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The Impact of Food Safety Scares on the Food Supply Chain in an Environment of Highly Integrated Monopolistically Competitive Agriculture
Department of Agricultural Economics
A key question regarding consumer and producer behavior is how they react when faced with unexpected food safety shocks. Recently, there have been E. coli outbreaks in the fresh spinach market closely followed by an outbreak in the processed beef market. Prior to this, concern was about Bovine Spongiform Encephalopathy (BSE) discovery that received worldwide reporting. This project will explore producers and consumers' reactions to food safety shocks. The purpose of this project is to investigate 1) the market impact of food safety shocks on prices along the supply chain in an environment of highly integrated monopolistically competitive agriculture and food industries; 2) the economic impact of food safety events on consumers' perceptions and preferences and their purchasing habits and behavior; and 3) the economic impact of food safety on producers, supply-channel marketing managers, and retailers, and their strategic responses to food safety incidents.
2010 Project Description
Food safety scares affect consumption behavior, and increasingly food safety and animal life issues are impacting international agricultural trade. Foot-and-mouth (FMD) is one of the Sanitary and Phytosanitary (SPS) measures that are applied to protect human or animal life or health from risks within the territories of the member countries. The increased concern for SPS Agreement is one of the recent significant structural changes in the international trade of livestock and their products. Overall, FMD has a negative impact on supply and demand within a country.
An important research question is whether and how importing countries trade decisions are affected by FMD. Rushton (2009) mentioned that the incentives to achieve FMD-free status for countries with the potential to export meat are high. Is it true that when a country remains a disease-free nation/region, it leads to higher potential exports? Better understanding of importer countries' reactions to FMD helps the bilateral trade negotiation strategies that protect the loss from a FMD outbreaks. The U.S. has been a FMD-free nation since 1929. Yet from 1996 to 2005, many countries were affected by FMD, as recorded by the World Organization for Animal Health (OIE).
This study proposed the gravity model of international trade with random-effects to analyze the effects of FMD in countries that import U.S. swine meat. Gravity models are widely used to examine bilateral trade flows. Formal theoretical foundations of the Gravity models were provided in Bergstrand (1989). Previous study by Wilson and Otsuki (2004) reveals how to solve the puzzles of regulations, policies, and standards. The FMD outbreak issues in importing countries are considered a food scare issue that results in a serious impact on trade flows. This study applied a gravity equation with panel data to find out whether other FMD-affected countries increased swine meat imports from the U.S. The panel was tested for fixed or random effects by using the Hausman specification test. Since some U.S. swine meat trade partners have had FMD discoveries, the main objective of this research was to investigate how the FMD discoveries impacted U.S. exports of swine meat to those countries.
The main goal of this study was to test all FMD-affected countries that had an increase or decrease in exports of swine meat to the U.S. This study contributed to the knowledge about the impacts of foreign FMD by confirming Rushton (2009) point that FMD-free status leads to higher exports. This research was presented at the annual meetings of the Food Distribution Research Socity (FDRS), and was later published in the March issue of 2010 Journal of Food Distribution Research.
Many researchers illustrate the impacts of FMD by analyzing beef cattle; however, this study focused on the U.S. "meat of swine," which identified by the code 0203 in the U.S. Trade Internet System. There are many varieties and different types of preparations of swine meat, like fresh, chill, or frozen. Furthermore, each country may have different demands for swine meat imports, so this study focused on the same product in each country.
Annual data were collected from 1996 to 2005, and 16 countries were selected because these countries had occurrences of FMD during the data period. Results of our sample set indicated that the U.S. had a significant increase in swine meat exports as other countries were affected by FMD outbreaks. This concurs with Rushton (2009) point. The coefficients of FMD and lagFMD revealed a consistent positive sign. When importing countries were affected by FMD outbreaks, these 16 countries on average responded by importing more swine meat from the U.S. The coefficients for FMD and lagFMD in value of exported swine meat were 0.6067 and 0.7286, respectively; the dynamic FMD effect (FMD plus lagFMD) in exporting value was 1.3353 and 1.2271 in exporting volume. The percentage change of FMD in value of exported swine meat was 83%. When FMD outbreak occurred in a swine meat importing country of the U.S., and the value of U.S. swine meat exports increased by 83% and 75% in volume on average (all other variables being constant).
An incidence of FMD outbreaks in an importing country dynamically increased the U.S. export value of swine meat by 280% and 241% in volume on average. When FMD outbreaks occurred in a swine meat importing country in time t-1 and t consecutively, the volume of U.S. swine meat exports decreased by 57% on average (all other variables being constant). The finding indicated that from 1996 to 2005, the U.S. export market gained a positive effect from FMD-affected importers.
In general, FMD outbreak causes both supply and demand shocks. One of the key questions is which shock has a longer recovery period. Due to the destroyed policy, the domestic production in importers takes at least few years to return to the original providing volume. The main difference between supply and demand shocks is that a supply shock takes longer to recover. When consumers' concerns are reverted back to the original levels, the supply might have a shortage before fully recovering. That is why FMD-affected countries increased their U.S. swine meat imports. Based on our examination, the results provided an intuition of the bilateral trade, consistent with previous research.
Yang, Shang-Ho and S. Saghaian. (2010). The Examination of the Foreign FMD on the Export Market: The Case of U.S. Meat Exports. Journal of Food Distribution Research, 41 (1): 115-119.
Yang, Shang-Ho1 and S. Saghaian. (2010). The Impact of Foot-Mouth Disease Vaccination Policy in Importing Countries on U.S. Meat Exports. The Southern Association of Agricultural Economics (SAEA) Annual Meetings, February 6-9, Orlando, Florida.
Yang, Shang-Ho1 and S. Saghaian. (2009). The Examination of the Foreign FMD on the Export Market: The Case of U.S. Meat Exports. The Annual Conference of the Food Distribution Research Society (FDRS), October 30-November 4, Broomfield, Colorado.