Thursday, February 18, 2010

Lit in Review: Livestock risks

From the last issues of the Review of Agricultural Economics (2009), Vol. 31, No. 3 and 4.

McCann (2009) "Transaction Costs of Environmental Policies and Returns to Scale: The Case of Comprehensive Nutrient Management Plans," No. 3, 561-573.
Livestock produce fertilizer. Put too much fertilizer on the land and the soil nutrients potentially end up in the drinking water. In the US, large livestock operations are required to have comprehensive nutrient management plans, made either by a government official or a private technical service provider. Recent studies have shown that farmers with plans put fewer nutrients on their land than those without, but still are putting too much on.

Eventually, the government hopes to expand this requirement to all livestock farms. Small and medium-sized farmers [I know what you're envisioning: munchkins raising guinea pigs. Let's not be silly.] face a number of transaction costs that larger farmers don't [it takes more steps to cover the same ground, for one. Stop that!] and extension services are not widespread enough to cover small farms as well. Farmer surveys (26 observations out of 1030 returned surveys out of over 3000 sent out to farmers in Iowa and Missouri. meh!) said the average monetary cost of preparing the CNMP was $460, with nothing significantly correlated, plus about 17 hours of work on the farmer's part [11 hours for the smallest farms, 24 for the largest] and 149 hours from government officials. The more animals you have, the lower the total cost per animal is.

Thus the conclusion is that extending the current set up to small and medium livestock farms would give large firms additional cost advantages. She argues that another method needs to be devised to keep the playing field level while still reducing the risk of environmental damage from livestock operations.

Elbakidze, Highfield, Ward, McCarl, and Norby (2009) "Economics Analysis of Mitigation Strategies for FMD Introduction in Highly Concentrated Animal Feeding Regions," No. 4, 931-950, ungated  An outbreak of Foot-and-Mouth Disease in Britain at the turn of the century caused damages of $720 to $2300 million, and larger losses in tourist income. Their simulation model has two components: an epidemiological model of disease risk and spread patterns and an economic model to examine losses. They include a fairly detailed table on the costs for appraisal, cleaning, vaccinations, etc by herd size and a rough estimate of the value of the livestock at different weight assumptions, including twelve classifications of cattle, six sheep, and six pigs.

Simulations indicate an outbreak of FMD in Texas would cost $1 billion in Texas cattle alone. Early detection efforts would save $150 million just for large feedlots and $3 mil for backyard production, so there's a fairly large margin to spend on the efforts. "Vaccine availability and enhanced surveillance were not economically effective ... compared to delayed vaccine availability and the default surveillance strategy." This is in part due to the assumption that vaccinated animals lose 50% of their value due to trade restrictions, though trade losses are not included in the model themselves.

Carlberg, Brewin, and Rude (2009) "Managing a Border Threat: BSE and COOL Effects on the Canadian Beef Industry"No. 4, 952-962
This teaching case describes cattle production and processing capacity in Alberta and Saskatchewan. Cattle processing used to be more spread out across Canada, but technological changes concentrated the processing in those two provinces. Farmers in the other provinces either trucked their animals across the country to have them processed or shipped them into the US. Just before the BSE [Mad Cow Disease] outbreak in 2003, 44% of Canada's cattle came into the US for processing. The BSE outbreak shut that down completely, glutting Canada's processors and wreaking havoc with cattle prices.

In response, the US has drafted mandatory Country of Origin Labeling (COOL) laws that came into effect March 2009. Some estimates indicated that processing costs could be as high as $50 million per plant to segregate the animals and their meat, a 2% per head increase. Since meatpacking is a low-margin business, this is economically important. Of course, you can avoid many of these costs if you don't use animals from other countries, so this has the potential to significantly decrease US plants' willingness to process Canadian livestock. There are plans to increase Canadian processing capacity to reduce reliance on US processors, just in case.

[Cow 1: Are you worried about becoming a raving lunatic because of BSE too?
Cow 2: Me? No. I'm a horse.]

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