomes that san considerable eriods of time, and costs may incur at different times than benefits are received, more formal benefit-cost rocedures can incororate discounting techniques. If the investment is made to obtain comlete quantification of key outcomes, the discounting techniques allo comarison of the monetary benefits and costs over time, and hence determination of the dollar value of the net benefit. As many assumtions are tyically needed to calculate the quantitative benefit and cost estimates, the decision-maker can also measure the sensitivity of his/her net benefit calculation to these assumtions. 2. The Concetual frameork resented in this section is a summary of Reort # 2. It is resented here for the convenience of the reader. For additional information on the concetual model, the reader is referred to the reort On-Farm Food Safety and Environmental Farm Plans: A Concetual Frameork for Identifying and Classifying Benefits and Costs (Hobbs et al., 2003). A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

17 This reort used a benefit-cost frameork to assess OFFS and EFP. The catalogue of benefits and costs as first develoed. Next, the exerience of industry ith already existing on farm quality control and environmental enhancement systems as used to identify the key benefits and costs. No attemt as made to deeen the analysis through the acquisition or develoment of quantitative measures, as this ould have required far greater resources than ere available. The frameork rovides a temlate uon hich a formal quantitative analysis can be based. Considerable insights, hoever, can be gleaned from the qualitative analysis resented. Benefit-cost analysis has one additional advantage as an aid to decision making. Private and societal benefits and costs often diverge (i.e. the costs imosed on society from ater olluted by agricultural roduction do not sho u on the financial balance sheet of the farm causing the ollution; nor do the benefits urban dellers receive from farmers undertaking soil conservation ractices that reduce dust storms). Thus, a roosed change in the ay firms oerate may lead to differences in the desirability of the outcome deending uon hether the rivate or ublic vie is taken. Benefit-cost analysis allos both rivate and ublic benefits and costs to be incororated into the decision-making frameork in a consistent fashion. Through a comarison of the to decisions it is ossible to assess the desirability of ublic sector intervention to encourage or dissuade rivate sector decisions. Introduction Some of the costs of OFFS are obvious. There ill be start-u (fixed) management costs associated ith develoing a lan and utting it into oeration, including one-time costs associated ith changes to facilities (fixed caital costs associated ith comliance). There ill also be ongoing (variable) management and comliance costs associated ith oerating the system, extra age costs or ossibly additional ersonnel, on-going staff training, comuter equiment, udates of record keeing softare, etc. Other costs may not be so obvious. If systems are not mandatory, there may be costs associated ith segregating roducts that are roduced under OFFS from those that are not, so that consumers can be assured of the quality of the roducts they are consuming. Whether roducts have been roduced under OFFS rotocols cannot be discerned hen food is urchased or even after consumtion. As a result, there must be ays of verifying that the roducts have been roduced to this standard. Thus, there ill be costs associated ith monitoring roduction rocesses. There ill also be costs associated ith dealing ith those ho cheat or lack the skills to live u to their commitments. A ide range of otential benefits have also been incororated into the frameork to evaluate OFFS. These benefits tend to be less obvious than the costs; and better illustrate the imortance of using a formal frameork. For examle, in times of rising international concerns regarding food safety, having an OFFS in lace may enhance access to foreign markets. It may also allo Canadian roducts to be differentiated from other roducts in foreign markets and allo Canadian roducers to obtain a remium for their roduct. It may also enhance the reutation of Canadian food internationally, assisting in building a loyal base of international customers. An OFFS can benefit consumers by reducing the costs they must incur to learn about the safety of the food they urchase. It may also benefit roducers by reducing the exenditures they must make to build consumer confidence in their roducts, or in roduction through imrovements in the use of inuts or an increased outut (e.g. through the reduction in roduct condemnations or recalls). Benefits may also accrue along the suly chain, such as loer losses during transortation and less ost-farm monitoring. One of the major benefits may be the reduced liability cost arising from the ability to trace roducts through the suly chain hen there is a break don in the food safety system. Being able to identify the farm(s) of origin may reduce the number of farms hose roducts must be A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 3

18 4Chater 1 recalled and may also increase the seed ith hich an animal health roblem or cro contamination roblem can be dealt ith. There may also be benefits that arise from isolating any firms currently free-riding on the food safety system (e.g. a farmer ho feels he/she doesn t have to reduce his/her esticide use because all the other farmers ill, and no one ill notice his/her high esticide levels if everything is mixed at the grain elevator). Many of these benefit and cost scenarios can be couched in an insurance frameork hereby incurring the costs associated ith OFFS acts not to eliminate a future occurrence but rather to reduce the robability that a future occurrence takes lace. As some food safety roblems can greatly reduce the income of a large number of farmers (e.g. a foot-and-mouth outbreak), each farmer s contribution to increased food safety acts as an insurance remium to reduce the robability of a high cost future event that affects a large number of farmers. The benefit-cost frameork for EFP is similar to that for OFFS. On the cost side there are both fixed and variable costs associated ith establishing and imlementing a lan. There are also monitoring and enforcement costs in terms of ensuring that lans are actually being folloed and to disciline those ho breach their commitments. If the farm lan indicates that there are unaccetable environmental ractices taking lace in the farming oeration, there may be mitigation costs associated ith remedying the roblem. These may be caital costs such as the installation of more sohisticated manure handling systems or variable costs such as changes to feed rations to reduce hoshorous in faecal material. As ith OFFS, there may be costs associated ith segregating roducts roduced under EFP from roducts not roduced under such lans. Benefits from EFP arise from loering information costs relating to the environmental friendliness of the rocesses used to roduce food and simultaneously increasing consumer confidence in the food system. There may be benefits from being able to brand Canadian roducts as environmentally friendly and from reducing the costs of meeting the market access requirements of imorting countries. Farmers may benefit from enhanced self-orth and community status from increasing their environmental steardshi. Putting roduction on an environmentally sustainable basis ill increase the quality of life for Canadians and may result in reduced human health imacts from toxic sills, etc. Externalities and liabilities ertaining to air quality and odour (nuisance) roblems may be reduced. There could also be ositive ecosystem effects such as enhanced ildlife habitat and green house gas reductions. Again, some of the benefit and cost scenarios can be couched in insurance terms as cost remiums to reduce the robability of infrequent and catastrohic events. The frameork can also be adated to deal ith the long-time horizons that characterize some environmental benefits. In addition to cataloguing the benefits and costs of HACCP-based OFFS and EFP, the distributional effects of the changes to various actors along the suly chain have been examined. For examle, to rea a rivate sector benefit from the HACCP-based OFFS ill require changes to ho agricultural roducts are monitored along the suly chain to the final consumer. The firms that articiate in the suly chain ill have to incur costs in ensuring that the high food standards are maintained through the suly chain and that consumers are ultimately informed of the benefits they receive. Suly chain articiants may also have a chance to share in any increase in revenues that arise from the change. Where aroriate, the factors that influence ho these benefits and costs are shared among suly chain articiants are identified. Individual sectors ill have differences in benefits and costs deending uon factors such as A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

19 hether the industry is heavily involved in exorting and hether their roducts are currently branded. Where aroriate, these differences are ointed out and their effect on the efficacy of food safety and EFP initiatives are indicated. Introduction A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 5

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21 Chater 2 On-farm food safety initiatives in the ork sector 2.1 Introduction At the outset, it is imortant to rovide a brief history of ho food safety initiatives in the Canadian ork sector began. The Canadian On-Farm Food Safety rogram (COFFS) began in It is administered by the Canadian Federation of Agriculture and is being imlemented according to the folloing hases: 1. Establishment of a national strategy to adot an OFFS; 2. Develoment of a generic HACCP model, roduction of roducer materials, running ilot rojects, develoing auditor training materials; 3. Imlementation of the rogram through roducer aareness and training sessions, auditor training, on-farm audits, develoment of certification system; 4. Official recognition of the rogram by the Canadian Food Insection Agency (CFIA), a third arty audit and an administrative assessment. The OFFS initiative of the ork industry is the Canadian Quality Assurance TM rogram (CQA). It as introduced in Aril It s main objective is to monitor and control biological contamination risks (e.g. salmonella, and E. coli bacteria); chemical risks (e.g. antibiotics, hormones and esticides) and hysical risks (e.g., foreign material in meat, such as needles) to assure a high quality and safe ork suly for domestic and international consumtion. The CQA gained federal recognition in July The CQA is based on the rinciles of roducer education and aareness. Its develoment folloed three major stes: 1. Identification of otential risk areas on hog farms that could affect food safety, quality and integrity; A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 7

22 8Chater 2 2. Identification of actions aimed at minimizing or eliminating risks; 3. Develoment of a risk-reduction lan for roducers, hich consists of set of documented standardized ractices knon as Good Production Practices. The imlementation stes of the CQA for a hog roducer, for examle, in Quebec are as follos: 1. The roducer must register ith the CQA through his/her regional union office; 2. The CQA is exlained to the roducer in training sessions; 3. Producers must follo good roduction ractices and kee the roer records; 4. A rogram validator checks the records ket by the roducer. If roblems are detected, the roducer must agree to make the aroriate adjustments; 5. The validator visits the farm. Validators are resonsible for ensuring that roducers are folloing the required roduction rotocols and meeting the standards. The validator s role includes: 1. revieing the documentation of roducers; 2. visiting the farm facilities; 3. making an annual artial validation through a revie of the revious year s records; 4. making recommendations; 5. issuing documents attesting certification. Producers are recertified every three years. A certain ercentage of validators are audited to verify the accuracy and consistency of the validation rocess and of the imlementation of the hole rogram. The certification mechanism of the CQA and the role of all articiating arties is summarized in Figure 1. Figure 1 is adated from a document of the Union des Producteurs Agricoles (UPA) in Quebec and illustrates the interactions beteen all arties involved in the imlementation of on-farm food safety initiatives in Canada. Develoment of OFFS initiatives by the Canadian association of roducers Enrolment and formation of Provincial association of roducers Imlementation on the farm Figure 1: On-farm food safety stes Aroval by the CFIA Third-arty audit Validation and certification by Provincial association of roducers The CQA is a voluntary rogram. The Fédération des Producteurs de Porc du Québec (FPPQ), Ontario Pork and Alberta Pork fully endorse the CQA. Alberta Quality Pork is the delivery agency for the CQA ithin the rovince of Alberta. It is resonsible for training and certifying validators and for keeing roducers and validators informed of any change in the rogram. Although enrollment in the CQA is voluntary, several rocessors require A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

23 farms shiing hogs to their lants to be enrolled in the rogram. In Ontario, to large rocessors (Male Leaf Burlington and Quality Meats) require roducers validation for urchases. In Alberta, Olymel and Trochu have contract requirements related to on-farm food safety rocedures. In Quebec, a monetary remium ($1/hog), effective January 1 st, 2002, is aid from the total ool revenues to validated roducers. Table 1 describes the chronology of the imlementation of the CQA by rovince. A total of 2,647 roducers in Quebec are enrolled. Their herds make u 98% of all market hogs in Quebec. Although a larger number of roducers are enrolled in Ontario, their herds reresent only 57% of the rovince s roduction. This statistic also highlights the differences in the structure of hog farming oerations in each rovince. It can be inferred from Table 1 that Quebec hog farms are, on average, larger than Ontario hog farms. The evidence resented in Table 1 is inconclusive ith resect to comarisons involving Alberta hog farms. Hogs roduced on validated enrolment in 2002 (i.e., roducers ho have been validated by an external audit), in Quebec, Alberta and Ontario make u 70%, 52% and 47% of the total suly in these rovinces. In 2004, 80% of market hogs ere enrolled in the rogram hile 63% of Canadian hogs ere raised by roducers ho obtained recognition ithin the CQA rogram. 2.2 The ork industry Before resenting the benefits and costs of the CQA, roduction and trade atterns in Quebec, Ontario and Alberta are briefly described. It is imortant to understand the differences in roduction and trade atterns beteen these three rovinces as this can effect the imact of the OFFS in each rovince. Figure 2 illustrates annual hog roduction in Quebec, Ontario and Alberta from 1990 to Hog roduction has steadily increased in all three rovinces during the last decade. The increase in roduction is more noticeable in Quebec and Ontario than in Alberta during the second half of the decade. Nb of heads 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 - Figure 2: Annual hog roduction in Quebec, Ontario and Alberta Québec Alberta Ontario On-farm food safety initiatives in the ork sector A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 9

24 Chater 2 Table 1: Imlementation rogress in Canada of the CQA TM Province Producers Sos Market hogs CQA enrolment Validated enrolment % market hogs Producers Sos Market hogs % market hogs Evaluators trained British Columbia , , Alberta ,469 2,823, ,139 1,822, Saskatchean ,048 1,247, , , Manitoba 1,528-3,000, , Ontario 3,650-3,900, ,153-3,219, Quebec 2, ,015 6,944, , ,427 4,951, Ne Brunsick , , Nova Scotia , , Prince Edard Island , , , , Nefoundland CANADA 9,430 1,021,801 18,850, , ,926 12,314, Note: Alberta and Quebec statistics are reorted as of the end of the second quarter of Manitoba statistics are reorted as of the end of the first quarter of A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

25 Figure 3 illustrates monthly ork exorts from January 1990 to Setember Beginning in 1994, monthly ork exorts from Quebec have increased at an average monthly rate of 2%. Exorts from Ontario have increased at a sloer rate. Pork exorts from Alberta reached a eak in March 1997, quickly decreased to an all-time lo in May 1998, and increased sloly thereafter. This latter eriod coincides ith a surge in exorts of live hogs from Alberta as deicted in Figure 4. Ontario and Alberta have exorted significant volumes of live hogs in recent years, mainly to the U.S. 3 Historically, exorts of live hogs from Quebec have been very lo. The differences in trade atterns in Quebec can be exlained by several factors. One of the three marketing mechanisms used in Quebec the re-attribution mechanism through hich 55% of the hogs are marketed guarantees the U.S. rice to hog roducers hile the other to mechanisms, the daily electronic auction and the so-called English contract (i.e. the auctioning of monthly sulies hich began in Aril 2000) have generated rices in excess of the U.S. rice more often than not. 4 Figure 5 illustrates the Kg Kg 25,000,000 20,000,000 15,000,000 10,000,000 5,000, , , , ,000 50,000 0 Figure 3: Monthly ork exorts in Quebec, Ontario and Alberta 0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Québec Alberta Ontario Figure 4: Monthly hog exorts in Quebec, Ontario and Alberta Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Québec Alberta Ontario rices generated by the three mechanisms beteen 1996 and Because Quebec hog roducers articiate in a revenue insurance rogram, the rice they receive is at times above the average of the three rices lotted in Figure 5. Under these circumstances, Quebec hog roducers have little incentive to exort live hogs. Finally, Quebec hog roducers are far aay from the large rocessing facilities of the U.S. Midest and as such they are confronted ith a stiffer natural trade barrier than estern Canadian hog roducers. On-farm food safety initiatives in the ork sector 3. According to Ontario Pork, U.S. rocessors have indicated that they ill require Ontario transorters delivering hogs to their slaughtering lants to become certified by the Trucker Quality Assurance rogram (TQA). The TQA as created by the National Pork Board to educate truckers on the imortance of roer handling loading and transortation of hogs ith attention to bio-security and animal elfare. Along ith TQA and HACCP-certification for millers and rocessing lants, the hole suly chain for the ork sector ill have develoed food safety initiatives ith the comletion of the CQA. 4. The interested reader is referred to Larue et al. (2000) for a revie of the Quebec hog/ork industry and its marketing mechanisms. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 11

26 Chater 2 Finally, it is interesting to look at the evolution of ork exort unit values in the three rovinces. Unit values of ork exorts are calculated by dividing the total value of exorts by the quantities of ork exorted. Figure 6 shos that unit values of ork exorts from Quebec have been consistently belo the unit value of ork exorts from Ontario and Alberta. Quebec s unit values are also less volatile than in the other to rovinces. These differences are directly linked to each rovince s volume of live hog exorts. The large sikes in Ontario and Alberta s unit values corresond to eriods of lo/high exorts of ork/live hogs. With feer hogs being domestically rocessed, cheaer cuts remained in Canada hile relatively more exensive cuts ere exorted. When the volume of hogs domestically rocessed is larger, it becomes rofitable to increase the share of cheaer cuts in the exort bundle. $ er 100 kg Figure 5: Weekly rices generated by Quebec s three marketing mechanisms beteen 1996 and Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Pré-attribution English contract Auction Figure 6: Exort unit values for Quebec, Ontario and Alberta Québec Alberta Ontario Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

27 Chater 3 Identifying the benefits and costs of on-farm food safety Industry stakeholders ere intervieed to determine the relative imortance of the benefits and costs identified in the concetual frameork develoed for this roject. Table 2 summarizes the otential rivate benefits of imlementing the CQA. In articular, it shos the benefits associated ith demand-side effects (i.e. benefits originating from variations in the decision variables of end-users both domestic and foreign consumers, and rocessors). Table 3 identifies the suly-side benefits of imlementing the CQA; (i.e. the benefits associated ith variations in the roduction decisions of roducers). Table 2: Potential demand-side benefits of on-farm food safety in hog roduction DEMAND-SIDE BENEFITS DESCRIPTION Domestic market: Reduce transaction costs for consumers Build consumer confidence Reduce substitution effects beteen farm roducts. Will tend to increase demand for ork roducts if consumers ercetions are that ork meat is safer than other meat roducts Premiums may not be easily collected from consumers. Hoever, if food safety initiatives increase demand, it could lead to higher rices at the retail, holesale and/or farm level Currently, a remium of $1 er hog is being aid to certified Quebec roducers. The remium is aid from the ool so it constitutes a cross subsidy from uncertified to certified roducers. The remium is likely to disaear as the roortion of certified roducers kees rising. In other rovinces, hogs from uncertified roducers are discounted by as much as $3. Marketing mechanisms seem to have an imortant imact (i.e. ool in Quebec versus rivate contracts in Ontario and Alberta) A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 13

28 Chater 3 Table 2: Potential demand-side benefits of on-farm food safety in hog roduction (Continued) DEMAND-SIDE BENEFITS International markets: Provide differentiation on the international market DESCRIPTION Producers believe HACCP is an instrument to rotect market shares in traditional markets (U.S. and Jaan) and to enetrate ne markets. No remiums can be obtained for certification, but it could be a sine qua non condition to get a sale Reinforce and develo trade netorks Facilitate trade by reducing non-tariff barriers Potential increases in market enetration in foreign markets if Canadian ork is cometing against other foreign suliers that have not established OFFS. Hoever, foreign customers are not likely to ay more Reduce marketing costs to communicate the nature of quality management systems and after-sale service. Hoever, it is ambiguous here the reduction in costs ill go. It can be translated either into loer rices for consumers and/or higher rofits along the suly chain (retailers, rocessors and/or roducers) Table 3: Potential suly-side benefits of on-farm food safety in hog roduction SUPPLY-SIDE BENEFITS DESCRIPTION Efficiency gains at the farm level: Imrove the roductivity of inuts Efficiency gains in business relationshis beteen roducers, rocessors and retailers: The mandatory training session at the beginning of the CQA rogram and the three months of training after hich the roducer is audited is believed to increase the over-all roductivity of hog roducers and loer the average cost of roduction. CQA forces roducers to use inuts more efficiently and should loer the costs of roduction Reduce logistics costs Ex-ost cost reduction folloing detection of contaminant in food Reduce measurement costs: erformance versus rocess standards Reduce monitoring and enforcement costs Reduce the costs of rocessing contaminated (or otherise roblematic) animals and contribute to imroving the overall efficiency of the suly chain Reduce the costs associated ith roduct recalls Reduce exected losses in the event of a serious (contamination) incident and reduce the robability of a serious incident. Best ractices do not eliminate all risks Reduce roduct liability costs 14 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

29 Table 4 identifies the rivate costs of imlementing the CQA. Table 4: Potential rivate costs of on-farm food safety in hog roduction SUPPLY-SIDE COSTS Management and comliance costs Sunk investments DESCRIPTION Variable costs are more imortant than fixed costs, but overall costs deend on the age and degree of decay of buildings and facilities. The most imortant variable cost is the oortunity cost of the time required for record keeing. Fixed costs may include modifications to the buildings or other fixed caital to comly ith the CQA guidelines. Some roducers may have to make more adjustments in terms of fixed costs than others roducers ith neer facilities. The measurement of cost differences ould require surveying farms Suliers are vulnerable to oortunistic behaviour by rocessors if buyer-secific HACCP sunk investments are made. Although CQA reduces the extent of sunk investments, it is believed it still exists. The extent to hich some rocessors (such as Ménard and Male Leaf) on requirements that are added on to CQA reduces the ability of roducers to sitch beteen rocessors remains to be evaluated Table 5 summarizes the otential benefits and costs of imlementing the CQA according to four different tyes of OFFS aroaches. The table is based on a qualitative assessment of benefits and costs from discussions ith industry stakeholders. Table 5: Benefits and costs of alternative OFFS for the ork industry Voluntary industryide OFFS Enforced industryide OFFS Buyer secific OFFS Regulatory standards Benefits Reduce transaction costs for consumers Minimal Minimal Moderate Minimal Build consumer confidence Moderate Moderate Moderate Moderate Convey additional information Minimal Minimal Significant Minimal Provide differentiation on international markets Moderate Moderate Moderate Moderate Facilitate trade by reducing NTBs Moderate Moderate Moderate Moderate Reinforce and develo trade netorks Minimal Minimal Moderate Minimal Imrove roductivity of inuts Moderate Moderate Minimal Minimal Imrove efficiency in roduction Minimal Minimal Minimal Minimal Reduce logistic costs None None None Minimal Reduce measurement costs: erformance vs rocess standards None None None Minimal Reduce monitoring and enforcement costs Minimal Minimal Minimal Minimal Reduce roduct liability costs Minimal Minimal Minimal Minimal Reduce ex-ost cost folloing contamination Moderate Moderate Moderate Minimal Reduce free-rider imacts Minimal Minimal Minimal Minimal Reduce incidence of foodborne illness Minimal Minimal Moderate Minimal Reduce information asymmetry Minimal Moderate Minimal Minimal Identifying the benefits and costs of on-farm food safety A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 15

30 Chater 3 Table 5: Benefits and costs of alternative OFFS for the ork industry (Continued) Total benefits Moderate Moderate Moderate Minimal Costs Management costs fixed establishing the HACCP lan variable revising lan to reflect external changes Comliance costs fixed caital costs variable Significant Significant Moderate Very minimal Significant Significant Significant Minimal Significant Minimal Moderate Minimal Significant Moderate Moderate Minimal Sunk investments Risk of hold-u Minimal Minimal Significant None Monitoring and enforcement costs fixed variable Voluntary industryide OFFS Minimal Moderate Enforced industryide OFFS Minimal Significant Buyer secific OFFS Minimal Moderate Regulatory standards Moderate Moderate Total costs Moderate Moderate Significant Minimal TOTAL NET BENEFITS Minimal benefit None Minimal cost None 3.1 Modeling the effects of OFFS Aendix A of this document rovides a technical analysis of the economic imacts of the CQA at various stages of the suly chain for ork roducts. It also includes a reliminary estimate of the quantitative imacts of imlementing OFFS in the rovince of Quebec. A more detailed exlanation of the technical model is resented in Aendix B of the concetual frameork document (Hobbs et al., 2003a). The analysis is resented for different scenarios of the demand and suly-side benefits and costs listed in the revious section. The assumtions underlying this analysis are exlained in Aendix A. Different outcomes for the Quebec, Ontario and Alberta hog industries are redicted based on their differences in roduction and exort trends. Note that a similar tye of grahical analysis, as is carried out hen live hog exorts are ositive, is also alicable for the beef and grain sectors. To rincial issues are analyzed to determine ho rices and quantities are imacted. First, the effects of imlementing OFFS on the cost structure of roducers is exlored. As argued before, the net effect of the CQA on roducers costs can be either ositive or negative. Second, the otential imlications of on-farm food safety initiatives on the demand for farm and rocessed roducts is also exlored. A number of different scenarios are ossible. Scenario 1: First, suose OFFS increases the marginal costs of roducers. Given the assumtion of free trade and the net exort osition of the rovince, the domestic rice of live hogs is unchanged. Hoever, the increase in roducers costs causes a decrease in roduction hich results in a decrease in live hog exorts roortional to the decrease in hog roduction. Other variables in the suly chain are unaffected. The assumed negative imact of the OFFS is not transmitted donstream to rocessors and consumers. Naturally, any benefits stemming from imlementing the OFFS ould also be catured exclusively by roducers. 16 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

31 Scenario 2: The situation ould otentially be different if no exorts of live hogs existed before imlementing HACCP at the farm level. Assume that the domestic rice for hogs is higher than the orld rice (adjusted for transortation costs). This reresents the ork sector in Quebec. The initial imact of the increase in roducers costs due to the OFFS imlementation is to increase the farm rice and thus reduce the suly of ork roducts by domestic rocessors because their inut costs have increased. With free trade in ork roducts, the domestic rice of ork ould remain constant. The farm rice of live hogs increases, but both rocessors and roducers are orse off due to the decrease in hog roduction and ork exorts. Scenario 3: Imlementing HACCP at the farm and rocessing levels can also have ositive imlications. More secifically, suose HACCP-induced efficiency gains decrease both roducers and rocessors costs. There ill be an increase in hog roduction but it does not affect the farm rice if there is free trade. Quantities rocessed by domestic rocessors increase. The increase in domestically rocessed ork is all exorted. The economic surluses 5 of roducers and rocessors increase folloing the imlementation of HACCP. Scenario 4: It is also imortant to consider the imact of HACCP on foreign markets. As reviously discussed, food safety initiatives at the farm level can bring about a differentiation of Canadian ork roducts although these otential benefits are likely to be small if ositive at all. Assume that the CQA increases the demand for Canadian ork and hogs. This increases hog and ork domestic rices because of free trade. The final effects are increases in live hog and ork exorts, and in hog roduction. But domestic ork consumtion decreases due to higher rices. These effects unambiguously decrease consumers benefits (consumer surlus) and increase roducers benefits (roducer surlus). The imact on rocessors is ambiguous because of the effect on the domestic rice of live animals. Processors sales increase but urchases of their necessary inuts cost more than before the imlementation of the OFFS. Scenario 5: Finally, assume that imlementing food safety initiatives at the farm level increases domestic consumers demand. Under the assumtions exlained in Aendix A (free-trade and the small country assumtion), the domestic rice of ork roducts does not change as Canadian rovinces remain net exorters of ork roducts. Hence, given the constant domestic rice, domestic consumtion of ork roducts increases and exorts decrease. Producers and rocessors do not benefit from this ositive demand-side effect of food safety initiatives since rices remain constant at all market levels. Hog roduction also remains constant Numerical Simulation A numerical simulation serves to highlight the otential magnitude of some of the demand and suly side changes discussed above. Full details of the simulation are rovided in Aendix A. A model of the Quebec ork sector is constructed in the aendix that accounts for the revenueinsurance rogram, Assurance Stabilisation du Revenu Agricole (ASRA). First, a benchmark equilibrium is defined, hich is then used to assess the relative imacts of simulated food safety shocks. To different scenarios and a risk analysis are resented. The first scenario assumes a boost in consumer confidence at home and abroad that translates into a higher orld rice and an enlarged domestic market. The second scenario assumes that the imlementation of on-farm Identifying the benefits and costs of on-farm food safety 5. Economic surlus is a measure used by economists to evaluate the gross benefits associated ith a articular market equilibrium. Changes in economic surluses are used to comute the net benefits (ositive or negative) accruing to a articular segment of the economy folloing a olicy change or changes in the decision variables of a articular set of agents. The interested reader can refer to Varian (2002) for further details on the concets of consumer surlus and roducer surlus. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 17

32 Chater 3 food safety measures induces an increase in efficiency on the art of hog roducers. The third scenario is a simulation of a crisis that brings about major reductions in domestic demand and in the orld rice of Canadian ork. The otimistic scenario of demand-side benefits, hich features ositive shifts in domestic and foreign ork demands due to greater consumer confidence in ork, brings a higher hog rice, but the increase is not sufficient to rovoke a change in suly because of ASRA. Consumer surlus increases in site of the higher ork rice and exort sales decrease. Processors benefit from the higher ork rice. Given that ASRA costs are being financed by the rovincial and federal governments (66.7%) and hog roducers (33.3%), hog roducers and taxayers also gain under the otimistic scenario. The net elfare gain relative to the benchmark case is $12.2 million; hich reresents an increase of 5.8% over the benchmark elfare level. The second scenario shocases the effect of efficiency gains in hog roduction. Total elfare decreases by $22 million because it makes ASRA more exensive through enlargement of the subsidy base and the subsidy margin although there is a roductivity imrovement. Gains accruing to hog roducers and ork rocessors are too small to make u for the loss to taxayers, hence the $22 million elfare loss. The crisis scenario is one in hich Quebec ould have to exort its ork at a much loer rice to get rid of its ASRA-determined suly under a deressed domestic market. Under such a scenario, the adjustment on the domestic hog rice ould be brutal. The loer domestic demand for ork ould bring about loer consumer surlus in site of the drastic reduction in the rice of ork. Producer surlus ould fall due to the reduction in the rice of ork in site of the ositive effect of the much loer hog rice. Having to exort in a context of deressed domestic demand, the gains from trade are very large, but the overall elfare is lo due to the astronomical ASRA cost. The elfare loss relative to the benchmark slightly exceeds $584 million. A scenario ith a comletely closed border ould have a similar qualitative effect. Hog roduction ould remain high as long as ASRA remains unchanged. Hoever, the market rice for hogs ould fall further and some hogs might have to be destroyed. This ould inflate further the cost of the ASRA rogram. Assume that the robability of a crisis is 1%. This is most likely too high, but it ill illustrate an asect of the so-called insurance motive for OFFS. To roerly isolate the insurance value, it is assumed that the only benefit generated from OFFS is to cut in half the robability of a serious food safety roblem. It is assumed that ith or ithout OFFS, a crisis lasts to years hen it haens. The change in robability due to OFFS is orth $5.72 million. Consider another asect of the insurance motive for OFFS by assuming that the robability of a major roblem is the same ith or ithout OFFS, but that the duration of the roblem is shortened by a year in the resence of OFFS. Given the robability of a crisis, the value of OFFS is $5.59 million. Naturally, the value of OFFS could be even higher if it reduced both the robability of a crisis and the length of otential crises. Interested readers can find greater details about the simulation in the technical aendix. 18 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

33 Chater 4 Environmental farm lans 4.1 Introduction The Environmental Management System (EMS) initiative establishes a voluntary national standard for hog roduction. The Canadian Pork Council (CPC) initiated develoment of the EMS standard in July The CPC mandated the Canadian Standards Association (CSA) to guide the industry through the rocess of develoing the standard. The CSA has brought together ork roducers, federal and rovincial deartments, universities and environmental rotection grous from across Canada to suort a consensus-based standard for the Canadian hog industry. The key develoment asects of the standard are: 1. It ill be comlementing regulation (not substituting for environmental olicies, las and regulations); 2. It ill combine environmental management system and erformance-based asects hile maintaining flexibility and innovation in meeting farm-based goals and objectives; 3. It ill be designed such that it may be ractically and economically imlemented by hog farmers; 4. Conformity ith the standard must be verifiable by indeendent third arties. Pilot rojects ere started in late 2004 to test the imlementation tolls and audit abilities. Fifteen farms have been chosen to verify the accessibility and audit ability of the draft EMS standard for hog oerations. Initiatives at the rovincial level are also being develoed. For examle, the agro-environmental lan of Quebec hog farmers initiated in 1997 has three main comonents: 1. Establishing the environmental outlook of hog roduction in Quebec; 2. Providing technical suort to hog roducers; 3. Offering environmental certification. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 19

34 Chater 4 The first comonent of the Quebec initiative roduced to environmental ortraits of the industry (1996 and 1998) hich ere used to establish secific agro-environmental objectives for These technical objectives are described in a FPPQ document (2002). Broadly, these objectives ill be achieved by: 1. Imroving technical knoledge of roduction ractices to minimize the negative imacts on the environment; 2. Educating and training roducers in imlementing environmentally resectful roduction ractices; 3. Encouraging environmental certification. The environmental roblems (air and ater ollution mostly) that accomanied the groth of the Quebec hog industry have attracted a lot of media attention and a moratorium has been imosed to aease the ublic. 6 The moratorium revents hog roduction from exanding in regions that do not have environmental roblems. But, it cannot erase the environmental damage that has already occurred (and continue to occur) in regions ith excessive manure suly. As such, this temorary measure is not efficient, but it rovides time to develo a roer resonse to the crisis. One might onder hy the environmental lan failed to revent the crisis given that the FFPQ had enough foresight to initiate it in Like the Euroean mad co crises and dioxin contamination, the magnitude of the Quebec environmental roblems and the reaction of the ublic toard these roblems ere underestimated for too long. Until recently, the main concern as to adequately contain stocks of manure, as demonstrated by the generous subsidization of manure-storage facilities. The environmental lan encouraged the adotion of environmentally-friendlier ractices by hog roducers, but it could not convey the sense of urgency to roducers the ay strict enforceable erformance standards could to revent soil saturation. The main lesson is that comrehensive environmental lans encouraging better ractices must be imlemented in conjunction ith enforceable erformance standards. In fact, the erformance standards in the ne regulations in Quebec ill undoubtedly boost articiation in so-called environmental-management clubs. The Alberta Pork Sustainable Environment Initiative also endorses the Alberta Environmentally Sustainable Agriculture rogram (AESA). The AESA is a voluntary, hole farm, self-assessment rogram that hels roducers identify risk areas and rovides an oortunity to them to document due diligence. The to illars of the AESA initiative are to: 1. Transfer ne technology and information to farmers and rocessors to minimize environmental imacts; 2. Monitor soil and ater quality to track the industry s effects on these resources. 6. A first moratorium as enforced in over 200 municialities as of June In May of 2002, a 6-eek rovince-ide moratorium as instigated at the request of the UPA. In mid-june of 2002, ne environmental regulations ere adoted, but it as decided that no ermits regarding exansion of existing facilities or the construction of ne ones ould be delivered for at least the next 18 months. Quebec s environment minister also requested that the Bureau d audiences ubliques sur l environnement (BAPE) conduct a ublic inquiry to identify ays for the hog industry to gro ithout environmental degradation. BAPE s recommendations are to be released no later than Setember A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

35 4.2 Identifying benefits and costs of environmental farm lans The folloing tables identify the otential demand and suly-side benefits and costs of EFP in the ork sector. The categories are dran from the concetual frameork outlined in reort #2 of this series, (Hobbs et al. 2003a). Information as gathered through intervies ith industry stakeholders. Table 6: Potential rivate demand-side benefits of environmental farm lans in hog roduction DEMAND-SIDE BENEFITS Domestic market: Build consumer confidence Convey additional information (hen used ith identity reservation systems) International markets: Provide differentiation on the international market Facilitate trade by reducing non-tariff barriers Reinforce and develo trade netorks DESCRIPTION Ho much does a moratorium cost to roducers? EFP can erhas revent the sort of crisis afflicting the Quebec hog industry. Even though the moratorium has no direct cost to roducers, it definitely costs money for roducers in terms of lost market oortunities at the resent time and in the future due to tougher regulations Similar to OFFS, benefits are more in terms of not losing established market shares than in terms of remiums. Environmental certification is geared toard environmental concerns. The negative ress is not good for business. Retailers do not suffer as much as roducers from the negative ublicity because of substitution beteen farm roducts. Conversely, rocessors and roducers are usually not diversified (although horizontal integration exists in rocessing activities) Esecially hen integrated ith roduct integrity (animal elfare, etc.) certification, there may be additional niche markets for Canadian ork. Price remiums for environmentally clean ork may not be large if they exist at all Could environmental standards be treated as a trade issue by the WTO in a context of multifunctionality? In other ords, can ayments to roducers be tied to environmental certification? Would this make it easier for government to circumvent domestic suort commitments to maintain or increase suort to roducers? OFFS identifying and classifying benefits and costs A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 21

36 Chater 4 Table 7: Potential suly-side rivate benefits of environmental farm lans in hog roduction SUPPLY-SIDE BENEFITS Imrove efficiency in roduction DESCRIPTION Imrove efficiencies through reduced resource use and aste Imrove relations ith neighbours through more efficient odour management strategies Reduce monitoring and enforcement costs Reduce free-rider imacts Demonstrate comliance ith alicable las and regulations and thus may decrease monitoring costs for the industry Eliminate or minimize environmental incidents and in the rocess demonstrate due diligence in the event of rosecution or litigation. It could also lead to a reduction in the environmental risk assessed by insurance and lending institutions; leading to loer insurance remiums Reduce vulnerability to environmental disaster in non-adoter sector Table 8: Potential rivate costs of environmental farm lans in hog roduction SUPPLY-SIDE COSTS Planning costs Management and mitigation costs DESCRIPTION Producers believe that investments are larger for EFP than for imlementing OFFS. Variable costs are also larger. Unlike food safety initiatives, this could have an imact on the structure of farms; esecially in Ontario here hog farms are generally smaller than in Quebec 22 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

37 Table 9 summarizes the otential benefits and costs of imlementing EFP in the ork industry according to to different institutional scenarios. The table is a qualitative assessment based on intervies ith industry stakeholders. Table 9: Institutional comarisons of the benefits and costs of EFP for the ork industry Benefits Voluntary EFP Reduce transaction costs for consumers None None Build consumer confidence Minimal Significant Convey additional information Minimal None Provide differentiation on international markets Moderate None Facilitate trade by reducing NTBs None None Reinforce and develo trade netorks None None Reduce monitoring costs Moderate None Reduce free-rider imacts Minimal Minimal Provide non-ecuniary benefit to roducers Significant None Reduce negative human health Moderate Moderate Reduce negative imact on farm assets Moderate Minimal Imrove local ecosystem effects Moderate Moderate Total benefits Moderate Minimal Costs Planning costs fixed establishing the frameork variable revising olicy Monitoring costs fixed variable Mitigation costs fixed caital costs variable Significant None Minimal None Minimal None Significant Significant Significant Significant Significant Significant Total costs Minimal Significant TOTAL NET BENEFITS Minimal to moderate benefit Land use regulations Minimal to moderate to cost OFFS identifying and classifying benefits and costs A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 23

38

39 Chater 5 Conclusions The objective as to rovide an analysis of the main benefits and costs associated ith OFFS initiatives and EFP for the Quebec, Ontario and Alberta hog industries. Notithstanding the secific considerations outlined in the text ertaining to differences in rovincial hog marketing mechanisms, the conclusions can be extended to other rovinces in Canada. The CQA is the voluntary food safety rogram imlemented by hog industries across Canada. Enrolment in the CQA and validation of roducers varies from one rovince to another. Yet, it is already ossible to identify some benefits and costs. Producers believe that OFFS initiatives in the form of the CQA are required to rotect market shares in traditional markets (U.S. and Jaan) and to enetrate ne ones. Hoever, the exectation is that comletion of CQA certification is not likely to bring about rice remiums. The CQA could become an instrument of market enetration in foreign markets if Canadian ork is cometing against other foreign suliers that have not established OFFS. Mandatory training sessions through the CQA can increase the overall roductivity of hog roducers and loer the average cost of roduction. The national EMS initiative is to establish a voluntary national standard for hog roduction. Hoever, EFP in the hog industry have long been needed. Comrehensive environmental lans encouraging better ractices should be imlemented in conjunction ith enforceable erformance standards to revent economic losses and environmental degradation. Similar to the CQA, benefits of the EMS initiative are more in terms of not losing established markets shares than in terms of gaining rice remiums. Producers have more to lose than any other grou along the marketing chain from negative ress about environmental roblems as retailers and, to a lesser extent, rocessors can rely on substitution beteen roducts/inuts to mitigate losses. Industry stakeholders indicated that there are unlikely to be synergies beteen OFFS and EFP in the hog industry. Aggregate market imacts of the CQA and the EMS initiatives are likely to be modest. This is not to say that these rograms do not have real imacts on the financial and economic variables affecting the bottom line of roducers, rocessors and retailers, but as the technical aendix illustrates, these rograms have a multitude of offsetting effects that are not likely to have much of an imact on market equilibria. At the roducer level, a key factor ill be the effect of the CQA and the EMS on the cost structure of hog farms. Will otential efficiency gains A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 25

40 Chater 5 outeigh additional costs imosed by CQA and EMS validation? At this stage, it is conjectured that the economic surlus of roducers ill modestly increase. The most imortant imlication of the CQA and the EMS has to do ith the rotection and groth of market shares in ork meat markets. As such, these initiatives ill contribute to the sustainable develoment of hog industries across Canada. 26 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

41 Bibliograhy Alberta Pork, Environment Issues, Information document., November 2002, Available at:.albertaork.com/roducers/environmental.html. Canadian Standards Association, Environmental Management System Standard for Hog Oerations: Requirements, Public Revie Draft, Setember Fédération des roducteurs de orcs du Quebec, Document d information sur l environnement, Novembre Available at:.leorcduquebec.qc.ca/ages/env/pageenvobj.html. Gervais, J.P., and B. Larue, The Imacts of Exchange Rate Volatility on Canadian Pork Exorts to the United States in Exchange Rate Volatility and International Agricultural Trade, S. Langley, S. Mohanty, M. Giugale and W. Myers (eds), Catus Press, Concord, Ontario. Gervais, J-P, B. Larue, J.E. Hobbs, W.A. Kerr and R. Gray. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Dairy Sector Reort reared for Agriculture and Agri-Food Canada, March Gray, R., M. Ferguson, B. Martin, J.E. Hobbs, W.A. Kerr, B. Larue and J-P Gervais. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Grain Sector, Reort reared for Agriculture and Agri-Food Canada, March Hobbs, J.E., J-P Gervais, R., Gray, W.A. Kerr and B. Larue. On-Farm Food Safety and Environmental Farm Plans: A Concetual Frameork for Identifying and Classifying Benefits and Costs. Reort reared for Agriculture and Agri-Food Canada, March 2003a. Hobbs, J.E., J-P Gervais, R., Gray, W.A. Kerr, B. Larue and C. Wasylyniuk. Overvie of the Develoment and Alications of a Concetual Frameork for Analyzing Benefits and Costs of On- Farm Food Safety and Environmental Farm Plans.. Reort reared for Agriculture and Agri-Food Canada, March 2003b. Kerr, W.A., C. Wasylyniuk, J.E. Hobbs, J-P Gervais, R. Gray and B. Larue. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Beef Sector. Reort reared for Agriculture and Agri-Food Canada, March A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 27

42 Larue, B., R. Romain, J-P. Gervais and S. Ben Salha, The Collusion Deterring Effect of Pre- Attributed Sulies and the Hog Auction in Quebec, Canadian Journal of Agricultural Economics 48(2000): Ontario Pork, Ontario Pork Position Paer on the Canadian quality Assurance Program, Setember Available at:.ontarioork.on.ca/issues/foodsafety/cqaosition.htm. Ontario Pork, Ontario Pork Position Paer on the Canadian quality Assurance Program, November Available at:.ontarioork.on.ca/cqa/nesletter/nesletter1102.htm. Varian, H. R., Intermediate Microeconomics: A Modern Aroach, W. W. Norton & Co, 6th edition, A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

43 Technical aendix APPENDIX A This section resents a technical analysis of the economic imacts of the CQA at various stages of the suly chain for hog/ork roducts. A more detailed exlanation of the technical model is resented in Aendix B of the concetual frameork document (Hobbs et al., 2003a). The analysis is resented for different scenarios of the demand and suly-side benefits and costs listed in the revious section. Different outcomes for the Quebec, Ontario and Alberta hog industries are redicted based on their differences in roduction and exort trends. A numerical simulation of the analysis follos. Figure 7 reresents the initial market equilibrium in the live hog and ork markets. The bottom left diagram deicts the domestic market for live hogs in a given rovince. S(, r0; ϕ0) The marginal cost curve of hog roducers determines the suly of live 0 = 0 hogs. Given the domestic demand of rocessors for live hogs, the exort D( ; γ 0 ) suly curve onto the orld market is reresented in the bottom right D Q 0 0 diagram. It is assumed that exorters of live hogs face constant terms- Processed roduct domestic market r of trade (i.e., the small country r assumtion). Domestic roduction S( r, α0 ) of live hogs is denoted by the quantity Q 0. Given free trade in live hogs, r0 = r0 rocessors urchases of live hogs are made at a rice of r and are D( r, 0; ϕ0) denoted by Y 0. This imlies that a Q quantity X 0 of live animals is Y 0 Q 0 X 0 Ra roduct domestic market exorted. Note that this market structure seems to reresent markets in Ontario and Alberta based on their roduction and trade atterns. Figure 7: Initial market equilibrium in the ork sector Y E0 (, 0; 0, ϕ0) ES r γ Processed roduct orld market ES ( r, 0, α0, ϕ0) Ra roduct orld market It is assumed that there exists a constant roortion technology hen rocessing live hogs into ork meat. Hence, the to left diagram illustrates the domestic market for ork. It is also assumed that ork rocessors are exorters. Given the constant orld rice and free trade, the domestic ork rice is =. Domestic consumers urchase a quantity D 0 and ork exorts 0 0 ED0 Q Q r ED0 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 29

44 Aendix A are denoted by E 0 on the to right diagram of Figure 7. As in the general concetual model, shifters are included in the demand and suly schedules of roducers, rocessors and consumers to reresent changes in food safety measures at the farm level. It is ossible to illustrate ho equilibrium quantities are imacted by changes in a number of different factors by using Figure 7 as a benchmark. To rincial issues ere analyzed. First, the effects of imlementing OFFS on the cost structure of roducers as exlored. As argued before, the net effect of the CQA on roducers costs can be either ositive or negative. The second issue examines the imlications of on-farm food safety initiatives on the demand for farm and rocessed roducts. First, consider the situation in Figure 8, hich osits that an OFFS increases the marginal costs of roducers. There is an uard shift in the domestic suly of live hogs in the bottom left anel of Figure 8. Given free trade, the erfectly elastic foreign demand and the net exort osition of the rovince, the domestic rice of live hogs is unchanged. Hoever, the increase in roducers costs causes a decrease in roduction, hile the domestic demand for live hogs remains constant. This results in a decrease in live hog exorts roortional to the decrease in hog roduction. r r = 0 0 = r 0 0 Figure 8: An increase in unit-cost of roduction on hog farms (, 0; 0) S r ϕ ( ; 0 ) D γ D Q 0 0 Processed roduct domestic market (, 1) S( r, α 0 ) Y E0 S r α r (, 0; 0, ϕ0) ES r γ Processed roduct orld market (, 0, 0, ϕ0) ES ( r, 0, α0, ϕ0) ES r α ED0 Q r ED0 The situation ould otentially be D( r, 0; ϕ0) different if no exorts of live hogs Q Q existed before imlementing OFFS. Y 0 Q 1 Q 0 X 1 X 0 Ra roduct domestic market Ra roduct orld market In Figure 8, the assumed negative imact of the OFFS is not transmitted donstream to rocessors and consumers. Naturally, any benefits stemming from imlementing the OFFS ould also be catured exclusively by roducers. It should be noted that the result in Figure 8 does not imly that there ill not be any effect in donstream markets. The strategy taken as to let only a single shifter vary at a time to gain a better understanding of the imact of each shifter at all stages of the suly chain. Figure 8 simly shos that hen exorts of live hogs occur, on-farm food safety induced changes in the roducers cost structure are not likely to imact donstream markets. No consider the situation in Figure 9. Assume that the domestic rice for hogs is higher than the orld rice (adjusted for transortation costs) and thus, that no exorts of live hogs occur in the initial equilibrium. This reresents the ork sector in Quebec. The initial imact of the increase in roducers costs due to the OFFS imlementation in Figure 9 is to shift uard the domestic suly curve of roducers. This increases the farm rice and thus shifts uard the domestic suly of rocessors in the to left anel. Because there is free trade 30 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

45 in ork roducts, the domestic rice of ork remains constant. The farm rice of live hogs increases, but both rocessors and roducers are orse off due to the decrease in hog roduction and ork exorts. Consider no the situation here the net effect of imlementing HACCP at the farm and rocessing levels is ositive. More secifically, suose HACCP-induced efficiency gains decrease both roducers and rocessors costs. Producer costs are reduced due to imroved roductivity, and rocessor costs are reduced due to imroved logistics, loer roduct recalls, etc. The to effects are deicted in Figure 10: the cost savings for roducers by an outard shift in their suly function, and the cost savings for rocessors by an outard shift both in their demand for live hogs and in their suly of ork. This otimistic scenario assumes that the movements in the demand and suly schedules leave the exort suly curve for live hogs unchanged. Hence, the increase in hog roduction does not affect the farm rice r = 0 0 r 1 r 0 Figure 9: An increase in unit-cost of roduction on hog farms hen exorts of live hogs are not rofitable (, 1) S( r, α0 ) (, 0; 0) D r ϕ due to the arbitrage condition imosed by free trade, but it increases the quantities rocessed by domestic rocessors (from Y 0 to Y 1 ). The increase in domestically rocessed ork is all exorted (from E 0 to E 1 ). The economic surluses of roducers and rocessors increase folloing HACCP imlementation. D 0 (, 1; 0) S r ϕ Q 1 Q 0 ( ; 0 ) D γ (, 0; 0) S r ϕ Q Y1 Y0 E1 E0 Processed roduct domestic market S r α Ra roduct domestic market Q ES (, r1; γ0, ϕ0) ES (, r0; γ0, ϕ0) ED Processed roduct orld market 0 Q Technical aendix It is also imortant to consider the imact of OFFS on foreign markets. As reviously discussed, food safety initiatives at the farm level can bring about a differentiation of Canadian ork roducts although these otential benefits are likely to be small if ositive at all. Nevertheless, it is assumed that the CQA increases the demand for Canadian live hogs and ork. Figure 11 illustrates the imlications for hog and ork rices as ell as on quantities roduced and exorted. Unlike Figures 7, 8 and 10, no suly-side effects are taken into consideration. This is equivalent to assuming that the net effect of OFFS on cost is insignificant because any OFFS-induced cost increases are offset by equivalent decreases in other costs. To excess demand schedules are reresented on the right hand-side diagrams. These to excess demands are a function of the orld rice and a shifter reresentative of the quality of Canadian hogs and ork meat. The imlementation of the OFFS is reresented by changes in the shifters β0 and λ0. It is assumed that the rogram increases the demand for Canadian ork and hogs, shifting the to excess demands outard. This increases hog and ork domestic rices because of free trade. The movements in rices are accomanied by shifts in the rocessors demand for live hogs. While the higher domestic rice for ork induces an uard shift in the demand for live hogs, the increase in the rice of live hogs increases the rocessors marginal A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 31

46 Aendix A cost and shifts uard the suly of ork in the to right anel. The end result is that exort sulies of live hogs and ork decrease in the right anels. The higher ork rice encourages roduction but discourages domestic consumtion, hich falls from D 0 to D 1. The final effects are increases in live hog and ork exorts, and in hog roduction. But domestic ork consumtion decreases due to higher rices. These effects unambiguously decrease consumers surlus and increase roducers surlus. The imact on rocessors is ambiguous because of the effect on the domestic rice of live animals. Processors sales increase but urchases of their inuts cost more than before the imlementation of the OFFS. Finally, consider the situation deicted in Figure 12 in hich the only significant net effect of imlementing food safety initiatives at the farm level is through an increase in domestic consumers demand. Due to free-trade and the small country assumtion, the domestic rice of ork roducts does not change as Canadian rovinces remain net exorters of ork. Hence, given the constant domestic rice, domestic consumtion of ork roducts increases and exorts decrease. Producers and rocessors do not benefit from this ositive demand-side effect of food safety initiatives since rices remain constant at all market levels. Hog roduction also remains constant. One imortant demand-side effect of food safety initiatives that is absent from the above grahical analysis are the ositive effects related to their ro-active nature. An OFFS can rotect established market shares both domestically and internationally that otherise could be challenged by foreign cometitors or other agri-food roducts, esecially hen a food contamination r r = 0 0 = r 0 0 r = = 0 r = r 1 1 r0 = r0 Figure 10: HACCP-induced decrease in roduction costs at the farm and rocessing levels D 0 (, 0; 0) S r ϕ ( ; 0 ) D γ (, 0 ) S( r, α1) S r α Q D( r, 0; ϕ1) D( r, 0; ϕ0) Y Q Q 0 0, Y1 Q 1 Ra roduct domestic market ( ) S (, r 0; ϕ 1) ( ) Y0 Y 1 E0 Processed roduct domestic market r X 0 E 1 ES, r0; γ0, ϕ0 ES, r0; γ0, ϕ1 ED0 Processed roduct orld market (, 0, 0, ϕ0) ES ( r, 0, α1, ϕ1) ES r α Ra roduct orld market Q Q r ED0 Figure 11: HACCP-induced increase in the foreign demand for farm and rocessed roducts ( ; 0 ) D γ (, 0 ) S r α D( r, 1; ϕ0) (, ; ) 0 0 Q D r ϕ Y Q 0, Y1 0 Q 1 Ra roduct domestic market Q S (, r 1; ϕ 0) ES S(, r0; ϕ0) (, r ) 1 ES (, r0 ) D 1 D 0 Y0 E0 E 1 Processed roduct domestic market Processed roduct orld market r (,, ) 1 0 ES r α (,, ) 0 0 ES r α (, ) ED r λ r 0 0 X 0 X 1 Ra roduct orld market (, ) ED β 0 0 (, ) ED r λ r 1 1 (, ) ED β 1 1 Q Q 32 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

47 incident haens. The above analysis has studied the effects of imlementing an OFFS, but has neglected to examine the effects of not imlementing an OFFS. These effects can be equally as imortant as the ones reviously identified. Numerical simulations of food safety scenarios in the Quebec industry r r = 0 0 = r 0 0 Figure 12: OFFS-induced increase in consumers demand for rocessed roducts (, 0; 0) S r ϕ ( ; 1) ( ; 0 ) D γ D γ D( r, 0; ϕ0) Y Q Q 0 0 Ra roduct domestic market A numerical simulation serves to highlight the otential magnitude of some of the demand and suly side changes discussed above. A simle artial-equilibrium model of the Quebec ork sector is constructed that accounts for the revenue-insurance rogram, Assurance Stabilisation du Revenu Agricole (ASRA). It is assumed there is zero substitution beteen live hogs and other inuts in the ork rocessing technology. First, a benchmark equilibrium is defined, hich is then used to assess the relative imacts of simulated food safety shocks. Linear suly and demand curves are assumed and the small country assumtion is made in order to derive the ricing of ork in the exort market. After a discussion on ho the arameters for the suly and demand functions ere derived, the results for three different scenarios and a risk analysis are resented. The first scenario assumes a boost in consumer confidence at home and abroad that translates into a higher orld rice and an enlarged domestic market. The second scenario assumes that the imlementation of on-farm food safety measures induces an increase in efficiency on the art of hog roducers. Such a ositive externality has been documented in case studies about the imlementation of HACCP in meat rocessing lants. The third scenario assumes a substantial dro in demand at home and abroad brought about by a crisis. This scenario is used in the risk analysis hich osits that on-farm food safety measures could decrease the robability of a crisis and/or reduce the length of such an unfortunate event. As reviously demonstrated through the grahical analysis, the simulation results are strongly conditioned by the economic and olicy environment in hich the Quebec ork sector oerates. (, 0 ) S r α D 0 D 1 Y0 E 1 E0 Processed roduct domestic market Q r X 0 ES ( r, 0, α0, ϕ0) ES (, r0; γ1, ϕ0) ES (, r0; γ0, ϕ0) ED Processed roduct orld market Ra roduct orld market 0 Q Q r ED0 Technical aendix Aggregate annual data on ork consumtion are not readily available by rovince. An estimate of ork meat consumtion in Quebec is built using the folloing accounting formula: ( ) D = Q + IM EX STOR STOR t t t t end beg here Dt reresents consumtion in year t, Qt denotes quantities slaughtered in year t, IM and t EX t reresents imorts and exorts (including inter-rovincial transfers) in year t resectively, and STOR and reresents the quantities of ork meat stored at the end and the end STORbeg beginning of year t resectively. A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 33

48 Aendix A In 1998, total consumtion of ork roducts as 4,821, kg carcass-equivalent. The average retail rice in 1998 as $ er 100 kg in Quebec. Based on elasticities reorted in the literature, it is assumed that the on-rice elasticity of ork demand is Given the assumtion of a linear demand, D = a b, it must be that: 0.75 = b D hich means, after lugging in the 1998 average rice and quantity, that: b = 6,922. Substituting the estimate of b into the retail demand function and evaluating it at the 1998 rice-quantity combination air, it is found that: a = 8,438,227. Attention is no turned to the suly of live hogs. The average hog rice in 1998 as $123.82/ 100 kg, more than $30 belo the suort rice of ASRA of $154.67/100 kg. Total hogs slaughtered in 1998 in Quebec amounted to 8,613,696 units of 100 kg. The combination of the suort rice and quantities slaughtered yields a oint on the marginal cost curve of roducers. Moschini and Meilke s (1992) long-run suly elasticity 8 of Canadian hog roducers of is used because it is believed to be a reasonable estimate for the suly elasticity for hog roduction in Quebec. Defining r as the rice of live hogs, a linear relationshi is assumed beteen suly and h βr rice (i.e., S = α + βr). This imlies that: = h, a relationshi that holds only if the sloe arameter β equals 18,267. Substituting back this estimate into the suly function, the other ara- S meter of the suly curve is derived: α = 5, 788,339. Given the arameters of the suly h h S α h function, the roducers marginal costs can be exressed as: MC = = S. This arameterization takes into account that Quebec hog roducers do not exort. Likeise, there are no imorts of live hogs. Hence, total rocessed hogs amount to 8,613,696 units of 100 kg. To arameterize the rocessors demand for live hogs and their suly of ork meat, Moschini and Meilke s (1992) estimate of for the ork suly elasticity is used. It is assumed that there exists a constant roortion technology in rocessing live hogs. This imlies that the demand and suly of ork meat ill be a function of the marketing margin of rocessors. In other ords, the difference beteen the retail and the farm rice ill condition the suly and demand of rocessors. 9 The rocessors suly of ork is deicted by: S = c+ d( r). The average retail and farm rices being $ and $ resectively, for = d S and the linear suly relation to hold, it must be that: d = 8,161 and c = 5,360,558. Fixing at a secific level, namely the U.S. ork rice, the rocessors suly equation can be interreted as a hog h US US demand equation: S D ( r; ) = ( c+ d ) ( dr). Finally, it is assumed that the average US exort rice is equal to the domestic retail rice under free trade, i.e. = Because of lack of data, the retail sector as not exlicitly modeled in the analysis. Table 5 rovides a summary of the calibrated equations used in the numerical simulations. β 7. The concet of on-rice elasticity of demand refers to the resonsiveness of the quantity demanded of a good to a change in its rice, other things remaining the same. 8. The elasticity of suly measures the resonsiveness of the quantity sulied of a good to a change in its rice, other things remaining the same. 9. The theoretical basis for this assumtion is the folloing. Hog roducers sell their outut q to donstream rocessing firms. Processing of the rimary commodity involves J other inuts. The rocessing technology is reresented by the roduction function ; here is an inut vector of dimension J 1, and all inuts in are sulied cometitively at rices j. The rofit equation of a reresentative rocessor is: ; here and r reresent the rices of the final rocessed roduct and the ra inut resectively. Assuming that one unit of outut (ork meat) requires one unit of rimary inut (hogs), the technology used by rocessors can be deicted by:. No additional structure is imosed on the sub-roduction function, excet for the assumtion that it is a tice-differentiable, continuous and quasi-concave function. The cost function dual to this technology is:. The rofit function of rocessors is:. The first order condition yields:. This equation determines the suly function of rocessors hich is also equal to the demand for hogs given the secified constant roortion technology. 34 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

49 Given the market characteristics secified in Table 10, the imact of on-farm food safety measures can be simulated. First, assume that on-farm food safety measures boost consumer confidence at home and abroad. This ositive develoment secifically translates into a arallel shift of the domestic demand function for ork (i.e. arameter a in the consumer demand function increases by 2%) and into a 1% increase in the orld rice for Canadian ork. The second simulation assumes that any increase in variable costs due to on-farm food safety measures is more than offset by an efficiency gain. The net result is a 1% donard shift of the hog suly curve. The third scenario is a simulation of a crisis that brings about major reductions in domestic demand and in the orld rice of Canadian ork. Key variables are comared across scenarios, such as quantities exorted, domestic sales, hog rice, consumer and roducer surluses, gains from trade and ASRA costs. Finally, the risk reduction effects of on-farm food safety measures are considered. To isolate the risk effect, it is assumed that the only benefit of on-farm food safety measures is to decrease the robability of to year long crisis (in the first case) or to leave the robability of a crisis unchanged, hile reducing the length of a crisis from to to one year hen such an event occurs (in the second case). Technical aendix Table 10: Potential suly-side rivate benefits of environmental farm lans in hog roduction EQUATION FUNCTIONAL FORM ESTIMATES Consumers demand Processors ork suly/demand for hogs Processors marginal cost Producers suly Producers marginal cost D = a b D = 8, 438, 227 6,922 ( ) S c d r = + S = 5,360, ,161 ( ) MC S c d h S = MC = S h = α + βr S = 5, 788, , 267r h ( ) h MC S α β = h MC = S h Table 11 summarizes the results for the benchmark case, the OFFS scenario ith a ositive demand shock, the OFFS scenario ith loer roduction costs for hog roducers and the food safety crisis scenario. The numbers beteen arentheses indicate the ercentage change in the variable under a given scenario ith resect to the benchmark case. At the outset, it should be noted that the results in Table 11 are meant to rovide an order of magnitude about food safety effects rather than absolute measures. Different results ould have been derived under different assumtions regarding the size and nature of the shocks and/or if the model had been calibrated using a different year. Nevertheless, the simulations are instructive because they sho ho adjustments ould take lace given the secific regulatory context of the Quebec hog/ork industry. ASRA sets the suly of hogs as long as the market rice remains belo the guaranteed rice. Consequently, an increase in the market rice for live hogs does not affect hog suly as long as the increase in the market rice is not large enough to change the ranking beteen the guaranteed rice and the market rice. It follos that an increase in the hog market rice that does not change the hog suly ill not affect the ork suly given that all hogs domestically roduced are domestically rocessed under the marketing agreement negotiated beteen hog roducers and ork rocessors. The relatively lo hog rices that revailed throughout 1998 contributed directly to the high cost of ASRA. The benchmark case rovides an estimate of $266 million. The otimistic scenario of demand-side benefits, A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 35

50 Aendix A hich features ositive shifts in domestic and foreign ork demands due to greater consumer confidence in ork, brings a higher hog rice, but the increase is not sufficient to rovoke a change in suly. Consumer surlus increases in site of the higher ork rice and exort sales decrease. Processors benefit from the higher ork rice. Given that ASRA costs are being financed by the rovincial and federal governments (66.7%) and hog roducers (33.3%), hog roducers and taxayers also gain under the otimistic scenario. The net elfare gain relative to the benchmark case is $12.2 million; hich reresents an increase of 5.8% over the benchmark elfare level. Table 11: Summary of the simulation results a VARIABLE BENCHMARK OPTIMISTIC (demand shock) a. The numbers in arentheses are ercentage changes from the benchmark case. OPTIMISTIC (suly shock) CRISIS (demand shock) Price of ork (1.0) (0.0) (-20.0) Price of hogs (4.2) (-2.6) (-84.4) Domestic sales x x10 6 (2.7) x10 6 (0.0) x10 6 (-20.0) Exort sales x x10 6 (-3.5) x10 6 (0.6) x10 6 (25.4) Consumer surlus x x10 9 (5.6) x10 9 (0.0) x10 9 (-36.0) Producer surlus b x x x x10 9 (0.3) (0.4) (-14,7) ASRA cost x x x x10 8 (-16.9) (10.8) (338.7) Gains from trade x x x x10 8 (6.9) (1.39) (57.3) Net elfare gain relative x x x10 7 to benchmark b. The roducer surlus as calculated from the rocessors suly curve. Because ork and hog roductions are cometitive industries, the roducer surlus reflects increases in inut costs at all levels as industry outut exands. The second scenario shocases the effect of efficiency gains in hog roduction (i.e. the hog suly curve shifts don by 1% from the benchmark ASRA rice). The reorted outcome might seem eculiar at first because a roductivity imrovement usually triggers an increase in roduction hich ends u increasing elfare. The reason hy the increase in roduction is not elfare enhancing is because it makes ASRA more exensive through enlargement of the subsidy base and the subsidy margin. Gains accruing to hog roducers and ork rocessors are too small to make u for the loss to taxayers, hence the $22 million elfare loss. This examle clearly demonstrates the imortance of accounting for the olicy-induced distortions in the modeling of the hog market. It is orth noting that if the insurable volume under ASRA as fixed for years (as ere acreages in the old U.S. commodity rograms), the efficiency increase in hog roduction ould not have had any effect on roduction, rice and trade. The crisis scenario is one in hich Quebec ould have to exort its ork at a much loer rice to 36 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

51 get rid of its ASRA-determined suly under a deressed domestic market. Under such a scenario, the adjustment on the domestic hog rice ould be brutal. The loer domestic demand for ork ould bring about loer consumer surlus in site of the drastic reduction in the rice of ork. Producer surlus ould fall due to the reduction in the rice of ork in site of the ositive effect of the much loer hog rice. Having to exort in a context of deressed domestic demand, the gains from trade are very large, but the overall elfare is lo due to the astronomical ASRA cost. The elfare loss relative to the benchmark slightly exceeds $584 million. A scenario ith a comletely closed border ould have a similar qualitative effect. Hog roduction ould remain high as long as ASRA remains unchanged. Hoever, the market rice for hogs ould fall further and some hogs might have to be destroyed. This ould inflate further the cost of the ASRA rogram. Assume that ithout the OFFS, the robability of a benchmark scenario is In other ords, the robability of a crisis is 1%. This is most likely too high, but it ill illustrate an asect of the so-called insurance motive for OFFS. To roerly isolate the insurance value, it is assumed that the only benefit generated from OFFS is to cut in half the robability of a serious food safety b c roblem. Define π t and π t to be the monetized elfare gains generated by the hog/ork industry under the benchmark and crisis cases at time t. Without OFFS, the discounted contribution of the hog/ork industry is measured as: Technical aendix B b b c b b πt π t n πt πt π t+ n = 0.99 π , t π n t n 1+ r ( 1+ r) 1+ r ( 1+ r) ( 1+ r) / ooffs b 1 c 1 2 hile ith OFFS, it is assumed to be: B b b c b b πt 1 π t n πt 1 πt 2 π t+ n = π t π n t n 1+ r ( 1+ r) 1+ r ( 1+ r) ( 1+ r) OFFS b c With or ithout OFFS, a crisis lasts to years hen it haens. Given the assumtion of stationary/constant monetized elfare gains through time, a 5% discount rate r and an infinitely-lived hog/ork industry, the change in robability is orth $5.72 million. Consider another asect of the insurance motive for OFFS by assuming that the robability of a major roblem is the same ith or ithout OFFS, but that the duration of the roblem is shortened by a year in the resence of OFFS. In this instance, the discounted benefits from the hog/ork industry are comuted as: B b b b b πt 1 π t n πt 1 π t+ n = 0.99 π t π n t n 1+ r ( 1+ r) 1+ r ( 1+ r) OFFS b c Given the robability of a crisis, the value of OFFS is $5.59 million. The revious comutations did not account for risk aversion in the agents references. Alloing for risk aversion ould inflate the measured OFFS benefits. Similarly, an extended crisis duration ithout OFFS ould inflate the reviously comuted benefits. The objective of the numerical simulation as to rovide ballark estimates of otential OFFS benefits for the Quebec hog/ork industry by taking into account the revenue-insurance rogram and some asects of the marketing agreement beteen hog roducers and rocessors. An otimistic scenario osits that OFFS can boost consumer confidence at home and abroad or reduce roduction costs for roducers and rocessors. The increased demand for ork ould generate net gains of $12 million/year over the benchmark case hich recludes OFFS. The second scenario simulated is one in hich OFFS bring about small efficiency gains in hog roduc- A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 37

52 Aendix A tion. Because the hog market rice is belo the guaranteed rice of the ASRA in the benchmark case, the increase in outut and the decrease in the market rice for hogs that follo an increase in hog roduction efficiency end u reducing elfare as the loss to taxayers more than offset the gains accruing to hog roducers and ork rocessors. The net effect on elfare is an annual loss of $22 million. A crisis scenario, hich brought about drastic reductions in the ork rice, as also simulated. OFFS could otentially reduce the robability of such crises and/or shorten the length of these crises hen they occur. To isolate the risk/insurance benefits, it as assumed that OFFS has no imact on consumer and rocessor demands and roducers cost of roduction. The benefits of OFFS ere measured by comaring the discounted value of the industry elfare gains ith and ithout OFFS. In one case, the robability of having a to-year crisis as reduced from 1% to 0.5%. In another case, the robability of a crisis as held constant at 1%, but the duration of the crisis as shorted to a year under OFFS. In both cases, the OFFS benefits are orth in excess of $5 million. These estimates give an order of magnitude about the benefits and costs of OFFS. Many more scenarios could be simulated. But given the limited amount of information available, it is fair to say that ithout a ilot study, OFFS benefits and costs ill be difficult to measure accurately. 38 A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector

53 Glossary of terms and list of abbreviations APPENDIX B Glossary TERMS Consumer surlus Demand-side effect Economic surlus Externality Free-ride Information asymmetry Marginal benefit Marginal cost Market benefit/cost Market failure Non-market benefit/cost Oortunism On rice elasticity Perfectly elastic Private benefit/cost Producer surlus DEFINITIONS A measure of the benefits to consumers (buyers) of a market outcome, i.e. the excess of marginal benefit over rice. A benefit or costs that manifests itself by increasing or decreasing the demand for a roduct The sum of consumer and roducer surlus. A measure of the total value to society of a market outcome Costs or benefits that flo beteen economic agents but that are not aid for in the market lace The ability to benefit from something ithout incurring the costs When one arty to a transaction (e.g. the seller) has more information than the other (e.g. the buyer) The additional benefit from roducing one more unit of outut The additional cost of roducing one more unit of outut See Private benefit/cost When distortions revent rices from accurately reflecting the true benefit or cost of a good, leading to a misallocation of resources (see externalities) See Public benefit/cost Self-interest seeking ith guile A measure of the resonsiveness of quantity demanded for a roduct to a change in its rice, everything else remaining equal When on-rice elasticity is infinity. A firm can sell all it ants at the going market rice but ill sell nothing at all other rices. Benefits and costs for roducts that bought and sold in the marketlace A measure of the total benefits to roducers of a market outcome, i.e. the excess of rice over marginal cost A Qualitative Assessment of the Benefits and Costs of On-Farm Food Safety and Environmental Farm Plans in the Pork Sector 39