1. 1 The Impacts of Animal Disease Crises on the Korean Meat Market Moonsoo Park Associate Research Fellow Korea Institute for Industrial Economics & Trade Yanhong Jin Assistant Professor of Agricultural Economics Texas A&M University, College Station David A. Bessler Professor of Agricultural Economics Texas A&M University, College Station July 29, 2008

2. 2  Three significant animal diseases outbreaks since 2000 FMD (Foot and Mouth Disease) outbreak in April 2000  Total estimated cost: $474 million AI (Avian Influenza) outbreak in December 2003  Total estimated cost: $ 137 million BSE discovery in the U.S. in December 2003  As of 2003, Korea is the 2nd largest country for beef importing from US  Ban import of beef from U.S  No systematical study for the Korean case Growing consumer concern about food safety Need to investigate quantify the impacts of domestic and oversea animal disease crises on the Korean meat markets Motivation

3. 3  Investigate the impacts of multiple disease outbreaks (domestic and oversea) Error correction model (ECM)  Meat prices at different levels of the supply chain  Price margins along the supply chain  Quantify the relative importance of each price on the net change of a certain meat price due to animal disease shock Historical decomposition of price innovations, accompanied by directed acyclic graphs (DAGs)  Dynamic Price interdependence in the meat system Research Objectives

4. 4  Data source: Korea Agro-Fisheries Trade Corporation (KAFTC)  Monthly price in meat supply chain Meat types: Beef, Pork, Chicken Supply chain levels: Retail, Wholesale, Farm  Study periods: January 1985 to December 2006 Data

5. 5  Vector Error Correction Model (VECM) Forecast prices using only information known before the event Compare forecasted prices with actual prices affected by all the information including the disease outbreak Statistical robustness tests for model specification  “Model selection methods” based on information criteria (Phillips, 1996)  Test for structural change: “Time-Varying Trace Test” Forecasting Meat Prices

6. 6 Forecasting (Cont.)  Measure the impact of animal disease outbreak (“size” and “duration” of the shocks) On each price series  % change of the actual price relative to the forecasted price  i=meat type, j= farm, wholesale, retail On price margins  Disease shocks widen price margin if PM >0, narrows if PM <0 retail-to-farm wholesale-to-farm retail-to-wholesale

7. 7 Forecasting (Cont.)  Impact of the 2000 FMD Outbreak Forecast prices of 44 months after the outbreak (2000:4—2003:11) but before the AI/BSE events using the data from 1985:1 to 2000:3  Impact of the 2003 AI/BSE Events Forecast prices of 36 months after the outbreak (2004:1—2006:12)  Option 1: Large sample from 1985:1 to 2003:11  Option 2: Small sample from 2000:5 to 2003:11 “Modified DM test" shows option 1 gives better forecasting performance

8. 8 Impacts of the 2000 FMD Outbreak on the Meat Prices BeefPorkChicken  Decrease beef and pork prices but increase chicken prices  Beef sector Prices recover back to the pre-event level after 16 months Retail beef price recovered 8 months after the FMD event Wholesale and farm level beef prices recovered 7 months after the recovery of the retail price  Pork sector Long term adverse impacts on the farm and wholesale prices: The prices did not fully recover for over 44 months after FMD  Chicken sector Short-run benefit due to the substitution effect

9. 9 Impacts of the 2003 AI/BSE Events on the Meat Prices BeefPorkChicken  Beef sector Retail beef price decreased by 10% in the 10 th month, rebounded, and recovered 13 months after the incidents Sharp price drop (28% in 6 th month) at the farm and wholesale levels wholesale beef recovered after 14 months, farm beef price did not fully recover “Concern of beef safety” may be one of main negative factor  Pork sector Pork market benefited from the outbreak  Chicken sector Negative short-run effect from the incidents

10. 10 Impacts of the 2000 FMD on Price Margins  Price margins of beef and pork at the retail level increased relative to the farm and wholesale levels, but the price margin between the wholesale and farm levels stayed the same  The changes of the price margins in the chicken sector are mixed, no discernable pattern. BeefPorkChicken

11. 11 Impacts of the 2003 AI/BSE Events on Price Margins  The price margin of pork and chicken in the retail level gained relative to the farm and wholesale levels.  The beef price margin increased starting from the 13 th month after the outbreaks. BeefPorkChicken

12. 12 Comparison between Two Events  The BSE outbreak occurred in the oversea market was greater than that of the domestic FMD outbreak Initial beef price dropped due to the BSE discovery within the first six months was much bigger than the FMD outbreak Price recovery came earlier in the BSE case (13 months after the BSE and 16 months for the FMD)  FMD negatively affects pork market, but AI/BSE increase pork prices

13. 13  Historical Decomposition “ Dynamic price interdependence” Evaluate how much each price innovation accounts for the atypical variation of a certain price series due to animal disease shocks: “ Dynamic price interdependence” Identification of contemporaneous causal ordering of price innovations: Directed Acyclic Graph (DAG) Price Interdependence

14. 14 Contribution of Each Price Series on the Innovation of Retail Beef Price 2000 FMD Outbreak2003 AI/BSE Outbreak  Each stacked bar illustrates positive or negative contribution of nine price series. The solid line represents the deviation of the actual retail beef price from the base projection  First six months after FMD, farm beef price innovation explained the majority of the retail beef price innovation, After six months the contribution of farm beef price was diminishing and was being replaced by the contributions from the retail beef, retail pork, and farm chicken price  For AI/BSE, farm beef price innovation had a significant negative contribution to the retail beef price innovation

15. 15 Summary  Both domestic and oversee animal disease outbreaks caused a temporary price shock to the Korean meat market  2003 AI/BSE incidents led to greater and more persistent changes in beef prices compared with the 2000 FMD outbreak  Price margin indicates that both outbreaks triggered asymmetric price transmission: Retail sector had a windfall price gain  Innovation of farm price has played a major role in explaining the innovations of the retail prices

16. 16 Concluding Remarks  This study provides a broader understanding of the impacts of disease outbreaks through the investigation of the impacts on meat prices  Analyses of welfare gains and losses in each supply chain are required  A more broad system, including imported meat price as well as quantity along the supply chain, should be analyzed to have a more complete understanding of the impacts of animal disease outbreaks