Impact of Exports on the U. S. Beef Industry. Ed Van Eenoo, Everett Peterson, and Wayne Purcell *

Impact of Exports on the U. S. Beef Industry Ed Van Eenoo, Everett Peterson, and Wayne Purcell * Paper presented at the NCR-134 Conference on Appled Commodty Prce Analyss, Forecastng, and Market Rsk Management Chcago, Illnos, Aprl 17-18, 2000 Copyrght 2000 by Ed Van Eenoo, Everett Peterson, and Wayne Purcell. All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes. Research Assocate, Assocate Professor, and Professor, respectvely, Agrcultural and Appled Economcs, Vrgna Tech.

Impact of Exports on the U. S. Beef Industry Ed Van Eenoo, Everett Peterson, and Wayne Purcell * Polcy and programmatc decsons dealng wth beef exports requre good nformaton as to the mpact of exports on the domestc beef ndustry. Ths paper utlzes a partal equlbrum model of the world beef market to assess the mpacts on the U.S. beef sector of ncreases n real ncome n major beef mportng countres, the mpacts of changes n the prces of pork and poultry products, and the mpacts of changes n the prce of feedgrans. A one percent ncrease n real GDP n Canada, Japan, Mexco, and South Korea yelded a 1.6 percent ncrease n U.S. exports of hgh-qualty beef. Ths ncrease n exports leads to approxmately a 29.2 mllon pound ncrease U.S. beef producton on a retal weght bass. The ncrease n export demand also yelds an ncrease n beef prces of approxmately $0.275 per cwt. on a $120 box of beef and $0.18 per cwt on a $70 fed steer. One percent ncreases n the prces of pork and poultry products yeld a smaller 0.8 percent ncrease n U.S. beef exports, but also lead to a 1.5 percent ncrease n U.S. mports of low-qualty beef. Ths s due to U.S. consumers vewng low-qualty beef as a substtute for pork and poultry. Fnally, a one percent ncrease n the prce of feedgrans reduces U.S. beef exports by 0.4 percent. Ths s due to a reducton n U.S. beef producton from the ncreased feedng costs. Background Exports of U.S. beef have grown rapdly, especally n the decade of the 1990s. Fgure 1 shows the quantty of beef and veal exported has ncreased nearly tenfold snce 1980. The 1999 level of exports, 2.328 bllon pounds, was equal to 9 percent of commercal beef producton n the U.S. As the export quanttes approach 10 percent of domestc U. S. producton levels, the mportance of export actvty to the economc vablty and future of the U.S. beef ndustry ncreases accordngly. Decsons that nfluence the level of checkoff funds spent on efforts to enhance beef exports and polcy, and programmatc decsons n the varous federal agences that montor and report export actvty also become more mportant. Research on the economc mpact of export actvty s needed to gude polcy and programmatc decsons. Research Assocate, Assocate Professor, and Professor, respectvely, Agrcultural and Appled Economcs, Vrgna Tech. 1

2.5 2 bl. lb. 1.5 1 0.5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Fgure 1. Quantty of U.S. Beef and Veal Exports, 1980-1999 (Carcass Weghts) Source: Lvestock and Poultry Stuaton and Outlook, ERS, USDA, varous ssues. Research dealng wth the mpact of U. S. beef and veal exports s lmted by the avalable data. Typcal econometrc analyses requre, at a mnmum, accurate and complete nformaton on quanttes and prces. Varyng types of beef are nvolved n U.S. beef exports, but the prce/quantty data collected by the Foregn Agrcultural Servce n the U.S. Department of Agrculture offer lttle detal on quantty or prce by category of product. Exporters complete a form that shows weght and total value of the shpment, wth no detal on the exact product mx n the shpment. Most shpments are smply dentfed as frozen or chlled boneless beef wth lttle added detal. The objectve of the project was to analyze the mpact of beef and veal exports on the U.S. beef ndustry wth mpacts measured n terms of trade, prces, and producton. To accomplsh ths overall objectve, t s mportant that the analyss take approprate account of the mpact of export actvtes not only on demand but on supples as well. The Economc Settng An ncrease n export actvty, at a constant prce, leads to an ncrease n aggregate demand for U.S. beef producton. Fgure 2 shows an ncrease n demand from D d D d, whch represents domestc market demand, to D a D a or aggregate demand when export demand s ncluded. The shape and poston of D a D a s ntended to suggest that the advent of export demand not only ncreases demand for U.S. beef but could also change the nature of the aggregate demand n terms of elastcty. If export buyers are more responsve to prce changes than are domestc buyers, then the aggregate curve wll flatten out and become more elastc (or less nelastc), especally at lower prces. Analyss of such possbltes s mportant to the domestc ndustry and to trade groups attemptng to nfluence export movement. 2

Prce D d D a D a D d Quantty Fgure 2. Demand Increasng Impact of an Expandng Beef Export Market When domestc ppelnes are jammed wth a seasonal or cyclcal surge n producton, the presence of a more elastc export demand wll be mportant to the market s efforts to dscover a market-clearng prce. If own-prce demand elastcty for beef n the domestc market s 0.67, a 1.0 percent decrease n prce wll be assocated wth a 0.67 percent ncrease n quantty taken. If there s a sgnfcant surge n producton levels, a substantal decrease n prce wll be requred to move that ncrease nto domestc consumpton and to clear the market ppelnes. If elastcty n the export market s more elastc at, for example, -1.5 then a 1.0- percent reducton n prce could prompt a 1.5 percent ncrease n quantty taken. Ths would help to clear added producton through ppelnes and reduce the tme requred for the marketplace to dscover and regster a new and lower market-clearng prce. The net result, other thngs equal, could be a beneft to the domestc ndustry and to domestc cattle producers n terms of reduced duraton and magntude of supply drven prce declnes n perods of heavy supply. Fgure 3 suggests that export volume s, as would be expected, negatvely related to nomnal U.S. boxed beef prces (Choce grade). A sngle equaton model ftted to the data ndcates that changes n nomnal quarterly prces of beef and veal exports explan nearly 80 percent of the varaton n quarterly export quantty. Ths strong relatonshp provdes anecdotal evdence that quantty s hghly responsve to prce. 3

0.7 0.6 Exports (bllon lbs) 0.5 0.4 0.3 0.2 0.1 0 90 100 110 120 130 Boxed Beef Prces ($ per cwt.) Fgure 3. The Relatonshp Between Beef and Veal Exports and Nomnal Boxed Beef Prces, by Quarters, 1990-1998 Source: Lvestock and Poultry Stuaton and Outlook, ERS, USDA, varous ssues. The possblty of a turn n the downward trend n beef demand n the domestc market has been wdely dscussed and documented wth the demand ndex and research now beng completed for the Cattlemen s Beef Board by researchers at Kansas State Unversty. In 1999, ncreased quanttes moved nto the domestc market at hgher nomnal and nflaton-adjusted prces. Export buyers had to compete n the same hgher-prced beef market. The nomnal quarterly prces were much hgher durng 1999 than they were durng 1998 on export volumes that matched or exceeded levels of earler years. The 1999 coordnates would le well above the tght relatonshp shown n Fgure 3, addng to the anecdotal evdence that demand for beef dd, n fact, ncrease n 1999. Any new source of buyng strengthens demand. Most observers of the growth n beef exports across the past decade would agree that aggregate demand has been ncreased and that, for a gven supply, beef prces n the domestc market would be hgher. Choose any quantty and supermpose t on the earler Fgure 2 and the prce wll be where that supply and demand, as represented by D a D a, ntersect. Prce wll be hgher than would have been the case f demand were stll as represented by D d D d n the domestc market alone for any fxed supply. But n the face of hgher prces for beef as export demand comes nto the marketplace, supply wll not be gven. Supply s the schedule of quanttes that wll be offered by producers at alternatve prces. When prce s pushed up by the advent of export demand, a proft wndow opens as prce s pushed above the average total cost (ATC) of producton. Prce above ATC of producton generates economc rents. In the beef busness, wth low barrers to entry, such proft opportuntes can lead to new nvestment n expanded producton capacty and the ndustry supply curve shfts out and to the rght. Fgure 4 shows the possbltes wth S n S n sgnfyng a new and hgher supply that pulls the prce back below the ntal and hgher prce, P exp, that 4

export buyng prompted when SS was the supply. But the mportant pont s that supply wll not be gven. The ndustry wll respond to prce ncentves by movng to a larger output and a larger ndustry. D d D a S S n P exp P D a S S n D d Fgure 4. Prce Decreasng Impact of Supply Increases Prompted by Exports that Generate a Prce Increase The Methodology Employed Due to the absence of detaled data on prce, quantty, qualty and the composton of export shpments, a comparatve statc partal equlbrum model of world beef producton, consumpton, and trade s utlzed rather than an econometrc approach. The partal equlbrum model specfes the relevant demand and supply components of the beef sector and s desgned to smulate the mpacts on the U. S. beef ndustry of shocks from outsde the beef sector. Examples of such shocks would be demand-shftng forces such as changes n ncomes n mportant buyng countres or changes n relatve prces of substtutes, or supply shftng forces such as changes n the prces of feedgrans. Partal Equlbrum Model of the U. S. Beef Industry The model s comprsed of eght regons: the U.S., Japan, Mexco, South Korea, Canada, Australa, New Zealand, and the rest of the world (ROW). These regons were chosen because the U.S. prmarly exports beef and hdes to Japan, Mexco, South Korea, and Canada and prmarly mports beef from Australa, New Zealand, and Canada. The beef exported by the U.S. 5

s generally hgher qualty cuts whle the beef mported by the U.S. s generally lower qualty meat used n processng. The U.S. porton of the model s comprsed of three vertcally lnked sectors: calf producton, cattle fnshng, and packng. The cow-calf or calf sector produces weaned calves for nput to the fnshng sector usng two nputs, feedgrans and a calf sector specfc factor (ths represents breedng stock, facltes, land, operator labor and management, etc.). The fnshng sector produces slaughter cattle for nput to the packng sector and uses three nputs: calves, feedgrans, and a fnshng sector specfc factor (facltes, labor, management, etc.). The packng sector s assumed to produce three fnal products: hgh-qualty beef, low-qualty beef, and hdes and uses two nputs: fed cattle and a packng sector specfc nput (facltes, labor, management, etc.). The product mx of the packng sector s somewhat of a smplfcaton but the value of varety meats and tallow exports s relatvely small. 1 The markets for all goods are assumed to be perfectly compettve. The non-u.s. beef ndustres are specfed n less detal. Only an aggregate beef sector, that ncorporates all growng and slaughter actvtes, s specfed n other countres, such as New Zealand, that competes drectly wth the U.S. for world beef markets. Ths smplfcaton s approprate because we are nterested prmarly n analyzng the mpact of U.S. beef exports on the U.S. beef prces and producton and due to a lack of detaled producton nformaton n the non-u.s. regons. The demand equatons for processed beef products n the non-u.s. regons are modeled dentcally to the U.S. demand equatons. The supply of beef and veal and hdes s specfed as a monotoncally ncreasng functon of output prces (hgh-qualty and low-qualty beef prces, and hde prces). 2 The partal equlbrum model s a system of lnear dfferental equatons descrbng each sector and s dvded nto four components: a system of demand condtons, a system of supply condtons, a system of zero proft condtons, and a system of market clearng condtons. In addton, a system of retal demand equatons s specfed for processed beef products. The complete model conssts of 67 equatons n 67 endogenous varables. There are also 12 exogenous varables defned n the model. These varables and the model equatons are descrbed n detal n Appendces A and B. Detaled descrptons of the development of the model, by sectors and n algebrac form, are avalable from the authors. 3 The system of lnear dfferental equatons can be expressed n matrx notaton by Axˆ = b ˆ 1 The relatvely small value s a justfcaton for not ncludng varety meats and tallow, but ncludng them would also requre addtonal model parameters, such as ncome and cross-prce elastcty parameters. No research that estmated such parameters could be located. 2 The dstncton between hgh and low qualty s not Choce (hgh qualty) and Select (low qualty). Some 40 percent of U.S. fed cattle are now Select, and Select s an mportant part of the fresh beef market. The dstncton used was "thn" meats as low qualty, and U.S. producton was dvded nto 74 percent and 26 percent for hgh qualty and low qualty, respectvely, usng gudelnes provded by the Amercan Meat Insttute. 3 Contact Wayne Purcell at (540) 231-7725 or purcell@vt.edu. 6

where A s a matrx of endogenous varable coeffcents, ˆx s a vector of percentage changes n the endogenous varables, and ˆb s a vector contanng the sum percentage changes n the exogenous varables scaled by the approprate parameters (.e. the rght hand sde of the equatons lsted n Appendx B). For a specfed change n one or more exogenous varables, the correspondng changes n the endogenous varables are gven by xˆ = A 1ˆ b, whch can be solved wth any standard spreadsheet software. Data Requrements Data on own-prce and cross-prce elastctes of demand, supply elastctes, ncome elastctes, elastctes of substtuton between producton nputs, cost and revenue shares, and consumpton and producton shares are requred. To employ the model, an ntal shock to one or more of the exogenous varables must also be provded. Demand, supply, and ncome elastctes were taken from the Tvedt et al. publcaton, Elastctes n World Meat Markets. Own-prce and cross-prce elastctes of demand were reported for fed beef, nonfed beef, pork, and poultry n each country. Fed beef was, after examnaton of lterature on other countres, consdered to be equvalent to U.S. hgh-qualty meat and nonfed beef to be equvalent to U.S. and other producng countres low-qualty beef. Demand elastctes were not reported for fed beef n Australa and New Zealand. The U.S. fed beef elastctes were mputed to Australa and New Zealand. Own-prce elastctes of demand were not always reported for hdes. Coeffcents assgned ranged from -0.6 n New Zealand to 1.16 n Mexco. 4 (See Appendx C for a complete lst of model parameters.) Supply elastctes were not generally reported separately for hgh-qualty beef, lowqualty beef, and hdes. However, supply elastctes were reported for a generc beef product n each regon. Snce the producton of the three beef products s nextrcably lnked, the same supply elastcty was used for each product. Income elastctes were reported for fed beef, nonfed beef, pork, and poultry n each regon. There was no acceptable ncome elastcty for Mexcan hgh-qualty beef, so the same ncome elastcty was used for ROW and Mexco. No ncome elastctes were reported for hdes, and ths parameter was set at 0.1 for all regons. Ths relatvely low elastcty value reflects that the demand for hdes s really a derved demand by leather manufacturers. As ncomes ncrease, consumers wll purchase more leather products, thereby ncreasng the demand for hdes. If the per-unt nput usage of hdes n leather products s constant, then the ncome elastcty for hdes s the ncome elastcty for leather products tmes the per-unt hde requrement. In the U.S., hdes comprsed approxmately ten percent of the total cost for the 4 These parameter estmates consttute one of the weaknesses of the study. There are very few publshed reports that estmate, for example, the cross elastcty between beef and pork n a country lke Mexco or demand elastctes for hgh-qualty beef n producng countres lke New Zealand. Parameter estmates were sometmes adapted from avalable research on smlar countres, and specal attenton was pad n the overall analyss to the senstvty of model results to the levels of elastcty parameters employed. 7

leather manufacturers (1992 U.S. Input/Output table). Thus, an ncome elastcty of 0.1 for hdes would mply an ncome elastcty of 1.0 for leather products. The producton and consumpton shares of the three products n each country were derved va orgnal calculatons from reported data on producton and consumpton. The cost and revenue shares were calculated or estmated based on publshed data from a number of sources. The elastcty of substtuton between nputs of producton was set at low levels based on knowledge of the ndustry and levels used n partal equlbrum research on other economc sectors. The nput supply elastctes were chosen to equal 0.67 for all sectors of the beef ndustry n order to obtan own-prce supply elastctes of approxmately 1.0 for the fed cattle and 0.9 for meat products. We beleve that ths represents a reasonable short to ntermedate run supply own-prce supply response for the U.S. beef sector. Increase n Income n Importng Countres Results The frst smulaton of the mpact of exports nvolves a one percent ncrease n the real Gross Domestc Products of the major mporters of beef--japan, Mexco, Canada, and South Korea. Table 3 gves the pont estmates, standard devatons, and the mnmum and maxmum values of the pont estmates for U.S. beef exports, U.S. beef mports, beef producton, and beef prces. In addton, Table 3 provdes an estmate of the probablty of the pont estmates takng on a negatve value (based on a senstvty analyss that s formally dscussed later). Table 3. Varable Effects of a One Percent Increase n the Gross Domestc Products of the Major Importers of U.S. Beef and Veal (Japan, Mexco, Canada, and South Korea) Pont Standard Estmate Devaton Mnmum Maxmum Probablty Less Than Zero a Percentage Change U.S. Trade Hgh-Qualty Beef (Exports) 1.63 1.18-26.28 3.72 0.03 Low-Qualty Beef (Imports) -0.36 0.56-1.19 8.01 0.81 U.S. Beef Producton 0.16 0.17 0.04 3.39 0.00 Prces Hgh-qualty Beef 0.23 0.29 0.07 7.04 0.00 Low-qualty Beef 0.17 0.36 0.05 7.27 0.00 U.S. Fed Cattle 0.16 0.26 0.04 6.56 0.00 U.S. Calves 0.22 0.36 0.05 8.68 0.00 a Ths represents the probablty of the pont estmate takng on a negatve value based on a senstvty analyss of the model parameters. The ncrease n real GDP n Canada, Japan, Mexco, and South Korea ntally ncreases these countres demand for hgh qualty beef, low qualty beef, and hdes, based on the specfed 8

ncome elastctes (see Appendx C). Because the demand for hgh qualty beef s more responsve to changes n ncome than low qualty beef and hdes, there s a dsproportonate ncrease n the demand for hgh-qualty beef compared to low-qualty beef and hdes. Japan, Mexco, and South Korea are the largest mporters of hgh-qualty beef. Because ther domestc beef ndustres are ether very small, as s the case for Japan and South Korea, or does not respond sgnfcantly to prce changes, as s the case for Mexco, the ncrease n demand for hgh and low qualty beef s satsfed through ncreased mports by these countres. The U.S. provdes almost all of the ncrease n mports of hgh-qualty beef by these countres because the beef supply n the U.S. s much more responsve to prce changes than n other major exportng countres. Because exports comprse approxmately ten percent of U.S. beef producton, the overall ncrease n U.S. beef producton s approxmately one-tenth the ncrease n exports. On a 25 bllon lb. U.S. producton base (carcass weght) or about 18.25 bllon lbs. retal weght, ths would mean an ncrement of 29.2 mllon lbs. retal weght or about 53,284 fed steers or hefers weghng some 1200 lbs. and producng 548 lbs. of boneless retal beef cuts per anmal. An added 53,284 slaughter anmals would requre 65,000 to 70,000 more beef cows n the cow herd, dependng on calvng percentage and whether hefers are beng held for herd replacement. If 70,000 more cows are needed, ths would mean an ncrease of 0.002 percent ncrease n a 35 mllon head beef cow herd. In addton, the ncrease n U.S. beef producton provdes more trmmngs and lowqualty cuts from an expanded cattle slaughter n the domestc market. Therefore, less lowqualty processng beef needs to be mported nto the U.S. market. The ncrease n export demand for U.S. hgh-qualty beef leads to a 0.23 percent ncrease n the prce of hgh-qualty beef, or about $.275 per cwt. on a $120 per cwt. boxed beef market. The prce of low-qualty beef also ncreases, but by a slghtly smaller amount than hgh-qualty beef. Ths s because the ncome elastctes for low-qualty beef are much lower than for hgh qualty beef, mplyng a smaller ncrease n the demand for low-qualty beef as ncomes ncrease. The prce of fed cattle ncreases by 0.16 percent, around $.11 to $.12 per cwt. on a $70 fed steer market. The reason why fed cattle prces have a slghtly smaller ncrease, compared to hghqualty and low-qualty beef, s because the prce of hdes decreased. Thus, the packer cannot afford to pay the same percent ncrease for fed cattle as they receved for hgh-qualty and lowqualty beef. The relablty of estmates from any partal equlbrum model depends on the relablty of the model s parameter values. 5 Because of the great deal of uncertanty about the value for many of the parameters n ths model, a senstvty analyss s conducted. Each elastcty n Appendx C s assumed to be a random varable wth a unform dstrbuton. The end ponts for each dstrbuton are plus and mnus 75 percent of the base elastcty value. The senstvty analyss s conducted by randomly drawng a value for each elastcty from a unform dstrbuton and then resolvng the model. Ths procedure s replcated 1,000 tmes usng 1,000 dfferent sets of elastcty values. The mnmum and maxmum values gven n Table 3 were 5 Of course, the relablty of the model also depends on the model structure, such as assumptons concernng producer behavor, beng correct. 9

determned usng ths procedure. In the case of a one percent ncrease n ncome n the major beef mportng countres, the prces of hgh-qualty and low-qualty beef always ncrease, regardless of the model parameters chosen. In addton, U.S. beef producton always ncreased. Whle an occasonal extreme result s generated, the vast majorty of the estmates were n a very close range around the pont estmate reported. Fgure 5 presents the frequency hstogram for the percentage change n U.S. hgh-qualty beef exports from a one percent ncrease n the real GDP n Japan, Mexco, Canada, and South Korea. 6 As shown n Fgure 5, t s possble for the U.S. exports of hgh-qualty beef trade to decrease when real ncome ncreases n the major beef mportng countres. Ths scenaro occurs when U.S. consumpton of hgh-qualty beef ncreases nstead of decreasng, where decreasng consumpton s the general case. The ncrease n U.S. hgh-qualty beef consumpton occurs when the own-prce demand elastcty for hgh-qualty beef s relatvely low and the cross-prce elastcty between hgh-qualty beef and low-qualty beef s relatvely hgh. Because the prces of hgh-qualty and low-qualty beef ncrease, the cross-prce effect domnates the own-prce effect, causng consumpton of hgh-qualty beef to ncrease. U.S. Exports of Hgh Qualty Beef Probablty 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0-1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Percent Change Fgure 5. Frequency Hstogram for Percentage Change n U.S. Hgh-Qualty Beef Exports from a One Percent Increase n GDP n Japan, Mexco, Canada, and South Korea 6 Senstvty tests on all the results are avalable from the authors. Contact Wayne Purcell at (540) 231-7725 or purcell@vt.edu. 10

Increase n the Prces of Beef Substtutes Table 4 shows the results of a one percent ncrease n the prce of pork and chcken n the world market. The effect of ncreased prces for substtutes on the world beef sector s determned by the relatve dfferences n the cross-prce demand elastctes for hgh-qualty and low-qualty beef n all regons. In the U.S., low-qualty beef s a much stronger substtute for pork and poultry than s hgh-qualty beef, wth hgh-qualty beef beng a complement wth poultry. Thus, n the U.S., consumers ncrease ther consumpton of low-qualty beef whle decreasng ther consumpton of hgh-qualty beef. The cross-prce elastctes for Australan and New Zealand are relatvely small so consumers n those countres respond very lttle to pork and poultry prce changes. In Canada, pork s a strong substtute for hgh-qualty beef, so hghqualty beef consumpton ncreases by approxmately one percent. In Mexco and ROW, hghqualty beef s a weak substtute for pork and poultry, whle low-qualty beef s a complement wth pork and poultry. Thus, the consumpton of hgh-qualty beef ncreases whle the consumpton of low-qualty beef decreases n those regons. Fnally, n Japan and South Korea, hgh-qualty beef s a complement wth pork and poultry whle low-qualty beef s a complement wth pork but a substtute for poultry. In both of these countres, the consumpton of hgh-qualty beef decreases whle the consumpton of low-qualty beef ncreases (the substtute relatonshp wth poultry offsets the complementary relatonshp wth pork). Table 4. Effects of a One Percent Increase n the Prces of Beef and Veal Substtutes (Pork and Poultry) Varable Pont Estmate Standard Devaton Mnmum Maxmum Probablty Less Than Zero a Percentage Change U.S. Trade Hgh-Qualty Beef (Exports) 0.78 0.62-15.18 1.56 0.03 Low-Qualty Beef (Imports) 1.54 0.46 0.36 6.09 0.00 U.S. Beef Producton 0.05 0.09-0.21 1.79 0.13 Prces Hgh-qualty Beef 0.05 0.15-0.21 3.85 0.10 Low-qualty Beef 0.06 0.20-0.38 4.18 0.23 U.S. Fed Cattle 0.05 0.14-0.21 3.63 0.13 U.S. Calves 0.06 0.19-0.27 4.81 0.13 a Ths represents the probablty that the pont estmate takes on a negatve value based on a senstvty analyss of the model parameters. The 0.78 percent ncrease n U.S. exports of hgh-qualty beef may be attrbuted to three causes. Frst, because of the strong substtuton between hgh-qualty beef and pork n Canada, whch s the second largest exporter of hgh-qualty beef, Canadan consumpton of hgh-qualty beef ncreases dramatcally. Thus, less hgh-qualty beef s avalable for export from Canada. Second, the ROW s a large consumer and mporter of hgh-qualty beef. Because of the relatve sze of ths regon, even a small ncrease n hgh-qualty beef consumpton leads to a relatvely large ncrease n hgh-qualty beef mports. Fnally, the U.S. beef supply elastcty s much 11

larger than the other exportng countres, mplyng that the U.S. wll have a larger supply response. Thus, the U.S. captures a large porton of the ncrease n hgh-qualty beef exports. To meet the ncrease n U.S. hgh-qualty beef exports and the ncrease n U.S. lowqualty beef consumpton, U.S. beef producton also ncreases. However, because hgh-qualty beef and poultry are complements n the U.S., hgh-qualty beef consumpton declnes. Ths decrease n U.S. consumpton offsets a porton of the ncreased export demand, yeldng a smaller ncrease n total U.S. beef producton. Fnally, because of the ncrease n U.S. consumpton of low-qualty beef, and the relatvely small ncrease n U.S. beef producton, U.S. mports of low-qualty beef ncrease by 1.54 percent. In contrast to the frst experment, the drecton of the changes n prces and quanttes are much more senstve to the set of parameters chosen. Thus, there s a hgher level of uncertanty of how changes n world pork and poultry prces wll affect the U.S. beef sector. For example, dependng on the values of the cross-prce demand elastctes n each regon, U.S. beef producton could actually decrease. (Fgure 6 shows the frequency hstogram for U.S. beef producton for ths experment). If hgh-qualty beef s a strong enough complement wth chcken n the U.S., then domestc beef consumpton could decrease. Smlarly, strong complementary relatonshps between hgh-qualty beef and pork and poultry n Japan and South Korea could reduce ther demand for hgh-qualty beef exports, whch would reduce the demand for U.S. beef. Out of the 1,000 replcatons of the model usng dfferent sets of parameter values, U.S. beef producton decreased 132 tmes. U.S. Beef Producton Probablty 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0-0.20-0.14-0.08-0.02 0.04 0.10 0.16 Percent Change 0.22 0.28 0.34 Fgure 6. Frequency Hstogram for Percentage Change n U.S. Beef Producton from a One Percent Increase n the Prce of Pork and Poultry 12

Increase n the Prce of Feedgrans Table 5 shows the results from a supply sde shock assocated wth a one percent ncrease n prce of feedgrans. The ncrease n the prce of feedgrans ncrease the costs for the cow-calf and cattle fnshng sector n the U.S., whch, at constant output prce, wll lead to a reducton n U.S. beef producton. Smlarly, the cross-prce supply elastctes for feedgrans are negatve for all other regons n the model (see Appendx C). Ths ntal decrease n world beef supply leads to an excess demand for beef at ntal beef prces. Thus, the prces of hgh-qualty and lowqualty beef rse. However, ths rse n beef prces wll also llct a supply response by producers n all regons. If the own-prce supply elastcty s relatvely large compared to the feedgran cross-prce supply elastcty n a gven regon, beef producton can actually ncrease. Ths s the case for all regons except the U.S., Canada, and Mexco, although the ncreases n producton are relatvely small, approxmately 0.05 percent. Overall, world producton of hgh-qualty beef and low-qualty beef decrease by 5 mllon and 1.7 metrc tons respectvely (or 0.02 percent and 0.008 percent). In the U.S., the rato between the own-prce and cross-prce supply elastctes s approxmately four to one; however, the ncrease n hgh-qualty and low-qualty beef prces s only one-ffth the sze of the prce ncrease n feedgrans. Thus, the ncrease n supply from the prce ncrease s not enough to offset the decrease n supply from n the ncrease n the prce of feedgrans, so U.S. beef producton declnes by 0.06 percent, or about 11 mllon lbs. of retal weght. Table 5. Effects of a One Percent Increase n the Prce of Feedgrans Varable Pont Estmate Standard Devaton Mnmum Maxmum Probablty Less Than Zero a Percentage Change U.S. Trade Hgh-Qualty Beef (Exports) -0.40 0.82-20.19 1.04 0.84 Low-Qualty Beef (Imports) -0.17 0.51-1.12 6.80 0.66 U.S. Beef Producton -0.06 0.14-0.20 2.84 0.81 Prces Hgh-qualty Beef 0.21 0.22 0.07 4.96 0.00 Low-qualty Beef 0.21 0.30 0.05 6.22 0.00 U.S. Fed Cattle 0.26 0.19 0.13 4.69 0.00 U.S. Calves 0.02 0.26-0.16 5.88 0.32 a Ths represents the probablty that the pont estmate takes on a negatve value based on a senstvty analyss of the model parameters. Due to the decrease n world producton of beef, the prces of hgh-qualty and lowqualty beef both ncrease by 0.21 percent, or approxmately $0.25 per cwt. on a $120 per cwt. box of beef. Because of the ncrease n feed costs, U.S. fed cattle prces ncrease by 0.26 percent, or $0.18 per cwt on a $70 per cwt fed steer. However, the prce of calves n the U.S. remans vrtually constant. Ths s because the cow-calf ndustry n the U.S. uses relatvely lttle feedgrans, mplyng a much smaller ncrease n producton costs than s the case for the fnshng ndustry. It s nterestng to note that n almost one-thrd of the model replcatons, the prce of calves n the U.S. decreased (compared wth fed cattle prces that never decreased). Ths 13

happens because as U.S. beef producton decreases, the demand for calves also decreases, whch leads to a reducton n the demand for the specfc factor n the calf sector. If the supply of ths factor s relatvely nelastc, then ts prce could decrease enough to offset the ncrease n cost from the ncrease n the feedgran prce. U.S. exports of hgh-qualty beef and mports of low-qualty beef both declne n ths experment. Imports of low-qualty beef declne because the ncrease n the prce of low-qualty beef decreases U.S. low-qualty beef consumpton by 0.1 percent, more than the decrease n U.S. beef producton. U.S. exports of hgh-qualty beef declne because the ncrease n the prce of hgh-qualty beef leads to a 5 mllon metrc ton decrease n the world consumpton of hghqualty beef. However, as shown n Table 5, t s possble for U.S. mports of low-qualty beef and exports of hgh-qualty beef to ncrease. If U.S. beef producton decreases by more than the decrease n U.S. low-qualty beef consumpton, the mports of low-qualty beef must ncrease. Ths occurred n approxmately one-thrd of model replcatons. U.S. exports of hgh-qualty beef could ncrease f the substtuton effect between hgh-qualty and low-qualty beef s strong enough n other regons to domnate the own-prce effect. Not surprsng, ths happens much more nfrequently, n approxmately 16 percent of the model replcatons. Rankngs of Relatve Impacts on U.S. Beef Sector Tables 6 through 8 presents the relatve rankngs of the mpacts on the U.S. beef sector from changes n real GDP, the prce of substtutes, and feedgran prces. Table 6 gves the relatve mpacts on U.S. beef trade of a one percent exogenous ncrease n real GDP n Japan, Mexco, Canada, and South Korea; a one percent ncrease n the prce of pork and poultry; and a one percent ncrease n the prce of feedgrans. Consderng the absolute values of the percentage changes n U.S. hgh-qualty beef exports, an ncrease n real GDP n Japan and Mexco have the largest mpacts on U.S. exports because they are the largest mporters of hghqualty beef. An ncrease n the prce of poultry or pork has the largest mpact on U.S. lowqualty beef mports because of the strong substtuton effects n U.S. consumpton between those products and low-qualty beef. Table 6. Relatve Impacts on U.S. Beef Trade of Varous Exogenous Shocks U.S. Hgh-Qualty Beef Exports U.S. Low-Qualty Beef Imports One Percent Increase In: Percent Change Rank Percent Change Rank Japanese GDP 0.78 1-0.04 6 Mexcan GDP 0.57 2-0.24 3 Poultry Prce 0.51 3 0.79 1 Feedgran Prces -0.40 4-0.17 4 Pork Prce 0.28 5 0.74 2 Canadan GDP 0.15 6-0.02 7 South Korean GDP 0.12 7-0.05 5 A change n the prce of feedgrans has the largest mpact on the prce of hgh-qualty beef and low-qualty beef (see Table 7). Ths reflects the relatve mportance of feedgrans n the cost of producng beef n the U.S. and Canada. The next three largest mpacts are from ncreases 14

n Japanese and Mexcan GDP and from an ncrease n the prce of pork. Agan, ths s due to Japan and Mexco beng relatvely large mporters of hgh-qualty beef and beause pork s a relatvely strong substtute for beef n some regons. Table 7. Relatve Impacts on Hgh-Qualty and Low-Qualty Beef Prces of Varous Exogenous Shocks U.S. Hgh-Qualty Beef Exports U.S. Low-Qualty Beef Imports One Percent Increase In: Percent Change Rank Percent Change Rank Feedgran Prces 0.21 1 0.21 1 Japanese GDP 0.11 2 0.06 4 Mexcan GDP 0.08 3 0.08 3 Pork Prce 0.08 4 0.10 2 Poultry Prce -0.03 5-0.03 5 South Korean GDP 0.02 6 0.02 6 Canadan GDP 0.02 7 0.01 7 Fnally, Table 8 shows the rankngs of the relatve mpacts on U.S. beef producton, fed cattle prce, and calf prce. As wth the prevous rankngs, a change n feedgran prces, the pork prce, Japanese GDP, and Mexcan GDP have the largest mpact. Wth the excepton of the mpact of an ncrease n feedgran prces on the fed cattle prce, there are only very small dfferences n the absolute values of the percentage changes for all of the experments. Table 8. Relatve Impacts on U.S. Beef Producton and the Prces of Fed Cattle and Calves U.S. Beef Producton U.S. Fed Cattle Prce U.S. Calf Prce One Percent Increase In: Percent Rank Percent Rank Percent Rank Change Change Change Pork Prce 0.07 1 0.07 2 0.09 1 Mexcan GDP 0.07 1 0.06 4 0.09 1 Japanese GDP 0.06 3 0.07 2 0.09 1 Feedgran Prces -0.06 3 0.26 1 0.02 5 Poultry Prces -0.03 5-0.03 5-0.03 4 South Korean GDP 0.01 6 0.01 7 0.02 5 Canadan GDP 0.01 7 0.02 6 0.02 5 Summary and Concluson Export actvty exerts a sgnfcant nfluence on the U.S. beef ndustry. Influence takes the form of changes n producton and prces n the domestc ndustry and on mports of lowqualty beef. The largest mpact on U.S. exports of hgh-qualty beef s assocated wth an ncrease n real ncome n major beef mportng countres. An ncreased n real GDP of one percent n these countres lead to a 1.63 percent ncrease n exports of hgh-qualty beef. Ths ncrease represents approxmately a 29.2 mllon-pound ncrease n retal weght of beef, requrng some 53,284 15

addtonal 1200-lb steers or hefers and 65,000 to 70,000 more cows n the beef herd. Ths ncrease n exports of hgh-qualty beef would also prompt up to a 0.23 percent ncrease n boxlevel prce of hgh-qualty beef. Ths s about $0.275 per cwt. on a $120 boxed beef market, and t would be $0.16 to $0.17 per cwt. on a $70 fed steer market. The smulaton results reported are ntended to represent short-run to ntermedate-run changes n the world beef market. Ths s a reflecton of the partal equlbrum nature of the model. Thus, the length of run for the model s long enough for the beef markets to adjust to a new equlbrum but not long enough for substantal changes to occur n other markets/sectors n the global economy. Based on ths shorter tme frame, we have chosen demand and supply elastctes that are n general farly nelastc. Partcularly on the supply sde, ths reflects the lmted ablty for producers to be able to respond to prce changes due to bologcal and tme constrants. In addton, because the model s a system of frst-order dfferental equatons (.e., a lnear approxmaton), the model results are only vald for small changes n the exogenous varables. Usng relatve large changes n the exogenous varables ncreases the potental for substantal approxmaton error n the results. Better measurement of prce of export tems s needed to allow more refned analyss. The elastctes (demand, supply, cross, nput substtuton) used n the partal equlbrum analyss were gleaned from a very lmted research lterature. Ths type of analyss would be more effectve f measurement of mpacts f the elastcty estmates were of more recent tenure and more consstent, n terms of how they were estmated, across countres. Concern about the effcacy of these mportant elastcty parameters prompted an extensve effort to test the senstvty of the results. The tests ndcate the estmates are generally relable and useful. But there s lttle doubt the ndustry would be well served n the future from better and more complete collecton and reportng of quantty, grade or qualty, and prce data assocated wth export actvty. 16

Relevant Lterture Internatonal Fnancal Statstcs Yearbook. Internatonal Monetary Fund, varous ssues. Lvestock, Dary, and Poultry Stuaton and Outlook. USDA ERS, varous ssues. Melton, B. and W. Huffman. Implcatons of the North Amercan Free Trade Agreement for Long-term Adjustment n U.S.-Mexcan Beef Producton and Trade. Center for Agrcultural and Rural Development, Workng Paper 93-WP 118. Iowa State Unversty, December 1993. Peterson, E. B. and R. Jones. Implcatons of U.S. Mexco Tarff Reductons Under NAFTA for the U.S. Sheep Industry. SID Sheep and Goat Research Journal. Tvedt, D., M. Reed, A. Malgaya, and B. Bobst. Elastctes n World Meat Markets. Agrcultural Economcs Research Report Seres No. 55. Unversty of Kentucky, 1991. Unted Natons Populaton Dvson, World Populaton Prospects: The 1998 Revson, forthcomng. Van der Slus, E. and D. J. Hayes. An Assessment of the 1988 Japanese Beef Market Access Agreement on Beef and Feed-Gran Markets. Revew of Agrcultural Economcs. Vol. 13, No. 1(January 1991): 45 58. 17

Appendx A: Descrpton of Varables As outlned above, the model conssts of 67 equatons n 67 endogenous varables and 12 exogenous varables. Followng s a lst of the endogenous and exogenous varables used n the model. Endogenous Varables: x hq (8) quantty of hgh-qualty beef and veal consumed n regon x lq (8) quantty of low-qualty beef and veal consumed n regon x h (8) quantty of hdes consumed n regon x f (1) nput demand for fed cattle n the U.S. x c (1) nput demand for weaned calves n the U.S. x zc (1) nput demand for non-gran nputs by the cow-calf sector n the U.S. x zf (1) nput demand for non-calf nputs by the feeder cattle sector n the U.S. x zp (1) nput demand for non-cattle nputs by the processng sector n the U.S. y hq (8) producton of hgh-qualty beef and veal n regon y lq (8) producton of low-qualty beef and veal n regon y h (8) producton of hdes n regon y p (1) producton of processed beef products n regon y f (1) producton of fed cattle n the U.S. y c (1) producton of calves n the U.S. y zc (1) supply of non-gran nputs to the cow-calf sector n the U.S. y zf (1) supply of non-calf nputs to the feeder cattle sector n the U.S. y zp (1) supply of non-cattle nputs to the processng sector n the U.S. p hq (1) prce of hgh-qualty beef and veal n the U.S. p lq (1) prce of low-qualty beef and veal n the U.S. p h (1) prce of hdes n the U.S. p f (1) prce of fed cattle n the U.S. p c (1) prce of weaned calves n the U.S. P zc (1) prce of non-gran nputs to the cow-calf sector n the U.S. P zf (1) prce of non-calf nputs to the feeder cattle sector n the U.S. (1) prce of non-cattle nputs to the processng sector n the U.S. P zp Exogenous Varables: p pk (1) prce of pork n the U.S. p ch (1) prce of poultry n the U.S. p g (1) prce of feedgrans n the U.S. p ls (1) prce of leather substtutes n the U.S. I (8) gross domestc product n regon 18

Appendx B: Reduced System of Equatons In ths appendx the system of equatons s expressed n smplfed form wth all endogenous varables lsted on the left hand sde and all exogenous varables lsted on the rght hand sde. In addton, a defnton s gven of each parameter. Equatons 1 8: Equatons 9 16: ˆ ˆ ˆ ˆ ˆ ˆ x η p η p = η p + η p + ε I hq hqhq hq hqlq lq hqpk pk hqch ch hq ˆ ˆ ˆ ˆ ˆ ˆ x η p η p = η p + η p + ε I lq lqlq lq lqhq hq lqpk pk lqch ch lq Equatons 17 24: ˆ ˆ ˆ ˆ x η p = η P + ε I h hh h hls ls h ν + c σ P ν P = c σ p Equaton 25: ( ) ˆ ˆ ˆ zf gf gzf zf zp zp gf gzf g ν + c σ P ν P = c σ p Equaton 26: ( ) ˆ ˆ ˆ zc gc gzc zc zp zp gc gzc g r P ˆ rp ˆ rp ˆ c P ˆ c c P ˆ c c c P ˆ c c c c c p ˆ Equaton 27: + + = ( + ) hq hq lq lq h h zp zp fp zf zf fp cf zc zc fp cf gc fp gf g Equatons 28 34: Equatons 35 41: Equatons 42 48: Equaton 49: Equaton 50: Equaton 51: yˆ = 0 * * ˆ hq νhqphq yˆ = 0 * * ˆ lq νlqplq yˆ = 0 * * ˆ h νh Ph * * ˆ ˆ us hqxhq hqyhq hq zppzp = 0 * ϕ φ φν * * ˆ ˆ us lqxlq lqylq lq zppzp = 0 * ϕ φ φν ˆ ˆ ˆ * ˆ ˆ us hxh hyh h zppzp = 0 * ϕ φ φν 19

Parameter Defntons: η jk : ε j : Prce elastcty of demand between commodtes j and k n regon Income elastcty of demand wth respect to the prce of commodty j n regon * ν j : Supply elastcty of commodty j n country * ν zp : Supply elastcty of non-cattle nputs to the U.S. packng sector σ gzc : Elastcty of substtuton between feedgrans and other nputs n the U.S. calf sector σ gzf : Elastcty of substtuton between feedgrans and other nputs n the U.S. fnshng sector r j : c fp : c cf : c gc : c gf : c zp : c zf : c zc : φ j : ϕ j : Revenue share of commodty j n the U.S. packng sector Cost share of cattle n the U.S. packng sector Cost share of calves n the U.S. fnshng sector Cost share of feedgrans n the U.S. calf sector Cost share of feedgrans n the U.S. fnshng sector Cost share of other nputs n the U.S. packng sector Cost share of other nputs n the U.S. fnshng sector Cost share of other nputs n the U.S. calf sector Share of world producton of good j n regon Share of world consumpton of good j n regon 20

Appendx C. Elastctes, Producton and Consumpton Shares, and Cost and Revenue Shares Used n the Partal Equlbrum Analyss Elastctes U.S. Japan Mexco Korea Canada Aus. N.Z. ROW Prce Elastctes of Demand hqhq -0.774-0.036-0.111-0.036-1.840-0.774-0.774-0.111 hqlq 0.728 0.026 0.046 0.026 0.757 0.728 0.728 0.046 hqpk 0.034-0.184 0.022-0.184 1.038 0.034 0.034 0.022 hqch -0.104-0.031 0.027-0.031 0.046-0.104-0.104 0.027 lqhq 1.292 1.279 0.013 1.279 0.005 1.292 1.292 0.013 lqlq -1.816-0.785 0.005-0.785-0.075-0.027-0.027 0.005 lqpk 0.364-0.709-0.014-0.709 0.039-0.010-0.010-0.014 lqch 0.224 0.843-0.114 0.843 0.016 0.004 0.004-0.114 hh -0.700-1.000-1.160-0.800-0.800-0.780-0.600-0.700 Own-Prce Supply Elastctes hq 0.91 0.977 0.007 0.977 0.609 0.421 0.421 0.244 lq 0.91 0.977 0.007 0.977 0.609 0.421 0.421 0.244 H 0.91 0.977 0.007 0.977 0.609 0.421 0.421 0.244 Feedgran Cross-Prce Supply Elastctes hq 0.24-0.15-0.05-0.15-0.15-0.05-0.05-0.05 lq 0.24-0.15-0.05-0.15-0.15-0.05-0.05-0.05 H 0.24-0.15-0.05-0.15-0.15-0.05-0.05-0.05 Income Elastctes hq 0.5 1.5 1.5 1.5 0.5 0.5 0.5 1.0 lq 0.2 0.5 0.5 0.5 0.2 0.2 0.2 0.35 H 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Consumpton and Producton Shares and Intal Trade Levels U.S. Japan Mexco Korea Canada Aus. N.Z. ROW Consumpton Shares hq 0.304 0.043 0.031 0.007 0.026 0.011 0.003 0.576 lq 0.200 0.018 0.057 0.012 0.017 0.020 0.003 0.674 h 0.147 0.033 0.065 0.065 0.009 0.016 0.004 0.662 Producton Shares hq 0.339 0.016 0.024 0.005 0.034 0.030 0.014 0.538 lq 0.131 0.005 0.054 0.010 0.013 0.055 0.011 0.720 h 0.241 0.008 0.039 0.008 0.020 0.042 0.011 0.631 Intal Trade Levels (1,000 Metrc Tons) hq 1138-691 -169-49 247 511 288-600 lq -1385-266 -29-30 -69 766 192 1373 h 384-102 -105-233 48 106 29-127 21

Elastctes of Supply, Elastctes of Substtuton, Cost Shares, and Revenue Shares for the U.S. Beef Industry Cow-Calf Cattle Feeder Processng Elastcty of Supply for Other Inputs 0.67 0.67 0.67 Elastcty of Substtuton Between Other Inputs and Feedgrans 0.05 0.1 - Cost Shares Calves - 0.7 - Cattle - -.8 Feedgran 0.1 0.25 - Other Inputs 0.9 0.05.2 Revenue Shares Hgh-qualty Beef - - 0.64 Low-qualty Beef - - 0.23 Hdes - - 0.13 22