Effects of Japanese Import Demand on U.S. Livestock Prices: Reply
Miljkovic, Dragan, Marsh, John M., Brester, Gary W., Journal of Agricultural and Applied Economics
In responding to a comment article, we concur that quantifying U.S. livestock price response to changing Japanese meat import demand requires nonzero supply elasticities beyond one quarter. However, rigidities in market trade and empirical tests justify the inclusion of exchange rates in the short-run analysis. Producer welfare asymptotically approaches zero for increasing supply elasticities in the long run, but short-run transitions in producer surplus are meaningful to producers.
Key Words: exchange rates, import demand, supply response
JEL Classifications: Q17, F14, C32
Long run is a misleading guide to current affairs. In the long run, we are all dead.
-John Maynard Keynes
We appreciate Henry Kinnucan's Comment on our December, 2002 Journal of Agricultural and Applied Economics article titled "Japanese Import Demand for U.S. Beef and Pork: Effects on U.S. Red Meat Exports and Livestock Prices." His Comment adds to the literature by questioning the role of exchange rates (if any) on trade, the role of supply response in quantitative analyses, and issues related to short- and long-run producer surplus as a result of changes in demand. We find it necessary to briefly respond to Kinnucan's Comment.
The goal of our initial research was to examine and quantify the effects (if any) of macroeconomic variables in a major U.S. beef and pork export market (Japan) on the U.S. red meat industry. In general, the U.S. red meat industry faces a mature domestic market and has become increasingly dependent on foreign consumer markets for growth. For example, approximately 9% of domestic beef supplies and 7% of domestic pork supplies are exported. Japan is the destination for about 50% of all U.S. beef exports and 45% of U.S. pork exports. Hence, we found it interesting to consider whether or not changes in Japanese incomes, exchange rates, and tariffs influence Japanese import demand for U.S. beef and pork. Ultimately, we were most interested in whether such factors influence U.S. beef and hog prices.
Kinnucan finds three problems with our research: (1) the use of short-run rather than longer-run domestic supply elasticities for beef and pork production, (2) the inclusion of exchange rates in import demand equations, and (3) the implication that short-run changes in demand cannot generate long-run gains in producer surplus.
U.S. Domestic Cattle Supply Responses
We acknowledge and appreciate the observation that, in the long run, U.S. domestic red meat supply elasticities are much more elastic than short-run elasticities. In fact, one could readily argue that the U.S. beef and pork sectors are characterized by constant returns to scale and are thus best represented by completely elastic long-run supply functions (Wohlgenant). Kinnucan modifies our initial model to include supply response behavior and finds that our estimates of U.S. cattle and hog price effects are overstated (on average, by a factor of two for the exchange-rate variable and by a factor of six for changes in Japanese income). The overstatement is the result of our assumption of completely inelastic supply responses in quarterly data in our original paper. We agree. In fact, we should have included such a discussion and, perhaps, we should have included results for both short-run and total response supply elasticity estimates.
Nonetheless, we feel that one cannot ignore short-run price effects that result from changes in import demand factors. These transitional consequences occur because of biology, technology, and expectational factors that cause rigidities in supply response (Marsh). Such rigidities are particularly plausible when considering trade issues using quarterly data as units of observation. In our initial research, we treated livestock (beef and pork) supplies as fixed on a quarterly basis. Some authors have found empirical evidence that such an assumption is reasonable even in annual data (Wohlgenant). …