Progress 10/01/07 to 09/30/12
Outputs
OUTPUTS: (1) I examined structural breaks in the vertical price relationships in U.S. beef/cattle and pork/hog sectors with the break dates being estimated endogenously. Estimates of break dates for the long-run price linkage equation were obtained by the procedures of Bai and Perron and Kejriwal and Perron, depending on whether the variables in the price equation were stationary or nonstationary but cointegrated. The estimated residual series in the long-run price equation was then utilized as the error correction term in the estimation of the short-run price dynamic system. Finally, simulations were conducted to gain insights toward the response of the price variables to a shock in the innovation of the system. Dissemination: an article in the Journal of Agricultural and Resource Economics (2010) and a presentation at the American Agricultural Economics Association 2008 Annual Meeting. (2) I investigated parameter non-constancy in agricultural production and price relationship, focusing on threshold regression and structural change models. Dissemination: a Ph.D. dissertation (Adachi, Department of Applied Economics, University of Minnesota, May 2010). (3) I investigated the threshold effects on demand of generic fluid milk advertising. The hypothesis was that the advertising-sales relationship might vary across regimes, depending on the intensity of advertising efforts. To estimate advertising thresholds and test for their statistical significance, I followed Cox, Hansen and Jimenez which builds on Hansen's threshold estimation procedure, while constraining the regression function to be continuous in advertising intensity. Dissemination: an article in the Journal of American Journal of Agricultural Economics (2010) and a presentation at the American Agricultural Economics Association 2007 Annual Meeting. (4) I reviewed recent literature in structural change estimations and illustrated the procedures via an analysis of retail-farm price relationship in the Japanese pork market. Dissemination: an article in the American Journal of Agricultural Economics (2009) and a presentation at the American Agricultural Economics Association 2009 Annual Meeting. (5) I analyzed the impact of farm size on productivity for rice producers in Bangladesh with a particular focus on a threshold effect of farm size. Using survey data of 960 rice farm households spread over 64 villages collected in 2008, total factor productivity measures for both Aman and Boro seasons were estimated. The estimates of productivity scores were further regressed on farm specific variables using Hansen's threshold estimation procedures. Dissemination: a presentation at the Agricultural and Applied Economics Association 2010 Annual Meeting and a manuscript under revision upon journal editor's invitation. (6) I estimated the impact of New Cooperative Medicine Scheme in rural China on access to health care of the rural residents. Employing a comprehensive data set from a longitudinal survey, a triple difference methodology was used in the estimation of program impacts. Dissemination: a poster presentation at the Agricultural and Applied Economics Association 2010 Annual Meeting. PARTICIPANTS: Nothing significant to report during this reporting period. TARGET AUDIENCES: academia, reserchers and policy analysts PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
(1) Retail-Wholesale-Farm Price Linkage: Results suggest that there are four breaks in the beef/cattle price linkage equation. Three structural breaks for the pork/hog price linkage equation are identified, explainable by the energy crisis of the late 1970s, the beginning of the national pork checkoff program in the mid 1980s, and the dramatic increase in vertical contracting since the early 1990s. With respect to the retail beef price equation, the long-run price transmission elasticity is about 0.47 and 0.40 for the wholesale beef and farm cattle prices, respectively. As to the retail pork price equation, the long-run price transmission elasticity ranges between 0.38 and 0.79 for the wholesale pork price and 0.02 and 0.26 for the farm hog price, depending on the regimes defined by the identified structural break dates. (3) Advertising Threshold and Impacts: The results support the existence of a minimum threshold below which advertising has no impact on sales and an upper threshold beyond which the law of diminishing returns dictates. Advertising is also found to have the effect of rendering fluid milk demand less elastic with respect to own price and more elastic with respect to income. (4) Retail-Farm Price Linkage in Japanese Pork Market: Four breaks were identified for the period of 1967~ 2008 in the retail-farm pork price relationship. The farm price transmission coefficient is estimated for each of the five regimes defined by the four break dates and was found to be asymmetrical in all regimes, even though the estimates are actually quite close to each other. This may be a relief if one interprets the result as retailers not being overly manipulative by raising pork prices significantly when the farm price is increasing, but lowering the price only very slightly when the farm price is decreasing. The estimated farm price transmission elasticity in all the five regimes are significantly different from zero, but their magnitudes decrease gradually from 0.56 to 0.05 as the regime progresses, suggesting a weakening linkage between retail pork and farm hog prices over the study period. (5) Farm Size and Rice Productivity in Bangladesh: The average technical efficiency scores are estimated at 76 and 72 percent for Boro and Aman rice farms, respectively, with the discrepancy being statistically significant and attributable to the relative difficulties of farming in monsoon season for Aman rice farmers. Two farm size thresholds are identified for Boro rice production units, classifying them into small, medium, and large farms, with the cutoff points being 0.33 and 0.96 hectares, respectively. For Aman rice farms, only one threshold is found, estimated at 0.35 hectares, classifying them into small and medium/large farms. The regression results support the importance of farm size on productivity as well as diminishing returns on productivity of farm size. In the case of Boro rice farms, there is a reversal in the size-productivity relationship, changing from a positive relationship to a negative one when farm size increases from small and medium size to large size.
Publications
- No publications reported this period
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Progress 01/01/11 to 12/31/11
Outputs
OUTPUTS: (1) Farm Size and Rice Productivity in Bangladesh: This project analyzes the impact of farm size on productivity for rice producers in Bangladesh with a particular focus on a threshold effect of farm size. Using rich survey data of 960 rice farm households spread over 64 villages collected in 2008, total factor productivity measures for both Aman and Boro seasons are estimated using Data Envelopment Analysis. The estimates of productivity scores are further regressed on farm specific variables using Hansen's threshold estimation procedures. As reported last year, preliminary results were presented at the 2010 annual meeting of Agricultural and Applied Economics Association as a selected poster. In completing the project, this year we focused on issues related to possible sampling bias of the survey data, and entertained additional explanatory variables of efficiency such as land tenure types, soil texture, and credit constraints facing small farmers. A complete manuscript is written and submitted to a journal for publication consideration. (2) The Effect of Diesel Fuel Subsidy in Bangladesh: Employing the same survey data set, this study investigates the effect of Bangladesh diesel fuel subsidy on the production efficiency of Boro rice farming operation. A stochastic frontier estimation method is used to statistically characterize the Boro rice production process in Bangladesh, from which technical efficiency scores of the producers are computed. To gain insight into the impact of diesel fuel subsidy program on productivity, a propensity score matching estimation method is currently being used to compare productivity of subsidy recipients with the productivity of non-recipients with similar farm and household characteristics. PARTICIPANTS: Dr. Kenji Adachi, CDC TARGET AUDIENCES: policy analysts and policy makers in the United States and Bangladesh governmental agencies and NGO's. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
(1) Farm Size and Rice Productivity in Bangladesh: The average technical efficiency scores are estimated at 76 and 72 percent for Boro and Aman rice farms, respectively, with the discrepancy being statistically significant and attributable to the relative difficulties of farming in monsoon season for Aman rice farmers. Two farm size thresholds are identified for Boro rice production units, classifying them into small, medium, and large farms, with the cutoff points being 0.33 and 0.96 hectares, respectively. For Aman rice farms, only one threshold is found, estimated at 0.35 hectares, classifying them into small and medium/large farms. The regression results support the importance of farm size on productivity as well as diminishing returns on productivity of farm size, perhaps, due to the existence of fixed human capital and production/marketing infrastructures. In the case of Boro rice farms, there is a reversal in the size-productivity relationship, changing from a positive relationship to a negative one when farm size increases from small and medium size to large size. Another important determinant affecting technical efficiency is land fragmentation as measured by the number of cultivated plots on the farm. Excess land fragmentation is found to be detrimental to technical efficiency, and its effect tends to be most devastating for smaller size farms. (2) The Effect of Diesel Fuel Subsidy in Bangladesh: While we are still working on the matching method estimation to determine the impact of diesel fuel subsidy, preliminary estimation results on stochastic production frontier are available. The results support the hypothesis that ownership of the asset facilitates optimal irrigation management without delay; a unit increase in the owned irrigation equipment (1,000 taka) can be associated with an increase in the technical efficiency score of 0.0005 (one-fiftieth of a percentage point). The results also suggest that larger farms are more efficient, but the effect on efficiency of farm size is not a function of the land ownership status. Finally, the coefficient associated with the diesel subsidy is positive and significant at the 10 percent level, with the marginal effect on efficiency of the subsidy estimated at 0.0051 (half a percentage point).
Publications
- No publications reported this period
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Progress 01/01/10 to 12/31/10
Outputs
OUTPUTS: (1) Retail-Wholesale-Farm Price Linkage: This project examines structural breaks in the vertical price relationships in U.S. beef/cattle and pork/hog sectors with the break dates being estimated endogenously. Consistent estimates of break dates for the price linkage equation are obtained by the procedures of Bai and Perron and Kejriwal and Perron, depending on whether the variables in the price equation are stationary or nonstationary but cointegrated. With the identified break dates, the dynamic least squares of Phillip and Loretan is adopted for the long-run price linkage equation to ensure the unbiasedness of the price transmission coefficients. The residual series in the long-run price linkage equation is then utilized as the error correction term in the estimation of the short-run price dynamic system. Finally, simulations are conducted to gain insights toward the response of the price variables to a shock in the innovation of the system. A manuscript was accepted by the Journal of Agricultural and Resource Economics in July 2010 and published in August 2010. (2) Advertising Threshold and Impacts: Using a spline threshold estimation procedure on quarterly data spanning a period of 30 years, this study represents the first attempt to investigate the threshold effects on demand of generic fluid milk advertising. The hypothesis is that the advertising-sales relationship may vary across regimes, depending on the intensity of advertising efforts. To estimate advertising thresholds and test for their statistical significance, this article follows Cox, Hansen and Jimenez, building on Hansen's original threshold estimation procedure, while constraining the regression function to be continuous in advertising intensity. The research results were published this year in the American Journal of Agricultural Economics. (3) Farm Size and Rice Productivity in Bangladesh: This project analyzes the impact of farm size on productivity for rice producers in Bangladesh with a particular focus on a threshold effect of farm size. Using rich survey data for 960 rice farm households spread over 64 villages collected in 2008, total factor productivity measures for both Aman and Boro seasons are estimated using Data Envelopment Analysis and stochastic frontier analysis. The estimates of productivity scores are further regressed on farm specific variables using Hansen's threshold estimation procedures. The preliminary research results were presented at the 2010 annual meeting of the Agricultural and Applied Economics Association as a selected poster. (4) Chinese Rural Health Insurance Program: This project estimates the impact of New Cooperative Medicine Scheme in rural China on access to health care of the rural residents. Employing a comprehensive data set from a longitudinal survey, a triple difference methodology is used in the estimation of program impacts. The study also investigates the effect of the program on out-of-pocket medical expenditures of rural Chinese residents across different income categories. The preliminary research results were presented at the 2010 annual meeting of the Agricultural and Applied Economics Association as a selected poster. PARTICIPANTS: Brenda Boetel Kenji Adachi TARGET AUDIENCES: Agricultural Economics Professionals and Policy Makers PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
(1) Retail-Wholesale-Farm Price Linkage: Results from the break date analysis suggest that there are four breaks in the beef/cattle price linkage equation, possibly reflecting the energy crises of the late 1970s and early 1980s, changes in trade policy in Japan in the early 1990s, and the phenomenon of the Atkins diet in the early 2000s. Three structural breaks for the pork/hog price linkage equation are identified, explainable by the energy crisis of the late 1970s, the beginning of the national pork checkoff program in the mid 1980s, and the dramatic increase in vertical contracting since the early 1990s. In studying the price linkage, retail price is specified as a logarithmic function of the wholesale and farm prices. With respect to the retail beef price equation, the long-run price transmission elasticity is about 0.47 and 0.40 for the wholesale beef and farm cattle prices, respectively. As to the retail pork price equation, the long-run price transmission elasticity ranges between 0.38 and 0.79 for the wholesale pork price and 0.02 and 0.26 for the farm hog price, depending on the regimes defined by the identified structural break dates. Results from the analysis of short-run price dynamics confirm that adjustment speeds are asymmetrical in the beef/cattle system, but statistically insignificant in the pork/hog system. While previous studies find that shocks are transmitted mainly in the direction of farm to wholesale to retail, the impulse response of the current analysis suggests a more versatile feedback mechanism that is bi-directional in nature. (2) Advertising Threshold and Impacts: The results support the existence of a minimum threshold below which advertising has no impact on sales and an upper threshold beyond which the law of diminishing returns dictates. Advertising is also found to have the effect of rendering fluid milk demand less elastic with respect to own price and more elastic with respect to income. The simulations highlight the importance of accounting for threshold effects when evaluating promotion programs. (3) Farm Size and Rice Productivity in Bangladesh: The estimation results of a linear threshold technical efficiency equation confirm that there are two thresholds that partition the 960 Boro farms into three possible categories and one threshold for the 465 Aman farms. Further, farm size and productivity are found to be positively related. Finally, factors affecting rice productivity vary across farm size categories: among the smaller farms, the larger the farm size, the higher the productivity. Land fragmentation has an adverse effect on improving productivity, except for the larger farms (above 1 ha). Policy adjustments related to land reform, aiming at small farms, would have the potential to increase rice production. (4) Chinese Rural Health Insurance Program: Preliminary results show that NCMS has significantly increased the access to health care facilities in rural China and has the effect of lowering the outpatient expenditure for low and middle income rural residents.
Publications
- Boetel, B.L., and D.J. Liu. Estimating Structural Changes in the Vertical Price Relationships in U.S. Beef and Pork Markets. J. Agr. And Resource Econ., 35(number 2, 2010): 228-244.
- Adachi, K. and D.J. Liu. Estimating Threshold Effects of the U.S. Generic Fluid Milk Advertising. Amer. J. Agr. Econ., 92(Number 3, 2010): 727-739.
- Adachi, K. Parameter Non-constancy in Linear Regression: Applications of Threshold Regression and Structural Change Models. Ph.D. dissertation, Department of Applied Economics, University of Minnesota, May 2010 (Adviser: Donald J. Liu).
- Adachi, K., del Ninno, C. and Liu, D.J. Technical Efficiency in Bangladesh Rice Production: Are There Threshold Effects in Farm Size Selected poster presented at the Agricultural and Applied Economics Association Annual Meeting, Denver, Colorado, July 25-27, 2010. Online at http://purl.umn.edu/61357.
- Chu, X., Wei, L. and Liu, D.J. The Effects of New Cooperative Medicine Scheme Coverage on Health Outcomes and Health Care in Rural China. Selected poster presented at Agricultural and Applied Economics Association annual meeting, Denver, Colorado, July 25-27, 2010. Online at http://purl.umn.edu/61260.
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Progress 01/01/09 to 12/31/09
Outputs
OUTPUTS: (1) Retail-Wholesale-Farm Price Linkage: We investigate how retail, wholesale, and farm prices in the U.S. pork/hog and beef/cattle markets interact and how these price relationships have changed over a period of 38 years. In addition to the staff paper produced last year, we have refined the model and have written a manuscript which was submitted to the Journal of Agricultural and Resource Economics for publication consideration. The anonymous reviews were positive and the editor has invited us to revise and resubmit the manuscript. We spent the last three months of 2009 revising the manuscript and plan to resubmit it to the journal by the end of January 2010. (2) Advertising Threshold and Impacts: This project investigates the hypothesis that the effect on sales of generic fluid milk advertising may vary across regimes, depending on the intensity of campaign efforts. Last year a manuscript was submitted to a journal for publication consideration. Upon the invitation of the editor, we spent the first six months of 2009 revising the model, using a more advanced econometric procedure and entertaining alternative empirical specifications per suggestions of the anonymous reviewers. The revision yields fruitful insights and the manuscript was accepted and will appear in a future issue of the American Journal of Agricultural Economics. (3) Japan Retail-Farm Price Linkage: Extending our framework for U.S. pork/hog and beef/cattle price models, this article discusses the new structural change paradigm and illustrates the procedures via an analysis of structural breaks in the retail-farm price relationship in the Japanese pork market. The paper was presented at the annual meeting of the American Applied Economics Association as an invited paper and has appeared in the American Journal of Agricultural Economics. PARTICIPANTS: (1) Dr. Brenda L. Boetel is an assistant professor in the Department of Agricultural Economics at the University of Wisconsin-River Falls. (2) Mr. Kenji Adachi is a PhD student in the Department of Applied Economics at the University of Minnesota. TARGET AUDIENCES: agricultural market participants, agricultural economists, agricultural policy makers and analysts PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
(1) Advertising Threshold: Using a spline threshold estimation procedure, this project investigates whether thresholds exist in the sales effect of U.S. generic fluid milk advertising. The estimation results of a linear spline threshold fluid milk demand equation confirm that there exist two thresholds that partition the 30 years of quarterly observations into three possible regimes depending on the level of the generic advertising goodwill stock. There are two essential features of the estimated model. First, the advertising coefficient is found to be not statistically different from zero in the first regime, supporting the notion that advertising goodwill stock below a minimum threshold results in no impact on sales. Second, the advertising coefficients pertaining to other regimes increase as the regime progresses, but eventually drop to a lower level, as dictated by the law of diminishing returns of advertising. A more parsimonious two-regime log spline threshold model, with the goodwill coefficient in the lower regime set to zero, is thus estimated to capture the two essential features of the linear spline threshold model. In this model, advertising is found to have the effect of rendering fluid milk demand less elastic with respect to own price and more elastic with respect to income. For policy analysis purposes, a simplified dairy industry model is constructed and is used to simulate the impact of advertising dollars contributed by milk processors over a period of 2000 to 2004. The change in producer surplus is estimated at $182.45 million per quarter and the associated rates of return of milk processors' dollars to dairy farmers are 11.29. (2) Japan Retail-Farm Price Linkage: This article examined structural breaks in the retail-farm price relationship in the Japanese pork market using the endogenous break date estimation procedures of recent literature. Four breaks were identified for the period of 1967~ 2008, reflecting changes in production costs, the state of the economy and trade regime. The estimated long run retail-farm price equation is used to construct an error-correction VAR model, and results from the impulse response analysis confirm the existence of structural changes in the short run price dynamics as well. The estimated farm price transmission coefficient is estimated for each of the five regimes defined by the four break dates, where asymmetry in the coefficient is allowed. The price transmission coefficient is found to be asymmetrical in all regimes, even though the estimates are actually quite close to each other. This may be a relief if one interprets the result as retailers not being overly manipulative by raising pork prices significantly when the farm price is increasing, but lowering the price only very slightly when the farm price is decreasing. The estimated farm price transmission elasticities in all the five regimes are significantly different from zero at the one percent level, but their magnitudes decrease gradually from 0.56 to 0.05 as the regime progresses, suggesting a weakening linkage between retail pork and farm hog prices over the study period.
Publications
- Adachi, K. and D. J. Liu. "Estimating Threshold Effects of the U.S. Generic Fluid Milk Advertising." Amer. J. Agr. Econ., to appear in 2010.
- Adachi, K. and D. J. Liu. "Estimating Long-run Price Relationship with Structural Change of Unknown Timing: An Application to the Japanese Pork Market." Amer. J. Agr. Econ. 91(December 2009):1440-1447.
- Liu, D. J. and K. Adachi. "Estimating Long-run Price Relationship with Structural Change of Unknown Timing: An Application to the Japanese Pork Market." An Invited Paper presented at the American Applied Economics Association Annual Meeting, Milwaukee, Wisconsin, July 26-28, 2009.
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Progress 01/01/08 to 12/31/08
Outputs
OUTPUTS: (1) Retail-Wholesale-Farm Price Linkage: Subscribing to the philosophy that it is important to account for structural change in conducting agricultural and food price analysis, we propose a protocol that explicitly entertains structural changes when analyzing long-term price relationship and short-term price dynamics. The proposed protocol is applied to the U.S. pork/hog and beef/cattle sectors to investigate how the retail, wholesale, and farm prices interact in the market place, both in the short-run and in the long-run, and how those price relationships have changed over a period of 38 years. Attention is also given to the asymmetry aspects of price transmission, in that the magnitude of the pass-through of a change in one price to another price depends on whether the price change is positive or negative. Additionally, the estimated models are used to investigate whether the speed of short-run price adjustments are the same when faced with a positive or negative deviation from the long-run price relationship. The dissemination activities include presentations at the National Taiwan University (June 13, 2008) and at the annual meeting of the American Agricultural Economics Association (July 28~30), and a Working Paper with the Food Industry Center of the University of Minnesota. The paper is currently under revision in preparation for journal submission. (2) Advertising Threshold and Impacts: Revising our 2006 model to address comments of anonymous reviewers, we investigate further the effect of U.S. generic fluid milk advertising programs on milk consumption, employing quarterly data spanning over a period of 30 years. The hypothesis is that the advertising-sales relationship may vary across regimes, depending on the intensity of advertising efforts. For example, one might postulate that advertising has no effect on sales in the low intensity regime in which a minimum threshold is yet to be crossed, has a significant effect in the medium intensity regime defined by the minimum threshold and an upper threshold, with the possibility of a third (and even a fourth) regime reflecting the eventual diminishing returns of advertising. The revised manuscript is submitted to a journal for publication consideration. PARTICIPANTS: (1) Dr. Brenda L. Boetel is an assistant professor in the Department of Agricultural Economics at the University of Wisconsin-River Falls. (2) Mr. Kenji Adachi is a PhD student in the Department of Applied Economics at the University of Minnesota. TARGET AUDIENCES: Not relevant to this project. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
(1) Retail-Wholesale-Farm Price Linkage: The empirical results strongly suggest that beef/cattle prices are nonstationary, while there is ample evidence to support the conclusion that pork/hog prices are stationary. As to the existence of a long-run relationship, the retail beef, wholesale beef and local farm cattle prices are found to be cointegrated, as well as the retail pork, wholesale pork and local farm hog prices, even though testing for cointegration for the stationary pork/hog price series is not necessary. Three structural break dates are identified in the pork/hog price linkage equation, reflecting the energy crisis of the late 1970's, the beginning of vertical contracting in the mid 1980's, and the period of extremely low hog prices in the late 1990's. Regarding structural breaks for the beef/cattle price linkage equation, two break dates are identified, corresponding to the above mentioned energy crisis and severe weather patterns in the U.S. in the early to mid 1990's. Given the break date estimates, the long-run price transmission parameters are estimated by regressing retail price on wholesale and farm prices and other terms. With respect to retail pork price equation, the long-run price transmission elasticity is about 0.80 and 0.20 for the wholesale pork and farm hog prices, respectively, and asymmetry in pass-through is confirmed for the wholesale pork price but not for the farm hog price. As to the retail beef price equation, the long-run price transmission elasticity is about 0.85 and 0.15 for the wholesale beef and farm cattle prices, respectively, and asymmetry in pass-through is confirmed for the farm cattle price but not for the wholesale beef price. With the exceptions of the wholesale pork and farm hog prices, short-run adjustment speeds are found to be asymmetrical. Finally, while previous studies find that shocks are transmitted mainly in the direction of farm to wholesale to retail, the impulse response of the current analysis suggests a more versatile feedback mechanism that is multi-directional in nature. (2) Advertising Threshold and Impacts: The findings support the notion that advertising expenditures below a minimum threshold level results in no impact on fluid milk demand and that, once overcoming the minimum threshold, the advertising coefficient becomes larger as the regime progresses, but eventually drops to a lower level, as dictated by the law of diminishing returns of advertising. For policy analysis purposes, a simplified dairy industry model, including the estimated threshold fluid milk demand equation as a component, is constructed and used in the simulation of the impact of advertising dollars contributed by milk processors over the recent five years (2000 - 2004). The changes in producer surplus with the threshold and the conventional models are estimated at $71.35 million and $62.99 million per quarter, respectively, and the associated rates of return of milk processors' dollars to dairy farmers are 4.42 and 3.90, respectively. The simulation results demonstrate the importance of entertaining the threshold effects of advertising in evaluating program effectiveness.
Publications
- Boetel, B.L. and Liu, D.J. 2008. Incorporating Structural Changes in Agricultural and Food Price Analysis: An Application to the U.S. Beef and Pork Sectors. Working Paper 08-02. The Food Industry Center, University of Minnesota.
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Progress 01/01/07 to 12/31/07
Outputs
OUTPUTS: OBJ 1: Identify and assess structural changes in the U.S. livestock and meat sector, with the goal of gaining insights toward the effect of the structural breaks on the equilibrium solution as well as on the performance of the market. The focus this year was on OBJ 1-b: the identification and estimation of structural breaks in price transmissions at the various levels of the vertical chain of the U.S. hog and beef markets, including farm-, wholesale- and retail-level prices. Two strains of econometric literature were surveyed: 1) the breaking-trend vs. unit root models, and 2) the threshold autoregressive structural change models. Recent empirical analyses based on the two methods were also investigated. OBJ 2: Identify structural changes in the Japanese hog production sector, with the goal of shedding light on the implications of the structural breaks on Japanese demand for U.S. hogs and pork products. Recent developments in structural change identification and estimation
methods were surveyed. Recent empirical analyses of Japanese hog cycles and their relationship with pork imports were investigated. A conceptual equilibrium model of Japanese hog industry, with an appropriate linkage to the import market, was specified and the necessary data identified. To collect long-range time series data pertaining to Japanese livestock markets, the following institutions in Japan were visited: Ministry of Agriculture, Forestry, and Fisheries; Ministry of Finance; Ministry of Internal Affairs and Communications; Policy Research Institute: Ministry of Agriculture, Forestry, and Fisheries; Japan International Research Center for Agricultural Sciences (JIRCAS); National Agricultural Research Center; University of Tokyo; Nagoya University; and Agriculture and Livestock Industries Corporation. To obtained feedbacks and suggestions on the research, the following individuals were consulted: Nobuhiro Suzuki (Professor, University of Tokyo), Yasuhiro Nakashima (Associate
Professor, University of Tokyo), Masahiko Gemma (Professor, Waseda University), Jun Furuya (JIRCAS), and Tetsuya Fujino (Agriculture and Livestock Industries Corporation). In addition, a presentation on the research project was made at Waseda University on June 18, 2007.
PARTICIPANTS: Kenji Adachi: Research Assistant, Department of Applied Economics, University of Minnesota
TARGET AUDIENCES: Researchers, Industry Participants, Agricultural Policy Makers
PROJECT MODIFICATIONS: None
Impacts
OBJ 1-b: Price data at various levels of the U.S. hog and beef market chain were collected. Contrary to the conventional Dickey-Fuller unit root test results of non-stationarity, preliminary findings from the structural break model suggest that a breaking trend specification may be a more reasonable characterization of the U.S. pork and beef price series. OBJ 2: A set of time series price and quantity data pertaining to Japanese livestock sector was collected. An industry model for Japanese hog sector was developed (including linkages to the importation of pork products from the U.S.), resulting in two dissertation project proposals.
Publications
- Adachi, Kenji. "A Survey of Recent Developments in Regime Switching Models: Markov-Switching, Threshold, and Structural Change Models." Essay #1 of Mr. Adachi's Ph.D. thesis proposal, Department of Applied Economics, University of Minnesota, St. Paul, January 6, 2007.
- Adachi, Kenji. "The Impact of Imports on the Japanese Hog Cycle." Essay #3 of Mr. Adachi's Ph.D. thesis proposal, Department of Applied Economics, University of Minnesota, St. Paul, January 6, 2007.
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Progress 01/01/06 to 12/31/06
Outputs
A component of this research addresses the issues of investment/disinvestment asymmetry and a possible existence of a sluggish regime in the demand for quasi-fixed input in the U.S. hog production sector. Adopting a new threshold estimation procedure, quarterly data from 1970 through 2002 are used to estimate a regime-dependent investment demand equation for quasi-fixed input, taking sows as a proxy. The results support the existence of three regimes over alternative specifications precluding the sluggish regime, confirming the existence of asset fixity in hog production. The results also highlight the importance of accounting for investment rigidity when estimating hog supply and variable input demands. An article from this research will appear in a forthcoming issue of the American Journal of Agricultural Economics. Another component of this research investigates the threshold effect of the U.S. generic fluid milk and cheese advertising programs. A threshold here
delineates the level of advertising intensity that has to be met to generate a specific level of sales effect. Given that promotional organizations face budget constraints, it is of particular interest to ascertain if there exists a minimum threshold that an advertising campaign has to overcome to yield a non-trivial sales effect. The estimation results confirm that, for both fluid milk and cheese advertisings, there exist three thresholds which partition the quarterly observations between 1975 and 2004 into four possible regimes depending on the level of advertising intensity in each period. The generic fluid milk advertising goodwill coefficient is found to be relatively small for the regime with the lowest advertising intensity, building up to a higher level as the regime progresses, but eventually drops to lower levels as the intensity continues to grow, reflecting the eventual arrival of the diminishing returns of advertising. The pattern of initial build up, however, is not
detected in the cheese equation in which the estimated goodwill parameter starts at a rather large magnitude in the first regime, but declines monotonically and drastically in the second and third regimes, only to become statistically not different from zero in the fourth regime. While the models are still under revision for journal publication purposes, the preliminary results were published as a departmental staff paper.
Impacts
Hog Study: As the U.S. hog production sector has changed to include larger operations, greater amounts and more specialized types of capital have been required. While changes in capital stock are possible, there are costs associated with such adjustments. Irregularities in the adjustment cost function may cause producers to maintain the same level of quasi-fixed inputs and, hence, producing more or less the same amount of output even though the economic situation has changed perceptibly. Given that capital adjustment may be characterized by a range of inaction, it is important that this aspect of decision making be incorporated when modeling hog producers demand for quasi-fixed input and output supply. The resulting estimates may otherwise be biased and the accompanying policy conclusions erroneous. Dairy Study: This research contributes to the discussion among researchers, program managers, and industry participants on the importance of entertaining the threshold
effect of advertising when examining program effectiveness and the optimal allocation of program dollars. Researchers need to be aware of the potential pitfalls of their conventional econometric estimates (and, hence, the limitations of their policy suggestions) when the true model is of threshold type. Program managers have argued that advertising effectiveness may vary, depending on the intensity of their campaigns and have long sought this information in their spending allocation decisions. The insights provided in this research will enhance our understanding of the threshold effect of advertising.
Publications
- Boetel, B.L., R. Hoffmann, and D.J. Liu. "Estimating Investment Rigidity within a Threshold Regression Framework: The Case of U.S. Hog Production Sector." Amer. J. Agr. Econ., February 2007.
- Adachi, Kenji and D.J. Liu. "The Threshold Effect of Advertising Expenditures: The Case of U.S. Generic Fluid and Cheese Advertising." Staff Paper P06-8, Department of Applied Economics, University of Minnesota, May 2006.
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Progress 01/01/05 to 12/31/05
Outputs
The analysis was refined, incorporating comments from journal reviewers. Among others, the input demand and output supply equations were re-estimated within a system framework with neoclassical theoretical restrictions being imposed in the estimation. The revised manuscript was resubmitted to the same journal for publication considerations. In addition, a literature review on recent developments in the econometric techniques of endogenously identifying structural changes is conducted, with the goal of carrying out in the near future an in-depth economic analysis of recent structural changes in the U.S. hog and cattle industries. A summary of the current phase of the research follows. As the U.S. hog production sector becomes ever more specialized, the importance of capital inputs has heightened. Given that it is costly to adjust the capital stock and that the associated adjustment cost function may exhibit cost asymmetries between investment and disinvestment,
profit-maximizing producers may find themselves trapped in a situation where it is neither profitable investing nor worthwhile disinvesting. This article addresses the issues of investment asymmetry and a possible existence of an inaction or sluggish regime in the demand for quasi-fixed input in the U.S. hog production sector. The conceptual framework is based on Abel and Eberly, allowing for the existence of an inaction/sluggish regime, alongside an investment regime and a disinvestment regime. Adopting the estimation procedures recently advanced by Hansen, quarterly data from 1970 through 2002 are used to estimate a regime-dependent investment demand equation for sows. In conjunction with the investment demand equation, hog output supply and feed input demand equations are estimated as a system with symmetry and cross-equation restrictions imposed. The dynamic recursive system is used in simulations to gain insights as to how price changes affect breeding stock, feed input demand,
and hog output supply. The econometric results support the existence of three regimes in the breeding herd investment demand over alternative specifications precluding the inaction/sluggish regime, confirming the existence of asset fixity in sow investment. The estimated breeding herd adjustment rate for the investment and disinvestment regimes are found to differ slightly. The existence of a linkage between breeding stock and hog supply is confirmed. The econometric findings indicate that it is important to account for investment rigidity when estimating hog output supply and quasi-fixed input as well as variable input demands. Still, the simulation results show that the various price elasticities are not dramatically different between the investment and disinvestment regimes. The simulation does confirm that the equilibrium regime configuration is responsive to a change in the output price path.
Impacts
As the U.S. hog production sector has changed to include larger operations, greater amounts and more specialized types of capital have been required. While changes in the stock of capital inputs are possible, there are costs associated with such an adjustment. Irregularities in the adjustment cost function may cause producers to maintain the same level of quasi-fixed inputs and, hence, producing more or less the same amount of output even though the economic situation has changed perceptibly. Given that capital adjustment may be characterized by a range of inaction, it is important that this aspect of decision making be incorporated when modeling hog producers demand for quasi-fixed input and output supply. The resulting estimates may otherwise be biased and the accompanying policy conclusions erroneous. The issue of investment rigidity may be more than merely a modeling concern for many reasons. For example, Pietola and Myers argue that rigidities may in effect work
as entry barriers, reducing the competitiveness of the industry. Thus, it may be desirable to devise policies to alleviate the problems caused by asset fixity and, in this regard, it is essential to first ascertain whether rigidity and investment asymmetry exist and to what extent it affects the equilibrium.
Publications
- No publications reported this period
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Progress 01/01/04 to 12/31/04
Outputs
During this year the hog production sub-model was re-estimated and policy insights simulated. Based on the findings, a staff paper is published and a manuscript written and submitted to a journal. A summary of the research follows. As the U.S. hog production sector becomes ever more specialized, the importance of capital inputs has heightened. Given that it is costly to adjust the capital stock and that the associated adjustment cost function may exhibit cost asymmetries between investment and disinvestment, profit-maximizing producers may find themselves trapped in a situation where it is neither profitable investing nor worthwhile disinvesting. This article addresses two issues related to the employment of quasi-fixed input in the U.S. hog production sector: does an inaction or sluggish regime exist in the demand for quasi-fixed input, and, if so, to what extent has this impeded adjustment in quasi-fixed input stock and, hence, hog output supply toward the long-term
equilibrium levels? The conceptual framework is based on the work by Abel and Eberly and allows for the existence of an inaction/sluggish regime, alongside an investment regime and a disinvestment regime. Quarterly data from 1976 through 1999 are used to estimate the three-regime investment demand equation, treating breeding sows as the quasi-fixed input. The threshold estimation procedure recently advanced by Hansen is adopted. To provide a linkage between breeding herd investment and hog output supply, a hog supply equation, specified in part as a function of lagged breeding stock, is estimated by a least squares procedure. The dynamic recursive system of investment demand and hog supply is used to simulate the effects on breeding stock and hog supply of changes in the magnitude of investment rigidities. The econometric results strongly support the three-regime breeding herd investment model. More than 10 percent of the observations fall into the sluggish regime, indicating that
this regime has occurred sufficiently often to warrant attention. The estimated rate of adjustment toward the long-run equilibrium breeding stock is 2.7 percent per quarter. The existence of a linkage between lagged breeding stock and hog supply is confirmed. Thus, the results suggest that it is important to account for investment rigidity when estimating breeding herd demand and hog supply. Simulation results indicate that the effects on breeding stock and hog supply of continued specialization in the hog production sector may not be as significant as what the hog production sector has experienced in the past decades. More importantly the simulations suggest that the impact of increasing investment rigidity is rather modest, about 3 percent at most and, thus, no policy intervention appears to be needed. However, the econometric results clearly indicate that estimates will be biased if investment rigidity is not explicitly accounted for when estimating breeding herd demand and hog
supply.
Impacts
The U.S. swine industry has experienced rapid change in the recent past. Larger hog operations, changing consumer meat demand, and increased coordination and concentration in the swine industry have all had an impact. As hog operations increase in size, more specialized capital assets (e.g. facilities, machinery, and manure disposal systems) are required, possibly creating a problem where the quasi-fixed inputs are caught in hog production, which in turn, makes it more difficult for producers facing market price changes to adjust their output. On the consumption side, consumers have become more aware of fat and holesterol content in pork products; and producer groups have initiated generic advertising campaigns positioning pork as a healthful product to counter any potential negative demand impacts. Linking production and consumption is the pork processing subsector, which has experienced in recent years dramatic increases in horizontal and vertical concentration with
the former involving a situation where a majority of output is controlled by few processing firms and the latter involving a situation where processors have greater control over the production and marketing processes of their upstream/downstream counterparts. The potential market impact of the increased concentration on the swine industry deserves attention and is investigated in this research.
Publications
- Boetel, Brenda L., Ruben Hoffmann, and Donald J. Liu. "Estimating Investment Rigidity within a Threshold Regression Framework: The Case of U.S. Hog Production Sector." Staff Paper P04-12, Department of Applied Economics, University of Minnesota, September 2004.
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Progress 01/01/03 to 12/31/03
Outputs
The current phase of this research is concerned with the fluctuations of farm prices and other related variables in the U.S. swine industry. Three submodels pertaining to the swine industry are estimated, including a hog production submodel, a retail pork consumption submodel, and a farm-retail price transmission submodel. The hog production submodel explicitly allows for the implications of asset fixity in the employment of farm quasi-fixed capital inputs. The retail pork consumption submodel is cast within a meat demand system framework and incorporates variables accounting for the implications on demand of food health information (e.g., fat and cholesterol contents) and generic advertising expenditures by the U.S. beef, pork and fish industries. The farm-retail price transmission submodel links the hog production submodel with the retail pork consumption submodel and allows for the potential effect on price spreads of increased vertical and horizontal concentration
in the processing as well as grocery subsectors. The three submodels are used to form an overall industry model to simulate the effects on U.S. swine industry equilibrium prices and quantities of farm asset fixity, of processor and grocer concentrations, of generic advertising, and of other demand and supply shifters such as feed costs and farm breeding production technology. In so doing, one identifies factors important to the vicissitude of U.S. hog market prices and related variables. Empirical results suggest that rigidities in quasi-fixed capital input investment arising from asset fixity have significant effects on hog prices and quantities, and the effects have become more pronounced since 1976. The capital investment demand can be classified into an investment regime, an inaction regime, and a disinvestment regime, in which producers respond differently when facing output and input price changes. The estimation results from the meat demand system indicate that there exists a
significant negative cross-advertising effect of beef advertising on pork consumption, while food health information and pork advertising are not important determinants. Finally, the increased horizontal concentration in the pork processing subsector has the effect of narrowing the farm-retail price spread, suggesting that the cost savings from increased concentration may have outweighed any potential anticompetitive effect on prices of the concentration change. A paper from a portion of the research is published in a referred journal. In addition, a Ph.D. dissertation was published. A second manuscript based on a different portion of the research is in progress and will be submitted to a journal for publication considerations.
Impacts
The U.S. swine industry has experienced rapid change in the recent past. Larger hog operations, changing consumer meat demand, and increased coordination and concentration in the swine industry have all had an impact. As hog operations increase in size, more specialized capital assets (e.g. facilities, machinery, and manure disposal systems) are required, possibly creating a problem where the quasi-fixed inputs are caught in hog production, which in turn, makes it more difficult for producers facing market price changes to adjust their output. On the consumption side, consumers have become more aware of fat and holesterol content in pork products; and producer groups have initiated generic advertising campaigns positioning pork as a healthful product to counter any potential negative demand impacts. Linking production and consumption is the pork processing subsector, which has experienced in recent years dramatic increases in horizontal and vertical concentration with
the former involving a situation where a majority of output is controlled by few processing firms and the latter involving a situation where processors have greater control over the production and marketing processes of their upstream/downstream counterparts. The potential market impact of the increased concentration on the swine industry deserves attention and is investigated in this research.
Publications
- Boetel, B.L. and Liu, D.J. (2003). "Evaluating the Effect of Generic Advertising and Food Health Information within a Meat Demand System." Agribusiness 19:345-354
- Boetel, B.L. "An Economic Analysis of the U.S. Swine Industry: Capital Investment Rigidity, Food Health Concerns, Generic Advertising and Processor Concentration." Ph.D. Dissertation, Department of Applied Economics, University of Minnesota, September 2003 (Advisor: Donald J. Liu)
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Progress 01/01/02 to 12/31/02
Outputs
It was reported last year that a pork demand model was being developed to fulfill Objective #3. Except for a final revision of a manuscript to appear in Agribusiness: An International Journal, this part of the project has been completed. The focus of this part of the research is to estimate consumer demand for U.S. meat products including beef, pork, poultry and fish, incorporating into the model generic advertising variables and non-advertising related food health information variables. From a policy evaluation viewpoint, it is important to determine and disentangle the demand effects of food health information from the two sources. It is found that the existing check-off funding for beef and pork has resulted in excessive advertising in the sense that a simultaneous decrease in advertising expenditures of both groups can lead to a solution that mzximizes the joint benefit of their promotional activities. This finding is consistent with the 'Beggar-Thy-Neighbor'
argument in Alston et al. that beef and pork producers should decrease the sum of their advertising expenditures by about two-thirds of the actual level (Ame. J.Agr. Econ., pp. 888-902, 2002). While the above finding suggests there is a negative spillover effect between pork and beef, a positive spillover effect of pork advertising on poultry consumption is also discovered. In addition, upon comparing with an earlier result in Kinnucan et al. (Ame. J.Agr. Econ., pp. 13-23, 1997), there seems to be evidence suggesting that generic pork advertising may have recently caused a movement in the consumer's perception of pork as an 'other white meat'.
Impacts
The recent price declines of the hog prices emphasize the need to better understand the underlying forces contributing to the vicissitude of the U.S. hog market, which may affect the health of the industry and the welfare of the producers. Additionally, it is imperative to address the issue of why hog producers may produce at a level that is above/below the demand. Of equal importance is the examination of the pricing behavior of pork processors in their purchases of hog inputs. It is only when the causes for the price volatility in the hog market and the related issues are identified and understood that future policy can be created to ensure the economic viability and, hence, the sustainability of the industry. Further, a thorough understanding of the hog market, from the perspectives of both the hog producers and pork processors, will enhance the ability to forecast future market situations and, hence, facilitate industry management decisions, thereby improving the
international competitiveness of the U.S. hog sector.
Publications
- Boetel, B.L., R. Hoffman, and D.J. Liu Determining Factors Contributing to the Collapse of U.S. Hog Market Prices. Selected Paper presented at the American Agricultural Economic Association Annual Meeting, Tampa, Florida, July 30 - August 2, 2000.
- Boetel, B.L., R. Hoffman, and D.J. Liu Testing Hystersis in U.S. Hog Production. Poster presented at the American Agricultural Economic Association Annual Meeting, Chicago, Illinois, August 5 - 8, 2001.
- Boetel, B.L., and D.J. Liu. Disentangling the Effects of Generic Advertising from Health Information within a Meat Demand System. Selected Paper presented at the American Agricultural Economic Association Annual Meeting, San Diego, California, July 28 - 31, 2002.
- Boetel, B.L., and D.J. Liu. Disentangling the Effects of Generic Advertising from Health Information within a Meat Demand System. Paper presented at the NEC-63 Conference, Wahsington, D.C., October 21-22, 2002.
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Progress 01/01/01 to 12/31/01
Outputs
It was reported last year that a switching-regime hog farm model was developed and the necessary data for its estimation collected. This effort was to fulfill Objective #1 which is to model and estimate the supply of hog output and demand for farm inputs of the U.S. hog producers, with explicit allowances for the implications of asset fixity in the employment of farm quasi-fixed capital inputs. This year's activities consist of two parts. The first part has to do with the empirical estimation of the hog farm model developed under Objective #1. The second part pertains to Objective #3, which is to estimate the U.S. consumer demand for pork products. (1) Estimation of the Hog Farm Model (Objective #1) The multiple-threshold estimation procedure developed by Hansen [Econometrica 68(2000): 575-603] was used to estimate the switching-regime hog farm model. Hansen's procedure was adopted because it puts forth the problem of estimation and hypothesis testing of the
multiple-regime hog farm model within a framework of linear least squares. A Gauss code was developed to simulate the asymptotic distribution of the estimates, as the threshold parameters are not defined under the null hypothesis that there exists only one regime. A tentative estimated model was reported in the Poster Session of the American Agricultural Economic Association's 2001 annual meeting. Currently, the empirical model is being revised. (2) Conceptualization of the Pork Demand Model (Objective #3) In the specification of the demand model, special focuses have been placed on separating the effects of generic advertising and health information on the consumption of pork products. While both factors are of importance when investigating meat demand issues, previous studies examined them only in isolation. A literature review on demand systems for agricultural products was conducted, and it was found that only one article incorporated both advertising and health information
simultaneously [Kinnucan, Xiao, Hsia, and Jackson, Amer. J. Agr. Econ. 79(1997):13-23.] Clearly, treating the two variables in isolation may bias the results and distort the policy implications. For example, if only generic advertising is considered, a structural change due to health information may be wrongly accounted for by advertisement. Using a translating procedure, a Rotterdam model has been derived that incorporates both generic advertising and health information indices. Additionally, data on advertising variables and most of the demand determinants necessary for the estimation have been collected from various government and private sources.
Impacts
The recent price declines of the hog prices emphasize the need to better understand the underlying forces contributing to the vicissitude of the U.S. hog market, which may affect the health of the industry and the welfare of the producers. Additionally, it is imperative to address the issue of why hog producers may produce at a level that is above/below the demand. Of equal importance is the examination of the pricing behavior of pork processors in their purchases of hog inputs. It is only when the causes for the price volatility in the hog market and the related issues are identified and understood that future policy can be created to ensure the economic viability and, hence, the sustainability of the industry. Further, a thorough understanding of the hog market, from the perspectives of both the hog producers and pork processors, will enhance the ability to forecast future market situations and, hence, facilitate industry management decisions, thereby improving the
international competitiveness of the U.S. hog sector.
Publications
- Boetel, B.L., R. Hoffman, and D.J. Liu. Determining Factors Contributing to the Collapse of U.S. Hog Market Prices. Selected Paper presented at the American Agricultural Economics Association Annual Meeting, Tampa, Florida, July 30 - August 2, 2000.
- Boetel, B.L., R. Hoffman, and D.J. Liu. Testing Hystersis in U.S. Hog Production. Poster presented at the American Agricultural Economics Association Annual Meeting, Chicago, Illinois, August 5 - August 8, 2001.
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Progress 01/01/00 to 12/31/00
Outputs
The importance of gaining a better understanding of factors contributing to the vicissitude of U.S. hog prices was highlighted by the recent episode of market price collapse. During the recent hog price collapse, pork producers lost almost $4 billion in equity between November 1997 and August 1999. Prices that averaged $47 per hundredweight between 1993 and 1998 fell to as low as $8 per hundredweight in December 1998. While hog prices have somewhat recovered from the recent collapse, the volatility of the hog market necessitates a better understanding of the underlying structure driving the market prices. The purpose of this phase of the research is to examine how the role of farm asset fixity and the extent of possible oligopsonistic market practices of pork processors have played in the vicissitude of hog market prices. Additionally, how have domestic and foreign demand shocks affected the price movement for hogs? Are there other intervening supply and demand
factors that have significantly contributed to the market situation of the hog industry? This research adopts a unified framework to investigate the extent of different factors determining the levels and fluctuations of U.S. hog prices, with special focuses on (i) the inflexibility of hog producers in adjusting output quantity (due to asset fixity), (ii) the oligopsonistic market power of pork processors, and (iii) domestic and foreign consumer demand shocks. Specific objectives are as follows: 1. To model and estimate the supply of hog output and demand for farm inputs of the U.S. hog producers, with explicit allowances for the implications of asset fixity in the employment of farm quasi-fixed capital inputs. 2. To model and estimate the demand for hog input and supply of pork outputs of the U.S. pork processors, with explicit allowances for the potential oligopsonistic power of the pork processors. 3. To model and estimate the consumer demand for U.S. pork products, explicitly
accounting for the implications of foreign excess demand fluctuations. 4. To simulate the effects of asset fixity, of processor's market power, of domestic and foreign demand shocks, and of changes in other demand and supply shifters on U.S. hog industry equilibrium prices and quantities and thus, identity factors important to the vicissitude of U.S. hog market prices. Most of this year's effort had been focused on Objective 1. Relevant literatures on asset fixity and investment with sunk costs were reviewed. Based on the framework of Abel and Eberly (American Econ. Review, 1994), a dynamic model of hog farm investment decision under uncertainty was developed. This conceptual model was presented in the annual meeting of the American Agricultural Economic Association (August 2000). The necessary data for the estimation of the farm investment model and their sources were investigated. Also explored was the switching estimation procedure called for by the model.
Impacts
The recent price declines of the hog prices emphasize the need to better understand the underlying forces contributing to the vicissitude of the U.S. hog market, which may affect the health of the industry and the welfare of the producers. Additionally, it is imperative to address the issue of why hog producers may produce at a level that is above/below the demand. Of equal importance is the examination of the pricing behavior of pork processors in their purchases of hog inputs. It is only when the causes for the price volatility in the hog market and the related issues are identified and understood that future policy can be created to ensure the economic viability and, hence, the sustainability of the industry. Further, a thorough understanding of the hog market, from the perspectives of both the hog producers and pork processors, will enhance the ability to forecast future market situations and, hence, facilitate industry management decisions, thereby improving the
international competitiveness of the U.S. hog sector.
Publications
- Boetel, B.L., R. Hoffman, and D.J. Liu "Determining Factors Contributing to the Collapse of U.S. Hog Market Prices." Selected Paper presented at the American Agricultural Economics Association Annual Meeting, Tampa, Florida, July 30 - August 2, 2000.
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Progress 01/01/99 to 12/31/99
Outputs
The U.S. pork sector is evolving from an industry of small, independent firms vertically linked by spot markets to one of substantially larger firms vertically connected through contractual agreements and integration. Potential benefits of tighter vertical arrangements include lower consumer pork prices, although the true nature of this benefit is uncertain. At the same time, there is concern of market foreclosure because a highly integrated industry may limit market access for independent hog producers. A component of this research is to estimate econometrically the extent of backward integration by pork processing firms in the upstream hog production stage, taking into account the oligopsonistic nature of processors, and to simulate the effect of increasing vertical integration on consumer and producer prices and welfare. Following Perry's theoretical framework (Amer. Econ. Rev., 1978), Azzam (Amer. J. Agr. Econ., 1996) presents an empirical study of backward
vertical integration in the agricultural sector. The current study is differentiated from Azzam's analysis by focusing on the pork industry rather than fed cattle markets, by allowing for oligopsonistic processors rather than a monopsonistic processor, and by considering multiple pork outputs rather than a single output. The procedure of the study is as follows. An individual processor's profit maximization problem consists of maximizing revenue from pork products and minimizing hog input expenditures, where the latter sub-problem involves a division of the total hog procurement between open market hog purchases and internal production by an upstream subsidiary. From the optimization, one derives the optimal pork output supply, total hog input demand, and open market hog input purchases. These behavioral equations of the individual processor are aggregated and estimated in conjunction with the pork demand equations of consumers and the open market hog supply equation of independent
hog producers. The estimated model is then used as a basis for simulating price and welfare effects of increasing vertical integration. The simulation procedure involves increasing the vertical integration parameter incrementally while allowing the open market hog supply function, the processors' input demand function, the processors' pork supply function and the consumers' pork demand equation to adjust to a new equilibrium. The subsequent prices for open market hogs and pork products are observed, and changes in producer and consumer surplus are calculated.
Impacts
The results suggest that the trend of increasing vertical coordination will expand the total U.S. hog slaughter, decrease the open market prices for hogs, increase the total supply of pork products, and decrease the prices of products.
Publications
- Pritchett, J.G. "Estimating Backward Vertical Integration in a Primary Input Market: The Case of the U.S. Hog Industry." Ph.D. Dissertation, Department of Applied Economics, University of Minnesota, St. Paul, September, 1999.
- Pritchett, J.G., and D.J. Liu. "Modeling Price Impacts of Backward Vertical Integration in the U.S. Pork Industry." Selected paper presented at the American Agricultural Economics Association Annual Meeting, Nashville, Tennessee, August 8-11, 1999.
- Pritchett, J.G., and D.J. Liu. "Estimating Backward Integration into a Primary Input Market: The Case of U.S. Pork Industry," in Proceedings of the 6th Joint Conference on Agriculture, Food and the Environment, Minneapolis, MN, August 31 - September 3, 1998.
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