Design and application of an econometric model of the U.S. beef sector to policy analysis

Abstract

This study stressed the need for a long range planning model of the beef sector that can address the sensitivity of this sector to economic shocks and changes in farm program and macroeconomic policy. Relatively few analyses of the beef sector incorporate the biological processes in beef production along with economic considerations when modeling the growth of the beef cowherd. Furthermore, there has been a lack of attention paid in aggregation policy analysis to the interaction between the beef sector and the rest of the economy. To correct these shortcomings, this study utilized a methodology which not only incorporated the biological nature of beef production, but also developed a capital stock adjustment relationship to explain producer decisions regarding aggregate investment in the beef cow breeding herd. The resulting model of the U.S. beef sector was then integrated into AG-GEM, a large scale econometric simulation model of the macroeconomy. This integration provided a means through which shocks to the macroeconomy could be transmitted between the beef sector and other sectors of the economy, including other livestock sectors as well as crop sectors. Three scenarios were simulated utilizing the enhanced version of AGGEM. The first, a pre-flood baseline scenario, utilized specific assumptions regarding macroeconomic and farm program policy to provide a basis from which policy analysis on the remaining scenarios could be conducted. The second scenario consisted of annual reductions in consumer disposable income to examine the potential impact of a deficit reduction package like that proposed by the Clinton administration. Analysis showed a reduction in consumer disposable income decreases activity and depresses prices at all levels of the beef sector. The final scenario assumed a ten percent reduction in corn and soybean production as a result of the 1993 flood. While there was an initial reduction in the size of the beef cow herd due to increased feed prices, most variables associated with the beef sector fully adjusted to pre-flood baseline levels by the end of the simulation period.