The impact on consumers and cattle producers of changes in beef processing costs

Abstract

The objective of this study has been to examine the impact of changes in beef processing costs on US beef producers and consumers under market conditions representative of the 1980's. Competitive equilibrium in the beef sub-sector was modelled as a series of log linear differential supply and demand equations for two inputs, cattle and marketing inputs, and two products, retail beef and byproducts. Particular attention has been paid to estimating the elasticity of substitution between inputs and to examining its role in the distribution of total economic surplus gains. If the beef sub-sector switched from boxed beef technology to tray-ready beef, the supply of marketing inputs is estimated to decline by five percent, resulting in an annual surplus gain of $836.7 million which is almost two percent of the value of the products of the sub-sector. Modelling the switch in technologies as an input supply shift was found to be equivalent to modelling it as biased technical change. The relationship between the elasticities of demand, input supply and input substitution are crucial to the distribution of total surplus gains. The share of cattle producers of total gains fell from 71 percent to 55 percent as the elasticity of substitution increased from zero to 0.1. The large share to producers is explained by a supply of cattle that is inelastic relative to demand in the short run. As the supply of cattle became more elastic in supply, the share of producers soon fell below 50 percent and was less than 10 percent in the long run. The supply of marketing inputs was assumed to be highly elastic which meant that the suppliers of these inputs received little of the increase in surplus. An important implication of the study is that once input substitution is allowed, the share of the market participants in the gains from increased efficiency in the sub-sector depend not only on relative demand and supply elasticities but also on whether the efficiecy gains occur at the farm or processing level.