Taiwanese livestock and feedgrain markets : economic structure, policy intervention, and trade liberalization

Abstract

Dramatic growth in the Taiwanese livestock and meat industry in recent years is largely the result of numerous economic and policy forces that are not well understood or documented. This study examines the economic structure and policy environment of the Taiwanese livestock, meat, and feedgrain markets with particular emphasis on the likely impacts of trade liberalization on those markets. A qualitative assessment of the key economic and policy forces affecting Taiwanese livestock, meat, and feedgrain markets sets the stage and provides the background for the subsequent empirical analysis of those forces. After exploring key methodological issues associated with modeling Taiwanese livestock, meat, and feedgrain markets, a theoretical model is developed consisting of three simultaneous blocks: (1) a livestock (cattle, hogs, and chickens) and meat supply system, (2) a meat (beef, pork, and chicken) demand system, and (3) a feedgrain (corn and soybeans) supply and demand system. The theoretical model features the integration of a linear approximation of the almost ideal demand system (LA/AIDS) for meat with a livestock supply system and a model of feedgrain markets in Taiwan. The parameters of the full model are first estimated using an iterated, seemingly unrelated regression estimator (ITSUR) and then a non-linear, three-stage least squares estimator (N3SLS). The ITSUR estimates do not perform as well as the N3SLS estimates even though there is no significant difference in the estimated coefficients across the two different estimation methods. Disaggregating beef into general and high-quality beef in the demand system improves the estimation results. Gross complementarity among meats in the meat demand system is problematic and leads to the comparison of three alternative specifications of the meat demand system in the model to explore the implications of the estimated complementarity: (1) the LA/AIDS model with no cross-price elasticity restrictions imposed; (2) the same model but with net substitutability imposed using the Bayesian procedure utilized by Wahl, Hayes, and Williams; and (3) a single equation model of meat demand including an ad hoc imposition of gross substitutability. Simulation and sensitivity analyses indicate that the first model performs better in tracking historical data and is stable. The first model is then used to determine the likely effects of Taiwanese beef and feedgrain import restrictions, economic growth, and changes in the value of Taiwanese currency on Taiwanese livestock, meat, and feedgrain markets and Taiwanese meat trade and feedgrain imports through historical simulation analysis. The results provide strong evidence that Taiwanese policy has severely restricted imports of both general beef (Australia) and high-quality beef (the U.S. and New Zealand). Taiwanese feedgrain import policies have also significantly restricted imports of feedgrains but have reduced the effectiveness of the beef import restrictions in supporting domestic cattle industry. Further, the results indicate that if the Taiwanese government continues restricting beef imports, further economic growth in Taiwan will require strong growth in feedgrain imports to support the growing livestock industry. Continued appreciation of the Taiwanese dollar and/or continued decline in feedgrain import prices would facilitate such growth. Actions by the Taiwanese government to prevent further appreciation of the Taiwanese dollar and/or to maintain restrictions on feedgrain imports will result in higher meat prices and pressure to eliminate beef import restrictions over time.