The threat of foot and mouth disease to the swine industry - Dermot Hayes, Ph.D., Iowa State University, from the 2012 World Pork Expo, June 6-8, Des Moines, Iowa, USA.

1. Economy Wide Impact of a
Foreign Animal Disease
Dermot Hayes, Jacinto
Fabiosa, Amani El Obeid and
Miguel Carriquiry

2. Overview
• Purpose
• The scenario
• Methodology
• Assumptions
• Results

3. Purpose
• To calculate the economic impact of a FAD on
the US economy
• To measure the costs of such an outbreak on
all commodities and on employment
• To measure the benefit of any measure that
would eliminate or reduce the probability of
such an event

4. The Scenario
• US feral hogs or deer are infected by accident or by a
terrorist act
• (Ireland, Britain, Taiwan and Japan are all islands)
• The US loses all export markets for beef and pork over a
ten year period
• The meat that would have been exported is consumed in
the US
• Importing countries switch to chicken and to pork and
beef from other countries
• At first prices fall, and eventually the industry downsizes

5. Methodology
• FAPRI produces an annual baseline where it
projects worldwide production, consumption
and trade in temperate agricultural crops
• This baseline projects continued increases in
US beef and pork exports
• Shock this model by restricting US beef and
pork exports and then allow the model to find
a new equilibrium
• Compare baseline and scenario

6. Assumptions
• Complete elimination of US beef, pork and live
animal exports
• Prices on US livestock and meat markets fall to
encourage the US consumer to eat the additional
meat
• The model shows that US meat imports fall to
almost zero
• Livestock producers react to low prices and
eventually cut back on production
• Markets reach a new equilibrium in 2016

7. Figure 1. Impact of FMD on Beef Prices and Revenue of Beef Producers
200 10
150
5
100
0
50
Percent Change from Baseline
-5
0
-50 -10
-100
-15
Percent Change in the Price of US
-150 Steers and Heifers
-20
-200
Percent Change in the Revenue of the
-250
US Beef Industry -25
-300 -30
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

8. Figure 2. Impact of FMD on Hog Prices and Revenue of Pork Producers
200 0
0
-10
-200
-20
Percent Change from Basen
-400
-600 -30
-800
-40
-1000
Percent Change in the Revenue
of US Pork Producers
-50
-1200
Percent Change in live Hogs
Prices
-1400 -60
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

9. Impact on Net Returns in Pork
(Average annual loss is $1.8 billion)
Billion Dollars
6
4
2
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
-2
-4
-6
Baseline FMD Scenario

10. Difference between net revenue and gross
revenue
• The earlier slides show net revenue i.e. gross
profit
• But employment depends on gross revenue
because input industries also provide
employment
• The next slides show total revenue impacts

11. Impact of FMD on US beef Industry Beef
Cumulative Lost Value = $71 Billion

12. Impact on the Pork Industry
Cumulative Loss = $57 Billion

13. Revenue in Poultry
Falls by one billion dollars
Billion Dollars
50
45
40
35
30
25
20
15
10
5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Baseline FMD Scenario

14. Impact on Corn Markets
• Corn prices fall by about $0.20 per bushel and
soybeans by $0.60 per bushel
• These price impacts last for the entire period
• Cumulative revenues for corn growers fall by
$44 billion and by $24.9 billion for soybean
producers

15. Impact on Soybean Prices
Dollars per Bushel
12.00
10.00
8.00
6.00
4.00
2.00
-
01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22
Baseline FMD Scenario

16. Employment
• The cumulative impact on both sectors over the ten year
period is $128.23 billion and average $12.8 billion per year.
The USDA has estimated that each billion dollars of export
value supports 4,528 jobs directly and 12,000 jobs
throughout the economy (Edmonson, 2008)
• Using this as a measure of the labor intensity of these
industries the annual jobs impact of a $12.8 billion
reduction in industry revenue is 58,066 in direct
employment and 153,876 in total
• Compare this job loss with total US based GM employment
(salaried and hourly) of 79,000.

17. Distribution of Dec 2012, Lean Hog Futures Prices as Implied by Futures and Option
Prices on the CME, November 17th, 2011. (Futures Price $81.5 Options Implied
Volatility 19.5%)
Frequency
300
250
200
150
100
50
0
30
34
38
42
46
50
54
58
62
66
70
74
78
82
86
90
94
98
102
106
110
114
118
122
126
130
134
138
142
146
150
154
158
162
More
Dollars per Hundredweight

18. Value of eliminating this possibility
• The option data suggests a 0.76 percent chance of a price reduction
of 50% or greater
• This suggests that the CME traders believe that there is a less than
1% chance that this will occur in 2012.
• If we multiply the probability of an outbreak (0.76%) by the
expected reduction in net revenues in the event of an outbreak
($1.8) billion, then the burden of this disease can be estimated at
$137 million per year
• In other words, the possibility of this disease adds an expected cost
to the US Pork industry of $137 million per year
• It would be worth at least this much to US pork producers to
eliminate the possibility of a disease outbreak or to buy insurance
that protect margins in the event that the disease occurs.

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