Tradeoffs and Resource Allocation Effects for Alternative IS Management Policies Thomas Wahl, Zishun Zhao, & Ricardo Diaz IMPACT Center and School of Economic Sciences Washington State University

The Rest Of The Team Preston Andrews, Horticulture Jan Busboom, Animal Science Ron Mittelhammer, Economics Ray Huffaker, Economics Michael Livingston, ERS

Motivation Agricultural production is a complex and dynamic process with an evolving productive stock  Changing demographics due to shocks BSE, FMD, coddling moth, …  Long-lasting effects of these shocks  Different effects on various participants Get the biological process right and then add the IS shocks and policies

Objectives Develop a modeling framework that:  Can be used to measure effects on social welfare from IS  Is general enough to accommodate different animal and plant species  Can establish the linkage between economic loss and risk management policies  Will generate optimal resource allocation schemes for alternative IS management policies

Model Highlights Two bio-economic models developed  Animal Pest (Livestock model)  Plant pest (Perennial fruit model)

Model Highlights Inventories are differentiated by age Demand system  AIDS  Substitution effects  Money-metric welfare measure Important IS pathways endogenized Flexibility in accommodating various expectation schemes

Non-Feed Fixed and Variable Costs Feed Price Feed Cost Nutrient Requirement Sub-Model (Cow) Expectations Profit Maximization Info available Expected price Constraints Solution Price of Imports Initial Breeding Stock and Feeders Import Costs Expected Revenues Breeding (Mature Female) Offspring(M) Offspring(F) Feeders Mature Animal Slaughter Average Slaughter Weight of Cows Non-fed Meat Finished Animal Slaughter Fed Meat Retention Feeder Imports Breeding Animal Imports Culling Breeding Stock Culled Feeders Culled Mature Females Feedlot Optimization Nutrient Requirement Sub-Model (Feeder) Fixed and Variable Costs Expected price Optimal Slaughter Weight Imports World Beef Market Domestic Beef Market Domestic Prices World Prices Exports Livestock Model

Orchard New PlantingsFruit production FruitsExports World Market Domestic Market Border Control Low-production blocks removal Imports Profit Maximization ExpectationsInfo available Expected prices Domestic RevenueExport Revenue Interest and Depreciation Rates Capital CostLabor CostMaterial Cost Wage RatesMaterial Prices Planting Cost Removal Cost ConstraintsSolution Perennial Fruit Model

IS Introduction and Dissemination Production decisions in the presence of an invasive species  Non-susceptible inventories  Immune inventories  Susceptible inventories  Affected (host) inventories Inventory groups determined by the dynamics of dissemination Random nature of introduction and spread

Contact Vaccination IS Introduction and Dissemination (e.g.. livestock) SusceptibleImmuneNon-Susceptible Introduction Hosts Susceptible ImmuneNon-Susceptible Hosts Death and Depopulation

IS Introduction and Spread Establishment and spread Prevention—reducing the probability of establishment and/or number of hosts Control—increasing the probability of eradication

IS Introduction and Dissemination Introduction and eradication are random variables with a geometric distribution Prevention—reducing the probability of establishment Control—increasing the probability of an IS being detected and eliminated

Policy Implications Prevention measures  Marginal cost among measures equal Positive probability of establishment  Eventually an IS becomes established  Prolong interval between events  Monitoring and emergency response

Policy Implications Tradeoff between prevention and control  Resource use  Fast-spreading, hard-to-eliminate species Preventing less costly  Costly-to-detect, slow-spreading species Control less costly Confidence in government agencies  Producers perception of susceptibility will change probability of becoming affected

Livestock Model Implementation Annual beef production model with 9-year reproductive life Feeders go through backgrounding and a fixed ration feeding program Growth and body composition of feeders predicted using NRC nutrient requirements Quality and yield grade predicted to fit the marketing system grid Linear search to determine the optimal slaughter point

Livestock Model Implementation Demand for both fed beef and cow beef Inventory updating—naïve expectations in unit profitability with partial adjustment  Unit profitability as a proxy for capital value of cows

Simulated Scenarios Assumed scenarios to test the validity and stability of the model  One-time 30% reduction in breeding herd representing a dramatic depopulation  15% death rate in the breeding herd representing an epidemic  100% increase in the feed cost representing feed regulation  100% increase in breeding cost (maintenance cost of cows)

One-time 30% Inventory Reduction

Death Rate Increase to 15%

100% Increase in Feed Cost

100% Increase in Breeding Cost

Simulation of FMD w/o Intervention Assuming no treatment and full recovery Dissemination rate of 4 herds/week 2% death in mature cattle and 20% death in calves Normal demand continues

FMD Scenarios With Normal Demand

Progress of the Perennial fruit model A simulation model for apple production is being implemented Increasing marginal cost is assumed Formulated as a mixed complementarity problem Runs of a preliminary version show stable and reasonable solutions

Summary and Conclusion Dynamic general equilibrium framework captures short- and long-term effects Linkage between the economic loss and the risk management policies  Cost-benefit analysis  Optimal resource allocation Validity and stability demonstrated

Unresolved Issues and Possible Extension Welfare measure for the producers A simulation model incorporating all livestock production  Common diseases  Substitution effects A livestock model including Canada, the US, and Mexico where all the live trade occur

Conference Papers Zhao, Zishun, Thomas Wahl, and Ricardo Diaz. “Modeling the Effects of Alternative Invasive Species Management Policies on livestock Production.” Selected long paper, AAEA 2004, Denver, CO. Zhao, Zishun, Thomas Wahl, and Ricardo Diaz. “Modeling the Impacts of Alternative Invasive Species Management Policies on Perennial Fruit Production and Consumption.” Selected paper, WAEA 2004, Honolulu, HI. Díaz, Ricardo, Thomas Wahl and Zishun Zhao. “The Economic Implications of Invasive Species in International Trade: The Chile – US Fresh Fruit Market.” Paper Presented to ASCC, PECC Trade Forum – LAEBA Conference 2004, Viña del Mar, Chile

Tradeoffs and Resource Allocation Effects for Alternative IS Management Policies Thomas Wahl, Zishun Zhao, & Ricardo Diaz IMPACT Center and School of Economic Sciences Washington State University