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Biotechnology in U.S. agriculture: Trade consequences for dairy products
Biotechnology in U.S. Agriculture: Trade Consequences for Dairy Products Doren Chadee and Joseph W. Guthrie,
Massev Universio', New Zealand
The emt:rgence of synthetic bovine Somatotropin (bST) is one of the most widely discussed a, lvances in biotechnology. Its potential impacts on milk production around the world could be ,4gnificant. However, the exact economic impacts of bST in any one region depends on a number of factors, some of which are still highly controversial. This article sets out to estimate the economic impacts of the adoption of bST in the United States, the single largest milk producer in ~he Western world. A quarterly econometric raodel of the U.S. dairy sector is used to lbrecast the .total production, consumption, and excess supply of milk to 1995. The preliminary results indicate that under the assumption of a gradual rate of adoption and a 15 percent milk production response, the United States could be exporting as much milk as New Zealand by 1995. Should the production response rate or the adoption ratc be higher, the United States could indeed become a major competitor in the world dairy market by 1995. Although such a development could adversely impact on other dairy exporters, such as New Zealand, the precise economic impacts on world prices and trade would depend crucially on the pt.sition that other major dairy producers, especially the EC. adopt with respect to the ~se of bST.
1. INTRODUCTION Recent research has estimated that the use of synthetic bST could raise the productivity of milk cows by 15 percent or more. Despite this fact, adoption of this new technology remains highly controversial. Opposition to bST in Western Europe, North America, and Oceania has come from both consumer advocates and from dairy farmers themselves, despite its potential economic benefits. The EC and New Zealand, the two leading exporters of dairy products, have adopted a wait-and-see policy toward the use of bST, ahd are unlikely to use it in the foreseeable future. Successful use of bST in other countries, especially the United States, could pressure the EC and New Zealand Address correspondem'e to Doren Cht~dee. Departmen, ¢( A?!ricuhura; Eronomics and Business. Massev University. Pahnerston North, New Zealand.
Received FebmaD' 19~t~;final draft accepted Dctobcr 199t~. Journal of Po/it3' Modeling 131,1.-41-,.58 ( !991 )
~ Society for Policy Modeling, 1991
241 016 ! -8938/91/$3.50
242
D. Chadee and J. Guthrie
into approving it. I:~ the United States, however, approval of bST has been delayed at least tmtil early 1991. If bST is approved and widely used in the United States, but not in the EC or New Zealand, the United States could potentially emerge as a major exporter of dairy products, at the expense of the Europeans and New Zealanders. The objective of this article is to gauge the impacts on milk production in the United States from the use of bST and to assess the potential implications that such a development represents for other dairy exporters, especially New Zealand. This article is organized in six sections. The next section gives a brief overview of the recent developments on bST, the U.S. dairy sector, and world trade of dairy products. The dairy sector model and results are discussed in Section 3, followed by model validation and forecasting in Section 4. Fhe impacts of bST use on U.S. production derived from the model are presented in Section 5. Section 6 discusses the international trade implications of these results, followed by some concluding remarks.
2. AN OVERVIEW OF BST, THE U.S. DAIRY SECTOR, AND WORLD TRADE Overview of BST BST is a protein that is produced naturally by cattle. Recently developed technology makes it possible for farmers to inject their cattle with synthetic bST at reasonably low prices. Dairy cows that are given daily injections of bST will immediately produce more milk, with no apparent harm to the cows' health or milk's quality. Although the amount of additional production has not yet been determined conclusively, recent studies indicate that the use of bST may increase milk production per cow by as much as 10-20 percent (Fallert et al., 1987). To gain the full benefits of bST, however, most farmers will have to feed and manage their cows more precisely than they do at present. Aside from increased herd management and the cost of the bST itself, estimated to be about $U.S. 0.25 per dose, few additional capital or operational outlays will be required. Hence, bST is a cost-reducing technology that could potentially be adopted by a large number of dairy farmers in the United States (Fallert et al., 1987). Despite the potential benefits of bST, or perhaps because of them, it has sparked a great deal of controversy. Because bST allows farmers to produce considerably more milk per cow, it has prompted cries that it will fundamentally restructure the dairy industry wherever it is
BIOTECHNOLOGY IN U.S. AGRICULTURE
243
adopted. Some argue that dairy surpluses, a chronic problem of the early 1980s, will reappear. Others believe that small and medium-sized dairy fta'ms will not be able to compete with their larger counterparts. As a result, there are fears that bST might drive many family farmers out of business. Agricultural economists from the USDA, however. believe that bST will reinforce, not fundamentally alter, current dairy structure and trends (Fallen et al., 1987). Furthermore, in this age of growing public concern over chemicals in food, bST-treated milk may be rejected by consumers, even if governmental regulatory agencies regard it as safe. These concerns have prompted some dairy producer groups and consumer advocates to call for a ban on the use of bST even before it has been made available. In the EC, a ban has been proposed, and adoption of the hormone in the foreseeable future appears unlikely. New Zealand has adopted a wait-and-see attitude, to gauge the effects of bST in other countries before making any decision (Blayney and Fallert, 1989). While these two major dairy exporters hedge on the use of the new technology, the United States might be the only major dairy producer to use bST in the early 1990s. If such is the case, the United States could become a competitor to the EC and New Zealand in the world milk market. Furthermore, the United States is probably in the best position of any dairy-producing nation to take advantage of bST, given the current policy and production practices. Unlike many OECD countries, the United States does not impose production quotas for milk. In countries with production quotas, there is little incentive to adopt new technology if farmers have to maintain quota levels. From a technical aspect, forage-based production, as in New Zealand, would probably not be able to provide the additional nutritional requirements necessary to make use of bST profitable. In contrast, dairy production in the United States uses a combination of concentrates and forages, thus allowing for more flexibility for meeting the feeding challenges presented by bST (Blayney and Fallert, 1989). Even in the United States, however, future use of bST is in doubt. The states of Wisconsin and Minnesota, which produce 25 percent of the nation's milk, recently announced a ban on bST use until June 1991. Vermont, another major milk-producing state, is expected to follow shortly. Western United Dairymen, a dairymen's association based in California, has recently called for an industry-imposed moratorium on bST until there is sufficient evidence that bST would not adversely affect milk sales (Dickrell, 1990). However, it is important to note that there has been no Congressional action to ban the chemical
244
D, C h a d e e and J. G u t h r i e
T a b l e !: Structural Chan,,c in the U.S. Dairy Sector: 1 9 5 5 - 1 9 8 9
Co~v,, I(tO0 head)
Farm,, wilh milk cows (OLEOhead l A~c. n o of coors per farnl Milk per cow [Ibs/.vcar~ Total milk production (million Ib,,.l
1955
1975
1989
Changc 1955-1989
21.044 2.763 g 5.842 122.945
I 1.139 414 25 1(|.3611 115.39s'
10.127 I O(I 49 14.244 145.252
-percent-52 -94 513 144 18
S~mne: USI)A.
nationally in the United States. Before bST is made available, it must be approved by the U.S. Food and Drug Adnfinistration (FDA) as being sate and effective. The FDA was expected to approve bST earlier this year: howcvcr, the agency has delayed its decision at least until early in 1991 (Dickrell, !990).
Overview of the U.S Dairy Sector Dairy production in the United States has traditionally been dominated by "'family" farms. These farms are relatively small and numerous, with moderate entry and exit constraints. Therefore they can be categorized rather accurately as perfectly competitive. During the past 30 years, the industry has been characterized by increasing milk production per cow and decreasing numbers of cows and dairy farms (Fallcrt, Blayney, and Miller, 1990). Table I shows that the total nun,her of dairy cows has declined from 21 million head in 1955 to about 10 million head in 1989. Similar drastic downward trends are evident for the number of farms with cows over the last three decades. However, managerial and technological advances have resulted in signilicant increases in milk production per cow over the same period of time. As a result, total milk production in the United States has increased by about 18 percent since 1955. Another characteristic of the U.S. dairy sector relates to the two major dairy programs that originated during the Great Depression of the 1930s and that have remained largely unchanged. These are the Federal Milk Market Order scheme and the Price Support scheme. The Federal Milk Market Order scheme sets minimum prices that milk processors must pay farmers (or their cooperatives) for fluid grade milk in a given market order area. Not all of the nation is included in the 48 federal market order areas, but these areas account for over 80 percent of the fluid milk produced. The program was designed to
BIOTECttNOI.OGY IN U.S. AGRICUL(I!RI-~
245
prevent processors from t,,~ing monopsony po~ver in purchasing milk and to differentiate prices between fluid grade milk and milk |\~r manufacturing purposes {Knutson. Penn. and Boehm. 19X3t. The Price Support scheme ~vas designed to maintain reasonable and stable prices for milk and dairy products; it i,,,opcl'atcd by go~,crnmcn[ purchases of dairy products. In this program, federal law periodically establishes a minimum support price lor milk. Whenever the market price falls below the support price for a specified length of time, the Commodity Credit Corporation {CCC) of the U.S. Dcpamnent of Agriculture (USDA) purchases butter, cheese, and nonl'm dry milk on the open market and then removes them from the market until the price returns to the support level. An import quota is used m pre',ent cheaper imports from undercutting the gaaran:eed pri','e. In the past. th~s quota has been set to about 2 percent of total supply. Government net removals through CCC purchases can be dispo.,,ed of in several ways. These include resale of dairy products on the open market at higher prices or disposal through federal nutrition programs. donation to foreign aid programs through PL 480, or exports. Unlike federal support programs for other agricultural commodities, such as wheat, the dairy support program does not require farmers to control production to qualify for the benefits of the supported price. The support price program was originally designed to moderate seasonal differences in supply and demand. During the !980s. h o w ever, the program has been more annual in nature and cxt:c, s supplies have led to dairy surpluses and low prices, thereby fim.'ing the CCC to purchase large quantities of dairy products throughout the year. The unprecedented costs incurred through purchases and storage of dairy products, along with growing concern over the federal budget deficit in the 1980s, led Congress to take extraordinary' measures in the 1985 Farm Bill. The Farm Bill authorized a whole-herd buyout program, called the Dairy Termination Program (DTP) and a declining support price. The DTP allowed farmers to dispose of their cattle and stay out of dairying fi~r five years, in return for government payments. Between 1980 and 1987. the program removed approximalcl3' l million cattle and 12 billion pounds of annual production capacity from ti~e market. Part of the cost of the program was tinanccd by producers through a U.S.$O.40/cwt levy on milk sales. The 1985 Farm Bill also called fl~r a fundamental change in the ;va\ support prices are calculated. Instead of continuing to link supports to parity prices, the Farm Bill authorized the Secretary of Agriculture to reduce the support price by U.S.$0.50/cwt whenever annual CCC purchases were projected to be above 5 billion pounds. USDA econ-
246
D. Chadee and J. Guthrie
omists believed up to 5 billion pounds of dairy products could be disposed of through aid and nutrition programs without creating market disturbances and without forcing the United States to dump dairy products on the international market. This policy led to a reduction of the support price of milk from U.S.$12.60/cwt to U.S.$10.10/cwt between 1985 and 1990. To the extent that the current stocks of butter, cheese, and skim milk powder are at historically low levels, the objectives of the 1985 Farm Bill have been largely met. The direction of U.S. dairy policy in the 1990s is defined in the 1990 Farm Bill, which became effective at the beginning of 1991. The current Farm Bill is defensive in nature to the extent that a minimum support price of U.S.$10.10/cwt will be maintained throughout the 1991-1995 period regardless of dairy product purchases. This policy reversal may force the CCC to purchase large quantities of dairy products, as it did in the 1980s, to maintain the support price. Additional output of milk resulting from the widespread use of bST should it be made available could further compound the U.S. dairy surplus problem. World Dairy Trade
World trade in dairy products is a relatively minor component both of total world dairy output and of total world agricultural trade. Only about 5 percent of the world's total dairy output is traded (International Dairy Arrangement, 1989). Because milk is a bulky and perishable commodity, most trade is actually in dairy products, especially butter, cheese, and dry milk powders. Most exports of dairy products come from the industrialized nations of the OECD, especially the EC, New Zealand, and the United States. Major importers of dairy products include a wide range of countries. The Soviet Union is often the leading importer of butter, and other Eastern European countries are also large importers. Developing countries have traditionally imported substantial quantities of milk powders and butteroil. Countries in the Middle East and East Asia are emerging as major importers as well. The less developed countries (LDCs) are the traditional market for milk powder. Figure l shows the major exporters of dry milk, butter, and cheese in 1988. As a region, the EC dominates the world markets for all three dairy products. The United States exports primarily dry milk powder, much of which is donated as food aid through PL 480 programs. Of the major exporters, New Zealand is the only country where dairy exports account for a major part of its export sector. Studies have shown that even without any changes in the GATT rules, the United States could emerge as a significant player in the
248
D. Chadee and J. Guthrie
world dairy market (Blayney and FaileR, 1989). Accordingly, three major factors would determine the role of the United States as a dairy exporter. The most important was found to be maintenance of EC production quotas to keep international prices strong. The domestic dairy policy was listed as next in importance, and third was the use of BST in the Ur;t,~d States and other dairy-trading nations. The same study argues that a flexible U.S. support price that accommodates domestic supply and demand relationships, coupled with EC discipline in production and export subsidies, would allow the United States to be an occasional dairy exporter. 3. THE DAIRY SIMULATION MODEL For the purpose of the present analysis, we use an aggregate quarterly econometric model of the U.S. dairy sector in order to determine the potential changes in total milk production in the United States as a result of the adoption of BST. The analysis in this study is done in the following stages: 1. Determination of appropriate econometric models for the relevant variables under consideration 2. Simulation of these models to generate sample forecasts for these variables 3. Use of the predicted values of these variables to estimate the potential increases in milk production from BST. The econometric model consists of four behavioral equations that explain milk cow inventories, milk production per cow, disappearance of commercial milk, and real farm prices for milk. Total milk production is derived through an identity. The dairy model is estimated from quarterly data for the period 1981.1 to 1990.1. Given that the explanatory variables in some equations are themselves determined by other equations, we use two-stage least squares (2SLS) as the estimation technique. The estimated econometric equations are summarized in Table 2 and are followed by a list of the variable definitions in Table 3. All variables are specified in their logarithmic form except for the 0-1 dummy variables, which are in nonlog form. Judging by their R 2 values, F values, and the coefficients of variation, all equations perform reasonably well. Autocorrelation did not pose a major problem for any of the equations except for the real farm milk price. Correction of autocorrelation in this case created additional problems at the simulation stage.
BIOTECHNOLOGY
IN U . S . A G R I C U L T U R E
249
T a b l e 2. E c o n o m e t r i c E q u a t i o n s o f the Dairy M o d e l : 2 S L S Results (1981. I - 1 9 9 0 . i) i.
Cow inventory I n C O W = 1.24 + 0.87 I n C O W _ ~ + 0 0 5 I n R F M P _ ~ - 0.02 I n R B M P _ (3.4) (22.0) (4.3) (-4.0) - 0.015 D T P - 0 . 0 0 9 D I = 0 . 0 0 6 D 2 - 0.002 D 3 . (-5.2) (-3.5) (-25) (-0.76) R 2 = . 9 8 ; D W = 1 . 7 ; F = 236;CV = 0.056.
.
Milk production per cow = 2.02 + 0.73 I n M P C _ I + 0.1 I n R F M P _ ~ - 0 . 0 5 InRBMP_D (2.0) (5.8) (2.0) ( - 1,9)
lnMPC
+ 0.002 T + 0.05 D i + 0 . 0 9 D 2 - 0 . 0 0 4 D 3 .
(2.7) R:' =
.
.97;
=
1.5; F
=
(17.1) 190; CV
=
(-0.4) 0.14.
Total w,ilk production lnPROD
.
DW
(6.4)
= InCOW + InMPC.
Commercial di~ppearances lnCDIS =
8.92 - 0.2 I n R F M P + 0.26 lnRY - 0.09 D ! (9.2) ( - !.8) (2.1) (-6.8)
- 0.01D2 + 0.02D3. (-0.8) (I.5) R-" = .86; D W = !.24; F = 44.5; C V = 0.25. .
Farm milk price InRFMP
= 7.1 + 0.79 l n R E S P - 0.72 I n C O W - 0 . 0 3 D I (I.8) (9.0) ( - i.7) ( - 1.3) -
0 . 0 9 1)2 -
(-4.1)
0.07 D 3 . (-3.1)
R 2 = .85; D W = 0.53; F = 42.0; C V = 3 . 4 6 . N o t e : in preceding a variable denotes the natural log of that variable. Subscripts at the end of a variable denote a quarterly lag. T values are shown in parentheses. D W is the Durbin-Watson value and C V is the coefficient of variation.
Cow inventory is determined as a function of numbers of cows in the previous quarter, real farm milk prices lagged one quarter, real soybean meal price lagged one quarter, a dummy variable (DTP) to account for the Dairy Termination Program, and quarterly seasonal 0-1 dummy variables. This specification is similar to the ones used previously by Kaiser (1990a) and Wescott and Carman (1985). All
250
D. Chadee and J. Guthrie
Table 3: Quarterly Dairy Model Variable Definitions Variable
Definition
Units
CDIS
Comrnerci,I disappearances of milk ~
Mil Ibs'
COW
Milk cow inventory b
Thousand head
D,
Dummy variable equal to I in the a~' quarter (i = 1,2,3)
0-1
DTP
Dummy variable for the Dairy Termination Program equals I for 1986-1987; 0 otherwise
0-1
MPC
Milk production per cow"
Pounds
RBMP
Real soybean meal price, Decatur, 44% protein ~
U.S.$/ton d
RESP
Real support price, less price deductions
U.S.$1cwt d
RFMP
Real farm milk price, for all milk sold to plants ~
U.S.$1cwt d
RY
Real U.S. disposable income h
Bil $d
T
Time trend (months)
!-37
aSum i0r me quarter. bAverage for the quarter. CMilk equivalent of products. dDeflated by CPI, 1967 = 100.
coefficients (except for D3) had the expected signs and were statistically significant at the 0.5 percent level. Milk production per cow was modeled following previous specifications by Kaiser (1990b). As in the previous case, the estimated coefficients had the expected signs and were also significant at the 0.5 percent level. As expected, the production of milk per cow is highly seasonal. In addition, the linear time trend confirms the gradual and steady increase in milk production per cow over the years. The specification of the equation for commercial disappearance of milk follows conventional consumer demand theory, whereby the demand for a product is determined by its own price, the prices of substitutes, and the level of income. To the extent that the present equation explains the disappearance of milk at the wholesale level rather then at the retail level, the prices of milk substitutes become less relevant. This model gave satisfactory results, with highly significant values for the important explanatory variables. Modeling the real farm milk price represented some challenges, as the performance of this equation was less satisfactory. The real farm milk price is specified as a function of the real support price, the number of cows, and quarterly seasonal dummy variables. Previous attempts to model the real farm milk price by Wescott and Carman
BIOTECHNOLOGY IN U.S. AGRICULTURE
251
T a b l e 4. lntrasample Simulation Performance
Variable Cow MPC PROD CDIS RFMP
Definition Milk cow inventory Milk production per cow Total milk production Disappearances of commercial production Real farm milk price
Root-mean-square percentage error 0.7 0. i !.6 2,5 5.0
Source: Estimated.
(1985) differ somewhat from the current specification. This is partly due to the different time period under consideration. The estimated coefficients have the expected signs, and apart from the seasonal dummy variable (D3) they are all significantly different from zero.
4. MODEL VALIDATION AND FORECASTING So far the behavioi'al eq-ations of the dairy sector model have been evaluated with statistical tests like the t test for individual coefficients, and the R 2 and the F test for the significance of the different models. It is instructive at this stage to evaluate the overall performance of the model, to investigate how well each model is capable of tracking the historical values of its dependent variable. In order to accomplish this, a dynamic simulation of the model was performed over the 1981-1990 period. Simulated values oI the dependent variable are generated by feeding predicted values of the dependent variables into the lagged endogenous terms. Summary performance statistics for each of the endogenous variables are presented in Table 4. Root-mean-square percentage errors (RMSPE) of less than 5 percent were observed for all five variables under consideration. The model appears to be weakest in reproducing the real farm price of milk. However, to the extent that errors for this variable in recent periods were substantially less than errors over the entire sample, the structure of the present model was kept for out-of-sample forecast. Once the models were validated, we used the estimated coefficients to generate conditional forecasts of the endogenous variables over the period 1991-1995. Conditional forecasts were produced based on conditional values of the exogenous variables over the forecast period. The simplistic structure of the present model meant that assumed values of only a small number of variables were needed. Futures prices of soybean meal from the Chicago Board of Trade were used as a guide
252
D. Chadee and J. Guthrie
for assumed values of beanmeal prices to 1995. The real suppo:t prices were based on support price of U.S.$10. lO/cwt contained in the 1990 Farm Bill. The real U.S. disposable income for the period 1991-1995 was Jerived by extrapolating current income trends. In all cases, a level of inflation of 5 percent annually was assumed. Figure 2 shows the plots of actual and simulated values of the endogenous variables over the historical period as well as over the forecast period. The forecast values of the endogenous variables are summarized in Table 5. The results indicate that the number of dairy cows will continue to decline over the 1991-1995 period. Although consistent with other studies, the magnitudes of the decline in this analysis are less dramatic than those reported in Kaiser, for instance. The number of cows is predicted to decline to 9.8 million head by the end of 1995. Milk production per cow is expected to continue its steady upward trend over the 199 l - 1995 period. By 1995, average annual milk production per cow is estimated to be 15,935 pounds. This translates into an annual rate of increase of about 2.4 percent, which is consistent with historical increases in milk production. This estimate compares favorably with that from Kaiser (1990b). The product of numbers of cows and milk produced per cow gives the total milk production in the United States. Again, the estimated total milk production over the 1991-1995 period is consistent with the general trend in milk production over the last decade. By 1995, the United States will be producing an estimated 155.8 billion pounds of milk annually. The U.S. commercial disappea_~nce of milk shows a slightly faster rate of growth over the 199 l-1995 period. This is partly due to lower real prices of milk over this period, since the support price is fixed at U.S.$10.10. By 1995 the real farm milk price is estimated to be U.S.$2.73/cwt, a drop of 12 percent from the 1991 price level. This is consistent with the historical trend as real farm prices dropped by about 4 percent annually during the 1980s. 5. IMPACTS OF BST ON PRODUCTION The impacts of bST on U.S. milk production can be derived in a straightforward fashion as follows. Two factors determine the extent by which total milk production will increase in the United States following the adoption of bST. These are (l) the rate of adoption of bST by farmers and (2) the response of milk production to bST. As mentioned earlier, proper management and nutrition also impact on results
253
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saNNod ~
+
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im •+.
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254
D. Chadee and J. Guthrie
Table 5: Predicted Values of Selected Variables (Without bST) COW
MPC
PROD
CDIS
RFMP
Year
(000 head)
(ib/year)
(bil. Ib)
(bil. Ib)
(U.S.$1/cwt)
1991 1992 1993 1994 1995
10,143 10,077 9,986 9,884 9,776
14,549 14,815 15,158 15,536 15,935
147,568 149,286 151,359 153,550 155,784
143,252 144,955 146,628 148,293 149,966
$3.11 3.01 2.91 2.82 2.73
Source: Estimated.
from bST use. The present analysis assumes that those farmers who adopt the use of bST are aware of these other factors and thus derive the maximum benefits from bST. On the basis of recent studies on the production response to bST and on the likely rate of adoption of bST by U.S. dairy farmers, the present analysis assumes the following: 1. Increases in the production of milk per cow (response rate) ranging from 10 percent to 20 percent, with an average of 15 percent. 2. The following rates of adoption for the 1991-1995 period: 1991 1992 1993 1994 1995
10 20 36 44 48
percent percent percent percent percent
These rates of adoption are consistent with recent USDA nationwide surveys on the potential users of bST in the United States should it be made available. On the basis of the above assumptions, the impacts of bST on milk production can be estimated as follows: Change in milk production = (Response rate • Milk per cow) • (Adoption rate • Cow inventory.)
The estimated increases in total milk production und~ ' ~5..,~,,,~ri:~us assumptions are summarized in Table 6. Increases in total milk production in the United States following the adoption of bST may be as low as 1.5 billion pounds in 1991 and as high as 15 billion pounds by 1995. This range is equivalent to 1 percent and 10 percent of current total production. Initially, the increases are modest, but as bST is more widely adopted across the nation, these
B I O T E C H N O L O G Y IN U.S. A G R I C U L T U R E
255
Table 6: Increase in Total Milk Production (mil Ib) from bST: 1991-1995 Increases in milk per coy, of:
1991 1992 1993 1994 1995
10%
15%
"~"~
1,476 2.986 5,449 6,756 7,478
2,2t4 4,479 8,173 10.134 I 1,216
2.951 5.97 I 10.898 13.512 14,955
Source: Estimated.
increases will be more substantial. The impacts of bST on total milk production between 1991 and 1995 under the three response rate assumptions are also compared to the baseline scenario (no bST) in Figure 3. 6. INTERNATIONAL TRADE IMPLICATIONS AND CONCLUDING REMARKS The above analysis has shown clearly that the adoption of bST in the United States can potentially produce substantial surpluses of milk in the United States. Assuming that the United States does not change
1751200 =¢ 170000. ~Z~165000 160000
I
155000 150000 14500C
19'90
...-m- NO BST
19'91
19'92
"4'-- 10% RESP. +
19'93
19'94
15% RESP. ~
19'95 20% RESP. I
Figure 3. Production with and without bST. Under 10%, 15%, and 20c~ response rates.
25(~
13. Chadcc and J. Gulhric 22000 . . . . . . . . . . . . . . . . . . . . . . . . 20000
/ . . . .I .
. . . . . . . . . . . . . . .
i
18O00
>-
/'"
/
~
i
16000 z
14000
P.,,
12000
Z 10000
m
8000 6000 4000
[ Figure 4.
-Q-
~7 . . . . 1990
N O [qST
1991 +
19~2
10'~ RESP, - ~ "
1993
19'g4" 1995
1"~'-~ I~.ESP. ---43--- 21,3G RESP,
1
Excess supply with and wilhout bST. Under 10c/~. 15c7~, and 20% resi~mse
rates.
its current levels of importation (which mainly consists of cheese) and of foreign aid donations, and assuming no major increases in local consumption, large surpluses of milk will be available for export by 1995. The magnitude of these surpluses can range from 5 billion pounds to 22 billion pounds over the 1991-1995 period (see Figure 4). To put the possible increases in milk production from bST in the United States into perspective, New Zealand's total milk production in 1988 amounted to 17 billion pounds. Thus the increase in U.S. production, although minimal by U.S. standards, could make the United States a larger exporter of dairy products than New Zealand. Since the United Slates exports mai,dy dry milk powder, New Zealand could be particularly hard hit. Australia and the EC could also be adversely affected by the emergence of the United States as adair 3' exporter. The above analysis has assumed that the United States is the only country that will use bST over the 1991-1995 period. However, as pointed out earlier, should the United States adopt bST, the EC could also do the same to maintain their competitiveness on the world dairy market. Such a situation would further add to the world surplus of dairy production. As a response to these surpluses, world prices of dairy products could decline significantly. An important implication of this development would be the threat
export subsidies duri
products. In the cwr’ of New Zealand. t essarily lead to gains in This is mainly due to th ’ -4and. which is not to capture the full benefits of bST. major change
in rn~~n~~~~~~~tand production practices would be required. Thus. New Zealrt~d’s international competitiveness in dairy could be seriousEy affected.
D. Chadee and J. Guthrie
258 indicators of the Farm Sector: Costs of Production-
ington. DC: USDA, March. United States Department of Agriculture DC: USDA, March. United States Department of Agriculture
(1990) Daiv (1981-1990)
Livestock and Dairy.
1998. Wash-
Situutiott and Outlook Report. Washingtorl,
Oil Crops Situation and Otctlook Report.
Washington, DC: USDA. Westcott. P., and Carman, C. ( 1985) Effects of Various Dairy Support Price Alternatives. Dairy Situation and Outlook Report. Washington, DC: USDA. March.
Massev Universio', New Zealand
The emt:rgence of synthetic bovine Somatotropin (bST) is one of the most widely discussed a, lvances in biotechnology. Its potential impacts on milk production around the world could be ,4gnificant. However, the exact economic impacts of bST in any one region depends on a number of factors, some of which are still highly controversial. This article sets out to estimate the economic impacts of the adoption of bST in the United States, the single largest milk producer in ~he Western world. A quarterly econometric raodel of the U.S. dairy sector is used to lbrecast the .total production, consumption, and excess supply of milk to 1995. The preliminary results indicate that under the assumption of a gradual rate of adoption and a 15 percent milk production response, the United States could be exporting as much milk as New Zealand by 1995. Should the production response rate or the adoption ratc be higher, the United States could indeed become a major competitor in the world dairy market by 1995. Although such a development could adversely impact on other dairy exporters, such as New Zealand, the precise economic impacts on world prices and trade would depend crucially on the pt.sition that other major dairy producers, especially the EC. adopt with respect to the ~se of bST.
1. INTRODUCTION Recent research has estimated that the use of synthetic bST could raise the productivity of milk cows by 15 percent or more. Despite this fact, adoption of this new technology remains highly controversial. Opposition to bST in Western Europe, North America, and Oceania has come from both consumer advocates and from dairy farmers themselves, despite its potential economic benefits. The EC and New Zealand, the two leading exporters of dairy products, have adopted a wait-and-see policy toward the use of bST, ahd are unlikely to use it in the foreseeable future. Successful use of bST in other countries, especially the United States, could pressure the EC and New Zealand Address correspondem'e to Doren Cht~dee. Departmen, ¢( A?!ricuhura; Eronomics and Business. Massev University. Pahnerston North, New Zealand.
Received FebmaD' 19~t~;final draft accepted Dctobcr 199t~. Journal of Po/it3' Modeling 131,1.-41-,.58 ( !991 )
~ Society for Policy Modeling, 1991
241 016 ! -8938/91/$3.50
242
D. Chadee and J. Guthrie
into approving it. I:~ the United States, however, approval of bST has been delayed at least tmtil early 1991. If bST is approved and widely used in the United States, but not in the EC or New Zealand, the United States could potentially emerge as a major exporter of dairy products, at the expense of the Europeans and New Zealanders. The objective of this article is to gauge the impacts on milk production in the United States from the use of bST and to assess the potential implications that such a development represents for other dairy exporters, especially New Zealand. This article is organized in six sections. The next section gives a brief overview of the recent developments on bST, the U.S. dairy sector, and world trade of dairy products. The dairy sector model and results are discussed in Section 3, followed by model validation and forecasting in Section 4. Fhe impacts of bST use on U.S. production derived from the model are presented in Section 5. Section 6 discusses the international trade implications of these results, followed by some concluding remarks.
2. AN OVERVIEW OF BST, THE U.S. DAIRY SECTOR, AND WORLD TRADE Overview of BST BST is a protein that is produced naturally by cattle. Recently developed technology makes it possible for farmers to inject their cattle with synthetic bST at reasonably low prices. Dairy cows that are given daily injections of bST will immediately produce more milk, with no apparent harm to the cows' health or milk's quality. Although the amount of additional production has not yet been determined conclusively, recent studies indicate that the use of bST may increase milk production per cow by as much as 10-20 percent (Fallert et al., 1987). To gain the full benefits of bST, however, most farmers will have to feed and manage their cows more precisely than they do at present. Aside from increased herd management and the cost of the bST itself, estimated to be about $U.S. 0.25 per dose, few additional capital or operational outlays will be required. Hence, bST is a cost-reducing technology that could potentially be adopted by a large number of dairy farmers in the United States (Fallert et al., 1987). Despite the potential benefits of bST, or perhaps because of them, it has sparked a great deal of controversy. Because bST allows farmers to produce considerably more milk per cow, it has prompted cries that it will fundamentally restructure the dairy industry wherever it is
BIOTECHNOLOGY IN U.S. AGRICULTURE
243
adopted. Some argue that dairy surpluses, a chronic problem of the early 1980s, will reappear. Others believe that small and medium-sized dairy fta'ms will not be able to compete with their larger counterparts. As a result, there are fears that bST might drive many family farmers out of business. Agricultural economists from the USDA, however. believe that bST will reinforce, not fundamentally alter, current dairy structure and trends (Fallen et al., 1987). Furthermore, in this age of growing public concern over chemicals in food, bST-treated milk may be rejected by consumers, even if governmental regulatory agencies regard it as safe. These concerns have prompted some dairy producer groups and consumer advocates to call for a ban on the use of bST even before it has been made available. In the EC, a ban has been proposed, and adoption of the hormone in the foreseeable future appears unlikely. New Zealand has adopted a wait-and-see attitude, to gauge the effects of bST in other countries before making any decision (Blayney and Fallert, 1989). While these two major dairy exporters hedge on the use of the new technology, the United States might be the only major dairy producer to use bST in the early 1990s. If such is the case, the United States could become a competitor to the EC and New Zealand in the world milk market. Furthermore, the United States is probably in the best position of any dairy-producing nation to take advantage of bST, given the current policy and production practices. Unlike many OECD countries, the United States does not impose production quotas for milk. In countries with production quotas, there is little incentive to adopt new technology if farmers have to maintain quota levels. From a technical aspect, forage-based production, as in New Zealand, would probably not be able to provide the additional nutritional requirements necessary to make use of bST profitable. In contrast, dairy production in the United States uses a combination of concentrates and forages, thus allowing for more flexibility for meeting the feeding challenges presented by bST (Blayney and Fallert, 1989). Even in the United States, however, future use of bST is in doubt. The states of Wisconsin and Minnesota, which produce 25 percent of the nation's milk, recently announced a ban on bST use until June 1991. Vermont, another major milk-producing state, is expected to follow shortly. Western United Dairymen, a dairymen's association based in California, has recently called for an industry-imposed moratorium on bST until there is sufficient evidence that bST would not adversely affect milk sales (Dickrell, 1990). However, it is important to note that there has been no Congressional action to ban the chemical
244
D, C h a d e e and J. G u t h r i e
T a b l e !: Structural Chan,,c in the U.S. Dairy Sector: 1 9 5 5 - 1 9 8 9
Co~v,, I(tO0 head)
Farm,, wilh milk cows (OLEOhead l A~c. n o of coors per farnl Milk per cow [Ibs/.vcar~ Total milk production (million Ib,,.l
1955
1975
1989
Changc 1955-1989
21.044 2.763 g 5.842 122.945
I 1.139 414 25 1(|.3611 115.39s'
10.127 I O(I 49 14.244 145.252
-percent-52 -94 513 144 18
S~mne: USI)A.
nationally in the United States. Before bST is made available, it must be approved by the U.S. Food and Drug Adnfinistration (FDA) as being sate and effective. The FDA was expected to approve bST earlier this year: howcvcr, the agency has delayed its decision at least until early in 1991 (Dickrell, !990).
Overview of the U.S Dairy Sector Dairy production in the United States has traditionally been dominated by "'family" farms. These farms are relatively small and numerous, with moderate entry and exit constraints. Therefore they can be categorized rather accurately as perfectly competitive. During the past 30 years, the industry has been characterized by increasing milk production per cow and decreasing numbers of cows and dairy farms (Fallcrt, Blayney, and Miller, 1990). Table I shows that the total nun,her of dairy cows has declined from 21 million head in 1955 to about 10 million head in 1989. Similar drastic downward trends are evident for the number of farms with cows over the last three decades. However, managerial and technological advances have resulted in signilicant increases in milk production per cow over the same period of time. As a result, total milk production in the United States has increased by about 18 percent since 1955. Another characteristic of the U.S. dairy sector relates to the two major dairy programs that originated during the Great Depression of the 1930s and that have remained largely unchanged. These are the Federal Milk Market Order scheme and the Price Support scheme. The Federal Milk Market Order scheme sets minimum prices that milk processors must pay farmers (or their cooperatives) for fluid grade milk in a given market order area. Not all of the nation is included in the 48 federal market order areas, but these areas account for over 80 percent of the fluid milk produced. The program was designed to
BIOTECttNOI.OGY IN U.S. AGRICUL(I!RI-~
245
prevent processors from t,,~ing monopsony po~ver in purchasing milk and to differentiate prices between fluid grade milk and milk |\~r manufacturing purposes {Knutson. Penn. and Boehm. 19X3t. The Price Support scheme ~vas designed to maintain reasonable and stable prices for milk and dairy products; it i,,,opcl'atcd by go~,crnmcn[ purchases of dairy products. In this program, federal law periodically establishes a minimum support price lor milk. Whenever the market price falls below the support price for a specified length of time, the Commodity Credit Corporation {CCC) of the U.S. Dcpamnent of Agriculture (USDA) purchases butter, cheese, and nonl'm dry milk on the open market and then removes them from the market until the price returns to the support level. An import quota is used m pre',ent cheaper imports from undercutting the gaaran:eed pri','e. In the past. th~s quota has been set to about 2 percent of total supply. Government net removals through CCC purchases can be dispo.,,ed of in several ways. These include resale of dairy products on the open market at higher prices or disposal through federal nutrition programs. donation to foreign aid programs through PL 480, or exports. Unlike federal support programs for other agricultural commodities, such as wheat, the dairy support program does not require farmers to control production to qualify for the benefits of the supported price. The support price program was originally designed to moderate seasonal differences in supply and demand. During the !980s. h o w ever, the program has been more annual in nature and cxt:c, s supplies have led to dairy surpluses and low prices, thereby fim.'ing the CCC to purchase large quantities of dairy products throughout the year. The unprecedented costs incurred through purchases and storage of dairy products, along with growing concern over the federal budget deficit in the 1980s, led Congress to take extraordinary' measures in the 1985 Farm Bill. The Farm Bill authorized a whole-herd buyout program, called the Dairy Termination Program (DTP) and a declining support price. The DTP allowed farmers to dispose of their cattle and stay out of dairying fi~r five years, in return for government payments. Between 1980 and 1987. the program removed approximalcl3' l million cattle and 12 billion pounds of annual production capacity from ti~e market. Part of the cost of the program was tinanccd by producers through a U.S.$O.40/cwt levy on milk sales. The 1985 Farm Bill also called fl~r a fundamental change in the ;va\ support prices are calculated. Instead of continuing to link supports to parity prices, the Farm Bill authorized the Secretary of Agriculture to reduce the support price by U.S.$0.50/cwt whenever annual CCC purchases were projected to be above 5 billion pounds. USDA econ-
246
D. Chadee and J. Guthrie
omists believed up to 5 billion pounds of dairy products could be disposed of through aid and nutrition programs without creating market disturbances and without forcing the United States to dump dairy products on the international market. This policy led to a reduction of the support price of milk from U.S.$12.60/cwt to U.S.$10.10/cwt between 1985 and 1990. To the extent that the current stocks of butter, cheese, and skim milk powder are at historically low levels, the objectives of the 1985 Farm Bill have been largely met. The direction of U.S. dairy policy in the 1990s is defined in the 1990 Farm Bill, which became effective at the beginning of 1991. The current Farm Bill is defensive in nature to the extent that a minimum support price of U.S.$10.10/cwt will be maintained throughout the 1991-1995 period regardless of dairy product purchases. This policy reversal may force the CCC to purchase large quantities of dairy products, as it did in the 1980s, to maintain the support price. Additional output of milk resulting from the widespread use of bST should it be made available could further compound the U.S. dairy surplus problem. World Dairy Trade
World trade in dairy products is a relatively minor component both of total world dairy output and of total world agricultural trade. Only about 5 percent of the world's total dairy output is traded (International Dairy Arrangement, 1989). Because milk is a bulky and perishable commodity, most trade is actually in dairy products, especially butter, cheese, and dry milk powders. Most exports of dairy products come from the industrialized nations of the OECD, especially the EC, New Zealand, and the United States. Major importers of dairy products include a wide range of countries. The Soviet Union is often the leading importer of butter, and other Eastern European countries are also large importers. Developing countries have traditionally imported substantial quantities of milk powders and butteroil. Countries in the Middle East and East Asia are emerging as major importers as well. The less developed countries (LDCs) are the traditional market for milk powder. Figure l shows the major exporters of dry milk, butter, and cheese in 1988. As a region, the EC dominates the world markets for all three dairy products. The United States exports primarily dry milk powder, much of which is donated as food aid through PL 480 programs. Of the major exporters, New Zealand is the only country where dairy exports account for a major part of its export sector. Studies have shown that even without any changes in the GATT rules, the United States could emerge as a significant player in the
248
D. Chadee and J. Guthrie
world dairy market (Blayney and FaileR, 1989). Accordingly, three major factors would determine the role of the United States as a dairy exporter. The most important was found to be maintenance of EC production quotas to keep international prices strong. The domestic dairy policy was listed as next in importance, and third was the use of BST in the Ur;t,~d States and other dairy-trading nations. The same study argues that a flexible U.S. support price that accommodates domestic supply and demand relationships, coupled with EC discipline in production and export subsidies, would allow the United States to be an occasional dairy exporter. 3. THE DAIRY SIMULATION MODEL For the purpose of the present analysis, we use an aggregate quarterly econometric model of the U.S. dairy sector in order to determine the potential changes in total milk production in the United States as a result of the adoption of BST. The analysis in this study is done in the following stages: 1. Determination of appropriate econometric models for the relevant variables under consideration 2. Simulation of these models to generate sample forecasts for these variables 3. Use of the predicted values of these variables to estimate the potential increases in milk production from BST. The econometric model consists of four behavioral equations that explain milk cow inventories, milk production per cow, disappearance of commercial milk, and real farm prices for milk. Total milk production is derived through an identity. The dairy model is estimated from quarterly data for the period 1981.1 to 1990.1. Given that the explanatory variables in some equations are themselves determined by other equations, we use two-stage least squares (2SLS) as the estimation technique. The estimated econometric equations are summarized in Table 2 and are followed by a list of the variable definitions in Table 3. All variables are specified in their logarithmic form except for the 0-1 dummy variables, which are in nonlog form. Judging by their R 2 values, F values, and the coefficients of variation, all equations perform reasonably well. Autocorrelation did not pose a major problem for any of the equations except for the real farm milk price. Correction of autocorrelation in this case created additional problems at the simulation stage.
BIOTECHNOLOGY
IN U . S . A G R I C U L T U R E
249
T a b l e 2. E c o n o m e t r i c E q u a t i o n s o f the Dairy M o d e l : 2 S L S Results (1981. I - 1 9 9 0 . i) i.
Cow inventory I n C O W = 1.24 + 0.87 I n C O W _ ~ + 0 0 5 I n R F M P _ ~ - 0.02 I n R B M P _ (3.4) (22.0) (4.3) (-4.0) - 0.015 D T P - 0 . 0 0 9 D I = 0 . 0 0 6 D 2 - 0.002 D 3 . (-5.2) (-3.5) (-25) (-0.76) R 2 = . 9 8 ; D W = 1 . 7 ; F = 236;CV = 0.056.
.
Milk production per cow = 2.02 + 0.73 I n M P C _ I + 0.1 I n R F M P _ ~ - 0 . 0 5 InRBMP_D (2.0) (5.8) (2.0) ( - 1,9)
lnMPC
+ 0.002 T + 0.05 D i + 0 . 0 9 D 2 - 0 . 0 0 4 D 3 .
(2.7) R:' =
.
.97;
=
1.5; F
=
(17.1) 190; CV
=
(-0.4) 0.14.
Total w,ilk production lnPROD
.
DW
(6.4)
= InCOW + InMPC.
Commercial di~ppearances lnCDIS =
8.92 - 0.2 I n R F M P + 0.26 lnRY - 0.09 D ! (9.2) ( - !.8) (2.1) (-6.8)
- 0.01D2 + 0.02D3. (-0.8) (I.5) R-" = .86; D W = !.24; F = 44.5; C V = 0.25. .
Farm milk price InRFMP
= 7.1 + 0.79 l n R E S P - 0.72 I n C O W - 0 . 0 3 D I (I.8) (9.0) ( - i.7) ( - 1.3) -
0 . 0 9 1)2 -
(-4.1)
0.07 D 3 . (-3.1)
R 2 = .85; D W = 0.53; F = 42.0; C V = 3 . 4 6 . N o t e : in preceding a variable denotes the natural log of that variable. Subscripts at the end of a variable denote a quarterly lag. T values are shown in parentheses. D W is the Durbin-Watson value and C V is the coefficient of variation.
Cow inventory is determined as a function of numbers of cows in the previous quarter, real farm milk prices lagged one quarter, real soybean meal price lagged one quarter, a dummy variable (DTP) to account for the Dairy Termination Program, and quarterly seasonal 0-1 dummy variables. This specification is similar to the ones used previously by Kaiser (1990a) and Wescott and Carman (1985). All
250
D. Chadee and J. Guthrie
Table 3: Quarterly Dairy Model Variable Definitions Variable
Definition
Units
CDIS
Comrnerci,I disappearances of milk ~
Mil Ibs'
COW
Milk cow inventory b
Thousand head
D,
Dummy variable equal to I in the a~' quarter (i = 1,2,3)
0-1
DTP
Dummy variable for the Dairy Termination Program equals I for 1986-1987; 0 otherwise
0-1
MPC
Milk production per cow"
Pounds
RBMP
Real soybean meal price, Decatur, 44% protein ~
U.S.$/ton d
RESP
Real support price, less price deductions
U.S.$1cwt d
RFMP
Real farm milk price, for all milk sold to plants ~
U.S.$1cwt d
RY
Real U.S. disposable income h
Bil $d
T
Time trend (months)
!-37
aSum i0r me quarter. bAverage for the quarter. CMilk equivalent of products. dDeflated by CPI, 1967 = 100.
coefficients (except for D3) had the expected signs and were statistically significant at the 0.5 percent level. Milk production per cow was modeled following previous specifications by Kaiser (1990b). As in the previous case, the estimated coefficients had the expected signs and were also significant at the 0.5 percent level. As expected, the production of milk per cow is highly seasonal. In addition, the linear time trend confirms the gradual and steady increase in milk production per cow over the years. The specification of the equation for commercial disappearance of milk follows conventional consumer demand theory, whereby the demand for a product is determined by its own price, the prices of substitutes, and the level of income. To the extent that the present equation explains the disappearance of milk at the wholesale level rather then at the retail level, the prices of milk substitutes become less relevant. This model gave satisfactory results, with highly significant values for the important explanatory variables. Modeling the real farm milk price represented some challenges, as the performance of this equation was less satisfactory. The real farm milk price is specified as a function of the real support price, the number of cows, and quarterly seasonal dummy variables. Previous attempts to model the real farm milk price by Wescott and Carman
BIOTECHNOLOGY IN U.S. AGRICULTURE
251
T a b l e 4. lntrasample Simulation Performance
Variable Cow MPC PROD CDIS RFMP
Definition Milk cow inventory Milk production per cow Total milk production Disappearances of commercial production Real farm milk price
Root-mean-square percentage error 0.7 0. i !.6 2,5 5.0
Source: Estimated.
(1985) differ somewhat from the current specification. This is partly due to the different time period under consideration. The estimated coefficients have the expected signs, and apart from the seasonal dummy variable (D3) they are all significantly different from zero.
4. MODEL VALIDATION AND FORECASTING So far the behavioi'al eq-ations of the dairy sector model have been evaluated with statistical tests like the t test for individual coefficients, and the R 2 and the F test for the significance of the different models. It is instructive at this stage to evaluate the overall performance of the model, to investigate how well each model is capable of tracking the historical values of its dependent variable. In order to accomplish this, a dynamic simulation of the model was performed over the 1981-1990 period. Simulated values oI the dependent variable are generated by feeding predicted values of the dependent variables into the lagged endogenous terms. Summary performance statistics for each of the endogenous variables are presented in Table 4. Root-mean-square percentage errors (RMSPE) of less than 5 percent were observed for all five variables under consideration. The model appears to be weakest in reproducing the real farm price of milk. However, to the extent that errors for this variable in recent periods were substantially less than errors over the entire sample, the structure of the present model was kept for out-of-sample forecast. Once the models were validated, we used the estimated coefficients to generate conditional forecasts of the endogenous variables over the period 1991-1995. Conditional forecasts were produced based on conditional values of the exogenous variables over the forecast period. The simplistic structure of the present model meant that assumed values of only a small number of variables were needed. Futures prices of soybean meal from the Chicago Board of Trade were used as a guide
252
D. Chadee and J. Guthrie
for assumed values of beanmeal prices to 1995. The real suppo:t prices were based on support price of U.S.$10. lO/cwt contained in the 1990 Farm Bill. The real U.S. disposable income for the period 1991-1995 was Jerived by extrapolating current income trends. In all cases, a level of inflation of 5 percent annually was assumed. Figure 2 shows the plots of actual and simulated values of the endogenous variables over the historical period as well as over the forecast period. The forecast values of the endogenous variables are summarized in Table 5. The results indicate that the number of dairy cows will continue to decline over the 1991-1995 period. Although consistent with other studies, the magnitudes of the decline in this analysis are less dramatic than those reported in Kaiser, for instance. The number of cows is predicted to decline to 9.8 million head by the end of 1995. Milk production per cow is expected to continue its steady upward trend over the 199 l - 1995 period. By 1995, average annual milk production per cow is estimated to be 15,935 pounds. This translates into an annual rate of increase of about 2.4 percent, which is consistent with historical increases in milk production. This estimate compares favorably with that from Kaiser (1990b). The product of numbers of cows and milk produced per cow gives the total milk production in the United States. Again, the estimated total milk production over the 1991-1995 period is consistent with the general trend in milk production over the last decade. By 1995, the United States will be producing an estimated 155.8 billion pounds of milk annually. The U.S. commercial disappea_~nce of milk shows a slightly faster rate of growth over the 199 l-1995 period. This is partly due to lower real prices of milk over this period, since the support price is fixed at U.S.$10.10. By 1995 the real farm milk price is estimated to be U.S.$2.73/cwt, a drop of 12 percent from the 1991 price level. This is consistent with the historical trend as real farm prices dropped by about 4 percent annually during the 1980s. 5. IMPACTS OF BST ON PRODUCTION The impacts of bST on U.S. milk production can be derived in a straightforward fashion as follows. Two factors determine the extent by which total milk production will increase in the United States following the adoption of bST. These are (l) the rate of adoption of bST by farmers and (2) the response of milk production to bST. As mentioned earlier, proper management and nutrition also impact on results
253
~. I
°
~....-...+ ......
,,,~._~...:" "
saNNod ~
+
"i"::'~ °~''° i
i""
i
II$S£I
i + + i iti
im •+.
i
i
i
.~ ~
!+iiii:," °
o, it!
', QVgH 000,
i
"
+ +,o--.. i + ~ ++'"+ ' SI3NIlOd N01111]~
'+
"
254
D. Chadee and J. Guthrie
Table 5: Predicted Values of Selected Variables (Without bST) COW
MPC
PROD
CDIS
RFMP
Year
(000 head)
(ib/year)
(bil. Ib)
(bil. Ib)
(U.S.$1/cwt)
1991 1992 1993 1994 1995
10,143 10,077 9,986 9,884 9,776
14,549 14,815 15,158 15,536 15,935
147,568 149,286 151,359 153,550 155,784
143,252 144,955 146,628 148,293 149,966
$3.11 3.01 2.91 2.82 2.73
Source: Estimated.
from bST use. The present analysis assumes that those farmers who adopt the use of bST are aware of these other factors and thus derive the maximum benefits from bST. On the basis of recent studies on the production response to bST and on the likely rate of adoption of bST by U.S. dairy farmers, the present analysis assumes the following: 1. Increases in the production of milk per cow (response rate) ranging from 10 percent to 20 percent, with an average of 15 percent. 2. The following rates of adoption for the 1991-1995 period: 1991 1992 1993 1994 1995
10 20 36 44 48
percent percent percent percent percent
These rates of adoption are consistent with recent USDA nationwide surveys on the potential users of bST in the United States should it be made available. On the basis of the above assumptions, the impacts of bST on milk production can be estimated as follows: Change in milk production = (Response rate • Milk per cow) • (Adoption rate • Cow inventory.)
The estimated increases in total milk production und~ ' ~5..,~,,,~ri:~us assumptions are summarized in Table 6. Increases in total milk production in the United States following the adoption of bST may be as low as 1.5 billion pounds in 1991 and as high as 15 billion pounds by 1995. This range is equivalent to 1 percent and 10 percent of current total production. Initially, the increases are modest, but as bST is more widely adopted across the nation, these
B I O T E C H N O L O G Y IN U.S. A G R I C U L T U R E
255
Table 6: Increase in Total Milk Production (mil Ib) from bST: 1991-1995 Increases in milk per coy, of:
1991 1992 1993 1994 1995
10%
15%
"~"~
1,476 2.986 5,449 6,756 7,478
2,2t4 4,479 8,173 10.134 I 1,216
2.951 5.97 I 10.898 13.512 14,955
Source: Estimated.
increases will be more substantial. The impacts of bST on total milk production between 1991 and 1995 under the three response rate assumptions are also compared to the baseline scenario (no bST) in Figure 3. 6. INTERNATIONAL TRADE IMPLICATIONS AND CONCLUDING REMARKS The above analysis has shown clearly that the adoption of bST in the United States can potentially produce substantial surpluses of milk in the United States. Assuming that the United States does not change
1751200 =¢ 170000. ~Z~165000 160000
I
155000 150000 14500C
19'90
...-m- NO BST
19'91
19'92
"4'-- 10% RESP. +
19'93
19'94
15% RESP. ~
19'95 20% RESP. I
Figure 3. Production with and without bST. Under 10%, 15%, and 20c~ response rates.
25(~
13. Chadcc and J. Gulhric 22000 . . . . . . . . . . . . . . . . . . . . . . . . 20000
/ . . . .I .
. . . . . . . . . . . . . . .
i
18O00
>-
/'"
/
~
i
16000 z
14000
P.,,
12000
Z 10000
m
8000 6000 4000
[ Figure 4.
-Q-
~7 . . . . 1990
N O [qST
1991 +
19~2
10'~ RESP, - ~ "
1993
19'g4" 1995
1"~'-~ I~.ESP. ---43--- 21,3G RESP,
1
Excess supply with and wilhout bST. Under 10c/~. 15c7~, and 20% resi~mse
rates.
its current levels of importation (which mainly consists of cheese) and of foreign aid donations, and assuming no major increases in local consumption, large surpluses of milk will be available for export by 1995. The magnitude of these surpluses can range from 5 billion pounds to 22 billion pounds over the 1991-1995 period (see Figure 4). To put the possible increases in milk production from bST in the United States into perspective, New Zealand's total milk production in 1988 amounted to 17 billion pounds. Thus the increase in U.S. production, although minimal by U.S. standards, could make the United States a larger exporter of dairy products than New Zealand. Since the United Slates exports mai,dy dry milk powder, New Zealand could be particularly hard hit. Australia and the EC could also be adversely affected by the emergence of the United States as adair 3' exporter. The above analysis has assumed that the United States is the only country that will use bST over the 1991-1995 period. However, as pointed out earlier, should the United States adopt bST, the EC could also do the same to maintain their competitiveness on the world dairy market. Such a situation would further add to the world surplus of dairy production. As a response to these surpluses, world prices of dairy products could decline significantly. An important implication of this development would be the threat
export subsidies duri
products. In the cwr’ of New Zealand. t essarily lead to gains in This is mainly due to th ’ -4and. which is not to capture the full benefits of bST. major change
in rn~~n~~~~~~~tand production practices would be required. Thus. New Zealrt~d’s international competitiveness in dairy could be seriousEy affected.
D. Chadee and J. Guthrie
258 indicators of the Farm Sector: Costs of Production-
ington. DC: USDA, March. United States Department of Agriculture DC: USDA, March. United States Department of Agriculture
(1990) Daiv (1981-1990)
Livestock and Dairy.
1998. Wash-
Situutiott and Outlook Report. Washingtorl,
Oil Crops Situation and Otctlook Report.
Washington, DC: USDA. Westcott. P., and Carman, C. ( 1985) Effects of Various Dairy Support Price Alternatives. Dairy Situation and Outlook Report. Washington, DC: USDA. March.