Determining the Market Potential of Livestock and Poultry in the Philippines: An Application of the Almost Ideal Demand System

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1 Determnng the Market Potental of Lvestock and Poultry n the Phlppnes: An Applcaton of the Almost Ideal Demand System Apolnares, R.J.V., Dgal, L.N., and J.M.P. Sarmento ABSTRACT Estmatng demand especally on agrcultural commodtes has been an nterest for many economsts to help draw approprate polces. Ths study was conducted to determne the demand of pork, beef, and chcken n the Phlppnes usng provncal cross-secton data across three tme-perods 1995, 2000, and 2009 usng the Almost Ideal Demand System. Ths study amed to provde a comprehensve analyss on the responsveness of the consumers to change n prces, prce of substtutes and the ncome level. Moreover, the study also determnes the market potental of the meat commodtes. AIDS was employed usng the Restrcted Ordnary Least Squares (ROLS) and Restrcted Seemngly Unrelated Regresson (RSUR) system methods observng the theoretcal restrctons of addngup, homogenety and Slutsky symmetry wth the ad of GRETL software. Contemporaneous correlaton of the error terms was present, thus, RSUR was preferred over ROLS. It was found out that pork s a necessty good wth market potental hgher compared to chcken and beef but decreases over tme. Chcken, on the other hand, has grown to become a necessty good next to Pork wth growng market potental. Lastly, beef wth ts hgh retal prces, are perceved by Flpnos as a luxury commodty wth decreasng market potental. Keywords: Demand Estmaton, Prce Elastcty, Expendture Elastcty, Restrcted Ordnary Least Squares, Restrcted Seemngly Unrelated Regresson 1

2 INTRODUCTION Generally, lvestock are mportant to humans because of ts uses. It serves as a food source, may vary from raw to processed meat, whch provdes proten for the body and helps refurnsh damage muscle tssues. Moreover, poultry products are very mportant to human s detary requrement snce t contans unsaturated fats that helps lower cholesterol n the body and a wde range of body buldng nutrents such as proten, calcum, vtamns E and A, and folate. Currently, the Phlppnes s mportng these commodtes to supply and sustan the level of demand of the Flpno people. Statstcs shows that Phlppne trend n mportng beef, carabeef and pork has been ncreasng over tme (BAS, 2010). Fgure 1. Supply Imports of Beef, Carabeef, and Pork n the Phlppnes ( ), n metrc tons. Thus, t s mportant to determne how dfferent factors affect the lvestock and poultry n the Phlppnes. The study explored the followng questons: (1) How responsve are the Flpno consumers on the changes of the prces of meat commodtes and ther substtutes? (2) How responsve are the Flpnos n ther meat consumpton to changes n ther ncome level? (3) What meat commodty exhbts hgh level of market potental? (4) What meat commodty shows a growng or decreasng trend of market potental? The study made use of secondary data provded by the Bureau of Agrcultural Statstcs. Data used where per capta consumpton n klogram and retal prces of meat commodtes across provnces n the perods of 1995, 2000, and

3 REVIEW OF LITERATURE There are two basc approaches n estmatng demand systems: (1) the use of utlty functons that satsfy specfc postulates of choces and (2) the use of arbtrary demand systems. Stone's (1954) model of Lnear Expendture System has been the poneer lterature of ths study but has ts lmtatons such as proportonalty of ncome and prce elastcty, and rulng out of complementary relatonshp among goods or the dsablty to create cross-prce elastcty. Ths led the way to the creaton of more flexble models such as the Rotterdam model of Thel (1965) and Translog model of Chrstensen et al. (1975). More recently, Deaton and Muellbauer (1980) proposed, a more flexble demand system - the Almost Ideal Demand System (AIDS). The model combnes the best theoretcal features of both Rotterdam and the Translog Model (Ingco, 1991). It makes use of a system approach wheren the demand s restrcted wth mpostons of dfferent axoms and laws n order to conform to the consumer theory. The model also gves the most robust estmates among demand models. AIDS has also been developed to enhance the model's dynamsm n explanng emprcal results accordng to the consumer theory. Several AIDS extensons have been developed, to name few; the nverse AIDS of Moschn and Vssa (1992) and the quadratc AIDS by Banks et al (1997). Some studes of AIDS nvolve assessng toursm demand (Durbarry, 2002), and energy sources (Labandera et al. 2005) among others. In the Phlppnes, AIDS was used n assessng the demand of agrcultural commodtes (Mutuc et al. 2006) and determnng market power (Dgal, 2009). A smlar study was conducted by Dumang (2009) reportng broler chcken as responsve to own prce whle beef and pork beng prce nelastc. Furthermore, pork and broler chcken were normal goods whle beef was an nferor tem. A dynamc modellng approach n studyng demand n the Phlppnes manly on lvestock and poultry s relatvely new. Moreover, many of the demand studes use tme seres data on the natonal level and very few uses a lesser aggregated data such as wthn the provncal level. Thus, ths study s an addton to the few exstng 3

4 AIDS lterature n the country whch may be of nterest to researchers and polcy makers. 4

5 MATERIALS AND METHODS AIDS shows a dynamc and more relable estmate n demand modellng because t conforms to the economc theory of demand. Usng the specfcaton of the lnear AIDS, demand represented by the budget share w of good s affected by ts prce, prce of the other substtutes, and the ncome level of the consumer. It s defned as follows: n X w = a + γ j ln p j + β ln + µ P (1) where w - s the share assocated wth the th good α, β - are the parameters to be estmated γ j - s the slope coeffcent parameter assocated wth the j th good n the th share equaton p j - s the prce on the j th good X - s the total expendture on the system of good gven by X n = = 1 p q (2) where q s the quantty demanded of the th good P - s the prce ndex defned as n n n 1 ln P = α + ln p + γ ln p ln p o j j = 1 2 = 1 = 1 (3) However, ths prce ndex makes the AIDS non-lnear n parameters n whch n some accounts makes t very dffcult to use n generatng estmates. To make t 5

6 lnear, the orgnal prce ndex s substtuted usng Stone s geometrc prce ndex defned as n = = 1 ln P w ln p (4) Any demand system as stated by Blancfort, Green, and Kng (1986) should satsfy the followng condtons to conform to the consumer theory: Addng-up, Engel Curve Aggregaton (5) n n n α = 1, β = 0, γ = 0 j = 1 = 1 = 1 Homogenety n j = 1 γ j = 0 (6) Slutsky s Symmetry Condton γ j = γ j (7) Expendture Elastcty s expressed n (8) whle elastcty formulas are presented n Table 1. : β η = + P P 1 w P (8) Table 1. Marshallan and Hcksan elastcty formulas. 6

7 An AIDS model was estmated usng two system methods - OLS and SUR usng the GRETL software. Lnear restrctons were mposed and contemporaneous correlaton of the error terms was tested. 7

8 RESULTS AND DISCUSSIONS Meat has become an mportant ngredent n Flpno dshes especally pork, beef, and chcken. For more than a decade, Flpno consumpton on these meat products have grown and become varable. Pork, beef and chcken are the major meat consumed n the country compared to the other lvestock and poultry that comprses less than a percent of the Flpno budget share. To have a better pcture on the movement of prces and consumpton of the meat commodtes, Table 2 shows ther average growth rate across three tme-perods. Table 2. Average Growth rate of Consumpton and Retal Prces of Meat Commodtes. Perod PORK (%) BEEF (%) CHICKEN (%) Consumpton prces Consumpton Prces consumpton prces % 6% 21% -5% 15% -4% % 3% -41% 9% 56% 0% % 10% -29% 4% 79% -4% From 1995 to 2000, beef showed the hghest rate of growth n consumpton wth 21%. Ths s justfed wth the reduced retal prce n the same year nterval of 5%. Ths behavour supports the fact that beef s very responsve n the changes of ts prces. From , chcken has a notceable growth n consumpton. The very sgnfcant growth n the consumpton of chcken can be explaned by the absence of growth n ts prce. However, pork, even n the ncrease of ts prces, s observed to have an ncrease n consumpton. Moreover, wth the ncrease n the prce of beef by 9%, ts consumpton has decreased to 41%, an evdence of prce responsveness. Lastly, accountng all the years consdered n ths study from , chcken have shown a hgh rate of growth n consumpton among the commodtes. Over tme, chcken has decreased n retal prces, whch can be the reason of ts hgh growth n consumpton. On the other hand, pork havng the hghest retal prce ncrease wth 10% stll shows a growth n consumpton of 10%, an ndcaton that pork has grown to be a necessty good to Flpno consumers. Beef, wth 4% ncrease n retal prces, responded wth a reducton n consumpton by 29%. 8

9 A model of AIDS under ROLS was generated usng the GRETL software and contemporaneous correlaton of error terms was checked. Zellner (1962) suggested that n analyzng cross-secton data, SUR estmaton s an alternatve tool for effcent analyss because t captures the correlaton n the error of cross-secton unts. Wth Decson Rule: Reject Ho f P-value s less than alpha 0.05 assumng Ho: wthout contemporaneous error whle Ha: wth contemporaneous error, results are shown n Table 3. It s shown that all the perods have p-values less than the alpha, whch means that the errors generated n the OLS are correlated and that the modellng s better be handled usng the system method of Seemngly Unrelated regresson (SUR). Table 3. Test for Contemporaneous Correlaton of Errors Perod Ch Squared P-value Decson Errors are all contemporaneously correlated Table 4 shows the values of the parameters n the generaton of the model of the three perods: 1995, 2000, and 2009 under RSUR system method. These models were generated usng GRETL and restrctons were mposed to follow the demand theory. As presented n Table 4 below, the coeffcents are all statstcally sgnfcant at 0.01 level of sgnfcance. Table 4. Restrcted SUR Estmates of the Parameters of the Three Tme Perods. Meat Commodty PORK BEEF CHICKEN Constant Term -0.95*** -0.47*** 2.42 NA γ 1 Pork Prce NA NA 0.37 NA γ 2 α Beef Prce NA 0.06*** 0.12*** γ 3 Chcken Prce 0.37 NA 0.12*** NA Expendture System Parameter 0.13*** 0.39*** -0.52*** α β Constant Term 0.59 NA NA 0.57*** γ 1 Pork Prce -0.14*** 0.01*** 0.13*** 9

10 2009 γ 2 Beef Prce 0.01*** 0.03 NA NA Chcken Prce 0.13*** NA -0.09*** Expendture System Parameter 0.07 NA 0.06 NA -0.13*** Constant Term 0.53 NA NA 0.61*** γ 1 γ 2 γ 3 Pork Prce 0.22 NA -0.21*** NA Beef Prce -0.21*** 0.05 NA 0.16 NA γ 3 α β Chcken Prce NA 0.16 NA NA β Expendture System Parameter 0.01 NA NA *** NA- parameters wth std. error equal to zero *Sgnfcant at 10%, **Sgnfcant at 5%, ***Sgnfcant 1% The parameters, all beng statstcally sgnfcant, were used to calculate the Marshallan (compensated) and Hcksan (uncompensated) own-prce, and crossprce elastcty of the three meat groups as well as the ncome elastcty. The values of the elastcty are shown n Table 5. Hcksan elastcty, also called pure elastcty was preferred snce t s devod of ncome effect and consders only the change n prces. Generally, all the meat groups have negatve sgn n own prce elastcty, mplyng, that the demand of the meat commodtes decreases as ther prce ncreases. The calculaton of own prce elastcty can also determne whether the meat commodtes are nferor, necessty, or luxury good. Table 5. Own Prce and Expendture elastcty of the Meat Commodtes. Own Meat Tme Own Prce Prce Interpretaton Type Perod Marshallan Hcksan Growng 1.25 Pork nelastcty; necessty good Growng 3.64 Beef elastcty; luxury good Inelastc but Chcken approachng 0.55 elastcty; necessty but 1.00 next to pork Exp. Elastcty Interpretaton Hgh market potental but decreasng Decreasng market potental Increasng market potental 10

11 It can be observed that pork has ncreasng movement n elastcty drawng closer to zero, hence, s approachng perfect nelastcty. Inelastc commodtes are less responsve to changes n prces. Despte ts ncreasng retal prces, the senstvty of consumers to ts changes n prces becomes lesser over tme. Apparently, ths shows that pork has become a necessty good, or t has grown mportant to Flpnos. Ths can be attrbuted to the constant ncrease n the supply of pork n the market that adds up to the securty and avalablty of ts supply. Beef, on the other hand, has growng elastcty. Ths mples that consumers are responsve to ncrease n prces. It s more of a luxury good. Ths can be attrbuted to ts hgh prce and lmted domestc supply compared to the other two commodtes. Lastly, t can be observed that chcken s responsveness to changes n prce has ncreased from 2000 to Chcken has nelastc nature but approachng elastcty. It s stll consdered a necessty good next to pork. In the producton, chcken s next to pork n the most produced meat commodty. The reason for ths s probably the preferences of the market. Flpnos have been more n to pork than that of the chcken. The ncreasng and flourshng ndustry of the fast-food chans n whch they mostly serve chcken recpes decreases the avalablty of chcken n the wet market. Another reason for the lesser avalablty of chcken n the market s that chcken s less vable and proftable f produced n small numbers as backyard farmng relatve to pork. In the Phlppnes, few large producers domnate the chcken ndustry partcularly broler producton. Expendture elastcty measures the responsveness of demand to changes n ncome of the populaton. Expendture elastcty s expected to have a postve sgn because as ncome ncreases, the propensty of a consumer to buy more of the good ncreases. Results, on the same table, shows that the expendture elastcty are generally postve. Expendture elastcty can also be use as a measure for market potental. Furthermore, the ncome level of the populaton s expected to ncrease over tme; hence, very ncome elastc meat commodtes are more lkely to have hgher market potental. The ncrease n ncome level would result to the ncrease n the quantty demanded of the good. 11

12 Results have shown that, hstorcally, pork has the largest market potental but dmnshes over tme whle chcken has ncreasng market potental. Beef has the least market potental at present. It s mportant to note that, chcken s the only meat commodty that has ncreasng market potental, and both pork and beef has decreasng market potental. Ths could be prmarly due to the flourshng ndustry of fast-food chans n the metropoltan and urban centers. SUMMARY AND CONCLUSION Lvestock and poultry are mportant food commodtes n the Phlppnes. Estmatng ther demand has long been an nterest of economsts. In ths study, the demand of the prmary meat commodtes pork, beef and chcken has been estmated usng the Almost Ideal Demand System (AIDS) of Deaton and Muellbauer (1980), an approach, whch s relatvely more dynamc n estmatng demand. The data used n the study were the per capta consumpton and retal prces 52 provnces across three tme-perods provded by BAS. The perods nclude 1995, 2000, Two system methods of smultaneous equatons were used to dentfy the best model for lvestock and poultry, Restrcted Ordnary Least Squares (ROLS) and Restrcted Seemngly Unrelated Regresson (RSUR). Imposton of restrctons of homogenety, addng-up, and slutsky symmetry to conform on economc theory was done successfully. The ROLS was not only used for comparson but to check f there s contemporaneous correlaton of resduals. Ths s an mportant underlyng assumpton n SUR to ensure effcency n the estmaton. Results have shown that the RSUR s more effcent than ROLS. Wth the estmaton of a better model, calculated elastcty are nferred to be relatvely relable. In estmatng own-prce and cross-prce elastcty, the Marshallan and Hcksan elastctes were calculated. Hcksan elastcty, also called pure elastcty was preferred snce t s devod of ncome effect and consders only the change n prces. There was also a separate calculaton n the estmaton of ncome elastcty. Results have shown that the Flpnos consstently treat pork as necessty, ts ncreasng retal prces do not have sgnfcant effect on the level of consumpton of 12

13 Flpnos. Moreover, pork consstently has the hghest market potental among beef and chcken but decreasng over tme. On the other hand, chcken showed a growng market potental and ts elastctes have shown that chcken s consdered a necessty good next to pork. On the contrary, because of the hgh retal prce and lmted domestc supply, beef consdered luxury good s the most elastc n the changes n ts prces and has the least and decreasng market potental. 13

14 RECOMMENDATION Snce pork has become more nelastc across tme ths means that pork has become mportant to Flpno and the demand tends to become steader even n the changes of prces, the government should provde mechansms as to how to augment supply, and ncrease level of sustanablty of pork n the country. Furthermore, pork s comprsed of small-scale hog rasers, whch practce backyard farmng. Hence, the government should provde support measures to these farmers n order for them to become more compettve. Support systems may nclude mprovement of nfrastructures such as farm to market road; accessblty of market nformaton to the producers and potental producers, consoldators, and even buyers; and techncal support, especally on the producton and marketng sde of the hog rasng ndustry. Moreover, snce chcken emerged to be a necessty good next to pork, t s expected that the demand for chcken wll contnue to ncrease. In broler producton where the ndustry s domnated wth bg enterprses, measures to lessen the barrers for new entrants that would venture n to chcken growng should be desgned. These measures wll prevent formaton of monopoly or olgopolstc knd of market that may compromse the welfare of the Flpno due to the possble ncrease n ts retal prces. The growng market potentalty of the poultry ndustry s a great opportunty for agrcultural enterprses to venture on ths product. Early determnaton of market potentals could help n establshng busness ahead of others and stablzng t before the market becomes very compettve. Beef wth a relatvely lower market potental coupled wth ncreasng level of luxurance may result to the government resortng to dependence on mportaton of the good. The relance of the country to mportaton of beef should push the government to desgn measures to protect ts people from possble harmful contamnaton of dseases of the mported meat commodty. For the academe, currently there already exsts AIDS models that have been modfed and mproved to capture a more dynamc and realstc phenomenon especally on factors that affect demand other than prces and ncome. Hence, the 14

15 researcher recommends usng a more dynamc specfcaton such as other complex structures of AIDS (e.g. MAIDS, QuAIDS, Inverse AIDS etc). 15

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