A Source Differentiated Analysis of U.S. Meat Demand. Joao E. Mutondo and Shida Rastegari Henneberry

Transcription

1 A Source Dfferentated Analyss of U.S. Meat Demand By Joao E. Mutondo and Shda Rastegar Henneberry Joao E. Mutondo s a postdoctoral research assocate n the Department of Agrcultural Economcs, Oklahoma State Unversty and lecturer n the Department of Crop Producton and Protecton, Eduardo Mondlane Unversty, Maputo, Mozambque. Shda Rastegar Henneberry s a professor n the Department of Agrcultural Economcs, Oklahoma State Unversty. Ths study was partally funded by the Hatch Project No of the Oklahoma State Unversty Agrcultural Experment Staton. An earler draft of ths paper was presented at the 2006 Western Agrcultural Economcs meetng n Anchorage, Alaska. The authors wsh to acknowledge the useful and helpful comments and suggestons from the JARE co-edtor George Davs and two anonymous revewers. Contact Author: Shda Henneberry Department of Agrcultural Economcs, 308 Agrcultural Hall Oklahoma State Unversty Stllwater, OK Tel: , Fax: E-mal: srh@okstate.edu

2 A Source Dfferentated Analyss of U.S. Meat Demand Abstract The Rotterdam model s used to estmate U.S. source dfferentated meat demand. Prce and expendture elastctes ndcate that U.S. gran-fed beef and U.S. pork have a compettve advantage n the U.S. beef and pork markets, respectvely. Expendture elastctes ndcate that beef from Canada has the most to gan from an expanson n U.S. meat expendtures, followed by ROW pork, U.S. gran-fed beef, and U.S. poultry. BSE outbreaks n Canada and n the U.S. are shown to have small mpacts on meat demand, whle seasonalty s shown to have a sgnfcant effect n determnng U.S. meat consumpton patterns. Key words: BSE, Rotterdam, seasonalty, source dfferentaton, U.S. meat demand 1

3 A Source Dfferentated Analyss of U.S. Meat Demand The U.S. s one of the major mporters n the global meat markets. In 2002, the U.S. was the largest mporter of beef accountng for 29.3% of the world volume of beef mports; whle t was the thrd largest mporter of pork, accountng for 12.7% of the world volume of pork mports (USDA-FAS, 2005). Moreover, supply and demand forces have made the U.S. meat market hghly segmented. For example, U.S. beef exports are manly composed of gran-fed, hgh-value cuts; whle ts mports are prmary grass-fed, lower value beef products for processng, manly as ground beef (USDA-ERS, 2007). In the pork market, the U.S. mports from the rest of the world (ROW) (manly Denmark) are mostly pork spare rbs, whch are preferred by the U.S. consumers (Leuck, 2001; USDA-ERS, 2006c). U.S. meat mports are expected to grow even further n the future wth the ncrease n market access resultng from blateral and multlateral trade agreements, such as the 2005 U.S. and Australa Free Trade Agreement and the ongong Agreement on the Free Trade Area of the Amercas (FTAA). The ncrease n meat mports by the U.S. s expected to brng about an ncrease n competton between U.S. produced meats and U.S. mported meats from other countres. Moreover, the recent outbreaks of anmal dsease have caused more varablty n demand for meats. For example, the global demand for U.S. beef sgnfcantly decreased durng the 2003 outbreak of Bovne Spongform Encephalopathy (BSE) n the U.S. Gven the recent dsease outbreaks and ncreased competton among meats from dfferent sources, recognzng source of orgn s mportant when analyzng the demand for meats n the U.S. Wth the rapd globalzaton of the U.S. domestc meat sector, the U.S. market has become ncreasngly complex and fragmented. Understandng the demand for source dfferentated meats n the U.S. and the factors shapng t would help n understandng ths 2

4 complex consumng market. Ths knowledge s of mportance to the U.S. meat producers, marketers, and polcy makers n developng effectve marketng programs amed at expandng sales and market shares. Despte the mportance of the topc, most of the studes addressng the compettveness (compettve advantage) 1 of U.S. produced meats have focused on the U.S. export markets (mostly on Japan) and not on the U.S. as a meat mporter. Moreover, most of the prevous studes on U.S. meat demand have focused on aggregate (non-source dfferentated) meat demand. Whle some have estmated the demand relatonshps between varous beef cuts, such as table cuts and ground beef (Brester and Wohlgenant, 1991; Eales and Unnevehr, 1988) or for Unted States Department of Agrculture (USDA) graded beef (Lusk et al., 2001), none have dfferentated meats by ther source of orgn, except studes by Jones, Hahn, and Davs (2004) and Muhammad, Jones, and Hahn (2004) on lamb and mutton. These aggregate (non-source dfferentated) demand studes mplctly assume that meat types (beef, pork, and poultry) from dfferent sources are homogeneous wth sngle prces. However, gnorng source of orgn, whch mght be vewed as an ntrnsc meat qualty attrbute; mght lead to based elastcty estmates that mght not reflect the true demand responses. As an example, whle substtutablty was found between U.S. produced and mported tobacco, usng a model that dd not account for the aggregaton bas; the relatonshp changed to complementary wth a model that dd account for the aggregaton bas (Davs, 1997). Hence, the prmary objectve of ths study s to estmate the U.S. demand for source dfferentated meats, ncludng meats that are produced n the U.S. and those that are mported. More specfcally, the objectve of ths study s to analyze the mpacts of economc factors (meat prces and expendtures) and non-economc factors (BSE and seasonalty) on the U.S. demand 3

5 for source dfferentated meats. Source dfferentated meat categores studed here nclude: U.S. gran-fed beef, U.S. grass-fed beef, U.S. pork, U.S. poultry, Australan beef, New Zealand beef, Canadan beef, beef from the ROW 2, Canadan pork, and pork from the ROW. Ths study s ntended to gve a better understandng of U.S. meat buyers preferences for meats from varous sources, ncludng U.S. produced meats, whle takng nto account the 2003 BSE outbreaks n North Amerca plus the effects of seasonalty. The U.S. source dfferentated meat demand elastctes obtaned n ths study may be used n the analyss of the economc mpacts of varous polces and marketng strateges on U.S. meat producers and marketers. Examples are the analyss of the much debated country-of-orgn labelng mandate or the anmal and poultry dsease outbreaks and the resultng polcy and regulaton changes. The general and partal equlbrum models, whch are used n evaluatng the welfare mpacts of these polces, rely on accurate measures of prce and expendture demand elastctes. A hstorcal overvew of U.S. meat trade polces s dscussed n the frst secton of ths artcle. Next, a model of the U.S. meat demand s presented, followed by a dscusson of the results, then the summary, and concluson. An Overvew of U.S. Meat Trade Polces The U.S. government restrcted the mportaton of meats through a quota system under the 1979 Meat Import Law (MIL). The law requred the U.S. presdent to mpose quotas on mports of beef, veal, mutton, and goat meat when the aggregate annual quantty suppled of such meats had exceeded a prescrbed trgger level (USDHS-CBP, 2005). The quota restrcton under MIL was allocated to varous supplyng countres on the bass of ther hstorc shares n the U.S. domestc market. However, the U.S. meat mport quotas establshed under MIL were elmnated subsequent to the blateral and multlateral trade agreements between the U.S. and other 4

6 countres, ncludng the Canada-U.S. Free Trade Agreement (CFTA), the North Amercan Free Trade Agreement (NAFTA), and the Uruguay Round Agreement on Agrculture (URAA). A summary of the U.S. meat trade lberalzaton s presented n table 1. The U.S. mport tarffs for beef, pork, and poultry from Canada and Mexco were totally elmnated n 1993 by CFTA and n 1994 by NAFTA, respectvely. Under the URAA, the U.S. replaced the mport quota system establshed under MIL wth tarff-rate quotas (TRQs) for U.S. beef mports from non-nafta countres (table1). Moreover, specal safeguard provsons, whch am to lmt mport surges by allowng the U.S. to rase tarffs f the volume of mports exceeds a certan amount or f the mport prces fall by a certan percentage of a base prce, are n effect for U.S. beef mports (Obara, Dyck, and Stout, 2003). Although sgnfcant progress has been made towards lberalzaton of the U.S. meat mport market, santary and phytosantary (SPS) measures are currently prevalent and consttute a major form of restrctng meat mports. The U.S. banned beef mports from Canada n May 2003 when BSE was detected there. Ths ban contnued untl August 2003, when the U.S. lfted the ban of Canadan boneless beef from cattle less than 30 months of age as cattle of ths age are consdered as havng lttle rsk of transmttng BSE (Hahn et al., 2005). Furthermore, fresh meats orgnatng from certan countres such as Mexco and South Amercan countres have not been allowed to enter the U.S. due to the prevalence of Classcal Swne Fever, Exotc Newcastle (END), Avan Influenza (AI), and foot-and-mouth dsease (FMD) n those areas (Hahn et al., 2005; Leuck, 2001). A Model of the U.S. Source Dfferentated Meat Demand Although nformaton about source of orgn of dfferent meat types s avalable at the wholesale level, U.S. meat consumers generally are not gven ths nformaton at the tme of purchase. 5

7 Therefore, the approprate theory to derve U.S. source dfferentated meat demand seems to be one based on producton theory, wth the retaler proft maxmzaton or cost mnmzaton as an objectve, rather than one based on consumer theory. Usng a two-stage budgetng procedure (a proft maxmzaton framework n the frst stage and a cost mnmzaton framework n the second stage), Davs and Jensen (1994) derved a source dfferentated demand model of the form: (1) q = q p, X ) where, n ths study, h ( h g g q s the volume demanded of meat from source h; p h g s the vector of prces of source dfferentated meats n meat group g; and meat group g. X g represents the total expendture on Accordng to Davs and Jensen (1994), the demand model represented n equaton (1) s a condtonal Marshallan constant cost nput demand functon that can be derved from the second stage of a two-stage proft maxmzaton problem. As they show and dscuss, ths second stage demand functon s observatonally equvalent to the second stage demand functon comng from a two-stage utlty maxmzaton problem. The Emprcal Model The almost deal demand system (AIDS) and the Rotterdam model have been frequently used n the lterature n mport demand estmatons. In ths study, the absolute prce verson of the Rotterdam model s used to estmate source dfferentated meat demands n the U.S. Several past studes have used the Rotterdam model to estmate demand for source dfferentated goods (Weatherspoon and Seale Jr., 1995; and Seale Jr., Sparks, and Buxton, 1992). Besdes beng theoretcally reasonable for estmatng mport demand equatons, the Rotterdam model s advantageous because t can be estmated usng lnear estmaton procedures 6

8 and the theoretcal restrctons can be mposed and tested easly. Furthermore, t also allows for a theoretcally correct specfcaton of exogenous demand shfters wth and wthout mposng functonal restrctons on shft varables (Marsh, Schroeder, and Mntert, 2004). Accordng to Seale Jr., Sparks, and Buxton (1992) and Marsh, Schroeder, and Mntert (2004), the absolute prce verson of the source dfferentated Rotterdam model wth ndcator varable demand shfters s specfed as the followng: * (2) w d logq = + Z + D + d log( Q) d log( p ) h h α 3 2 α l α m β + l= 1 m= 1 h0 hl hm h h k k where subscrpts and j ndcate goods (beef, pork, and poultry), h and k ndcate supply sources (country of orgn), l ndcates the number of seasonalty ndcator varables, and m ndcates the number of the BSE ndcator varables. * w h s the budget share of good from source h, here * defned as: w = ( w + ) / 2 ht w ht ; q ht 1 s the quantty demanded of meat from source h; h quarterly ndcator varable for seasonalty; j k γ j j Z l s a D m represents the U.S. and Canadan BSE outbreak ndcator varables; Q s the dvsa volume ndex, here defned as d logq= w d(log q ) ; h h h p j k s the prce of meat j from source k (wth j ncludng h and k ncludng h), and α h, α 0, hl α hm, β, and h γ h j are parameters to be estmated; and k d log( x ) = dx / x. General demand restrctons of homogenety, symmetry, and addng-up, whch are derved from economc theory, are mposed usng parameter constrants as shown n equaton (3), (4), and (5) respectvely. j h (3) γ = 0 h jk (4) γ h j = γ k jkh 7

9 (5) α 0 ; α = 0 ; α = 0 ; β = 1; γ = 0 h = h0 h hl h hm h h j k The condtonal Cournot (uncompensated) own-prce and cross-prce elastctes, the condtonal Slutsky (compensated) own-prce and cross-prce elastctes, and expendture elastcty are calculated at the mean level of expendture shares (Seale, Jr., Sparks, and Buxton, 1992). The statstcal sgnfcance of elastctes s determned by the method offered by Mdafr and Brorsen (1993). 3 Statstcal tests are performed n the Rotterdam model (equaton 2). Specfcally, the assumpton of normalty of the error terms, jont condtonal mean (no autocorrelaton, parameter stablty, and lnear functonal form), and jont condtonal varance (statc and dynamc homoskedastcty, and varance stablty) are tested usng the system msspecfcaton tests as suggested by McGurk et al. (1995). Furthermore, varous hypotheses regardng the U.S. meat demand model, ncludng block separablty and product aggregaton are tested for the U.S. source dfferentated Rotterdam model (equaton 2). Block Separablty Test Ths study tests block separablty wthn the meat groups. The three dfferent blocks are beef, pork, and poultry, wth each block (for beef and pork snce not much poultry s mported n the U.S.) composed of meats from dfferent sources. The block separablty test s used to test f meat buyers preferences wthn each block can be explaned ndependent of quanttes of meats n the other blocks. More specfcally, for parsmonous estmaton t s useful to know whether each block of meat (beef from dfferent sources) could be studed separately from meats n other blocks (poultry and pork from dfferent sources) wthout ncorporatng ther prces (not ncludng the prces of pork and poultry n the beef equatons). Ths study uses quas-separablty of the cost functon to test for separablty between blocks (for the test of quas-separablty of the cost j h k 8

10 functon, see Hayes, Wahl, and Wllams, 1990, p. 561; Yang and Koo, 1994, p. 400). The null hypothess for ths test s that each block of meats s separable from all other meat blocks. Followng Hayes, Wahl, and Wllams (1990), and Yang and Koo (1994), the restrcton to be tested s gven as follows: (6) γ j = w w j γ j h k where γ h j s the cross-prce parameter between meat from source h and meat j from source k. k For example, n testng the null hypothess that the demand for U.S. produced gran-fed beef s separable from the demand for U.S. produced pork, γ h j s the cross-prce parameter between k U.S. produced gran-fed beef and U.S. produced pork. h k w h s the mean of budget shares of meat from source h wthn the meat group (the mean of budget shares of U.S. produced gran-fed beef wthn the beef group for the above example); w j k s the mean of budget shares of meat j from source k wthn the meat group j (the mean of budget shares of U.S. produced pork wthn the pork group for the above example); andγ j s the cross-prce parameter between groups and j, estmated from an aggregate Rotterdam model (the cross-prce parameter between beef and pork under the non-source dfferentated Rotterdam model for the above example). Product Aggregaton Test The source dfferentated model used n ths study s based on the assumpton that meat buyers place dfferent values on the same meat type orgnatng from dfferent sources. However, ths assumpton needs to be tested. The product aggregaton test s used to test the restrctons that the parameters of the source dfferentated Rotterdam model are the same as the parameters of the non-source dfferentated Rotterdam model (aggregate model). The null hypothess for ths test s that each knd of meat can be aggregated (not to be separated by supply source) and estmated 9

11 usng a non-source dfferentated Rotterdam model. Non-source dfferentaton (aggregaton) reduces the number of parameters to be estmated and therefore ncreases the degrees of freedom, compared to the non-aggregated models. Followng Yang and Koo (1994), for testng product aggregaton (the model that does not dfferentate meats by source of orgn) can be done by testng the followng restrctons. (7) α =α h, h γ j h k =γ j h, k, j, β h =β h. where α, h γ, andβ are the estmated ntercept, own and cross-prce parameters, and h jk h expendture parameters of the source dfferentated Rotterdam model presented n equaton (2); α, γ j, and β are the estmated ntercept, own and cross-prce parameters, and expendture parameters of the non-source dfferentated Rotterdam model (aggregate model). For example, n testng the null hypothess that beef can be aggregated (non source dfferentated), α, γ h h j, k andβ are the estmated ntercept, own and cross-prce parameters, and expendture parameters h of the source dfferentated beef products (U.S. grass-fed beef, U.S. gran-fed beef, Canadan beef, Australan beef, New Zealand beef, and ROW beef) from equaton (2) and α, γ j, and are the estmated ntercept, own and cross-prce parameters, and expendture parameters of aggregate beef (not dfferentated by source of supply) from the non-source dfferentated Rotterdam model. The Wald F-test s used to test the hypothess of product aggregaton over dfferent supply sources. Ths test s conducted by mposng restrctons related to the assumpton of product aggregaton represented n equaton (7) above on the parameters of the source β 10

12 dfferentated model (equaton 2). If the Wald F-test results ndcate the rejecton of the null hypotheses (equaton 7), t can be concluded that meat buyers place dfferent values on the same meat type orgnatng from dfferent sources. Hence, U.S. meat demand should be estmated usng source dfferentated models. Data and Estmaton Procedures Quarterly data from 1995 (quarter I) to 2005 (quarter IV) are used to estmate the parameters of the U.S. source dfferentated meat demand. For ths study, 1995 s chosen for the begnnng of data because the major U.S. meat mport barrer (mport quota system) was elmnated n Ths s also the year that the URAA began to be mplemented. The meats studed here are beef, pork, and poultry. Beef from the U.S. s dfferentated by qualty (gran-fed and grass-fed), and beef and pork are dfferentated based on the orgn of supply (source dfferentated). 4 A country s dentfed as a supply source f mports from that source consttuted at least 10% of the total mports of the selected meat. All other sources that suppled less than 10% of the U.S. total mports of the selected meat are aggregated as the ROW. Usng ths crteron, U.S. meat mports are categorzed as: beef from Australa, beef from Canada, beef from New Zealand, beef from the ROW, pork from Canada, and pork from the ROW. Poultry s not dfferentated by supply source, snce more than 95% of U.S. poultry consumpton s suppled by U.S. producers. Because retal prces for source dfferentated meats n the U.S. are not avalable, untvalue mport prces are used to measure market prces for mported meats. 5 Source dfferentated mport prces (unt values) of ndvdual meats are calculated by dvdng the total mport values by the total mport quanttes. Data on mport values (n thousand of U.S. dollars) and quanttes (n metrc tons) are from USDA-FAS, Data on U.S. domestc meats at the wholesale level are from varous sources. For U.S. produced beef and pork, quantty and prce data are from 11

13 USDA-ERS, 2006a, and data for poultry are from USDA-ERS, 2006b. The quantty of gran-fed beef s calculated as the sum of the quanttes demanded of beef from steers and hefers. The quantty demanded of grass-fed beef s calculated as the sum of the quantty demanded of beef from cows and bulls. Slaughter steer prce of choce 2-4 Nebraska Drect s used as the prce of gran-fed beef. Slaughter cutter cow prce s used for the prce of grass-fed beef. Seasonal and BSE ndcator varables are ncluded n the Rotterdam model to measure the mpact of seasonalty and BSE dsease outbreaks on the U.S. meat demand. Three seasonal quarterly varables are ncluded for the frst (January through March), thrd (July through September), and fourth (October through December) quarters. Two BSE dummy varables, one accountng for the BSE outbreak n Canada and another accountng for the BSE outbreak n the U.S. are ncluded n the model. The BSE ndcator varables are ntended to reflect the perod durng whch the BSE scare n the U.S. would have been most lkely to occur. It s assumed here that f the BSE outbreak would have had any mpact on the U.S. meat demand, t would have been durng the perod when NAFTA countres banned beef mports from the North Amercan nfected countres. Therefore, the BSE ndcator varables take the value of one durng the beef mport ban perods n other NAFTA countres. On the other hand, the lftng of the mport ban by the NAFTA countres may have sgnaled the respectve governments confdence regardng the safety of beef to the U.S. meat buyers. We assume that the U.S. meat buyers may not have necessarly reacted n the same way to bans by (not nearby) countres n other contnents, such as Japan and S. Korea. More specfcally; U.S. and Japanese consumers are reported to react dfferently n terms of ther meat demand to non-prce and non-ncome concerns, ncludng food safety ssues (Tonsor and Marsh, 2007). Hence, the perod durng whch Japan and South Korea 12

14 banned U.S. and Canadan beef s not consdered n constructng the BSE dummy varables used n the U.S. source dfferentated meat demand. Although meda coverage ndces have been used to model demand response to food scares (Pggott and Marsh 2004), ths study uses ndcator varables. Emprcal applcatons of meda coverage ndces n modelng demand response to food scares have some mportant lmtatons. These shortcomngs may be a result of the subjectve nature of consumers dscrmnaton between postve and negatve nformaton; deprecaton of the nformaton effect due to the memory dscount effect; and the dfferng effect of confrmatory news from the frst news (Mazzocch, 2006). Furthermore, collectng and analyzng adequate meda coverage nformaton can be a tme-consumng and potentally an expensve operaton. Hence, snce the perod when NAFTA countres banned beef mports from the North Amercan nfected countres s known, ths study uses the BSE ndcator varables. The U.S. mport ban on Canadan beef began n May 2003 and lasted through August 2003 when the ban of Canadan beef from cattle younger than 30 months of age was lfted n NAFTA countres (Hahn et al., 2005). Consequently, the Canadan BSE outbreak ndcator varable takes the values of one for the second and the thrd quarters of the year 2003 and zero at other tmes. Smlarly, the ban on U.S. beef from NAFTA countres began n December 2003 and lasted through March 2004, when NAFTA countres lfted the ban of U.S. beef from cattle younger than 30 months of age (Hahn et al., 2005). Therefore, the U.S. BSE outbreak ndcator varable takes the values of one for the fourth quarter of the year 2003 and the frst quarter of the year 2004 and zero at other tmes. Anmal dsease outbreaks n Mexco and n South Amercan countres such as Brazl, Argentna, and Uruguay have been frequently documented. However, anmal dsease outbreak 13

15 varables for these countres are not ncluded n ths study. They are omtted because none of these countres s a separate source of meat supply n the model used n ths study (all are ncluded n the ROW). Addtonally, Hahn et al. (2005) report that the majorty of U.S. mports from these countres are composed of hghly processed or cooked meats that are sealed n artght contaners. Because of ths fact, these meats may be perceved as safe. Therefore, anmal dsease outbreaks n these countres mght not sgnfcantly mpact the U.S. meat demand. The teratve seemngly unrelated regresson (ITSUR) estmaton method s used to estmate the parameters of the Rotterdam model (equaton 2). 6 Due to the addng-up condton, the contemporaneous covarance matrx s sngular. Therefore, one equaton (pork from the ROW equaton) s dropped from the system for estmaton purposes. If the maxmum lkelhood estmaton method s used, the resultng estmates are nvarant to whch equaton s dropped. Because the ITSUR estmatons for the complete demand systems are equvalent to the maxmum lkelhood estmates, the parameters estmated n ths study are nvarant to whch equaton s dropped. The theoretcal restrctons of symmetry, addng up, and homogenety are mposed to make the model consstent wth economc theory. Results Pror to the estmaton of the parameters of the U.S. source dfferentated Rotterdam model (equaton 2); the approprateness of the model was tested usng the system msspecfcaton tests as descrbed n the Model secton. Results of the system msspecfcaton tests are presented n table 2. Test results ndcate the falure to reject the null hypothess of normalty of the error terms at the 1% sgnfcance level. Results of the Jont condtonal mean and jont condtonal varance tests ndcate the rejecton of the null hypotheses that the jont condtonal mean and jont condtonal varance are properly specfed at the 1% sgnfcance level. Ths mght be due 14

16 to the autocorrelaton of the error terms whch test results confrm n ths study (table 2). Dynamcs are expected to be partcularly mportant n the analyss of the U.S. meat demand system as meat buyers are unlkely to respond fully to changes n prce, ncome, or other determnants of demand n the short run. Psychologcal factors (consumpton habts), nventory adjustments, or nsttutonal factors have been gven as reasons for the lagged consumer response (Kesavan et al., 1993; Henneberry and Hwang, 2007). Therefore, to allow for the lagged effects, the fnal model s estmated usng teratve seemngly unrelated regresson, corrected for autocorrelaton (Berndt and Savn, 1975; and Pggott and Marsh, 2004). Block separablty and product aggregaton tests were also conducted by mposng the restrctons related to block separablty and product aggregaton assumptons on the fnal model (corrected for autocorrelaton), followng the descrpton gven n the Model secton for these tests. Test results of the null hypotheses of block separablty among the ncluded meats (table 2) ndcate the rejecton of the null hypotheses at the 1% sgnfcance level. Therefore, test results support estmatng the U.S. source dfferentated Rotterdam model for meats, ncludng all three types of meats. Furthermore, test results presented n table 2 ndcate that the null hypothess of non-source dfferentaton (product aggregaton) for all meats s rejected at the 1% sgnfcance level. Hence, the results support estmatng U.S. demand for meats, usng a source dfferentated model. Calculated Marshallan (uncompensated cournot) and Hcksan (compensated slutsky) demand elastctes wth ther standard errors n parenthess are presented n tables 3 and 4, respectvely. Estmated parameters of seasonal and BSE ndcator varables are also presented n table 3. Of mportance to note s that the results dscussed n the followng sectons represent 15

17 U.S. demand for domestcally produced and mported meats, estmated usng wholesale level data. Prce and Expendture Elastctes Consstent wth economc theory, all source dfferentated own-prce elastctes are negatve and statstcally sgnfcant (tables 3 and 4). In the beef market, most own-prce elastctes fall wthn the range of to Ths range s consstent wth publshed own-prce elastctes for beef reported by the U.S. Envronmental Protecton Agency (USEPA). The estmated own-prce elastctes of mported beef from Australa and New Zealand are greater than 2.6 n absolute value (tables 3 and 4). These results suggest that mported beef from major grass-fed beef supplers are senstve to own-prce n the U.S. domestc market. These results support the fndngs from prevous studes that the perceved lower qualty meats (such as grass-fed beef mported from Australa and New Zealand) have hgher own-prce elastctes, compared to perceved hgher-qualty meats (gran-fed beef from the U.S. and Canada) (Lusk et al, 2001; Brester and Wohlgenant, 1991; and Eales and Unnevehr, 1988). Smlar to beef, n the pork and poultry markets, most of the calculated own-prce elastctes are less than one and fall wthn the range of to for pork and to for poultry, as reported by USEPA. The compensated (Hcksan) cross-prce elastctes (table 4) ndcate net substtutablty or net complementary relatonshps among products from dfferent sources. Whle a sgnfcant postve Hcksan cross-prce elastcty between meats from dfferent supplers may ndcate substtutablty, a sgnfcant negatve cross-prce elastcty may ndcate complementary relatonshp. Justfyng a complementary relatonshp between meats s dffcult snce all meats are sources of anmal proten and therefore are expected to substtute for one another n human consumpton. 16

18 For the U.S. beef market, the results show that U.S. gran-fed beef s a net substtute to beef from varous sources, especally wth U.S. grass-fed beef and mported beef from Canada and New Zealand (frst row, table 4). The substtutablty between U.S. gran-fed beef wth U.S. grass-fed beef and beef from New Zealand s an unexpected result because of the dfference n qualty between U.S. gran-fed beef wth these beef products. However, the substtutablty relatonshp between U.S. gran-fed beef and Canadan beef s consstent wth pror expectatons snce both beef products are produced from gran-fed cattle of smlar qualty. Moreover, the magntude and statstcal sgnfcance of cross-prce elastctes ndcate that whle the demand for U.S. gran-fed beef s not strongly mpacted by the prces of mported beef and U.S. grass-fed beef (frst column, table 4), the prce of U.S. gran-fed beef has a more notceable mpact on the demand for other beef products (frst row, table 4). Regardng other supplers, beef from New Zealand and Australa show to be substtutes. The substtutablty between the mported beef from Australa and New Zealand s consstent wth pror expectatons, snce both countres supply beef from grass-fed cattle to the U.S. beef market. Substtutablty also exsts between Canadan beef and ROW beef. The U.S. beef mports from the ROW (manly South Amercan countres) are manly composed of further processed, grass-fed beef products due to the prevalence of anmal dseases (manly foot-and-mouth dsease) n those countres. Hence, the substtutablty between Canadan beef and ROW beef mght be consstent wth prevous expectatons because the further processed (value added) beef from the ROW mght be perceved by U.S. meat buyers as havng a smlar value compared to gran-fed Canadan beef. However, Canadan beef shows a statstcally sgnfcant complementary relatonshp wth U.S. grass-fed and New Zealand beef. Agan, these results are consstent wth pror expectatons snce the U.S. mports of beef from Canada are manly 17

19 composed of hgh-qualty beef cuts graded as choce and select from gran-fed cattle. The choce and select qualty beef are not expected to compete wth U.S. grass-fed beef manly from cows and bulls and New Zealand grass-fed beef (used mostly for hamburger meat). Regardng the pork market, the estmated cross-prce elastctes show that U.S. pork competes wth pork from Canada. However, ROW pork shows a complementary relatonshp wth U.S. and Canadan pork. The lack of substtutablty mght be due to dfferences n meat cuts and products between pork from North Amerca (the U.S. and Canada) and pork from the ROW. Whle Canada and the U.S. produce smlar qualty pork products, manly composed of whole pork carcasses; the U.S. mports from the ROW are manly composed of spare rbs and hams from Denmark. Regardng cross-meat products relatonshps (e.g., the relatonshp between source dfferentated beef and source dfferentated pork), the results show a substtuton relatonshp between U.S. pork on one hand and U.S. gran-fed, U.S. grass-fed beef, and Canadan beef on the other hand. Moreover, Canadan pork shows a substtute relatonshp wth beef from Canada, Australa, and the ROW. There s no clear relatonshp between U.S. poultry and source dfferentated beef and pork products snce the majorty of cross-prce elastctes are not statstcally sgnfcant. In the Summary and Conclusons secton, the dscusson wll address the mplcatons of these relatonshps. Regardng expendture elastctes n the beef market; all expendture elastctes are postve (table 3). Moreover, the expendture elastcty estmates of U.S. gran-fed beef and Canadan beef (whch s manly composed of gran-fed beef) are greater than one. These estmates beng greater than one are consstent wth U.S. consumers preferrng gran-fed beef from the U.S. and Canada, over grass-fed beef mported from Australa and New Zealand and 18

20 U.S. grass-fed beef. Moreover, the estmated expendture elastcty of Canadan beef (2.451) s hgher than that of U.S. gran-fed beef (1.258). Consequently, a Wald-F test was conducted to test the hypothess of the two elastctes beng equal. Test results (p-value = 0.744) faled to reject the null hypothess that the two elastctes are equal. Ths falure to reject the equalty of the two elastctes s at least partally due to the mprecson n estmatng the Canadan expendture elastcty, whch s not sgnfcantly dfferent from zero. Regardng the pork market, all expendture elastctes are postve; however, only the expendture elastcty of U.S. pork s statstcally sgnfcant. The U.S. demand for ROW pork s expendture elastc (1.391). Ths result s consstent wth the general preferences for pork n the U.S. snce U.S. pork mports from the ROW are manly composed of hgh qualty spare rbs and hams from Denmark, whch are preferred by U.S. consumers (USDA-ERS, 2006c). In the poultry market, the expendture elastcty of U.S. poultry s postve, greater than one, and statstcally sgnfcant. Effects of Seasonalty and BSE on the U.S. Meat Demand The parameter estmates of seasonal and BSE ndcator varables are presented n table 3. In the beef market, the coeffcents of seasonal ndcator varables show that the budget shares of most of the beef products (U.S. gran-fed beef, Australan beef, and New Zealand beef) are lower n the fourth quarter compared to the second quarter. These results are consstent wth seasonal consumpton patterns n the U.S.: the fourth quarter (October-December) s assocated wth tradtonal holday seasons when Amercans consume more poultry meat than beef compared to other seasons. In the pork market, the results of the seasonal ndcator varables show that the shares of pork from dfferent sources are hgher n the fourth quarter compared to the second quarter. Snce most of the pork consumpton n the U.S. s n the form of breakfast meats, the 19

21 consumpton of pork s expected to decrease durng the warm summer months (second quarter). Ths s consstent wth pror expectatons because consumers are more lkely to eat hot breakfasts durng the colder seasons. Regardng BSE mpacts, the results ndcate that the BSE outbreak n Canada dd not affect the source dfferentated meat shares n the U.S. However; the BSE outbreak n the U.S. decreased the shares of U.S. grass-fed beef and ncreased the shares of Canadan and ROW beef. The negatve mpact of the U.S. BSE outbreak on the U.S. grass-fed beef market share s consstent wth prevous expectatons because U.S. grass-fed beef, whch s composed of cows and bulls, s consdered to carry a hgher rsk of transmttng BSE. Smlarly, the results that the U.S. BSE outbreak ncreased the shares of Canadan and ROW beef are consstent wth prevous expectatons. Ths ncrease mght have resulted from meat buyers substtutng beef from those mport sources, whch were perceved safe by U.S. consumers, for U.S. grass-fed beef durng the U.S. BSE outbreak. 7 Summary and Conclusons Ths study estmates the mpacts of economc factors (meat prces and expendture) and noneconomc factors (seasonalty and BSE outbreaks n the U.S. and Canada) on the U.S. quantty demanded for source dfferentated meats, usng the absolute prce verson of the Rotterdam model. To assure that the system specfcaton and estmaton procedures were correct, varous hypotheses regardng the U.S. source dfferentated meat demand model were tested. The tested hypotheses nclude: normalty, jont condtonal mean, jont condtonal varance, separablty among meats ncluded n the system, and product aggregaton. The results of msspecfcaton tests show that the jont condtonal mean and jont condtonal varance s not well specfed, manly due to autocorrelaton of the error terms. Hence, the model was estmated usng teratve 20

22 seemngly unrelated regresson wth autocorrelaton correcton. Moreover, the results of statstcal tests support estmatng a set of meat demand equatons for the three types of meats (beef, pork, and poultry), each meat beng dfferentated by the supply source (source dfferentated). Ths study s one of the frst that analyzes source dfferentated meat demand n the U.S. domestc market. The results of ths study shed lght on the preferences for meats from dfferent sources, ncludng domestcally produced meats n the U.S. meat market. Furthermore, the mpacts of seasonalty and the BSE outbreaks n the U.S. and Canada on the U.S. demand for source dfferentated meats are analyzed. The estmated prce and expendture elastctes are used to access the compettveness of U.S. produced meats n the U.S. domestc market. Followng the defnton of compettve advantage, the results of ths study ndcate that U.S. gran-fed beef has compettve advantage n the U.S. market, compared to beef from other major supplyng sources. Ths s judgng by ts relatvely small own-prce elastcty (n absolute values) and greater than one and statstcally sgnfcant expendture elastcty, compared to beef from other major supplers. In the pork market, smlar to beef, U.S. produced pork has compettve advantage compared to pork from other sources. Ths s because the expendture elastcty of U.S. pork s statstcally sgnfcant and the own-prce elastcty of U.S. pork s the lowest (n absolute value) among own-prce elastctes of pork from other sources. The results of ths study would have mplcatons for the global meat supplers to the U.S. market n the event of market condton changes, free trade agreements, and anmal dsease outbreaks. For example, f the ncreased avalablty of Australan beef n the U.S. resultng from the 2005 U.S./Australa free trade agreement reduces the relatve prce of Australan beef and consderng the large postve and statstcally sgnfcant New Zealand/Australa cross-prce 21

23 elastctes, New Zealand producers are expected to have the most to lose n terms of decreased exports and reduced U.S. market shares. Another current applcaton of ths study s the mplcaton of anmal dsease outbreaks on the meat share of varous supplers n the U.S. market. The substtute relatonshp of U.S. produced pork wth U.S. and Canadan-produced beef may ndcate that the demand for U.S. pork mght ncrease followng a cattle dsease such as the BSE outbreak n North Amerca. Fnally, market development actvtes ntended to ncrease meat consumpton n the U.S. are expected to have the most sgnfcant mpact (n terms of percentage change n sales volume) on U.S. and Canadan gran-fed beef, ROW pork, and U.S. poultry) compared to other meat products. 22

24 Footnotes 1. Compettve advantage may be defned as an advantage over compettors ganed by offerng meat buyers a greater value; ether by lowerng prces or by provdng greater benefts and servces, such as hgh-qualty products that justfy hgher prces (Porter, 1985). In ths study, any meat product that carres a hgher and statstcally sgnfcant expendture elastcty compared to other meats s assumed to be perceved by meat buyers as a hgher value product. Furthermore, supplers that supply hgher-valued meat products would be expected to prefer facng an ownprce nelastc demand. Ths s because the hgher prces assocated wth ther meats, compared to other meats from other supplers, wll result n an ncrease n ther total revenues (ceters parbus). Therefore, n ths study, a country that supples hgher-prced meat products, such as the U.S., s sad to have a compettve advantage n a market that has a prce-nelastc and expendture elastc demand. 2. In ths study, the ROW refers to the group of all other countres that export a specfc type of meat to the U.S., except those countres whch are analyzed n ths study and dentfed as the U.S. compettors. For example, ROW beef s beef that the U.S. mports from all other countres except for Australa, Canada, and New Zealand. 3. The equatons of own-prce, cross-prce, and expendture elastctes can be wrtten n matrx form as e= Ab where e s the vector of estmated elastctes (ε s and η s); b s the vector of estmated Rotterdam model parameters (γ s and β s); and A s a matrx of constants (budget shares). The standard errors are calculated by takng the square root of the varance covarance ' matrx of e [VAR( e ), gven by VAR( e) = AVAR( b) A where VAR( b ) s the varance covarance matrx of b]. 23

25 4. Due to a lack of dsaggregated trade data, ths study mplctly assumes that each type of meat from the same source s a relatvely homogeneous product. Ths assumpton mght be okay because the meat exportng countres to the U.S. manly specalze n exportng specfc meat categores. For example, the majorty of U.S. beef mports from Australa and New Zealand are composed of manly grass-fed beef, whle Canadan exports to the U.S. are manly composed of gran-fed beef. However, some aggregaton bas mght stll exst from the homogenety assumpton, whch results from the actual dfferences n meat categores (cuts and organs) wthn each source dfferentated meat. 5. Although unt values usually reflect perceved qualty dfferences of mported meats, they may dffer from wholesale prces when trade restrctons are n effect. 6. The U.S. meat demand system was also estmated usng a lnear as well as a non-lnear verson of the AIDS model. Whle the lnear approxmaton of the AIDS model (LA/AIDS) produced elastctes that were smlar n magntude and sgns to the calculated elastctes usng the Rotterdam model, the non-lnear AIDS model dd not converge. Convergence falure of the nonlnear AIDS model s expected n cases where a large number of parameters need to be estmated usng a lmted number of observatons (44 here). 7. Although there was a BSE outbreak n Canada n May 2003, pror to the U.S. BSE outbreak n December 2003, Canadan beef mght have been consdered safe by the U.S. consumers. Ths s because the U.S. government had already lfted the ban on Canadan fresh beef products from cattle younger than 30 months of age as of August 2003, sgnalng the safety of Canadan beef to the U.S. consumers (Hahn et al., 2005). 24

26 References Berndt, E.R. and N.E. Savn. Estmaton and Hypothess Testng n Sngular Equaton Systems wth Autoregressve Dsturbances. Econometrca 43(1975): Brester, G.W., M.K. Wohlgenant. Estmatng Interrelated Demands for Meats Usng New Measures for Ground and Table Cut Beef. Amercan Journal of Agrcultural Economcs 73(November 1991): Davs, G.C. Product Aggregaton Bas as a Specfcaton Error n Demand Systems. Amercan Journal of Agrcultural Economcs 79 (February, 1997): Davs, G.C. and K.L. Jensen. Two-Stage Utlty Maxmzaton and Import Demand Systems Revsted: Lmtatons and an Alternatve. Journal of Agrcultural and Resource Economcs 19(1994): Dyck, J.H. and K.E. Nelson. Structure of the Global Markets for Meat. Agrcultural Bulletn Number 785.USDA/Economc Research Servce, Washngton, DC, September Eales, J.S., and L.J. Unnevehr. Demand for Beef and Chcken Products: Separablty and Structural Change. Amercan Journal of Agrcultural Economcs 70(August 1988): Hahn, W.F., M. Halley, D. Leuck, J.J. Mller, J. Perry, F. Taha, and S. Zahnser. Market Integraton of the North Amercan Anmal Product Complex. Electronc Outlook Report. USDA/Economc Research Servce, Washngton DC, May Hayes, D.J., T.I. Wahl, and G.W. Wllams. Testng Restrctons on a Model of Japanese Meat Demand. Amercan Journal of Agrcultural Economcs 72(August 1990): Henneberry, S.R. and S-K. Hwang. Meat Demand n South Korea: An Applcaton of 25

27 the Restrcted Source Dfferentated AIDS Model. Journal of Agrcultural and Appled Economcs 39 (Aprl 2007): Jones, K.G., W.F. Hahn, and C. G. Davs. Demand for U.S. Lamb and Mutton by Country of Orgn: A Two-Stage Dfferental Approach. Selected Paper, Amercan Agrcultural Economcs Assocaton, Canada, July 27-30, Kesavan, T., Z.A. Hassan, H.H. Jensen, and S.R. Johnson. Dynamc and Long-run Structure n U.S. Meat Demand. Canadan Journal of Agrcultural Economcs 41(1993): Leuck, D. The New Agrcultural Trade Negotatons: Background and Issues for the U.S. Beef Sector. Electronc Outlook Report. USDA/Economc Research Servce, Washngton DC, December Lusk, J.L., T.L. Marsh, T.C. Schroeder, and J.A. Fox. Wholesale Demand for USDA Qualty Beef and Effects of Seasonalty. Journal of Agrcultural and Resource Economcs 26 (2001): Marsh, T.L, T.C. Schroeder, and J. Mntert. Impacts of Meat Product Recalls on Consumer Demand n the USA. Journal of Appled Economcs 36 (2004): Mazzocch, M. No News Is Good News: Stochastc Parameters versus Meda Coverage Indces n Demand Models After Food Scares. Amercan Journal of Agrcultural Economcs 88 (2006): McGurk, A., P. Drscoll., J. Alwang., and H. Huang. System Msspecfcaton Testng and Structural Change n the Demand for Meats. Journal of Agrcultural and Resource Economcs 20(1995): Mdafr, A. and B.W. Brorsen. Demand for Red Meat, Poultry, and Fsh n Morocco: An 26

28 Almost Ideal Demand System. Agrcultural Economcs 9(1993): Muhammad, A., K.G. Jones, and W.F. Hahn. U.S. Demand for Imported Lamb by Country: A Two-Stage Dfferental Producton Approach. Selected Paper, Southern Agrculture Economcs Assocaton, Tulsa, OK, February 14-18, Obara, K., J. Dyck, and J. Stout. Pork Polces n Japan. Electronc Outlook Report. USDA/ Economc Research Servce, Washngton DC, March Pggott, N.E. and T.L. Marsh. Does Food Safety Informaton Impact U.S. Meat Demand? Amercan Journal of Agrcultural Economcs 86 (February 2004): Porter, M.E. Compettve Advantage. Creatng and sustanng superor performance. Macmllan Inc. London Seale Jr., J.L., A.L. Sparks, and B.M. Buxton. A Rotterdam Applcaton to Internatonal Trade n Fresh Apples: A Dfferental Approach. Journal of Agrcultural and Resource Economcs 17(1992): Tonsor, G.T. and T.L. Marsh. Comparng Heterogeneous Consumpton n U.S. and Japanese Meat and Fsh Demand. Agrcultural Economcs 37 (2007): Unted States Department of Homeland Securty/ Customs & Border Protecton (USDHS-CBP). SEC.321.Agrculture. Internet ste: (Accessed n December 2005). Unted States Department of Agrculture/Economc Research Servce (USDA-ERS). Brefng Rooms, Anmal Producton and Marketng Issues: Trade. Internet ste: ( (Accessed: Aprl Red Meat Yearbook. Internet ste: 27

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30 Table 1. Summary of the U.S. Meat Trade Lberalzaton Resultng from CFTA, NAFTA, and URAA Trade Partner NAFTA Countres Non- NAFTA Countres Beef Pork Poultry Import quotas for beef from Canada and Mexco were elmnated by CFTA and NAFTA agreements as of January 1, 1989 and January 1, 1994, respectvely. 4.4 cents tarff per pound of beef orgnatng from Canada was phased out and elmnated n July Import quotas were elmnated to TRQs of 378,214 tons/year for Australa, 213,402 tons/year for New Zealand, 200 tons/year for Japan, 20,000 tons/year each for Argentna and Uruguay, and 64,805 tons/year for other countres by URAA n Tarffs wthn TRQs on cuts specally prepared for retal ranges from 4% to 10%. Wthn TRQs tarffs are 4.4 cents/kg. Over TRQs tarffs lowered from 31.1% to 26.5% by URAA agreement from 1995 to Specal safeguard provsons to lmt mport surges on over TRQs are appled. Tarff for beef offal s zero. Sources: Hahn et al. (2005); and Dyck and Nelson (2003). Tarffs of 1.2 cents per kg for sausage and 6.4 cents per kg for canned ham orgnatng from Canada and Mexco were elmnated by CFTA and NAFTA agreements as of January 1, 1989 and January 1, 1994, respectvely. Tarff on cuts specally prepared for retal were lowered from 2.2 cents/kg to 1.4 cents/kg by URAA agreement from 1995 to Tarffs for pork offal s zero. Import tarffs, whch ranged from cents per kg of the U.S. mports of poultry orgnatng from Canada were supposed to be phased out over a 10 year perod by CAFTA as of January 1, However, they were elmnated n July Import tarffs, whch ranged from cents per kg of the U.S. mports of poultry orgnatng from Mexco were elmnated by NAFTA as of January 1, Tarffs on poultry meat were lowered from 22 cents/kg to 17.6 cents/kg by URAA agreement from 1995 to