Potential Economic Impacts of African Swine Fever (ASF)

African Swine Fever (ASF) is a viral disease that affects domestic and wild pigs. ASF is highly infectious and is fatal for pigs. Unfortunately, ASF has been ravaging the Chinese pork industry, which is by far the largest in the world. Some estimates suggest more pigs in China have died from ASF than exist in all of the United States. ASF does not cause illness in humans, but border security has been ramped up in the U.S. to make sure the virus doesn’t enter and hit our producers.

The other day I was asked about the potential economic impacts if ASF hit the United States. To answer the question, I constructed a fairly simply model of the U.S. pork industry (see details here). The basic idea is this that if ASF hit the U.S., the quantity of pork supplied would fall. This would, of course, result in less pork on the market and would result in an increase in price of hogs and pork for consumers. I considered three possible scenarios: a 10%, 25%, and 50% reduction in the quantity of U.S. pork supplied as potential outcomes of ASF. Of course, there are other possible impacts. It is likely that foreign buyers of U.S. pork might shut off imports from the U.S. to protect their own domestic herds. Thus, I also considered what happens if all foreign buyers of U.S. pork stopped importing. Finally, even though the disease does not affect humans, domestic consumers may choose to cut back if ASF hit the domestic herd; I thus considered a 10% reduction in consumer willingness-to-pay for pork.

Here are the possible impacts I calculate.

First, consider the impacts if only U.S. domestic supply is affected but foreign and U.S. consumers do not change their preferences. In the mildest scenario (a 10% supply reduction), both U.S. consumers and U.S. hog producers would lose about $1 billion/year. In the worst-case scenario considered (a 50% supply reduction), both U.S. producers and consumers would be worse off by almost $5 billion/year.

Now, what happens if foreign buyers of U.S. pork decide to stop buying? Over 20% of U.S. domestic production is exported, so the effects aren’t trivial. The estimates under the three supply reduction scenarios and a 100% reduction in foreign quantity demanded are shown below. Now, the worst-case scenario (a 50% supply reduction) results in an almost $7 billion/year loss for U.S. producers. The impacts on U.S. consumers are somewhat muted because there is now more supply on the U.S. market for U.S. consumers since foreign buyers are no longer buying, and as a result their losses aren’t as severe as in the above table.

Finally, consider the worst of all impacts. Supply in the U.S. falls (by either 10%, 25% or 50%), foreign buyers reduce their quantity demanded by 100%, and U.S. consumers also reduce their willingness-to-pay by 10%. Now, both U.S. producer and consumer impacts vary from about $4 to about $8 billion/year.

Don’t like my estimates or assumptions? Feel free to modify my model or mess around with the spreadsheet I used to create these results.

Spending on Beef over Time

Meat demand has been a frequent topic on this blog (e.g., see here, here, here, or here). As some of the previous posts indicate, “demand” is a hard thing to measure. A slightly easier thing to measure is spending. As it turns out, the Bureau of Labor Statistics (BLS) has been tracking consumer spending at the household level on food at home in a number of categories, including beef, pork, and poultry, in their annual Consumer Expenditure Survey.

Using these data, I constructed the following animation showing the relationship between spending on beef and total household expenditures by quintiles of income.

The figure shows, at any point in time, higher income households (or those with greater total spending) spend more on beef than lower income households (or those with less total spending). In econ-speak, beef is a “normal” good. However, for any given income (or total spending) level, spending on beef has fallen precipitously since 1984 (all figures are in inflation-adjusted 2017 dollars). The change over time is most dramatic for the higher income/spending households. In 1984, the lowest and highest quintile income households spent $265 and $681 per year (in 2017 dollars), respectively, on beef for consumption at home. By 2017, these figures had fallen to $158 and 352, respectively.

These data could be reflective of downward demand shift - i.e., consumers willing to pay less for each pound of beef than they were in the past. Other possible explanations for the downward decline in spending include changing beef prices over this period, changing household demographics (the average number of people in today’s households is slightly smaller today than in the mid 1980s; fewer people normally means less spending), other protein sources, such as poultry, becoming relatively less expensive or more attractive, a shift toward more food spending away from home (the BLS only tracks spending for individual food categories for food eaten at home), and more.

How do the data in the above figure square with measures of demand (such as these constructed by Glynn Tonsor), which show no clear trend in beef demand since the early 1990s? Well, as I mentioned above, spending isn’t “demand” because while the figure controls for income, it doesn’t control for prices. Another possible explanation is that the data in the figure above are for households, while aggregate demand statistics like those created by Tonsor are calculated nationally. It is possible for total aggregate demand to rise even if each individual household’s demand is falling if population is increasing and more households are being added. That is, in fact, what has happened. There were about 86 million households in the US in 1984. Today there are about 128 million households.

Food Affordability Over Time

On a number of occasions, I’ve written about the Engel Curve, which relates the share of consumer spending on food to the consumer’s income (or total expenditures on all goods). Whether we compare consumers within a country or compare spending across countries, a common relationship holds: the higher a consumer (or country’s) income, the smaller the share of their income they tend to spend on food.*

This relationship indicates that as consumers and countries get richer, we’d expect food expenditure shares to fall, a phenomenon generally thought to be associated with higher consumer well-being. While this relationship is widely known among economists, there is another fact that is not as widely known. In particular, the entire Engel Curve has been shifting downward over time. That is, for any given level of income, consumers today are spending less on food than they were in the past.

To illustrate this phenomenon, I pulled data from the Consumer Expenditure Survey that has been collected annually since 1984 by the Bureau of Labor Statistics (BLS). The BLS report food expenditures and total expenditures by quintiles of income. These data were used to create the following animation.

The video shows that, despite the year-to-year variation, there is a fairly steady shift in the Engel Curve over time downward and to the right. That is, consumers are getting richer over time (i.e., their total expenditures are rising), and for any given level of total expenditures, the share being spent on food is generally falling. There are several possible drivers of this phenomenon, but one likely culprit is technological progress. For any given level of income or total expenditure, innovation and technological change has brought down the price of food such that consumers are able to eat what they want while being able to spend more of their income on other, non-food items. That is, food today is more affordable (at least by this metric) for households of all incomes (or total expenditure categories).


*Note: just because the food share falls, it doesn’t mean total spending on food falls as income increases. In general, richer consumers spend more on food than poorer consumers. However, spending on non-food items tends to increase at a faster rate than spending on food as income rises, leading to a smaller share of income being spent on food.

Retail Food Prices in 2018 and Beyond

The December 2018 edition of the Purdue Ag Econ Report is out. Some of the questions addressed by my colleagues include:

• Why will the U.S. economy slowdown in 2019?

• What are the implications of the Administration’s trade policy in 2019?

• What was accomplished for agriculture in the new farm bill?

• Record corn yields and higher corn prices increase corn returns. How much?

• Record bean yields, Chinese tariffs and trade assistance payments. What’s the net effect?

• Crop costs for 2019. What crops to plant?

• Cash rents and land values. Up or down for 2019?

• What will you be paying for food in 2019?

My contribution was to weigh in on the last question about retail food prices.

Changes in the retail price of food at home have remained low, averaging just 0.5% year-over-year growth over the past five years and 0.4% year-over-year growth thus far through 2018 according to data from the Bureau of Labor Statistics.  Inflation of food prices away from home, by contrast, is higher but has remained fairly stable over time at about 2.6% year-over-year increases.  Since 2016, prices of food at home have grown much more slowly than overall prices in the economy, implying food at home is becoming cheaper in real terms.  Since 2017, changes in prices of food away from home have been at about the same level as prices changes in the rest of the economy. 

The U.S. Department of Agriculture, Economic Research Service (ERS) projects annual food price inflation, for combined food at home and away from home, of between 0.75% and 1.75% for the year 2018, increasing to 1.5% to 2.5% for 2019.  In 2018, low agricultural commodity prices helped keep downward pressure on food price inflation.  Several commodities, such as pork, dairy, and processed fruits and vegetates experienced overall price declines, or deflation, in 2018.  A few commodities have experienced more significant retail price increases in 2018, including beef (expected to increase about 1.75%) and eggs (expected to increase more than 9% from 2017 to 2018).

 As the foregoing suggests, food price affordability is driven in part by where consumers choose to buy their food.  ERS calculations indicate that since 2010, consumers have been spending more money on food away from than they are on food for at-home consumption.  In 2017, consumer spent almost $870 billion on food away from home and about $747 billion on food at home, implying 54% of food expenditures were for food consumed away from home. 

Even for food consumed at home, consumers are changing their purchasing habits.  Two decades ago, 71% of food for at-home consumption was bought at grocery stores; today the figure is only 58%.  Consumers have shifted food purchases away from grocery stores toward warehouses clubs and superstores.  For food away from home, there has been a slight shift toward more food spending at limited-service restaurants over the past two decades, but overall the share of meal spending at full service restaurants compared to other outlets has remained steady at about 36% of all food away from home spending. 

Turkey Prices

It’s almost Thanksgiving. That means its time for the annual news stories on trends in turkey prices. I put out a story a week or so ago that has been picked up in a number of print, radio, and TV spots. The headline is that this November’s turkey prices are expected to be at a 10 year low.

For a bit of background and context, this claim is based on average price data reported by the Bureau of Labor Statistics (BLS). These data are collected as a part of the BLS’s effort to construct the consumer price index (CPI) and monitor inflation. Here is a graph of inflation-adjusted retail prices for frozen turkey for the past eleven years in the months of October, November, and December.

The blue line represents November prices (we don’t yet know the 2018 November’s price, so it is foretasted based on past price movements). This year’s November price is expected to be around $1.45/lb, which is about 22% lower than the peak in 2013 and about 6% lower than back in 2008.

A couple comments based on the above graph. Interestingly, prices tend to fall from October to November. On average during the past 10 years, November prices are about 8% lower than October prices. At first blush, this might seem a bit strange. Doesn’t demand for turkey increase during thanksgiving, which should drive up turkey prices? Yes, but other factors are also at play. For one, retailers may strategically cut the price of turkey to get people in the door to buy the rest of their thanksgiving meal - i.e., turkey is potentially a “loss leader.” Second, producers expect the demand shift and produce more birds around the holiday. Here is a figure from the Livestock Marketing Information Center (LMIC) based on USDA data. As you can see, turkey production tends to peak each year in November.

I should note that the American Farm Bureau puts out an annual cost of Thanksgiving, and their estimates are for prices to be down this year as well. The USDA Economic Research Service estimates overall food price inflation and they’re also projecting historically low price increases. For 2018, they forecast prices for food at home to only rise only between 0 and 1% for the year; the 20 year average is about 2.1%. Why the low food prices?

One answer is that food production in general, and turkey production in particular, has become much more productive. We get more using less. Here is data again from the LIMC and USDA showing the number of turkeys slaughtered in federally inspected facilities since 1960 alongside the calculated number of pounds produced per turkey.

Prior to the 1970s, turkeys averaged about 15 lbs/bird, a figure that’s increased almost linearly since the 1980s up to the point now where we are over 30 lbs/bird. In fact, compared to the mid 1990’s we now have about 5 million fewer turkeys slaughtered every month even though we’re actually producing more total lbs of turkey today than in the early 1990s. Here’s total lbs of production over time.

The other big factor driving the recent affordability of turkey and other foodstuffs is that commodity (e.g., corn, soy, wheat) prices are low and have been low for the past couple years. Of course, this can’t be the only explanation because the price of retail foodstuffs is comprised of much more than just commodities, so it must mean that the prices of other inputs like labor, energy, and packaging have also remained relatively affordable.