A vertical trade model of the international pork industry
The main objective of the study is to develop a vertically integrated trade model of the feedgrain, hogs and pork sectors that allows for two-way trade in order to examine the impacts of various structural and policy changes on the pork industry. The model consists of six regions/countries: Canada, the U.S., the EU., Japan, China and an aggregate for the rest of the world (ROW). Pork was treated as a differentiated commodity. The Armington framework is applied to this model to obtain the demand equations for the various markets. Overall elasticities of supply and demand and the elasticity of substitution are used from other sources to estimate the own and cross-price elasticities. Intercepts and coefficients for each region/country are then calculated using 1993 (base year) prices, quantities, market shares and own and cross-price elasticities. Several policy and development scenarios are used as examples to examine the performance of this model. These are: the abolition of Crow Subsidy under the Western Grain Transportation Act, abolition of the countervailing duty on the Canadian hog exports to the U.S. and the impact of China becoming a major importer of pork. Two levels of Chinese demand are examined; imports of 2 percent and 4 percent of the total domestic demand. A test of linearity is carried out to demonstrate that the assumption of linear demand and supply equations is appropriate and that it shows the expected proportional changes in the endogeneous variables as a result of policy changes. A detailed sensitivity analysis is carried out to demonstrate that the results are robust between the selected lower and upper bounds of the various parameter values. Model simulations show considerable differences between the assumptions of product differentiation and product homogeneity. The results indicate that a market with homogeneous products shows larger impact on the quantities as a result of very small price changes. In the case of the assumption of product differentiation, however, the model shows relatively smaller impact on the quantities as a result of larger price changes. The results of this study show that this model has proved useful as an analytical tool and can be used for the purposes of policy analysis. The model also provides an opportunity to modify the parameters to suit a particular market's need and a researcher's assumptions. (Abstract shortened by UMI.)
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