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Effects of the liberalisation of North Asian beef import policies Project 7131 .l01

David Harris, Andrew Dickson, Greg Corra and Walter Gerardi

E E:::iTAgricultural ABARE and Resource Economics

O Commonwealth of Australia 1990

This work is copyright. The Copyrigllt Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without written permission of the Director Publishing and Marketing, AGPS. Inquiries and requests should be directed to the Manager, AGPS Press, Australian Government Publishing Service, GPO Box 84, Canberra ACT 2601.

ISSN 1030-9527 ISBN 0 644 13634 0

Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601

Telephone (06) 246 9111 Facsimile (06) 246 9699 Telex AGEC AA61667

ABARE is a professionally independent research organisation attached to the Department of Primary Industries and Energy.

Published for the Australian Bureau of Agricultural and Resource Economics by AGPS, Canberra.

Printed in Australia by National Capital Printing, Canberra

Foreword

The likely effects of both current and potential reforms to Japanese and Korean beef policy on the Australian beef industry are assessed in this study.

In April 1991 Japanese beef import quotas will be replaced by a regime of declining ad valorem tariffs. Access to the South Korean beef market will also be expanded over the 1990-92 period, in accordance with agreements reached between Korea and the major Pacific Basin beef supplying countries. These agreed policy reforms have the potential to yield substantial net gains for the Australian beef industry over the coming years.

The current understanding covering Korean beef trade is due to lapse in 1993. The timetable for further reforms requires that Korea's import controls be 'GATT- consistent' by 1997. An option for future negotiations may be the replacement, in 1993, of Korean import quotas with a regime of declining ad valorem tariffs, as has been agreed to by Japan. Such a 'tariffication' of the Korean beef import

market should yield substantial benefits for the Australian industry.

The potential effects of the complete removal of Japanese and Korean trade restrictions on beef are also examined here. This provides some indication of the costs to Australia of current policies.

The benefits available from diversifying into the North Asian beef markets can be realised only by continuing to seek further liberalisation and by supplying products that satisfy consumer preferences in these markets.

BRIAN FISHER Executive Director

Australian Bureau of Agricultural and Resource Economics

November 1990

iii

Acknowledgments

The research described in this report was supported by a grant from the Australian Meat and Live-stock Research and Development Corporation.

The authors also wish to acknowledge the contributions that were made at various stages of this project by: Bruce Gosper (Australian Embassy, Tokyo), H. Choe and Bob Davis (Australian Embassy, Seoul), Tsutomu Hasegawa (Livestock Industry Promotion Corporation, Sydney),

Ted Namba (Ministry of Agriculture, Forestry and Fisheries, Tokyo), Kenzo Kawabe, Richard Lange and Bill Tolisson (Australian Meat and Live-stock Corporation, Sydney), Ian Harris (Westland Meats, Gunnedalx), and Steve Beare, Sheree Bradley, Helen Carter, Joe Dewbre, Jacqui King, Graham Love, Gordon MacAulay, Colleen McCoy, Terry Sheales, Jemifer Smith, Kay Smith and Edward Wheeler (ABARE).

CONTENTS Summary I

1, Introduction

2. The Pacific Basin meat trade 2.1 The Pacific Basin beef trade 2.2 Import policies affecting Pacific Basin beef trade 2.3 Pacific trade in pig and poultry meats 2.4 Conclusions

3. North Asian beef markets 3.1 The Japanese beef market 3.2 The Korean beef market 3.3 Conclusions

4. Livestock-feedgrain linkages in North Asia 28 4.1 The Pacific Basin feedgrains trade 28 4.2 The Japanese animal feed industry 30 4.3 The Korean animal feed industry 32

5. Analysing policy reforms in the North Asian beef trade 5.1 Expected effects in North Asian livestock markets

I 5.2 EMABA-A model of Pacific Rim livestock markets

6. Estimated effects of current reforms to the North Asian beef trade 45 6.1 A scenario for North Asian beef trade reforms 45 6.2 Baseline simulation results for North Asian livestock markets 48 6.3 Baseline simulation results for Oceania livestock markets 5 2 6.4 Baseline simulation results for North American livestock markets 54 6.5 Baseline estilnates of Pacific Basin feedgrain consumption 5 6

7. Tariffication of Korean beef quotas 7.1 A scenario for the tariffication of Korean beef quotas 7.2 Simulation results for North Asian livestock markets

7.3 Simulation results for Oceania livestock markets 64 7.4 Simulation results for North American livestock markets 64 7.5 Pacific Basin feedgrains consumption 66 7.6 Conclusions 67

8. Unrestricted North Asian beef trade 68 8.1 A scenario for unrestricted North Asian beef trade 68 8.2 Simulation results for North Asian livestock markets 68 8.3 Simulation results for Oceania livestock markets 71 8.4 Simulation results for North American livestock markets 72 8.5 Pacific Basin feedgrains consumption 73 8.6 Conclusions 74

9. Concluding comments 9.1 Current reform programs 9.2 Tariffication of Korean beef import controls 9.3 Unrestricted North Asian beef trade 9.4 Feedgrain market effects 9.5 The EMABA model: further development

Appendixes A Japanese effects of beef trade liberalisation B Coinparison of landed and wholesale beef prices in Japan C Effects on exporters of liberalising North Asian beef trade D Estimation of feedgrain effects of North Asian trade reforms

References

List of figures and tables

Figures A Major world trade flows for beef and veal B Major world trade flows for pig and poultry meats C Japanese imports of pig and poultry meats D Japanese consumption of meat and seafood per person E Korean consumption of meat and seafood per person F Major world trade flows for feedgrains G Japanese imports of coarse grains and feed wheat H Korean imports of coarse grains I Baseline simulation results - selected variables

J Si~nulation results for alternative Japanese beef stock reductions K KORTRF simulation results- selected variables L NAFREE simulation results - selected variables M Effects of trade liberalisation on the Japanese beef market N Effects of Japanese beef trade reforms on a beef exporting country 0 Effects of Japanese beef trade reforms on the US processing beef market P Feed-livestock conversion ratios

Tables 1 Pacific Basin beef production, consumption and trade flows in 1989 2 Pacific Basin pig and poultry meat production, consumption and trade

flows in 1989 3 Summary statistics of the Japanese beef market 4 Estimated nominal rate of protection for Japanese beef producers 5 Comparison of retail beef prices in Japan, Australia and the United States

l 6 Summary statistics of the Korean beef market l l I 7 Estimated nominal rates of protection for Korean beef producers l

8 Comparison of retail beef prices in Korea, Australia and the United States 9 Pacific Basin feedgrain production, consumption and trade flows h 1989

10 Estimated Japanese livestock consumption of compound feeds 11 Materials used in Japanese compound feeds 12 Estimated Korean livestock consu~nption of compound feeds 13 Materials used in Korean compound feeds 14 Summary of commodity-country coverage in EMABA 15 Estimated responsiveness of Pacific Basin beef and pig meat supplies to

a change in output price

Estimated responsiveness of North Asian meat and seafood demands to changes in retail price and income Estimated responsiveness of selected Pacific Basin meat and seafood demands to changes in retail price and income Main assumptions adopted in simulations Baseline projections for North Asian livestock markets Baseline projections for Oceania livestock markets Baseline projections for North American livestock markets Baseline projections for Pacific Basin feedgrain markets Baseline projections for Australian broadacre agriculture Tariffication of Korean beef quotas: effects on North Asian livestock markets Tariffication of Korean beef quotas: effects on Oceania livestock markets Tariffication of Korean beef quotas: effects on North American livestock markets Tariffication of Korean beef quotas: effects on Pacific Basin feedgrain markets Unrestricted North Asian beef trade: effects on North Asian livestock inarkets Unrestricted North Asian beef trade: effects on Oceania livestock inarkets Unrestricted North Asian beef trade: effects on North American livestock markets Unrestricted North Asian beef trade: effects on Pacific Basin feedgrain markets Coinparison of 1990 wholesale and landed prices in Japan: grain fed beef Comparison of 1990 wholesale and landed prices in Japan: pasture fed beef Estimated livestock-feedgrain conversion for pigs, poultry and cattle in selected Pacific Basin countries Estimated effects of a permanent 10 per cent rise in world grain prices on Australian broadacre agriculture

viii

Livestock weights

Boneless weight Also referred to as product weight. For cattle the boneless meat from a carcass weighs about two-thirds of the weight of the bone-in carcass, though 'dressing percentages' vary. Carcass weight equivalent Also referred to as dressed weight. Weight of slaughtered beast minus hide, blood and some bone such as hoofs and horns. Dressed weight See carcass weight equivalent. Product weight See boneless weight.

Retail weight equivalent Weight of final product sold at the retail level. In this study, estimated from carcass weight equivalent using the following conversion factors: beef, 0.686; pork, 0.686; chicken, 0.755; and seafood, 0.382. Shipped weight Actual weight of product (both bone-in and boneless) when it leaves exporting country. Ratio to carcass weight equivalent will vary depending on the mix of bone-in and boneless product. With no bone-in product, shipped weight will equal boneless (product) weight.

SUMMARY In recent years, the attention of the Australian beef industry has increasingly focused on the potential for expanded beef sales in the North Asian region of the Pacific. Since 1988 both the Japanese and South Korean governments have negotiated major reforms to their respective import policy arrangements. These reforms have important implications for future developments in Pacific Basin beef markets. The size of the effects will in part be influenced by the linkages between the beef industry and related industries in each country. The objective in this report is twofold: to examine, first, the implications for the Australian beef industry of the 1988 Japanese beef import agreement, in conjunction with the recently negotiated changes to Korea's import arrangements, and second, the potential implications of further liberalisation of North Asia's beef import policies.

Pacific Basin meat trade The beef markets of several Pacific Riin countries are linked together by trade flows to form a trading group that is largely separate from the rest of the world.

l This separation is based on the I maintenance of a ban on beef imports

from countries where foot-and-mouth disease is endemic. The consequences of reforms to North Asian beef import policies for the Australian beef industry will in part be determined by these trade linkages and the remaining associated policy interventions.

Consumer demand relationships form another type of linkage between the beef market and the markets for other livestock products such as pig meat and poultry. Consequently it is important to consider North Asian policy reforms in terms of

Pacific Rim livestock markets as a whole rather than viewing beef markets in isolation.

An additional factor to consider is that the beef, pork and poultry industries of Pacific Basin countries are largely based on intensive grain feeding production systems. For this reason, the effects of liberalising beef import policies in North Asia will partially depend on the 'second round' effects of changes in the cost of feed ingredients resulting from 'first round' changes in demand for feedgrain used in meat production.

Trade policy reforms Beef trade within the Pacific Basin is heavily influenced by doinestic and trade- related policy instruinents adopted by the major importing countries, the United States, Canada, Japan and South Korea. A range of trade-related policy instruments and import regulations also affect the movement of pig and poultry meat within the Pacific Basin. Feedgrain trade in the Pacific region, however, is not significantly distorted by trade policies.

In mid-1988 a new set of bilateral trade agreements between Japan, Australia and the United States provided for the phased replacement of existing Japanese import quotas with ad valorern tariffs. These agreements require Japan to increase imports by 60 kt (product weight) per year over a three-year period from Japanese fiscal year (JFY) 1988 to JFY 1990. (Japanese fiscal years extend from April of the year indicated to March of the following year.) In April 1991 the quota will be abolished and replaced by a regime of ad valore~n tariffs declining from 70 per cent in JFY 1991 to 50 per cent in JFY 1993.

North Asian beef import liberalisation 1

In 1989 a GATT panel found that South Korea's beef import policies were not consistent with GATT principles. Korea has since held bilateral negotiations with the major supplying countries and announced the establishment of minimum access levels for beef imports. Korea has agreed to import a minimum of 58 kt in 1990, 62 kt in 1991 and 66 kt in 1992, on a boneless weight basis. Subsequent to this agreement the Korean government has expanded its 1990 import requirements to 80 kt.

Anal sing policy reforms in the Nort g Asian beef trade Current and future North Asian beef trade policy reforins have the potential to yield substantial net gains for the Australian beef industry over the coming years. In this study, ABARE's Econometric Model of Australian Broadacre Agriculture (EMABA) was used to analyse the potential effects of import policy changes in Japan and Korea on trade in the various meats and on their supply and demand in the various countries of the region.

A key feature of the model is that, in the representation of trade for beef, poultry and pig meats, trade in each meat is differentiated by country of origin. Thus, the variations in export prices of meats from different countries could be accounted for in the analysis. As feedgrain markets are not represented in the EMABA model (apart from a group of equations representing the Australian grain market), use was made of known relationships between livestock production and feedgrain usage to estimate changes in feedgrain demand resulting from the expansion or contraction of production of each meat.

The effects of current policy reforms To assess the implications of policy reforms currently under way in the North Asian beef market, the EMABA model was used

to simulate a set of projections for Pacific Basin livestock markets over the 1991-95 period. The reforins included the shift to tariff-based beef import controls in Japan and the establishment of minimum import quotas with annual increments in Korea, as described above.

In this 'baseline' simulation, current Japanese policy reforms result in a decline in nominal Japanese retail beef prices of around 16 per cent between 1990 and 1995. As a consequence, beef consumption rises, resulting in a substantial rise in Japanese imports of those types of beef now restricted by quota, which total more than 580 kt (shipped weight) by 1995. An assumed increase in disposable incomes also results in increased demand for pig and poultry meats, while coinpound feed consumption and feedgrain requirements also increase over the simulation period.

In Korea, an assumed strong growth in disposable incoines causes the demand for beef to expand. The imposition of quota limits on beef imports, combined with relatively low levels of domestic output, results in a substantial rise in nominal retail prices, which increase by around 55 per cent between 1989 and 1995. With imports of pig and poultry meat effectively banned in Korea, increased delnand for these products resulting fro111 rising disposable incoines and beef prices is largely supplied by increased domestic production. Korea's consumption of compound feeds and feedgrain requirements also rises over the simulation period, resulting in increased feedgrain iinports.

Increased Japanese and Korean delnand for Australian beef results in a rise in nominal Australian farm level beef prices of between 10 and 15 per cent in the short run. This price rise initially induces beef producers to hold stock off the market, particularly breeding cows and heifers, in order to allow an expansion in cattle numbers. Toward the mid-1990s the larger herd leads to increased Australian beef production, which totals 1813 kt by (cwe)

Discussion paper 90.1 1

by 1995, as compared with 1492 kt (cwe) in 1989. Beef exports also increase, from 538 kt (shipped weight) in 1989 to around 730 kt (shipped weight) by 1995. Higher beef prices over the simulation period induce an increase in demand for, and hence production of, pig and poultry meat, although this is initially subdued by falls in sheep meat prices. Increased intensive meat production in conjunction with increased lot feeding of cattle results in a modest increase in Australian concentrated feed consumption and feedgrain requirements.

Despite a fall in diaphram beef imports, increased Japanese demand for grain fed beef results in higher US beef exports, which total around 364 kt (shipped weight) by 1995. Rising prices for both Australian and New Zealand beef lead to a decline in US beef imports from these countries in the short term. The US pig industry is affected only to a small extent by developments in North Asia, while US poultry production rises slightly in line with increased demand. Consequently, US feedgrain requirements and concentrated feed consumption also rise marginally.

Tariffication of Korean beef quotas To assess the implications of further liberalisation in North Asian beef trade, an alternative simulation experiment was performed. The current minimum access agreement covering Korean beef trade is due to lapse in 1993. The timetable for further reform requires that Korea's import controls be 'GATT-consistent' by 1997. An option for future negotiations may be the replacement, in 1993, of Korean import quotas with a regime of declining ad vai~rern tariffs. The use of such a 'tariffication' approach to the liberalisation of Korea's beef import arrangements was therefore examined, by assuming that the Korean import quota is replaced by a 100 per cent tariff in 1993, declining to 80 per cent by 1995.

North Asian beef import liberalisation

In all three years of this simulation, Korean beef prices decline. As a result, beef production also declines as the domestic producers adjust to the new trading environment. In the first year of the simulation (1993) an increase in beef consumption of over 30 per cent is achieved by a rise in beef imports, which are more than 80 per cent above the 'baseline' level by 1995. The decline in beef prices also results in significant reductions in pig and poultry meat production. Consequently, Korea's feedgrain requirements and feedgrain imports are significantly less than the baseline simulation levels.

Such developments would have significant effects on the Australian beef industry. In the simulation, increased Korean import demand results in Australian saleyard prices being around 8 per cent higher than 'baseline' Ievels in the first year, encouraging even faster rates of herd buildup than indicated in the 'baseline' projections. However, as Australian beef prices rise, Australian exports of beef to Japan decline in response to the resulting increased competitiveness of US product in that market.

Measures of the change in economic surplus were estimated for each year of the simulation and discounted to net present value terms in 1990 dollars. The gain to Australian beef producers from the tariffication of Korean beef quotas over the period 1993 to 1995 was calculated as the sum of each year's benefits, and totalled around $805m. Rising retail beef prices in Australia would, on the other hand, impose costs on Australian beef consumers. Consequently, the net gain to the economy as a whole was estimated to total around $468m.

Tariffication of the Korean beef market should yield substantial benefits for the Australian beef industry. It would provide another sizeable, price-responsive outlet for pasture fed beef, and insurance against US import controls and/or lower-than-

3

expected sales of pasture fed beef to Japan. Further expansion of Korea's trade in grain fed carcass beef would also provide a source of additional competition for Australia's grain fed beef trade with Japan.

Unrestricted North Asian beef trade Consideration was also given to the potential impact of the complete removal of trade restrictions on beef in Japan and Korea. Comparison of the baseline simulation with this 'free trade' simulation provides some indication of the costs to Australia of current policies.

Results from the free trade simulation highlight the large implicit taxes presently imposed on consumers of beef in North Asia. In the simulation, retail prices in Japan and Korea fali substantially below baseline levels, resulting in higher levels of consumption and imports. The benefits accruing to North Asian beef producers from current assistance arrangements are indicated by the substantially lower levels of domestic production and lower levels of feedgrain requirements in the free trade simulation.

The cost to the Australian beef industry of currently agreed North Asian trading arrangements is illustrated by the large rise in beef prices and the increase in the size and productive capacity of the cattle herd under free trade, due to increased export demand. Relative to the estimated effects of present import policies, the overall net gain to the Australian economy over the simulation period from the complete liberalisation of the North Asian beef market was estimated to be around $2370m in net present value terms.

Other issues While the North Asian beef markets are set to expand appreciably over the coming years, much uncertainty surrounds the product composition of this trade. This uncertainty stems from a lack of know- ledge of actual consumer preferences in

both Japan and Korea. Specitically, the crucial issue is the degree to which imported and domes tically produced beef, and grain and grass fed beef, are substitute products.

If, in the post-quota Japanese beef market, the degree of substitution between these products is found to be low, a strong consumer preference for grain fed product would limit the prospects for an increase in Australian grass fed beef exports to Japan. This might encourage the expansion of Australia's grain feeding capacity, though marketing of the whole grain fed carcass would be required for Australian producers to fully benefit from this strategy.

If, on the other hand, there is a significant degree of substitution between available products, an improvement in the quality of Australian grass fed beef through short feeding, in conjunction with appropriate promotion and marketing efforts, might be a better long term strategy for the Australian industry. Similarly, tariffication of Korean import quotas would enable consumer preferences to dictate the quality of Korea's beef imports. The results of this study highlight the need for research on North Asian consumer preferences in order to assess the best strategy for development of the Australian beef industry.

Liberalisation of North Asian beef import policies provides an important opportunity for the Australian beef industry to diversify its markets, so as to I have four main outlets. The United States and the Australian domestic market will remain important outlets for manufacturing grade beef and pasture fed beef, respectively. The expansions of the Japanese and Korean beef markets provide further competition for pasture fed beef sales as well as potentially encouraging the development of the grain fed beef industry. These benefits from diversifying into the North Asian markets can be realised only by continuing to seek further liberalisation and supplying products that satisfy consumer preferences in both countries.


1. Introduction

In recent years, the Australian beef industry has shown increasing interest in the potential for expanded beef sales in the North Asian region of the Pacific Basin. This interest in the Japanese and South Korean beef markets has been largely based on the GATT-related reforms of their respective import arrangements. The primary objective in this report is to provide an assessment of the effects of these import policy arrangements on the Australian beef industry. These effects are assessed in the context of Australian trade with other Pacific Rim countries as well as competition from US and New Zealand product in the North Asian markets.

The economic returns to the Australian beef industry are heavily dependent on export sales to Pacific Rim countries. Generally more than half of Australia's annual beef output is sold to Pacific Rim markets, notably the United States, Canada, Japan, South Korea and Taiwan. However, these importing countries utilise a variety of trade policy interventions in order to limit access and support their domestic beef industries.

The United States and Japan are the two major beef importing countries in the Pacific Basin, and Australia the largest

I exporter. Access to the United States market has generally been unrestricted, although 'voluntary export restraints' (VERs) may be negotiated at times when annual imports are expected to exceed a predetermined level. In contrast, Japanese beef imports have been tightly controlled by ad valorem tariffs and (negotiable) mmimum import quotas. On average, the United States and Japan purchase around 80 per cent of Australia's total beef exports, and consequently they have a major influence on prices in the Australian beef market.


Trade restrictions are also used by the other major beef importing countries of the Pacific Basin. Canada, for example, has used VER arrangements similar to those applying in the United States. Until recently South Korea had no formal quota arrangements and proved to be an unreliable market with access levels largely determined by political developments. In Taiwan imports are controlled by ad valorern tariffs that differentiate between high and low quality beef imports.

Compared with a free trade environment, these policy interventions have had a number of consequences for Pacific Basin beef markets. Reduced access has raised beef prices in importing countries, resulting in lower levels of beef consumption and higher domestic beef production. For exporting countries the smaller trade demand means lower prices, lower output levels and higher domestic consumption. Reductions in the level of protection provided by these import policies should result in a more efficient allocation of resources in both importing and exporting countries. Lower beef prices in importing countries would result in increased beef consuinption and (in the absence of other forms of assistance to replace protection against imports) reduced domestic production. The increased trade demand could be expected to raise prices in exporting countries, causing production to expand and domestic consumption to decline.

In recent years, both the Japanese and South Korean governments have negotiated major changes to their beef import arrangements. Following separate bilateral negotiations with the United States, Australia and New Zealand in 1988, the Japanese Government agreed to phase

out its beef import quotas. Liberalisation of the Japanese trade involves a three- year expansion of import quotas followed by the replacement of quotas with a 70 per cent tariff in Japanese fiscal year (JFY) 1991, with subsequent tariff levels progressively reduced to 60 per cent in JFY 1992 and 50 per cent in JFY 1993. (Japanese fiscal years extend from April of the year indicated to March of the following year.)

Two other, interrelated, developments in the Pacific Basin beef trade have been the re-emergence of South Korea as an importer of beef, and the unfavourable 1989 ruling by a GATT panel on the legality of Korean import controls. In April 1990 Korea negotiated an interim minimuin access agreement with supplying countries for the 1990-1992 period. Subsequent negotiations will determine how Korea's import controls will need to change beyond 1992 in order to ensure consistency with GATT principles by 1997.

Liberalisation of the Japanese and South Korean beef trade is likely to have significant effects on the beef markets of Pacific Rim countries. The magnitude of these effects will be influenced, however, by the linkages between the beef industry and related industries in each country. For example, in most countries beef competes with other forms of meat protein for a share of the consumer's food budget. Consequently, market outcomes for other products such as sheep meat, pig meat, poultry and seafood will influence the effects of a change in trade policies on Pacific beef markets. The influences of these consumer demand relationships are sometimes referred to as second round effects.

There are also potentially important 'second round' effects for the beef industry from linkages with feedgrain markets. The beef, pig meat and poultry industries of most Pacific Rim countries are based on intensive grain feeding production

systems. Changes in meat consumption patterns may therefore affect aggregate feedgrain demand in Pacific f i n countries. The consequent increase in feedgrain prices would affect the cost of producing intensively fed livestock, including lot fed beef. Changes in feedgrain prices will also have implications for the size and nature of Australia's beef industry, due to enterprise substitution relationships between sheep, cropping and beef production in broadacre agriculture.

Changes in the beef import policies of the main importing countries could yield substantial net gains for the Australian beef industry over the coining years. In this study, forecast silnulation experiments using ABARE's Econolnetric Model of Australian Broadacre Agriculture (EMABA) were undertaken in order to obtain estimates of the effects of liberalising the North Asian beef trade. The EMABA model contains detailed representations of the markets for livestock (for example, beef, pig meat and poultry) in Australia, New Zealand, the United States, Canada, Japan, Korea and Taiwan. For each country represented within the model, production, consumption and trade are determined simultaneously so as to yield separate prices for beef, pig meat and poultry. The model differs from previous models reported in the literature in that a differentiated product approach is used in representing the major bilateral trade flows between Pacific Rim countries: that is, trade flows are distinguished by country of origin, with separate export I

prices, rather than being aggregated and I

having a single 'world price'; moreover, in some domestic markets different types of beef are distinguished.

The EMABA model was used to generate a forecast simulation for the 1991- 95 period incorporating the announced reforms to the Japanese and Korean beef trade. The reforms represented include the 'tariffication' of Japanese beef quotas and the establishment of Korean minimum


import quotas with annual increments. From the livestock production results, livestock-feedgrain conversion factors were then used to estimate likely feedgrain demand in selected Pacific Rim countries. These forecast simulation results were subsequently used as a baseline against which to compare two simulations of alternative North Asian beef import policies.

In the first alternative simulation, the application of Japan's 'tariffication' approach to the reform of Korea's beef import arrangements was examined. It was assumed that Korean quotas are abolished once the interim access agreement expires in 1992, and replaced with tariffs of 100 per cent in 1993, 90 per cent in 1994 and 80 per cent in 1995. The resultant changes in feedgrain demand, relative to the above baseline simulation, were used to assess the implications for feedgrain prices and the consequent second round effects on the production of grain fed beef, pig and poultry meats.

Though the reforms to Japanese and Korean beef import policies now under way will give the beef industries of the exporting countries increased access to those markets, the domestic beef industries of Japan and Korea will still be substantially protected from competition.

The costs of a continuation of these policies to the Australian beef industry are of some interest. A second alternative simulation experiment was therefore directed at determining the effects of moving to free trade in the Japanese and Korean beef markets from 1991. It was assumed that Korean import quotas are abolished and that all beef tariffs in the Japanese and Korean markets are set to zero. The resulting estimated changes in meat production were, again, used to assess the implications for feedgrain demand and the consequent differences to feedgrain prices and meat production.

This report continues with, in chapter 2, an overview of livestock markets in Pacific Rim countries and the import policies affecting Pacific Basin beef trade. The North Asian beef markets are examined in more detail in chapter 3, and Pacific Basin feedgrain demands in chapter 4. The expected effects of trade liberalisation are discussed and the relevant features of the EMABA inodel are outlined in chapter 5. The following three chapters contain detailed results of the baseline and alternative simulation experiments, and in the final chapter some concluding coinrnents on the implications of the analysis are presented.


2. The Pacific Basin meat trade

The beef markets of several Pacific Rim countries are linked together by trade

1 flows to forin a trading group that is largely separate from the beef trade in the rest of the world. As indicated in the previous chapter, these trade flows are restricted by a variety of policy interventions by importing countries. The reform of North Asian beef import policies will therefore affect market developments in each of the countries involved in the Pacific Basin beef trade. The effects of these reforms on the Australian beef industry will, in part, be de te rmined by the Pacific t rade linkages and by any remaining policy interventions.

Consumer demand relationships form another type of linkage - between the beef market and markets for other livestock products such as pig meat and poultry. Consequently it is important that the effects of North Asian beef trade reforms be considered in the context of all Pacific Rim livestock markets rather than viewing the beef markets in isolation. As is the case for the beef trade, there are trade flows linking the pig and poultry markets in Pacific Rim countries which are also affected by policy

l interventions. This chapter contains details of the

main features of the Pacific Basin beef trade. Linkages between the major markets - Japan, Korea, Australia and the United States - are examined, and the impor t policies that affect the movement of product between these countries are also discussed. The chapter also includes a brief outline of the Pacific trade in pig and poultry meats and the main policy interventions affecting product movement.

2.1 The Pacific Basin beef trade The separation of Pacific Basin beef trade from trade in the rest of the world is largely the result of bans imposed by importing countries on trade with supplying countries where foot-and-mouth disease is endemic. The major beef importing countries in the Pacific Basin are the United States, Canada, Japan, South Korea and Taiwan. Each of these countries is free of foot-and-mouth disease and imposes this animal health trade restriction. Australia, New Zealand and the United States are the main exporters of foot-and-mouth-free product and together account for more than 90 per cent of beef traded within the Pacific Basin (table 1).

Ireland and Denmark offer the only significant non-Pacific supply of foot-and- mouth-free product (Harris, Shaw and Cameron 1985). However, beef sales by these countries in the Pacific Basin have been limited by relatively high transport costs, and by the 'Andriessen assurances' which prevent the European Community from using export restitutions to sell beef in Australia's 'traditional' Asian markets.

The Pacific Basin can be viewed as comprising five main regions (see figure A): North America (the United States and Canada), North Asia (Japan and South Korea), Oceania (Australia and New Zealand), South-East Asia (which includes Hong Kong, Malaysia, the Philippines, Singapore, Taiwan and Thailand) and the foot-and-mouth-free Central American countries (including Costa Rica, El Salvador, Guatemala, Honduras and Panama). The trade flows that link these

8 Discltssion paper 90.1 1

1Pacific Basin beef production, consumption and trade flows in 1989 a

Oceania - Australia - New Zealand

North America b - United States - Canada

North Asia -Japan C

- South Korea

South-East Asia d - Taiwan

Production Consumption Imports Exports

kt cwe kt cwe kt SW kt SW

Central America e 289 243 - 31

Total Pacific Basin 14 959 15 096 1 466 1 305

a All quantities are calendar year, except for Australia (year ended June 1989) and New Zealand (year ended September 1989). b Includes trade between the United States and Canada. c Includes trade in diaphragm beef. d Includes Hong Kong, Malaysia, the Philippines, Taiwan, Thailand and Singapore. e Includes Costa Rica, El Salvador, Guatemala, Honduras and Panama. cwe Carcass weight equivalent. SW Shipped weight. Sources: National Livestock Cooperatives Federation (1989); US Department of Agriculture (1989b, 1990e); Livestock Industry Promotion Corporation (1990).

together are themselves subject to an assortment of trade restrictions.

While there are some trade flows both into and out of the Pacific Basin beef market, the quantity of beef involved is relatively small. In some cases the small size of these trade flows is due to quantitative import controls. Examples of such trade include the small quantities of foot-and-mouth-free beef that flows from Australia and the United States to the European Community and that from the Community to the United States.

Canada provides a potentially unconstrained point of entry for EC beef into the Pacific Basin beef market (Spill and Harris 1989). However, following a 1985 decision by the European Community to subsidise beef exports to Canada, the Canadian Government responded by imposing countervailing duties on product imported from the Community. These duties have remained in force, limiting


the penetration of EC beef into the North American markets and thus into the Pacific Basin beef trade. The Canadian government has yet to respond to the finding of a GATT pane1 that these countervailing duties contravene the Subsidies Code.

The incentive for Pacific Rim exporters to trade with price-responsive non-Pacific markets, such as the Middle East, has been limited by the relatively low prices received. In the past, these lower prices have been largely due to the disposal of surplus EC beef stocks with the assistance of export subsidies. Trade with markets such as the Middle East are unlikely to affect developments in the Pacific Basin beef trade unless there are significant price falls in Pacific Rim countries or price rises for beef traded outside the Pacific.

In recent years the total movement of product into the Pacific from non-Pacific suppliers has been less than 5 per cent of

p-p P p p P p p p

A Major world trade flows for beef and veal a

EABARE Atlantic B asin 1 Pacific B asin

a All flows have been calculated as the avera e of 1986 to 1988 data and are specified in shi ped weight terms. Sources: Commonwealth Secretariat 1988); bffice of Customs Administration (1989); US 8epartment of Agriculture (1990e); Japan Tariff Association (19 4 0); AMLC (1990 a).

total imports by Pacific Rim countries. Similarly, exports by Pacific Rim countries to non-Pacific markets has accounted for less than 5 per cent of total shipments.

Beef produced, consumed and traded within the Pacific Basin is a non- homogenous product. Production systems in each country have particular features which distinguish or differentiate their product from that of other countries. In terms of output, beef can be broadly disaggregated into grain fed product and forage fed product. These two categories can be further disaggregated on the basis of the type of feed ration used and, in the case of grain fed beef, the length of time on feed.

Australia, New Zealand, Taiwan and South Korea are all predominantly producers of forage fed beef. However, while beef production in Australia and New Zealand is primarily based on extensive pasture grazing, the production systems that are used in Taiwan and Korea are largely based on intensive feeding with predominantly forage based rations.

Similarly, while Japan, the United States and Canada are all largely producers of grain fed beef there are significant differences in the types of beef produced. Grain fed beef produced in the United States and Canada is primarily based on intensive grain feeding for relatively short periods (for example, 4-6 months). In addition, both countries produce large quantities of forage fed beef primarily derived from culled breeding cattle drawn from the pasture-based cow-calf operations. In contrast, Japanese beef production is almost entirely based on intensive grain feeding over much longer feeding periods (for example, 12-14 months for dairy beef and 17-20 months for wagyu beef). A further distinction is that culled breeding animals are also finished on grain-based rations due to a shortage of grazing land (Longworth 1983).


2.2 Import policies affecting Pacific Basin beef trade Pacific Basin beef trade is heavily influenced by the domestic and trade- related policy instruments adopted by the major importing countries, the United States, Canada, Japan, South Korea and Taiwan (Harris, Corra and Shaw 1989).

Since 1965 access to the US market has been regulated. In 1980, the US meat import law (MIL) was introduced to set a limit on annual access levels. Each year, an import quota is determined by a countercyclical formula, which is intended to lower (increase) import access during periods of increasing (decreasing) per- person cow beef production in the United States (Weeks 1979). If imports seem likely to exceed 110 per cent of the quota, voluntary export restraints (VERs) are negotiated with supplying countries on the basis of shares of the 110 per cent 'trigger' level. For exporting countries, the alternative to 'voluntary' restraint of shipments is the imposition of the import quota itself. VERs also enable exporting countries to capture the price premium (tariff equivalent rents) on beef sold to the US market during periods of restricted access.

Canada has a similar meat import law, although determination of access levels is more discretionary (Weeks and Turner 1981). In the past, the triggering of US import controls has sometimes led to the imposition of Canadian import restrictions due to the close relationship between the two markets. During free access periods, imports by both countries are determined by market prices, which are subject to relatively small import duties. In 1989, Canada and the United States imported around 647 kt (shipped weight) of beef from third countries.

Japanese beef imports have been restricted since the early 1960s by a

combination of ad valorern tariffs and import quotas controlled by a quasi- government importing agency, the Livestock Industry Promotion Corporation (LIPC), The import quotas (to be abolished in 1991) have comprised specific quotas for particular purposes, types of beef and import channels. They have effectively been maximum access levels, and those since 1979 have been negotiated on the basis of four-year bilateral agreements between Japan and the major suppliers: Australia, New Zealand and the United States. These agreements have generally involved a Japanese commitment to expand its global quota level as well as to increase its imports of 'high quality' beef, which until June 1988 was a specially defined category for grain fed imports. The last such agreement, covering the period JFY 1984-87, provided for a 6.9 kt annual growth in 'high quality' beef imports within a 9 kt annual increase in the global quota (Coyle 1986).

This expansion in the Japanese import quota for grain fed beef appears to have been the major factor in the expansion in US beef trade during the 1980s. Since 1979 the US share of the Japanese imported beef market has increased at the expense ~ of Australian pasture fed beef. The US share of 'quota' beef imports' rose from 18.1 per cent in 1979 to 43.7 per cent in 1989. Australia's share declined from 77.5 per cent to around 50.6 per cent over the same period.

In addition, large quantities of US diaphragm beef have entered the Japanese market outside the quota arrangements. For Japanese customs purposes diaphragm beef is defined as offal, and it is excluded from the official definition of beef for import quota purposes. Consequently, the volume of diaphragm beef trade has

'Quota' beef refers to those categories of beef imported under quota until the introduction of ad valorem tariffs in JFY 1991. It does not include diaphragm beef, which (see below and table 3) has been excluded from quota controls.

increased significantly in recent years, as an ad valorern tariff of 15 per cent has been the only restraint on trade. If 'quota' beef imports are combined with the diaphragm beef trade, Australia's total market share was around 62.7 per cent in 1979 compared with a 30.5 per cent share for the United States. In 1989, Japanese imports comprised 349 kt of 'quota' beef and an estimated 103 kt of diaphragm beef (shipped weights). By this time Australia's total market share had fallen to 40.9 per cent and the US market share had risen to around 53.1 per cent.

Two different explanations have been advanced for the changes in the composition and source of Japanese beef imports. Sirnpson and Farris (1982) and Japanese officials contend that the growth in imports from the United States was the result of increasing Japanese demand for high quality grain fed beef. The alternative explanation for the increasing US market share was put forward by George (1983, 1984) and Mori and Gorman (1984). These authors suggested that it was partially caused by an unofficial Japanese government policy to favour grain fed beef imports in response to political pressure from the United States.

In line with this second view it has been argued that, although Japan officially maintained only a global import quota (subdivided as mentioned above), various administrative mechanisms were used to change the composition of beef imports toward specific country suppliers (Johnson and Fisher 1988). An analysis by Teal, Dickson, Porter and Whiteford (1987) suggested that country shares of Japanese beef imports were affected by the manner in which the import control system was structured and administered. These authors also found that the 'implicit tariff' imposed on Australian beef imports (the difference between domestic and import prices) was higher than that imposed on US beef imports, and suggested that this was due to the LIPC's purchasing preferences (p.4).

Discussion paper 90.71

The LIPC has exercised considerable control - though to a lesser extent since April 1988 - over the type of cuts and the 'quality' of beef imported. Tenders were announced for specific quantities of particular types of beef, and were allocated to suppliers on the basis of price competitiveness. Opportunities for Australian suppliers to gain a share of the global 'high quality' (grain fed) import quota were extremely limited. This was because the Japanese requirements were generally for onIy a restricted range of primal cuts, and since there is little Australian demand for grain feed beef, potential Australian suppliers were faced with a major difficulty - the lack of profitable sales outlets for those parts of grain fed carcasses not required by the Japanese market.

In mid-1988, a new set of bilateral agreements between Japan and the United States, New Zealand and Australia provided for the phased replacement of Japanese beef import quotas with ad valorern tariffs, with no special provisions concerning 'high quality' beef. These agreements require Japan to increase imports by 60 kt (product weight) per year for a three-year period, from the 214 kt import quota that applied in JFY 1987. This will raise the import quota to 394 kt in JFY 1990. In April 1991 the quota will be abolished and replaced by an ad valorem

l l tariff of 70 per cent for JFY 1991. The tariff I rate will be reduced to 60 per cent in JFY

1992 and 50 per cent in JFY 1993. Tariff rates beyond JFY 1993 will be subject to negotiation within the context of broader trade discussions of the General Agreement on Tariffs and Trade (the GATT). The tariff rate applied to imports of diaphragm beef will remain 15 per cent.

An additional safeguard allows Japan, following the removal of import quotas, to impose an emergency tariff of an extra 25 per cent under certain circumstances. Should annual imports appear likely to exceed either a 20 per cent growth rate


over the previous year or the JFY 1990 quota level (394 kt) compounded by a 20 per cent annual growth rate - whichever be the less - the emergency tariff may be imposed.

Unlike Japan, Korea has until recently had no formal quota arrangements for determining annual access levels for beef. A quasi-governmental importing agency, the Livestock Products Marketing Organisation, announced Korean import requirements by calling for suppliers to submit bids for tenders. This policy of informal non-negotiable import quotas was supplemented by an ad valore?n tariff of 20 per cent, which cannot be raised without GATT approval (Harris and Dickson 1990).

On some occasions, access to the Korean market was closed without warning, causing uncertainty and large variations in the overall level of Pacific Basin export demand. For example, during 1983 Korean beef imports reached 74.5 kt (shipped weight), whereas there had been almost none just three years earlier. In late 1984 the Korean government suspended beef imports due to a downturn in domestic beef prices, and the market remained closed until the resumption of trade in mid- 1988.

In 1989 a GATT panel found that South Korea's beef import policies were inconsistent with GATT principles. Korea has subsequently held bilateral negotiations with the major supplying countries and announced the establishment of minimum access levels for beef imports. On a boneless weight basis, Korea has agreed to import a minimum of 58 kt in 1990, 62 kt in 1991 and 66 kt in 1992. Subsequent to these negotiations the Korean government has increased its 1990 import requirements to 80 kt. In view of the fact that in 1989 beef imports were around 80 kt (shipped weight), domestic developments in the Korean beef market could result in beef imports in excess of these minimum access levels.

13

Subsequent negotiations, which must begin by mid-1992, will determine how Korean import arrangements are to be made consistent with GATT principles by 1997. A possible reform option could be the adoption of arrangements similar to the Japanese beef liberalisation agreement: the eventual replacement of import quotas with a regime of gradually declining ad valorern tariffs.

Another important market in the Pacific Basin beef trade is Taiwan, with total imports of around 37 kt (shipped weight) in 1989. For a number of years, Taiwan's

, beef trade has primarily been restrained l l by a two-tier tariff regime, tariffs of

NT$23.8/kg and NT$30/kg being applied to 'special quality' and 'other quality' beef imports respectively. The 'special quality' category is predominantly supplied by grain fed beef from the United States. 'Other quality' beef imports are largely composed of grass fed product from Australia and New Zealand. In mid-1990 the tariff applied to 90CL boneless beef from Australia was approximately equivalent to a tariff rate of 30 per cent.

More recently, a trade dispute with Taiwan in late 1989 has led to an agreement by Australia to voluntarily restrain shipments of some 'low quality' ~ beef products in 1990. Depending on the level of sales that would have been reached in its absence, this agreement could add a further impediment to Australia's beef trade with Taiwan. Subsequent negotiations between the United States and Taiwan have reinforced the discrimination between qualities of beef imports: Taiwan has recently agreed to lower the 'special quality' tariff to NT$20/ kg. This is approximately equivalent to a tariff rate of 15 per cent on the mid-1990 landed price of US grain fed loin cuts.

Trade with the other South-East Asian countries is generally free of quantitative controls, although import duties and ad valorern tariffs are applied in some cases. Overall the South-East Asian markets,

including Taiwan, imported around 124 kt (shipped weight) of beef in 1989.

2.3 Pacific trade in pig and poultry meats Consumers in Pacific Rim countries obtain their meat protein requirements from a number of different sources. As a result there are several alternative products competing with beef for a share of the consumers' expenditures on meat. The resulting substitution relationships introduce a Linkage between developments in the beef market and in the markets for other meat products.

There are differences in the dietary preferences of consumers in the Pacific Rim countries. Common to all countries is the importance of pig and poultry meat as alternatives for beef as a source of meat protein. Other important sources of non- vegetable protein include sheep meats in Australia and New Zealand, and seafood in the diets of consumers in Japan, Korea and Taiwan.

The consumer demand linkages between beef, pig and poultry markets are compounded by the meat trade flows between Pacific Rim countries. As is the case for beef, restrictions based on the presence of foot-and-mouth disease could be expected to contribute to a separation of Pacific Basin pig meat trade from trade in the rest of the world (figure B). However, such a separation in the world trade in pig meats is not evident. The 'Andriessen assurances' do not apply to the European Community's pig meat trade with Asian countries, and significant quantities of foot-and-mouth-free product from Denmark and Ireland enter the Pacific Basin through the Japanese and North American markets.

Japan is the only major pig meat importer in the Pacific region, while Taiwan, Canada and the United States are the main Pacific based exporters. Pig meat exports from the region are limited, with


B Major world trade flows for pig and poultry meats a

--p

Pacific Basin E ABARE

Atlantic Basin

a Traded volumes are averages for 1986 to 1988 and expressed in shipped weight t e r n . Pig meat trade flows include trade in bacon and ham Sources: Commonwealth Secretariat (1988); Office of Customs Administration (1989); US Department of Agriculture (1990 e); Japan Tariff Association (1990).

- - ---p ----p-pp

only a small quantity of North American United States and Thailand - the main product shipped to the European Pacific based exporters - supply most of Community. Japan's import requirements. Poultry meat

For poultry meat there appear to be no trade flows out of the Pacific Basin are quarantine-based trade restrictions predominantly composed of US shipments separating trade between Pacific Rim to the European Community and the Middle countries from that in the rest of the world. East. Trade flows into the Pacific include Japan is the main importer of poultry significant quantities of EC and Brazilian meat within the region, although some of product destined for the Japanese market. the smaller South-East Asian countries also Feeding practices in the pig and poultry import significant quantities (table 2). The industries of Pacific Rim countries

2 Pacific Basin pig and poultry meat production, consumption and trade flows in 1989 a

Production

kt cwe

Consumption

kt cwe

Imports

kt SW

Exports

kt SW

Pig meat Oceania - Australia - New Zealand North America b - United States - Canada North Asia - Japan - South Korea

South East Asia C

- Taiwan

Central America d

Total Pacific Basin

Poultry meat Oceania - Australia - New Zealand North America b - United States - Canada North Asia - Japan - South Korea

South-East Asia C

- Taiwan

Central America d

Total Pacific Basin

a All quantities are calendar year, except for Australia (year ended June 1989) and New Zealand (year ended September 1989). b Includes trade between the United States and Canada. c Includes Hong Kong, Malaysia, the Philippines, Taiwan, Thailand and Singapore. d Includes Costa El Salvador, Guatemala, Honduras and Panama. cwe Carcass weight equivalent. SW Shipped weight. Sources: National Livestock Cooperatives Federation (1989); US Department of Agriculture (1989b,c, 1990~); Livestock Indushy Promotion Corporation (1990).


generally involve the use of compound Pacific Basin (figure C). Taiwan was the feed mixtures, although there are some major supplier, withCanada and the United differences in the production technologies States supplying smaller but significant used. Differences in feed mixtures, breeds, quantities. The United States is also a major climatic conditions, processing and supplier of poultry meat to Japan, although packaging yield pig and poultry meat its share has been declining in recent years products that are distinguishable by due to strong competition from Thailand. country of origin. Thus, the pig and In South Korea the longstanding failure poultry meat products traded by Pacific to issue government controlled import Rim countries, like the beef traded within licenses has effectively resulted in a ban the region, are non-homogeneous. on imports of pig and poultry meat. Recent

There are a range of trade-related policy reports suggest that, while the ban on instruments and import regulations poultry imports continues, Korea has plans affecting the movement of pig and poultry to allow a limited quantity of pig meat meat within the Pacific Basin. Japan does imports during the second half of 1990 not apply quantitative controls on imports (US Department of Agriculture 1990f). In of pork or poultry meat. It does, however, the event of an import licence being issued, apply ad valoretrr tariffs of 10-14 per cent to ad valorern tariffs of 50 per cent and 30 per poultry imports, and controls pork imports cent would apply to pig meat and poultry by a system of minimum import prices. imports respectively.

The LIPC uses tariffs and variable levies In addition to foot-and-mouth trade to ensure that pork imports are landed at restrictions, there are other quarantine- no less than a 'Stated Import Price'. This based regulations that prevent or restrict price, which is determined by the trade in pig and poultry meats between stabilisation band applying to the Japanese Pacific Rim countries. For example, until pork industry, ensures that pig meats recently Australia and New Zealand imported at world prices will not undermine imposed a quarantine-based requirement this domestic stabilisation scheme. It also which effectively excluded Canadian pig ensures that the landed prices are the same meat imports, though this restriction has for all foreign suppliers (Shagan 1988). now been removed.

In 1989 around half of Japan's pig meat In North America, Canada maintains imports were obtained from within the quotas both on domestic poultry

l C Japanese imports of pig and poultry meats l

Pig meat from non-Pacific Basin suppliers Pig meat from the United States Pig meat from other Pacific Basin suppliers -- Poultry meat from non-Pacific Basin suppliers PouItr meat from the - unitedi~tates Poultry meat from other Pacific Basin suppliers

1985 1986 1987 1988 1989 a Shipped weight Source : Japan Tariff Association (1990) ---


production and on poultry imports. The industry will depend on the competition United States recently imposed for a share of the North Asian trade from countervailing duties on imports of other suppliers such as the United States Canadian pig meat, following claims that and New Zealand. It will also depend on pig stabilisation schemes operated by the competing demands for Australian provincial governments in Canada beef from other importing countries (for subsidised shipments of yjg meat into the example, the United States, Canada and US market. Taiwan) and hence by the trade policies

affecting these import demands.

2.4 Conclusions Trade flows linking the Pacific Basin beef markets face a variety of policy interventions adopted by importing countries to reduce access levels. Trade linkages ensure that a change in North Asian import policies will affect market outcomes in all major Pacific Rim beef markets. The effects on the Australian beef

Linkages between the beef, pig meat and poultry markets in Pacific Rim countries should also be considered when assessing the effects of reforming the North Asian beef trade. There are trade linkages between Japan and the United States in both pig and poultry meat which have some effect on meat consumption levels in both countries and also on the level of Japanese demand for imported beef.

18 Discussion paper 90.1 1

3. North Asian beef markets

Japanese and Korean import policies provide assistance to their respective domestic beef industries by restricting access and raising prices above the levels that would prevail under free trade. Removal of these beef import restrictions could provide large benefits to the Australian beef industry. The size of the benefits would depend primarily on how the beef industries in Japan and Korea responded to changes in levels of protection. The detailed examination in this chapter of the beef markets in Japan and Korea provides a basis for assessing the potential benefits to Australia.

3.1 The Japanese beef market In some respects, the Japanese beef industry is similar to that of North America. Beef production is based on feeding grain-based rations, and the production system is predominantly characterised by separate calf raising and cattle fattening operations. However, several characteristics of the Japanese industry differentiate the Japanese product from US grain fed beef. These distinguishing features include the breeds of cattle, the relative contribution of dairy cattle to total beef supplies, the length of time cattle are placed on feed, and the grain finishing of culled breeding cattle.

Japanese commercial beef production is essentially sourced from two distinct types of cattle. The traditional source of domestic beef has been the wagyu native cattle, which historically were used as draught animals. However, the relative importance of wagyu beef production has been declining due to the increasing quantities of product derived from dairy cattle. A


specialised 'dairy beef' industry has been established through the grain feeding of surplus Holstein calves. Dairy beef has become an increasingly important source, and currently accounts for around two- thirds of domestic beef output (table 3).

Wagyu beef production is typically small scale, with around 85 per cent of the herd carried on farms with less than 10 head Uohnson and Fisher 1988). In most cases, fattening wagyu cattle is a sideline operation to other agricultural activities or non-farm employment (Longworth 1983). The dairy herd is more concentrated, with around 60 per cent of the herd carried on farms of 10-50 head.

Due to the limited availability of grazing land, wagyu calves are mostly hand fed on special concentrate rations for around 8-10 months. At an average liveweight of 285 kg those calves not required as breeding herd replacements are sold to feedlot operators. Generally wagyu feeder calves are fed high-concentrate grain-based rations for approximately 17-20 months and slaughtered at weights of around 380- 400 kg. A small proportion of wagyu calves are also sold to specialist 'kobe' beef producers. Mostly females, these calves are fed special rations for up to two years and yield a product highly marbled with fat, which commands a substantial retail price premium over other types of beef. Prior to slaughter the culled wagyu breeding cattle are also finished on grain- based rations for around 5-8 months (Longworth 1983).

Domestically produced dairy beef is distinguishable from the beef produced from wagyu animals. The differences between the two products are largely related to the breed of cattle and the length of time on feed (Mori, Lin and Gorman

3 Summary statistics of the Japanese beef market

Unit 1980 1985 1986 1987 1988 198913

Total cattle inventories a '000 head 4 385 4 662 4 706 4 686 4 668 4 671 - wagyu female '000 head 986 1 060 1 063 1 048 1 041 1 046 - wagyu male '000 head 492 550 563 571 574 580 - dairy female '000 head 2 104 2 111 2 103 2 049 2 017 2 031 - dairy male b '000 head 803 941 977 1 018 1 036 1 025

Beef and veal production kt cwe 418 555 559 565 570 548 - wagyu beef kt cwe 134 207 201 189 183 190 - dairy beef kt cwe 284 348 358 376 387 358

'Quota' beef imports kt SW 122 151 178 217 264 349 - Australia kt sw 93 93 105 121 136 171 - United States kt SW 22 47 62 82 109 150

l - New Zealand kt SW 4 7 6 8 10 14

Diaphragm beef imports C kt SW 49 74 88 91 103 103 - Australia kt SW 9 6 7 8 9 8 - United States kt SW 35 61 74 77 87 88

Beef consumption d kt cwe 657 870 944 l 000 1 112 1 141

a As at February except 1980, which refers to February 1981. b Recorded as the dairy breed component of 'beef cattle inventories'; includes some dairy heifers for fattening. c Recorded as import category 02.01-131 from 1980 to 1987, and as categories 0206.10-010, 0206.21-000 and 0206.OU)OO for 1988 and 1989; includes some other internal organs and tongue. d Domestic disappearance, estimated as production plus imports less exports and change in stocks. p Preliminary. cwe Carcass weight equivalent. SW Shipped weight. Sources: Livestock Industry Promotion Corporation (1990); Ministry of Agriculture, Forestry and Fisheries (1990a); Japan Tariff Association (1990).

1989). Shortly after birth the surplus male dairy calves are generally sold to specialist feeder cattle producers or direct to feedlots. At around 7-8 months of age, and weighing around 250-270 kg, they are placed in feedlots and grain fed for 13-14 months (Simpson, Yoshida, Miyazaki and Kada 1985). Culled dairy cows are also finished on grain-based rations prior to

1 slaughter. Availability of male dairy calves for

beef production is closely linked to the size of the dairy cow herd, which in turn is primarily dependent on returns to milk production. Coyle (1983) suggested that Japanese dairy farmers received only 10- 20 per cent of their gross agricultural income from the sale of newly born dairy calves. If this is so, the long run

have a substantial impact on the level of domestic beef output.

The contribution of domestic output to total Japanese beef consumption has gradually declined. In 1980, Japan produced around 64 per cent of total domestic requirements (table 3). Since that time the global import quota has been expanding in line with the increased consumer demand for beef. The output of dairy beef has increased, but wagy; beef production has remained almost stationary and domestic beef supplies currently account for less than half of total domestic disappearance.

The LIPC controls - that is, acts as importer for - the majority of the global import quota, and its primary aim appears to be the maintenance of domestic beef

responsiveness of dairy beef supplies to prices at high levels (Johnson and Fisher movements in beef prices may be limited 1988). Import levies are extracted by the (Corra, Dickson and Teal 1989). On the LIPC as the difference between landed other hand, changes in government prices and the sell-out prices determined policies affecting the dairy industry could by the domestic market for each type of


imported beef. These profits are used to support provided by import quota fund domestic programs for the controls. Estimated nominal rates of development of the livestock and meat protection for dairy beef producers have industries. The LIPC is responsible for approximately doubled since 1980 (table stabilising domestic beef prices between 4). These estimates were derived by maximum and minimum price limits comparing the landed price of US grain through the buying and selling of both fed steers with the Japanese price of dairy imported and domestic beef. steers. Use of this comparison implies that

Until recently there were separate the two types of beef are perfect wholesale price stabilisation bands for substitutes. In fact, however, US beef and wagyu beef and dairy beef. As the longer- Japanese dairy beef are distinguishable fed wagyu beef is regarded as a higher products, due to a number of factors quality product than dairy beef the wagyu including the length of time on feed. It is price stabilisation band limits were set at possible that Japanese consumers are higher levels. These stabilisation willing to pay more for dairy beef than for arrangements are reflected in the saleyard grain fed beef imported from the United prices paid for wagyu and dairy cattle. As States, in which case the actual rates of table 4 indicates, the price premium for protection would be lower than these wagyu steers relative to dairy steers has estimates. been in the range 50-65 per cent in recent A major factor underlying the rise in years. Following recent changes to the protection was the substantial appreciation Japanese meat grading system the wagyu of the yen that occurred during the 1980s. and dairy steer price stabilisation bands In 1989 a US dollar was worth Y137, as have now been replaced by a single price against 34226 in 1980. A rise in the value of stabilisation band for B2-B3 category cattle. the yen reduces the landed price of

Japanese beef producers have enjoyed imported beef in yen, and thus increases high levels of assistance through the price LIPC profits earned on the sales of

4 Estimated nominal rate of protection for Japanese beef producers

Unit a 1980 1985 1986 1987 1988 1989

(1) Japanese price of medium grade wagyu steers USc/ kg 511 434 651 801 942 914

(2) Japanese price of medium grade dairy steers USc/ kg 352 311 460 529 579 568

(3) Premium for wagyu beef over dairy beef b % 45 40 42 51 63 61

I (4) Landed price of US fed l steers C USc/kg 185 161 159 176 188 192 l

(5) Estimated nominal rate of protection d % 90 93 189 201 208 196

1 JapaniUS exchange rate Y/US$ 226 239 169 144 128 137

a All prices are liveweight saleyard prices. b Ratio (1)-(2):(2). c Omaha price of choice fed steers (900-llM) lb, liveweight) adjusted for freight rates plus unloading charges of 10 per cent. d Ratio (2)-(4):(4). Sources: LIPC (1990); US Department of Agriculture (1990~).


imported product. The quota effectively isolated the Japanese market from the effects of changes in imported beef prices caused by exchange rate movements.

Through the maintenance of retail beef prices at very high levels, these import arrangements effectively tax Japanese beef consumers. Dewbre, Harris and Sheales (1986) provided some estimates of the cost that Japanese import controls imposed on domestic beef consumers. As shown in table 5, Japanese beef consumers were paying around $A21/kg for fresh domestic chuck steak in 1985. This price level was approximately four times the price paid by US consumers for grain fed chuck. By 1989 the Japanese domestic chuck price had risen to almost $A34/kg, more than six and a half times the price of grain fed chuck steak in the United States. This 'snapshot' price comparison does not allow for differences in the quality of the two products as perceived by the Japanese consunTer.

However, it is evident that there is considerable scope for reducing Japanese retail beef prices by allowing greater quantities of lower cost imported beef on to the market.

The high level of retail beef prices in part explains the relatively low levels of Japanese beef consumptiot~. Income levels and relative retail prices of seafood and other meats also affect the level of beef consumption, given underlying consumer preferences. Traditionally, the Japanese have been large consumers of seafood products, although pork and poultry meat have also become important sources of non-vegetable protein in the Japanese diet (figure D). In retail weight terms, the Japanese consumed an estimated 6.4 kg of beef per person in 1989. For comparison, 1989 beef consumption levels in the United States and Australia were 31.8 kg and 28.6 kg respectively.

The beef available to Japanese consumers cannot be viewed as a single

5 Comparison of retail beef prices in Japan, Australia and the United States

(1) Japanese price of fresh, domestic chuck a

(2 ) Japanese price of frozen, imported chuck b

(3) Premium for Japanese domestic beef over imported product C

(4) US price of fresh, domestic chuck d

(5) JapaneseIUS price differential e

(6) Australian price of fresh, domestic chuck r

(7) JapaneseIAustralian price differential g

(8) Australian1 US exchange rate h

Unit

Ac/kg

Aclkg

a Tokyo average retail price survey for 'medium quality' product. b Tokyo average retail price survey for imported grain fed product. c Ratio (1)-(2):(2). d US average retail price for chuck steak, bone-in. e Ratio (1)-(4):(4). f Sydney average retail price for chuck steak, bone-in. g Ratio (1)-(6):(6). h For Japan/US exchange rate, see table 4. Sources: US Department of Agriculture (19904; LIPC (1990); Australian Bureau of Statistics (1990~).

22 Disctlssion paper 90.1 1

D Japanese consumption of meat and seafood per person

1965 1975 1985 1987 1989 a Estimated retail weieht.

homogeneous product. Longworth (1983) highlighted the non-homogeneous nature of Japanese domestically produced beef. Mori, Lin and Gorman (1989) also argued that imported beef and domestic dairy beef were differentiated products. Wahl, Hayes and Williams (1987) partially acknowledge the differentiated nature of the market by disaggregating beef into wagyu and non-wagyu product. Hence, their analysis was an advance on the study of beef demand by Teal, Dickson, Porter and Whiteford (1987). However, as Dyck (1988) suggested, this level of disaggregation may still be insufficient to adequately represent the highly segmented nature of the Japanese market.

The preferences of Japanese consumers for different types of beef are a critical

1 factor in assessing the implications of reforming North Asian import policies. At present the Japanese market may be divided into four main segments: - Japanese grain fed wagyu beef (17-20

months on feed); - Japanese grain fed dairy beef (12-14

months on feed); - imported grain fed beef (4-5 months

on feed); and - imported grass fed beef.

There are large price differentials between similar cuts of the four types of beef available on the Japanese market. For


example, the 1989 average retail price for fresh, domestically produced chuck was 211 per cent higher than the average retail price of imported, grain fed frozen chuck (table 5). These price differentials in part reflect the underlying consumer perceptions of the quality of each type of beef.

Consumer demand for a particular type of beef is dependent on its own price, disposable income levels and the prices of competing products such as pork, poultry, seafood and other types of beef. To varying degrees each of the four beef products will be substitutable for one another. An induced change in the retail price of the imported products will therefore affect the respective demands for domestically produced beef products as well as the consumption of imported beef.

3.2 The Korean beef market The raising of cattle for beef production in Korea is a much more recent phenomenon than in Japan. Originally Korea's native cattle breed were used for draft work on small scale family farms producing rice and other crops. Today these cattle form the basis of Korea's commercial beef industry, although breeding and fattening operations continue to be predominantly on a small scale, with around half the native cattle herd held on farms of 1-2 head (Harris and Dickson 1989).

As in Japan, the dairy industry also makes a substantial contribution to Korea's beef production. Increased demand for dairy products over recent years has led to an expansion of the dairy herd and hence increased availability of culled dairy cows for slaughter. In addition, increasing numbers of surplus dairy calves are being fattened for beef production on grain based rations.

Until recently, Korean native cattle were intensively fed on forage based rations composed of rice bran and other vegetable matter. This yielded a forage fed beef

23

product similar to beef produced in Australia and New Zealand. In the past few years there has been a trend toward the use of compound feeds and other simple grain mixtures. In view of the limited availability of land suitable for forage production, this trend suggests that a slow but definite shift towards a grain fed domestic product may be occurring.

Throughout the 1980s Korea's domestic beef output has not always been sufficient

l to satisfy the consumer demand for beef. At various times beef has been imported - mainly from Australia - to supplement domestic supplies and to reduce the

~ inflationary impacts of rapidly rising beef prices. At other times, during periods of increased domestic cattle slaughterings and falling beef prices, beef imports have been banned. In mid-1988 the Korean market reopened, and the 80 kt (shipped weight) of beef imported during 1989 constituted around 46 per cent of total domestic disappearance (table 6).

A quasi-governmental authority, the Livestock Promotion and Marketing Organisation (LPMO), is responsible for the purchasing and distribution of imported beef. In the past, the LPMO's requirements were largely met by imports of grass fed carcass beef, although

increasing quantities of grain fed carcass beef have been imported in recent years. With monopoly control of imported beef sales the LPMO earns sizeable profits, which are primarily used to fund domestic livestock development programs. In early 1989, the average LPMO profit on imported grass fed carcass beef sales was estimated at around 335 Usclkg (Harris and Dickson 1989).

Some of the imported product is released by the LPMO on to the wholesale market; the remainder is directly consigned to other organisations involved in the distribution of beef such as hotel suppliers. In either case, imported product is sold by the LPMO at a fixed price which is based on a predetermined discount relative to the average wholesale price of domestically produced beef. In 1989 this discount price was reported to be 70 per cent of the wholesale price for wholesale market sales and around 50 per cent for product consigned to other organisations (Harris and Dickson 1989).

The LPMO is also required to stabilise domestic beef prices. As the Korean imported beef trade is entirely composed of frozen product which can be stored indefinitely, this is achieved by varying the quantities of imported beef released

-

6 Summary statistics of the Korean beef market

Total cattle inventory a

- native b

- dairy

Beef and veal production

Beef imports - from Australia - from United States - from New Zealand

Beef consumption C

Unit

'000 head '000 head '000 head

kt cwe

kt sw kt SW

kt SW

kt SW

kt cwe

a As at December. b Includes beef breed cattle. c Domestic disappearance estimated as domestic production plus imports less exports and change in stocks. p Preliminary. Sources: National Livestock Cooperatives Federation (1989, 1990); Office of Customs Administration (1989).

24 Discussion paper 90.11

7 Estimated nominal rates of protection for Korean beef producers

Unit a 1980 1985 1986 1987 1988 1989

(1) South Korean price of native steers b Ac/ kg 284 454 422 442 615 819

(2) Landed price of Australian steers in Korea C Aclkg 90 118 129 141 147 162

(3) Estimated nominal rate of protection d % 216 285 227 213 318 405

KoreaIAustralia exchange rate won/$A 692 608 589 574 571 529

Korea/US exchange rate won/US$ 607 870 881 823 731 670

a Prices are liveweight saleyard prices. b Based on 400 kg liveweight native slaughter steers. c Based on Brisbane steer price (251-300 kg estimated dressed weight) and adjusted for exchange rates, freight and assumed unloading charges of 10 per cent. d Ratio (l)-(2):(2). Sources: Australian Meat and Live-stock Corporation (198%); NLCF (1990).

on to the domestic market and adjusting the fixed price paid by the other distributors of imported beef (AMLC 1989~).

Quantitative controls on beef imports have provided Korean beef producers with high levels of assistance through the support of domestic beef prices. The estimated nominal rates of protection presented in table 7 are based on a comparison of Korean native steer prices with the landed price of Australian grass fed steers. These estimates indicate rising levels of protection, in part due to the substantial appreciation of the won during the second half of the 1980s. The estimated 1989 protection level of 405 per cent is likely to be an overestimate, because Australian and Korean beef are hkely to be close but not perfect substitutes.

Korea's import policies implicitly tax beef consumers by raising retail prices above the levels that would prevail under free market conditions. In 1989 Korean beef consumers paid an average market price of $A19.22/kg for boneless beef (table 8). By way of comparison, the 1989 average Australian price for fresh chuck steak was $A6.41/kg, a price difference of approximately 200 per cent. Australian grass fed beef and Korean forage fed beef are similar products. Indeed, some

North Asian beef import liberalisat ion

imported Australian product has reportedly been sold as domestic beef (Australian Meat and Live-stock Corporation 1989c), which suggests that imported and domestically produced forage fed beef may be highly substitutable products. Therefore, even allowing for transportation and handling charges and a quality-related price premium for the domestic product, there is considerable scope for retail price reductions in a liberalised trading environment.

Historically, the major source of non- vegetable protein for Korean consumers has been seafood (figure E), but the

E Korean consumption of meat and seafood per person

8 Comparison of retail beef prices in Korea, Australia and the United States a

Unit 1980 1985 1986 1987 1988 1989

( l ) Korean price of fresh domestic boneless beef b Aclkg 675 1 188 1080 1 119 1 408 1 922

(2) US price of fresh, domestic round steak C Aclkg 535 889 911 909 844 869

(3) KoreanIUS price differential d % 26 34 19 23 67 121

(4) Australian price of fresh, domestic chuck steak e Aclkg 373 440 475 497 562 641

(5) KoreanIAustralian price differential f % 81 170 127 125 151 200

a Exchange rates used are reported in table 7. b Seoul average retail price of boneless beef (cut not specified). c US average retail price of boneless round steak. d Ratio (1)-(2):(2). e Sydney average retail price for boneless chuck steak. f Ratio (1)-(4):(4). Sources: NLCF (1990), US Department of Agriculture (1990d); ABS (1990~).

contribution of seafood to consumer diets has been declining, with strengthening demand for beef, pork and poultry meat. In 1989 the estimated beef consumption per person was around 4.0 kg (retail weight), about half the amount of pork consumed.

For some time the Korean authorities have imposed maximum retail prices for domestic beef, imported beef and pork. Although the price controls were only indirectly enforced, and until recently did not differentiate by cut (Huh 1986), they may have distorted retail price relativities and hence meat consumption levels. There is no formal grading system in Korea, and thus no hard evidence on the price-quality trade-offs for consumers purchasing beef.

The recently announced minimum access levels for Korean beef imports constitute the first step in establishing a Korean import policy consistent with GATT principles by 1997. Subsequent

provided for Korean beef producers. In particular, future growth in the Korean beef trade would depend on the timing of the removal of import quotas, the initial tariff rate to be applied and the rate of progressive reductions to a final tariff rate.

The other important issue relates to the composition of Korean beef imports that would be expected in a trading environment where consumer preferences dictate import requirements. At present, there is no information on the range of price-quality trade-offs available in the Korean market among the various qualities of beef (grain fed, grass fed, and so on) and the different cuts. Without this information it is not possible to judge the relative strengths of future consumer demands for grain fed and grass fed beef imports. Further research on this issue is very desirable prior to market liberalisation.

negotiations could result in a Japanese- style beef import agreement, with quotas replaced by ad valovetn tariffs. In that event, the effects of the reform on Pacific Rim exporting countries would largely depend on two issues.

The first issue relates to the details of the tariff regime and the level of protection

26

3.3 Conclusions Japanese and Korean beef import policies have had a major influence on their respective beef markets. They have provided substantial assistance to domestic beef producers. Estimated nominal rates of protection have risen substantially


during the second half of the 1980s, in Although consumers appear to be willing part due to the significant currency to pay a price premium for domestic appreciations in both countries. In product, the import controls have addition, the quantitative import controls implicitly taxed beef consumers at very have prevented the Japanese and Korean high levels. Though the removal of all beef markets from responding to assistance would lead to substantial falls movements in Pacific Basin beef prices. in beef prices and sizeable gains for beef

Beef is a non-homogeneous product in consumers, domestically produced beef both markets, and there are significant may well continue to trade at a price wholesale price differentials between premium over imported product. imported and domestically produced beef.


4. Livestock-feedgrain linkages in North Asia The beef, pig meat and poultry industries of the Pacific Rim countries are largely based on intensive grain feeding production systems. This creates an important linkage between the markets for feedgrains and livestock products. The effects of liberalising the beef import policies of North Asia will therefore partially depend on changes in production of grainfed meat and on how these affect demand for feedgrains and the cost of feed.

The major source of change in feedgrain demand as a result of changes in beef import policy is likely to be developments in livestock outputs in Japan and Korea. As the animal feed industries of both countries are heavily dependent on feedgrain imports, these policy reforms may have important implications for the North Asian feedgrain trade, most of which is sourced from Pacific Rim suppliers. This chapter contains details of the Pacific Basin feedgrains trade and the policies that may affect feed costs.

4.1 The Pacific Basin feedgrains trade As regards price determination there appears to be no separation of the world's feedgrain trade into regional markets as occurs with the world's beef trade (see figure F). However, a large proportion of world feedgrain trade movements is between Pacific Rim countries. The United States is the world's largest exporter of feedgrains and Japan is the world's largest importer. Australia, Canada and Thailand are small though significant exporters of feedgrains, and these together with the United States account for around 70 per cent of world exports. The remainder of

the world trade is sourced primarily from the European Community, Argentina and South Africa.

Japan, Korea and Taiwan have little or no domestic feedgrain supplies and import large quantities of feedgrains. Currently, these three countries account for around 37 per cent of world imports, with the Soviet Union, Eastern Europe, Mexico, the Middle East and North Africa accounting for the remainder. During 1989 Japan imported around 21.8 Mt of feedgrains, Korea 7.0 Mt and Taiwan 4.7 Mt (see table 9). More than two-thirds of these imports were froin the United States, which principally supplies corn and sorghum. The remaining import requirements were largely supplied by Argentina, South Africa, Australia and, on occasion, China.

In most Pacific Rim countries the compound feed industry is controlled by private interests. In general, feedgrain trade in the Pacific Basin is not distorted by trade policies of importing countries. Access is either duty free or with very low tariffs. Japanese compound feed manufacturers can import corn and sorghum duty free (ABARE 1988), although farmers who use imports in mixing their own livestock feeds pay import duties of 15 per cent. The Japanese Food Agency controls imports of barley and wheat, which incur tariffs of 10 per cent and 20 per cent respectively. Both Korea and Taiwan apply ad valorern tariffs on feedgrain imports of 3-5 per cent.

Grain policies adopted by the major feedgrain producing countries - the European Community, the United States and Canada - have had a substantial impact on world feedgrains trade and on the prices paid for compound feed ingredients. The domestic farin programs


5 I F Major world trade flows for feedgrains a f

A

Atlantic B asin Pacific B asin ~ A B A R E B I

a Traded volumes are averages for 1986 to 1988 data. Inclucks trade in corn, sorghum, oats, barley and rye. Sources: Office of Customs Administration (1989); Australian Bureau of -S tatistics (1989); S tatistics Canada (1989); Canadian Grains Council (1989); Canadian Wheat Board (1989); US Department of Agriculture (1989 a ); Japan Tariff Association (1990).

9 Pacific Basin feedgrain production, consumption and trade flows in 1989 a

Production Consumption Imports Exports

Mt Mt Mt Mt

Oceania 7.1 5.3 - 1.9 - Australia 6.4 4.6 - 1.9 - New Zealand 0.7 0.7 - North America 246.5 - United States 223.3 - Canada 23.2

North Asia - Japan - South Korea

South-East Asia 14.3 14.5 6.1 0.8 - Taiwan 0.5 5.1 4.7 -9 Total Pacific Basin 269.0 235.8 35.9 71.1

a Marketing year (October 1989 to September 1990). Feedgrains include corn, sorghum, barley, oats, rye, millet. Sources: US Department of Agriculture (1989a, 1990a,b).

l adopted by these countries have often l contained elements which stimulated grain

production and hence lowered world grain prices, though at other times production restraining elements have been incorporated in some programs, tending to increase world prices.

More recently, the European Community and the United States have resorted to subsidising grain exports to some countries in order to maintain or increase their respective market shares in those countries.

l Feed barley has been the main feedgrain I subject to such subsidies. Japan and Korea

have not been directly targeted for these subsidies, although they may have benefited indirectly froin price reductions in the world market due to the effects of export subsidies in other markets such as the Soviet Union and the Middle East. Because of the size of the US feedgrain industry the cost of feed ingredients in Pacific Rim countries will closely reflect movements in US feedgrain prices.

4.2 The Japanese animal feed industry Processed compound feeds are the major source of animal nutrition in Japan,

reflecting the intensive nature of livestock production and the limited domestic supplies of roughage and other types of feed. The use of feeds mixed on-farm has shown little growth in recent years due to the higher cost of these feeds relative to prepared co~npound feed. The importance of roughage in cattle feeds has been steadily declining since the early 1980s because of the limited domestic supplies and the relatively high price of imported roughage (United Nations Developrnent and Trade Bureau 1984; MAFF 1989b).

In line with the growth in Japanese livestock outputs, production of coinpound and mixed feeds for all types of livestock has increased over the past decade. The pig and poultry industries are the major consumers of prepared feeds, accounting for 29 per cent and 48 per cent of total Japanese compound feed consumption respectively (table 10). Japan's beef and dairy industries are also heavily dependent on grain-based rations, with prepared feeds accounting for around two-thirds of beef feed requirements and around half of the feed requirements for the dairy industry (Coyle 1983).

Grains account for around two-thirds of the raw materials used in Japanese


10 Estimated Japanese livestock consumption of compound feeds a

Unit 1980 1985 1986 1987 198tip 1989 e

Poultry kt 10 692 11 557 11 902 12 169 12 175 11 700 Pigs kt 6 399 7 519 7 521 7 680 7 700 7 714 Dairy cattle kt 2 323 2 777 2 792 2 877 3 010 3 049 Beef cattle kt 2 724 3 236 3 459 3 575 3 450 3 391 Other b kt 114 144 130 131 100 113

Total kt 22 252 25 233 25 804 26 432 26 435 25 967

a Includes simple mixed feeds. Years: JFY, beginning 1 April, b Sheep, horses and goats. p Preliminary. e ABARE estimate. Sources: MAFF (1989a,b, 1990b).

compound feeds for poultry, pigs and beef cattle (table 11). Corn and, to a lesser extent, sorghum are used extensively, although some rice has been used during periods when the government subsidised domestic sales of rice to eliminate mounting domestic surpluses. Only small quantities of wheat and barley are used, because government support policies have increased their prices relative to the prices of corn and sorghum.

Japanese compound feed prices are stabilised under two schemes, termed the ordinary co~npensation program and the extraordinary co~npensation program (OECD 1987). The ordinary compensation program is funded privately by feed

manufacturers and livestock producers. Under this scheme, livestock producers are entitled to draw income from the fund in the event of price increases for compound feeds. The extraordinary compensation program is funded equally by the government and feed companies, and payments occur when compound feed prices increase by inore than 8 per cent since the previous year. This scheme is available only to those contributing to the ordinary compensation program.

Japan's compound feed suppliers are heavily dependant on imports, most of which are sourced froin Pacific Rim countries (figure G). The United States is the main supplier, with a 1989 market

11 Materials used in Japanese compound feeds a

Grain - Corn - Sorghum - Wheat

I - Barley l l l

- Rice l l

- Other Cereal bran Oilseed and animal

Other

Unit

kt kt kt kt kt kt kt kt

kt kt 1 Total b kt 22 292 25 381 25 903 26 544 26 470 25 974

a Years: JFY, commencing 1 April. b Totals may not equal consumption totals reported in table 10 due to wastage during processing. p Preliminary. e ABARE estimate. Source: MAFF (1990b).

G Japanese imports and feed wheat

Australia 25 United States

of coarse grains I

EABARE

Other Pacific Other a

1985 1986 1987 1988 1989 a Mainly Argentina and South Africa.

share of around 75 per cent, largely comprising corn and sorghum. The other major suppliers are Australia and Canada,

l

primarily trading in sorghum, barley, oats and feed wheat. Consequently, any change in Japan's feedgrain requirements due to beef trade liberalisation will directly affect export demand for US and Australian feedgrains.

4.3 The Korean animal 1 feed industry

Korea's livestock industries consume a wide variety of animal feeds, ranging from manufactured colnpound feeds to simple on-farm mixes of grain by-products, farm waste and forage crops. Historically, pasture and forage crops formed the basis

of most of the animal feeds consulned in Korea. In particular, beef cattle were fed intensively on diets of grain by-products (for example, rice bran) and other roughages.

Over the past 15 years, increased production of livestock products has increased the demand for feed. To ineet the increased requirements, forage production was expanded, with more forest land being cultivated and the adoption of higher yielding winter pasture species (Dyck and Sillars 1986). However, as in Japan, forage supplies in Korea are limited by the availability of arable land. Consequently, the expansion in meat production has seen a marked increase in the consumption of manufactured compound feeds based on imported feedgrains.

While Korea's pig and poultry industries are the largest consuiners of prepared feeds, there has also been substantial growth in co~npound feed use by the beef industry (table 12). In part this reflects an expansion in comlnercial feedlots using grain-based rations to produce a higher quality beef product. This trend toward increased use of grain- based rations in beef cattle feeds is expected to continue, due to the high cost of forage and the continued shift toward the more efficient feedlot operations.

Consumption of on-farm mixed feeds has declined in importance as livestock

12 Estimated Korean livestock consumption of compound feeds a

Chicken Pigs Dairy cattle Beef cattle Other Total

Unit 1980 1985 1986 1987 1988 p 1989 e

a Excludes mixed feeds prepared on-farm. Calendar years. p Provisional. e ABARE estimate. Source: National Livestock Cooperatives Federation (1990).


13 Materials used in Korean compound feeds . Unit 1980 1985 1986 1987 1988 p 1989 e

Grain kt 2 077 4 095 4 617 5 649 6 026 5 891 Brans kt 685 1 000 1 329 1 324 1 432 1 783 Vegetable and animal proteins kt 517 972 1 238 1 444 1 645 1 971

Inorganic substances kt 184 298 351 412 439 459 Other kt 22 103 157 210 247 323 Total b kt 3 486 6 468 7 693 9 038 9 788 10 427

a Calendar years. b Totals may not equal consumption totals reported in table 12 due to wastage during processing. p Provisional, e ABARE estimate. Source: NLCF (1990).

production has become more specialised (United Nations Development and Trade H Korean imports of coarse grains Bureau 1984). However, feed rations mixed on-farm continue to be important on small scale pig operations, which constitute a X!!XL major component of the Korean pig meat industry. In addition, many native cattle are still raised as a sideline activity to rice growing and are fed on a mixture of rice bran and other vegetable matter.

Grains constitute around two-thirds of the total raw materials utilised by Korea's compound feed manufacturers (table 13). The use of grain has increased during the past decade in response to the increased

19k5 1686 19'87 19'88 demand for nutritionally efficient feeds. , Mainly South Africa and Argentina. As in Japan, corn and sorghum are the predominant grains used, although some Japan, changes in Korean feedgrain feed wheat has been used at times when delnand due to beef trade liberalisation relative price movements justified its use. will directly affect feedgrain trade with Rice, wheat and barley brans are also used Australia and the United States. as feed ingredients, although their importance has been declining.

The United States is the major supplier of feedgrains to the Korean market, and its market share has increased substantially over recent years (figure H). Imports of feedgrains from non-Pacific countries are small, Australia and Canada being the other major suppliers. While the United States has predominantly supplied corn and sorghum, the Korean market has been an important destination for Australian feed wheat exports. As is the case for


5. Analysing olicy reforms in the North Asian g eef trade The negotiated changes to Japanese and Pacific Rim livestock ~narkets is also Korean beef trade policies have important discussed. implications for future developinents in pacific Basin beef markets. -~omest ic developments in the beef markets of both countries will be the main determinant of the potential gains for the exporting countries, Australia, New Zealand and the United States. This chapter begins with an examination of the likely impact of beef trade liberalisation on the North Asian livestock markets.

The most effective way of assessing the effects of these beef trade reforms is through the use of a mathematical model incorporating the key relationships and parameters of the Pacific Basin livestock markets. ABARE's Econometric Model of Australian Broadacre Agriculture (EMABA) has several of the features required for this type of analysis. EMABA contains detailed representations of Pacific Basin livestock markets which incorporate the simultaneous linkages and feedback effects, yielding outcomes which are consistent across commodities.

Another feature of the model is the inclusion of an Australian crops supply system and of substitution effects between broadacre enterprises such as beef, wool and crops. However, EMABA lacks the necessary detail to conduct a fully integrated livestock-feedgrain analysis of the North Asian beef trade reforms. To consider this potentially important feedback effect, EMABA's livestock production results can be used to assess the effects on regional feedgrain demand and their likely consequences for feedgrain prices. In the second part of this chapter an outline is given of the main features of the EMABA model, and the approach used for handling potential feedgrain effects on

34

5.1 Expected effects in North Asian livestock markets After JFY 1991, the Japanese beef import quota will be replaced by an ad valorem tariff of 70 per cent. The tariff drives a wedge between the price paid by Japanese consumers for imported product and its landed price. As tariff levels are reduced during the period JFY 1991-93 the wedge will narrow and, all else unchanged, Japanese retail prices of imported products will fall. Lower prices should encourage higher levels of imported beef consumption, although developments other than lower tariffs will also affect future market outcomes.

In appendix A, a sin~ple theoretical account is given of how trade liberalisation is likely to affect the Japanese beef industry. For the beef exporting countries - Australia, the United States and New Zealand - there are two important issues to consider when assessing future levels of demand for imported beef. The first is how consulnption of imported beef will change in response to the short run movements in its Japanese retail prices as the market shifts from quota controls to tariff-only trading. The second is what preferences Japanese consulners will show for different types of beef - that is, what will be the substitution relationships between imports and domestically produced beef.

From April 1991 the Japanese beef market will, for the first time, become responsive to movements in the landed prices of

Discitssion paper 90.1 1

maintained until March 1991 the removal of quotas would result in lower wholesale prices for imported beef. Provided that retail beef prices reflected such movements in wholesale prices, the demand for imported beef would increase.

During the middle of 1990, price differentials for US grain fed cuts (clod, thick flank and topside - see table 32) were such that the Japanese wholesale prices would have increased if quotas had been replaced at that time with a 70 per cent tariff. In contrast, the price differentials for grass fed imports suggest that the immediate removal of quotas would have resulted in lower wholesale prices (see table 33). All else unchanged, these relative price ~novelnents would yield an increased demand for grass fed imports and a larger Australian share of the Japanese imported beef trade. More recent movements in price differentials suggest relatively larger price reductions for grass fed product. During the final months of quota controls, larger supplies of imported product are likely to result in some narrowing of the price differentials for all types of beef.

As noted above, any reductions in wholesale prices must be passed on to Japanese consumers before supplying countries will benefit through increased beef imports. The extent to which any reduction in Japanese wholesale prices will flow on to the retail level will depend on the level of competition and efficiency in the Japanese meat distribution system. As tariffs are reduced during the period to JFY 1993, prices paid by Japanese wholesalers for imported beef should decline and lead to increased beef imports. However, the price reducing effects of progressively lower tariffs will be affected by other influences on the landed prices of imported product including: - exchange rate movements; - the price of beef in exporting countries; - the rate of growth in Japanese

disposable incomes;

imported beef. The prospects for increased consumption of imported beef in JFY 1991 depend heavily on trading conditions just prior to the removal of quotas. If Japanese wholesale prices for imported beef at that time substantially exceed the tariff- adjusted landed prices for the same products after the removal of quotas, the imported beef prices paid by Japanese wholesalers can be expected to fall.

In the short run, the prospects for an increased share of grass fed beef (as opposed to grain fed beef) in Japanese imports will similarly depend on the wholesale/landed price differentials of each type of beef prior to the removal of import quotas. There is a strong underlying preference for grain fed beef which will contribute to increased sales of imported grain fed product. Although grass fed beef may be perceived as a lower quality product, a market segment for the relatively cheaper grass fed product already exists. A reduction in Japanese wholesale prices for chilled grass fed imports following the removal of quotas should encourage larger sales, provided that a product of consistent quality is readily available to consumers.

An indication of likely short term retail price movements in response to the specified tariff may be obtained from a comparison between recent wholesale prices for selected imported beef cuts and estimated landed prices for the same cuts. Appendix B provides monthly average

I price comparisons for a range of grain fed l and grass fed chilled beef cuts since the ' start of 1990.

During the first half of the year, Japanese wholesale prices for both grass and grain fed imported beef gradually declined as greater quantities of imported product were landed on the market. As a result there was a substantial narrowing of the differential between wholesale market prices and the estimated landed prices. More recently these price differentials have tended to expand. If the September price differentials were


- movements in feedgrain prices; and - the relative prices of competing meats

in the Japanese market. For example, an appreciation

(depreciation) of the yen would enhance (erode) the price reductions and contribute to higher (lower) consumption of imported beef. A further example would be an expansion (contraction) in South Korean beef import quotas, which would lead to higher (lower) prices in supplying countries, and hence higher (lower) landed prices for Japanese beef imports, tending to offset (augment) any wholesale price declines induced by the lowering of Japanese tariffs.

Over the medium term there will be l

other factors affecting the Japanese demand for imported beef. Product promotion, the development of branded products, and probably an expanded range of imported products available to consumers are all likely to alter the underlying consumer preferences for different types of beef. While changes in consumer perceptions about imported beef will be gradual they will be an important determinant of the growth in sales of imported grass fed and grain fed beef in the medium to longer term.

These factors will also affect the US and Australian shares of Japanese beef imports. Although a stronger demand for grain fed

I beef imports is likely to result in a larger l market share for US product, the l

composition of Australian beef sales too could shift towards a higher proportion of grain fed product. This will depend heavily on processors overcoming the abovementioned difficulty of profitably marketing the full range of primal cuts from grain fed carcasses.

The second issue mentioned above - what Japanese consumer preferences for different types of beef will emerge - relates to the substitutability between imported product and domestically produced beef. The consumers' willingness to substitute between different products is

36

reflected in their consumption responses to movements in retail prices. Substitution relationships among beef types are reflected by the degree to which a change in the price of one type of beef affects consumption of other types (everything else unchanged).

The degree of substitution between domestic and imported beef is clearly an important issue for beef exporting countries. For example, if imported beef and domestically produced dairy beef are highly substitutable, higher (lower) prices for domestic product would increase (reduce) imported beef sales as well as reducing (increasing) consuinption of dairy beef. The existing substitution relationships can be expected to gradually change over time as Japanese consumers become exposed to a wider range of imported products through product development and promotion.

If dairy beef and imported grain fed beef are highly substitutable, lower prices for imported product could result in a fall in the saleyard price of dairy beef. Dairy beef production rnay therefore (depending on the extent of the price fall) decline over the medium term - though any such reduction is likely to be limited, because calf sales make only a relatively small contribution to the profitability of the Japanese dairy industry (Coyle 1983). In addition, producers will gain some additional assistance through the feeder calf price support program. However, the most important factor affecting future levels of dairy beef production is likely to be the level of support for milk returns.

Developments in Japan's pork and poultry industries rnay also affect markets for both domestically produced and imported beef. If Japanese consumers regard these alternative meats as significant substitutes (or, on the contrary, complements) for beef, a fall in the retail price of beef would mean reduced (increased) demand and lower (higher) prices for pork and poultry meat. The


extent of these effects will depend on the price and income responsiveness of consumer demands for each meat. If the price responsiveness between different types of meats is small, changes in incoines could have a greater influence on the Japanese consumer demands for beef, pig meat and poultry, over the medium term, than the mutual influences of their price changes.

Finally, there are two other factors that could affect imported beef demand following the removal of quotas. First, any reduction in Japanese economic growth rates would result in lower incomes, and hence reduced demand for all types of beef, compared with the model results described in the following chapters. Second, market participants in Japan will need to determine an appropriate level of beef stocks for trading purposes.

In recent times beef stocks have built up from 60-70 kt during 1987 to an estimated 75 kt in October 1988 and 119 kt in October 1989. Since that tiine stocks appear to have stabilised at about 110 kt. If these holdings are above normal trading requirements, some of the stocks could be substituted for imports during the period following the lifting of quotas - in particular, if the application of a 70 per cent tariff raises the wholesale price of imported product.

There have been a number of previous I studies on the likely consequences of

liberalisation of the Japanese beef market. Most of these studies have focused on the potential effects on Japanese livestock markets, with little emphasis on the price effects in beef exporting countries such as Australia. In general, a wide range of results have been reported in these previous studies.

Ooga (1989) suggested that in Japan the effects of the removal of import quotas could be substantial. Using a model of the Japanese beef market, he considered the effects of the differential between the wholesale prices of dairy beef and of

imported grain fed beef under alternative assumptions. Under the assumption of perfect substitutability between the two products, total beef imports would be expected to reach 1000 kt (product weight) by JFY 1995, while domestic consumption would reach 1750 kt (cwe) and - assuming financial support froin the feeder calf price support prograin - domestic d a j r beef production would rise to around 425 kt (cwe).

In contrast, Wahl, Willialns and Hayes (1988) have suggested that the effects of Japanese trade liberalisation may be relatively small. They note that as import quotas expand during the transition phase the tariff equivalent of the quota declines, and indicate that the switch to a 70 per cent tariff in JFY 1991 would result in a small rise in Japanese prices of 'import quality' beef (defined as imported and dairy beef). They conclude that the initial impact of Japanese trade liberalisation on beef imports, beef prices and the Japanese livestock economy would in general be relatively small.

The results of these and other studies, such as Harris, Corra and Shaw (1989), are heavily dependent on the assumptions employed - particularly as to inarket developments such as exchange rate movements, Japanese income growth rates and other factors affecting beef prices in the exporting countries, Australia, New Zealand and the United States.

It is important to make some estimate of the effects of Japanese beef trade liberalisation on Japan's domestic livestock industries, because this will provide an indication of the potential for future growth in Japanese beef sales. There is also considerable interest in the wider effects of Japanese liberalisation, and particularly in the shares of the Japanese beef market likely to be held by Australia and the United States. Possible future market shares and gains for beef exporting countries have been discussed by Alston, Carter and Jarvis (1989) and by Coyle and


Dyck (1989) in papers focusing on the specific question of American gains from Japanese beef trade liberalisation.

Changes in Japanese demand for imported beef will affect total beef demand in exporting countries and, consequently, the price of imported products landed in Japan. Appendix C contains a theoretical discussion of the effects of North Asian beef trade liberalisation on the Australian and United States beef markets.

With the removal of import quotas, Japanese consumers of imported beef will become responsive to movements in the landed prices of imported product. In assessing the effects of Japanese trade liberalisation, consideration must be given to the interaction between the landed price

I and changes in Japanese demand for imported beef. Any assessment of the Japanese trade reforins should also take into account the iinplications of the concurrent beef trade reforms occurring in Korea.

The provision of permanent access to the Korean market constitutes a significant improvement on the informal, 'on-off' quota arrangements of previous years. Nevertheless, for the next three years at least, the Korean beef industry will remain insulated from developments affecting Pacific Basin beef trade and unresponsive

I to changes in the landed price of imports. To the extent that imports and domestic

l

beef are substitute products in Korea, increased ilnports may cause a contraction in demand for domestic product, lower prices and reduced domestic beef production. Medium term developments in the Korean beef market will also depend on factors other than the availability of imports. These factors include the rate of growth in disposable incomes as well as changes in the price of feedgrains and in the relative prices of competing meats. If domestic market conditions indicate a need for larger beef supplies, actual imports may exceed the negotiated minimum access levels, as they have done during 1990.

5.2 EMABA - A model of Pacific Basin livestock markets ABARE's Econometric Model of Australian Broadacre Agriculture (EMABA) was used to estimate the effects of North Asian beef trade reforms discussed in this report.

The development of EMABA EMABA is a dynamic, annual model, developed from a number of ABARE modelling efforts undertaken over the past 15 years. At its present stage of development EMABA is primarily focused on the livestock industries of the Pacific, and in particular the Pacific Basin beef trade. The coverage of the model is quite extensive: it contains annual estimated represen-tations of demand, supply, trade and price determination for up to seven agricultural commodities in 21 countries.

The statistical structure of EMABA was first described by Dewbre, Shaw, Corra and Harris (1985), with regression and validation statistics for each equation presented in a coinpanion report by Harris, Corra, Shaw and Dewbre (1985). At the time of the above documentation, EMABA largely consisted of detailed representations for the three main broadacre sectors of Australian agriculture - cattle, sheep and crops. It also contained a model of the US beef market as well as representations of beef export demands in other countries and total export demands for wool and mutton.

Since this original docuinentation was published EMABA has been refined through subsequent modelling efforts. The additions have involved improving the mathematical representations of several foreign demands for Australian beef and wool exports. The emphasis on these two commodities was due to the relative importance of export demand in their price determination.

Augmentations of EMABA have been documented in a number of subsequent


studies that have made use of the model. They include econometrically estimated representations of: - New Zealand livestock supplies (beef,

wool, lamb and mutton) and domestic demand for beef, pig meat, poultry, lamb and mutton (Shaw 1986; McLeish and Spill 1987);

- the demand for apparel wool in the eight major OECD wool consuming countries (Dewbre, Vlastuin and Ridley 1986; Bureau of Agricultural Economics 1987);

- pig meat supplies in Australia and the United States (McLeish and Spill 1987);

- Japanese beef supplies (Corra, Dickson and Teal 1989) and Japanese domestic demand for beef, pig meat, poultry and seafood (Teal, Dickson, Porter and Whiteford 1987);

- Canadian beef supplies and domestic demand for beef, pig meat and poultry (Harris and Corra 1990);

- Korean domestic demand for beef, pig meat, poultry and seafood (Harris, Corra and Shaw 1989) and Korean beef supplies (Dickson, Harris and Corra 1990); and

- pig meat supplies in Japan, Korea, Taiwan, Canada and New Zealand (Corra, Harris and Dickson 1990).

Key features of EMABA The results presented in this report are based on simulations using the current version of EMABA, which incorporates all of the above developments (table 14). With these extensions the model contains explicit representations of each of the major Pacific Basin countries producing foot-and- mouth-free beef - Australia, New Zealand, United States, Canada, Japan, Korea and Taiwan. In addition, the commodity coverage has been extended to include representations of the pig and poultry industries in these same countries. A recent paper by Harris and Shaw (1990) provides a more detailed discussion of the model structure and the underlying elasticities.


Apart from the extensive commodity and country coverage, EMABA has other features which are relevant to a simulation analysis of beef trade reforms in North Asia. One of the key features of the model is the use of a differentiated products approach in representing both production and trade for beef, pig meat and poultry - that is, the model contains individual price determination for all three meats in each country represented, rather than all markets for a given meat reaching a common 'world price'.

For example, Australian and New Zealand beef prices are determined by the interaction of supply and total demands (domestic plus export). Similarly, demand and supply interactions determine the market price of domestically produced beef in other Pacific Basin countries, There are also distinctions between types of beef produced within some countries: there are separate price determinations for table and processing beef in the United States and Canadian components of the model. The major Pacific Basin bilateral trade flows in beef, pork and poultry meat form a linkage between industry developments in each country, and are determined by the relative movements in market prices. For example, the relative prices of US grain fed beef and Australian grass fed beef determine each country's share of Japanese beef imports.

Restrictions on trade have also been incorporated into the model. For example, EMABA includes a group of equations to represent the formula contained in the US meat import law and the allocation of import quantities between supplying countries under 'voluntary export restraints'.

Another feature of the model is explicit representation of the dynamic behaviour inherent in livestock supply response to price changes. Complete supply adjustment to a change in net returns can be delayed, partly because of the biological constraints of inventory dynamics in

14 Summary of commodity-country coverage in EMABA

- - - P - P - P

Domestic demand relationships - Meat demands for beef, lamb, mutton, pig meat and poultry in Australia and New Zealand; - Meat demands for beef, pig meat, poultry and seafood in Japan, Korea and Taiwan; - Meat demands for table beef, processing beef, pig meat and poultry in the United States; - Meat demands for beef, pig meat and poultry in Canada; - Beef demands in South-East Asiat; and - Apparel wool demands in France, Italy, West Germany, the Netherlands, United Kingdom, Belgium,

Japan and the United States.

Domestic supply response functions - Livestock supplies of beef, lamb, mutton, wool and pig meat in Australia and New Zealand; - Livestock supplies of fed beef, non-fed beef and pig meat in the United States and Canada; - Livestock supplies of wagyu beef, dairy beef and pig meat in Japan; - Livestock supplies of beef and pig meat in Korea; - Pigmeat supplies in Taiwan; - Wool supplies in Argentina and Uruguay; and - Crop supplies of wheat, sorghum, barley, oats, winter oilseeds and summer oilseeds in Australia.

Trade demand relationships - Total beef, lamb, mutton and wool export demands for Australia and New Zealand; - Beef export demands for Australian and New Zealand sales to the United States, Canada, Japan, Korea,

Taiwan, Singapore and Malaysia. - Total wool export demands for Argentina, Uruguay and Rest of World (excluding Australia and

New Zealand); - Total beef import demand for the United States, Canada and Korea; - Total beef, diaphragm beef and pig meat import demands for Japan; - United States imported beef trade with Australia and New Zealand; - Canadian imported beef trade with Australia and New Zealand; - Korean imported beef trade with Australia, New Zealand and the United States; - Japanese imported beef and diaphragm beef trade with Australia, New Zealand, the United States and

Canada; - Japanese imported pig meat trade with the United States, Canada and Taiwan; - Japanese imported poultry meat trade with the United States; and - South-East Asian1 imported beef trade with Australia, New Zealand, the United States and Canada.

Price determination relationships - Market prices for beef, lamb, mutton, wool, pig meat and poultry in Australia and New Zealand; - Market prices for fed beef, non-fed beef, pig meat and poultry in the United States and Canada; - Market prices for wagyu beef, dairy beef, p ~ g meat and poultry in Japan; - Market prices for beef, pig meat and poultry in Korea and Taiwan; - Market prices for beef in South-East Asial; and - Market prices for wool in Argentina and Uruguay.

1 'South-East Asia' here includes separate representations for Singapore, Malaysia and Hong Kong.

livestock production, and partly because of its effect on producer expectations of future returns and hence on investment. An increase in current period market prices has both a positive effect on slaughter ('sell now') and a negative effect ('retain breeding stock'). If the latter, investment, effect outweighs the former, there will be a short run negative supply response, although the resulting expansion of breeding inventories will eventually lead

to an increase in output. The most important behavioural relationships are those affecting the rate of retention of female breeding stock.

Livestock supply response in EMABA The general approach used to model livestock supply response in EMABA is discussed in some detail by Dewbre, Shaw, Corra and Harris (1985). For each country


the model contains groups of inventory identities and behavioural equations to represent the biological aspects of supply response. In addition, EMABA generates an expectation process through an unweighted three-year moving average of current and past net returns.

All behavioural relationships contained in EMABA have been estimated using time series data commencing in the early 1960s and ending in the mid to late 1980s. For the estimated responsiveness of each country's beef and pig meat supplies to a change in output price, see table 15. Note that these estimates of production response are explicitly time dimensioned, reflecting detailed modelling of the assumed expectations forming process and of the

dynamic behaviour of livestock inventories. For example, in Australia the initial beef supply response to a price increase is negative as females are withheld from slaughter. As the herd expands there is an increase in production, and the longer run effect is positive.

The relatively large long run supply response for Australian beef production reflects the substitution possibilities existing in Australian broadacre agriculture: large amounts of resources can be diverted between enterprises in response to changes in price expectations. The EMABA model contains representations of Australian crops supplies, allowing for possible production substitution effects on the beef industry.

15 Estimated responsiveness of Pacific Basin beef and pig meat supplies to a change in output price

Percentage change in quantity supplied for a one per cent increase in price obtained r

After 1 year After 5 years After 10 years Long run

% % % %

Australia Beef -0.04 0.10 0.88 2.99 Pig meat 0.05 0.27 0.47 2.51

New Zealand Beef 0.03 0.20 0.41 0.59 Pig meat 0.07 0.70 1.16 1.54

United States Beef -0.01 0.07 0.12 0.66 Pig meat 0.07 1.21 1.95 2.34

l

I Canada l Beef -0.05 0.12 0.42 0.69

Pig meat 0.01 0.92 1.52 2.00

Japan Wagyu beef 0.03 0.27 0.39 0.41 Dairy beef -0.01 0.16 0.31 0.42 Pig meat 0.11 1.08 1.87 2.63

Korea Beef 0.09 0.57 0.82 0.86 Pig meat 0.10 1.05 1.99 3.54

Taiwan Pig meat 0.23 2.33 3.99 5.38

r Estimates were derived from EMABA model simulations using 1988 data, allowing f d adjustment to an immediate and permanent 1 per cent rise in output price. See Dewbre, Shaw, Corra and Harris (1985, pp. 22-4) for a detailed discussion of the method used to calculate these estimates.

North h i a n beef import liberalisation 4 1

Poultry meat producers, with a four- month production cycle, are able to respond quickly to changes in demand, relative to the annual time cycle of EMABA. For this reason, Pacific Basin poultry industries are represented as infinitely elastic: that is, able to supply any demand level without change in price.

Meat demand response in EMABA Another feature of the EMABA model is the extensive coverage of domestic meat demands in Pacific Basin countries (table 14). Groups of equations are included to represent consumer demands for beef, pork and poultry meat in each of the main markets, seafood demands in Japan, Korea and Taiwan, and lamb and mutton demands in both Australia and New Zealand. These estimated behavioural relationships provide an indication of the responsiveness of consumption of a meat or seafood to a change in its price, in the prices of competing products or in income level.

Table 16 contains price responsiveness estimates for meat and seafood consumption in both Japan and South Korea. In both countries beef consumption appears to be responsive to changes in

income and to movements in retail beef prices. In general, changes in the retail prices of other meats have relatively small 'cross-commodity' effects on beef consumption levels, and vice versa.

While most of the cross-commodity consumption relationships for Korea have the expected positive values, implying that the colninodities are partial mutual substitutes, many of the estimates for Japan appear to show that beef and the other meats are complements. For example, it appears that a fall in beef prices results both in higher beef consuinption and in higher consumption of pork and poultry.

Such a result is contrary to what would normally be expected. It may be due to the fact that the estimated consumer responses are 'uncompensated' - that is, do not allow for the change in consumers' disposable incolnes resulting from a change in the amount of expenditure needed to purchase any given quantity of a commodity. Estimates of the 'compensated' delnand relationships indicate that in all cases these cross- commodity relationships are small, and therefore unlikely to affect the overall conclusions to be drawn from the analysis.

16 Estimated responsiveness of North Asian meat and seafood demands to changes in retail price and income a

Japan Beef consumption Pig meat co&umption Poultry consumption Seafood consumption

Korea Beef consumption Pig meat consumption Poultry consumption Seafood consumption

Percentage change in quantity purchased for a one per cent increase in

Beef price

%

Pork price

%

Poultry price

%

Seafood price

%

Income b

%

a Estimates were derived horn EMABA model simulations using 1988 data. They are not compensated for effects of the prices on the remainder of disposable income, b Represented by personal. consumption expenditure per person.


A further limitation of the EMABA model is that the estimates of Japanese and Korean consumer demand for beef are based on an assumption that consumers view the different types of beef as the one commodity - that they do not distinguish between the different types of beef available for purchase. Though such product differentiation in other countries can be represented in EMABA, it has not been possible for Japan and Korea because of limitations of the available data. Further research is required to fully incorporate the differentiated nature of the beef markets in these countries.

Estimates of the price and income responsiveness of meat demands in other Pacific Basin countries are summarised in table 17. For the US component of EMABA a distinction is made between the table beef (mainly grain fed) and processing beef (mainly non-fed) markets at the retail level. In most cases beef consumption appears to be responsive to changes in both income levels and retail prices. The estimated cross-commodity relationships (not reported in table 17) generally reveal small substitution effects between each of the meats.

Livestock-feedgrain linkages Livestock-feedgrain linkages may also influence the impact of North Asian trade reforms on Pacific Basin beef markets. Changes in grain fed livestock production simultaneously affect feedgrain demands and consequently the prices of compound feeds paid by livestock producers. Appendix D contains details on the approach used to estimate the changes in feedgrain demands and their effects on feedgrain prices. For the most part, the changes in feedgrain demands will be concentrated in Japan and Korea, the countries reforming their policies on beef trade, and in the United States and Australia, the major exporters of beef to


17 Estimated responsiveness of selected Pacific Basin meat and seafood demands to changes in retail price and income P

Australia Beef Pig meat d Poultry Lamb

New Zealand Beef Pig meat Poultry Lamb

United States Table beef Processing beef Pig meat Poultry

Canada Table beef Processing beef Pig meat Poultry

Taiwan Beef Pig meat Poultry Seafood

Percentage change in quantity demanded for one

percentage increase in

Retail price b Income C

a Elasticity estimates were derived from EMABA model simulations using 1988 data. b Uncompensated (see table 16) own-price elasticities of demand. c Represented by personal consumption expenditure per person. d Excludes bacon and ham.

North Asia. Although other Pacific R im countries will be affected by the beef trade reforms, the effects on their respective total feedgrain demands are likely to be small.

Feedgrain demands in Japan, Korea, the United States and Australia will in any case be influenced by a nuinber of different factors over the medium term. Progressive liberalisation of the North Asian beef trade introduces a new set of developments, which are likely to have

43

different effects in each country, For example, a decline in domestic beef production in North Asia could reduce feedgrain imports from the United States and Australia. At the same time, increased North Asian demand for grain fed beef would induce greater US beef production and hence higher consumption of feedgrains.

Higher beef prices in the United States would normally encourage higher domestic consumption of pig and poultry meat and therefore higher feedgrain demands. However, US trade in pig and poultry meats may also be affected by developments in the Japanese market, via their influence on import demand for these meats. In Australia the trend toward grain fed beef production could become more

l

l significant, while output of pig and poultry l l meats should increase due to the effects of

higher beef prices on consumer meat demands.

For the Australian beef industry these feedgrain effects could be important in two respects. First, changes in the profitability of grain production have implications for the size of the Australian cattle herd, and hence for the supply of feeder cattle for feedlots and the level of

l I grass fed beef production. Second, the l availability and price of feedgrains will l

affect the growth of Australia's grain fed beef industry. In addition, any change in feedgrain prices would affect livestock production in North Asia and hence the

level of imported beef demand. The net effects of North Asian beef

trade reforms on feedgrain demand and prices, and their consequences for the region's livestock industries, can be fully assessed only with a complete model of world livestock and feedgrain markets. Such a model is not available. In EMABA, assumed US feedgrain prices, adjusted for exchange rates, are used to determine compound feed costs for grain fed beef, pig meat and poultry production in all country representations. These US prices are also used to determine farm level output prices for Australia's crop producers.

Thus, EMABA does not inode1 the determination of feedgrain prices. However, some approximate measures of Pacific Basin feedgrain demands and hence prices can be obtained by making use of the relationships between livestock production and feedgrain usage (see appendix D). By applying estimates of livestock-feedgrain conversion factors to EMABA simulation results for grain fed meat production, in Japan, Korea, the United States and Australia, feedgrain demands in the countries of most interest are estimated. These levels of feedgrain demand can then be used to adjust the assumed US feedgrain prices. If the feedgrain price adjustment is significant - which in the present study proved not to be the case - the simulations can be repeated with the adjusted price.


6. Estimated effects of current reforms to the North Asian beef trade The primary objective in this report is to assess the implications for Australia of reforms to North Asian beef import policies. A secondary objective is to consider how these beef market developments could affect the pig, poultry and feedgrain markets of the Pacific Basin. In this chapter, the effects of current reforms are examined in the context of dynamic forecast simulation experiments using the EMABA model.

6.1 A scenario for North Asian beef trade reforms Using medium term projections for all exogenous variables (see table 18), the EMABA model was used to simulate a set of projections for Pacific Basin livestock markets over the 1991-95 period. This simulation - identified as NABASE - included the reforms to both Japanese and Korean beef import policies announced so far. The Japanese import quota was replaced by the negotiated annual tariff rates from JFY 1991, while import quotas with annual increments were imposed on

l the Korean market for the entire simulation period.

The NABASE results provide an indication of future market outcomes, for the assumptions imposed, allowing for demand and supply interactions between all the major Pacific Basin livestock markets. The results from NABASE are also used as a baseline or reference point for comparison of the results of two alternative simulation experiments incorporating other policy scenarios, which are the subject of chapters 7 and 8.

In preparing a simulation over a forecast period, assumptions are required for all exogenous variables contained in the


model. Some of these assuinptions will significantly affect the simulated market outcomes. This is particularly true of the assumptions for macroeconomic variables and those influencing the cross-enterprise resource substitution effects in Australian broadacre agriculture.

Exchange rates, income levels and other macroeconomic variables were set at the medium term projection values used by ABARE for the 1991 National Agricultural and Resource Outlook Conference (ABARE 1990).

For the Australian wool industry, the minimum reserve price (or floor price) for wool was assumed to remain at 700c/kg (clean) for the entire forecast period. Producer levies to finance the scheme were assumed to be 23 per cent of gross proceeds from the sale of wool for 1991, 27 per cent for 1992 and 1993 and 20 per cent for 1994 and 1995. It was also assumed that the 1992 quota on wool sales of 750 kt would be maintained throughout the simulation period.

Medium term assumptions concerning the level of wool tax and quota on deliveries will affect the baseline results for the Australian beef industry. For example, a higher-than-assumed wool tax throughout the forecast period would, by 1995, yield a smaller sheep flock and larger crop areas. However, the effect of such baseline changes on the results of this analysis are likely to be small.

For all livestock producing countries and for the Australian crop sector, feedgrain prices were derived from US feedgrain prices, which in US dollar terms were assumed to rise steadily over the forecast period (in line with relatively low levels of world stocks and increased demand by producers of grain fed cattle,

45

pigs and poultry). For example, the US corn price was assumed to rise gradually from its estimated 1990 value of US$2.44/ bus to US$2.99/bus by 1995. Table 18 provides year-by-year details for these and other major assumptions imposed for the simulation experiments.

For the Pacific Basin beef trade, the most important assumptions are those specifying the Japanese and Korean import policies. A Japanese beef import quota of 394 kt was imposed for JFY 1990, as laid down for the initial transition phase by the agreement with supplying countries. For JFY 1991 the quota was replaced by an ad valorevn tariff of 70 per cent, reducing to 60 per cent in JFY 1992 and 50 per cent in JFY 1993 and subsequent years (JFY 1994-95). Japanese tariff rates for

l

I diaphragm beef imports remained at 15 l I

per cent throughout the simulation period. I It was assumed that Japanese producers

would receive no assistance from the feeder calf support program during the period simulated.

The recent negotiations on Korea's beef import arrangements yielded an understanding on minimum access levels

l for the 1990-92 period, on a boneless l I

weight basis, though these minimum l access levels may be exceeded. For the l

l purposes of the simulations it was assumed that, on a shipped weight basis, Korea's imports would grow by 10 kt a year from an estimated base level of 90 kt in 1990. In NABASE, it was also assumed these minimum access arrangements would be extended to cover the 1993-95 period, so that imports would reach 140 kt in 1995. Allocation of total imports between Australia, the United States and New Zealand was assumed to remain in the ratio 75:15:10, approximately as in 1989. All beef imports were assumed to remain subject to a tariff of 20 per cent.

In the simulations, the allocation of Japanese beef imports between supplying countries was determined by the relative prices generated by the model. It should

46

be noted that the initial estimation of the model was over a period when the LIPC may have influenced the observed preferences as to the quality of beef imports. From JFY 1991, LIPC involvement in the imported beef trade will cease and the quality composition and origin of beef imports will be determined by consumer preferences. Thus, the historical market shares may not be a good basis from which to determine future lnarket shares. This type of difficulty is unavoidable in any attempt to model across a time of policy change.

In the lead-up to the reinoval of Japanese import quotas in JFY 1991 the level of stocks of imported beef has been a matter of some concern. Since early 1988, public and private stockholdings of imported beef have increased substantially, and averaged around 110 kt (product weight) throughout 1990. It is the stated intention of the Livestock Industry Promotion Corporation (LIPC) to reduce its holdings of beef stocks to zero by April 1991. If this is not possible, the LIPC will release stocks progressively throughout JFY 1991. In the simulations, unless otherwise stated, it was assumed that, in the first year of tariff-only protection, 30 kt of frozen imported beef stocks would be released onto the market. In subsequent years, Japanese beef stocks were assumed to remain unchanged.

The level of detail contained in the EMABA model ensures consistency between the simulated lnarket outco~nes in each of the Pacific Basin beef markets. A particularly important example is the modelled interaction between changes in North Asian delnand for imported beef and producer prices in the main supplying countries, Australia, New Zealand and the United States. It is in this way that the 1

NABASE results provide an indication of how North Asian policy reforms could affect the Australian beef industry.

The crucial issue for Pacific based exporters of beef is the extent of any post-


18 Main assumptions adopted in simulations

Unit 1989 p 1990 U 1991 1992 1993 1994 1995

Changes in personal consumption expenditure a b

Japan % 4.9 5.5 3.5 3.5 3.5 3.5 3.5 Korea % 6.1 8.0 6.0 6.0 6.0 6.0 6.0 United States % 2.5 1.0 1.5 3.0 4.5 3.5 3.0 Canada % 3.0 1.5 2.0 3.5 3.5 3.0 3.0 Aus tralia % 4.1 3.3 0.5 3.5 4.0 4.0 3.0 New Zealand % 1.1 0.5 1.7 2.0 2.0 2.0 2.0

Changes in consumer price index b Japan % 2.3 3.2 2.5 2.0 2.0 2.0 2.0 Korea % 5.6 11.0 8.0 7.0 7.0 7.0 7.0 United States % 4.8 6.0 6.0 4.0 4.0 4.0 4.0 Canada % 5.0 5.5 6.0 4.5 4.5 4.5 4.5 Australia % 7.4 8.0 5.5 5.0 5.0 5.0 5.0 New Zealand % 5.7 6.1 4.0 3.0 3.0 3.0 3.0

Exchange rates C

Japan #/$A 108 111 95 94 91 88 86 Korea won/$A 529 536 544 550 557 564 589 United States US$/$A 0.79 0.78 0.77 0.75 0.74 0.73 0.73 Canada CN$/$A 0.93 0.91 0.90 0.88 0.88 0.87 0.87 New Zealand NZ$/$A 1.31 1.30 1.26 1.22 1.19 1.17 1.14

Population Japan million 123.1 123.7 124.3 124.8 125.4 126.0 126.6 Korea million 42.4 42.9 43.3 43.7 44.2 44.6 45.1 United States million 248.8 250.8 252.6 254.3 256.2 258.0 259.8 Canada million 26.3 26.5 26.7 26.9 27.1 27.3 27.5 New Zealand million 3.30 3.32 3.34 3.36 3.43 3.45 3.47 Australia million 16.8 17.1 17.3 17.6 17.9 18.1 18.4

US grain prices d Wheat US$/bus 3.02 3.91 2.84 3.05 3.42 3.58 3.75 Corn US$/bus 2.51 2.44 2.48 2.48 2.63 2.84 2.99 Sorghum US$/bus 2.25 2.18 2.06 2.19 2.37 2.51 2.63

I Australian wool marketing e I Floor price (clean) Ac/kg 870 870 700 700 700 700 700

Producer levies % 8.0 8.0 23.0 27.0 27.0 20.0 20.0 Delivery quota kt - - - 750 750 750 750

a Real annual percentage growth rates. b Calendar years, except for Australia (year ended 30 June) and New Zealand (year ended 30 September). c Calendar years. d Crop years; farm level prices in nominal terms. e Assumes no revolvement of producer levies; levies in 1992 and 1993 include a 25 per cent tax and a 10 per cent revolving surcharge discounted to an additional annual tax of 2 per cent. Prices in nominal values, p Provisional. s ABARE estimate.

(JFY)1990 reductions in Japanese retail beef application of a 70 per cent tariff level, prices and consequent changes in beef there will be adjustn~ents in each market consumption. As discussed earlier, Pacific segment, for the reasons given in appendix beef production is non-homogeneous, and A. The interactions of doil~estic demands there are thus a number of related markets and import supplies will determine the for different types of beef. Ideally, the levels of grass and grain fed beef imports effects of Japanese beef trade reforms and yield a new set of retail price should be assessed in the context of the differentials for the various types of beef disaggregated Japanese beef demands. In available. In subsequent years the lowering the JFY 1991 trading year, with the of tariffs will encourage further price and

North Asian beef import liberalisat ion 47

quantity adjustments in each of the market segments.

However, a hnitation of the EMABA model at present is that Japanese beef demand is modelled only in aggregate, with fixed price relationships between the segments, described below. Thus, the disaggregated price and quantity outcomes in the Japanese market cannot as yet be adequately assessed. ABARE research is currently underway to obtain estimates of the price responsiveness of demand and supply for the different types of beef consumed in Japan (including cross-price effects of the kind shown in table 16). These estimates may then be used to reassess the effects of Japanese beef trade reforms.

The NABASE simulation of Japanese market outcomes for a non-quota trading environment required three further assumptions. First, some assumption was required concerning the transmission of US beef prices to the Japanese domestic market. It was assumed that the Japanese price of dairy steers would adjust to a level equivalent to the landed price of US grain fed choice steers (that is, adjusted for freight, handling charges and tariffs). This assumption implies that the two products are perfect substitutes; whereas in fact, to the extent that consumers differentiate them, the price of the US product will not be fully transmitted to the domestic product. For this reason, the simulated effects on Japanese production, consumption and imports may be overstated.

Second, the model includes an equation whereby the wagyu beef price is determined by the dairy beef price. Such a linkage is a simplification of the likely movements in wagyu beef prices after 1990. The change in prices will in fact depend on a number of factors, including the responsiveness of beef demands and supplies and the degree of substitutability between dairy beef and wagyu beef. However, the alternative assumption of

48

no influence of dairy on wagyu beef price was considered to be less plausible, as it implies a complete absence of substitution effects.

A final assumption relates to the transmission of wholesale price signals to the retail level. In the estimated (initial) version of the EMABA model, the equation for the retail-wholesale margin for beef in Japan employed the wholesale prices for domestically produced beef. For simulating a situation in which import prices also are important in determining consumption, the same margin was applied between an aggregate retail beef price and a weighted average wholesale price of wagyu, dairy, imported grain fed and imported grass fed beef. This approach only approximates the actual situation, since it implies that the same retail- wholesale margin holds for all types of beef.

6.2 Baseline simulation results for North Asian livestock markets The removal of Japanese import quotas in JFY 1991 results in lower Japanese beef prices2, increased beef consurnption and a substantial rise in beef imports (table 19 and figure I), In the first year of simulated trade liberalisation, Japanese retail beef prices decline by around 19 per cent and beef imports rise by almost 10 per cent to 448 kt (shipped weight).

Beyond 1991 Japanese beef consumption expands further, reaching 1432 kt by 1995. In retail weight terms this represents a consumption per person of approximately 7.8 kg in that year. The estimated 1989 consumption was 6.5 kg per person.

Despite the substantial fall in domestic beef prices there is no appreciable decline

All prices reported in these simulation results are in nominal terms, as are the percentage price effects reported from the simulations of alternative policy situations.


1 Baseline simulation results- selected v

Australian beef price EABARE

Australian beef exports EA~ARE

Japanese 'quota beef' imports CABARE


Australian beef production EABARE

Australian beef consumption EABARE

Korean beef imports EABARE

19 Baseline projections for North Asian livestock markets a

Unit b

Japan Beef

Production Consumption 'Quota' imports - Australian - us Diaphragm imports Retail price Wholesale price c

Pig meat Production Consumption Imports

l Farm price d

I Poultry Production Consumption Imports Retail price e

l Korea

Beef Production Consumption Imports Retail price Farm price t

l Pig meat

Production Consumption Farm price g

l Poultry

1 Production Consumption

l Wholesale price h

l

a Calendar years. b Prices in nominal terms, production and consumption as carcass weight equivalent and imports as shipped weight. c Dairy steers, dressed weight. d Farmers' sale price of barrows and gilts, liveweight. e Broilers, product weight. f Price received by farmers for 400 kg male cattle. g Average price received by farmers for 90 kg hogs, liveweight. h Average 'all cities' wholesale price of chicken, dressed carcass weight. p Provisional. s ABARE estimate.

in domestic beef production. This result reflects the relatively low price responsiveness of Japanese beef supply.

Initially the rise in 'quota' beep imports is substantial, though always below the 20

per cent growth rate which would trigger the emergency tariff procedures. Toward the mid-1990s it slows, in line with slower growth in beef consumption. By 1995 Japanese 'quota' beef imports reach 582 kt, with Australia and the United States gaining market shares of around 51 per cent and 44 per cent respectively. These market shares vary throughout the

For convenience, this term is retained here even though quotas will be replaced by tariffs in 1991. The distinction between 'quota' and diaphragm beef will then become one of tariff levels. See also p.12 and table 3.


projection period in response to the relative As is illustrated in figure J, in the 100 kt moveinents in landed prices of beef. stock reduction scenario, Japanese beef

Both in the baseline simulation and in imports in 1991 are almost 18 per cent the alternative siinulations which are the lower than the baseline level, as the subjects of chapters 7 and 8, stock levels disposal of domestic stock holdings of imported beef are assumed to decline crowds out imported product. The by 30 kt product weight in JFY 1991, and reduction in Japanese import demand has to remain unchanged for the remainder of the effect of reducing prices in Australia the simulation period. To assess the by almost 5 per cent in JFY 1991 relative implications of a larger liquidation of to the baseline. The effects of a 50 kt stock imported beef stocks in JFY 1991, two reduction in JFY 1991 are somewhat less. alternative assumptions were examined. Even in this scenario, however, Japanese In the first case, stocks were assumed to beef imports are reduced by over 5 per decline by 50 kt in JFY 1991; in the second, cent and Australian saleyard beef piices the assumed decline was 100 kt. by around 1 per cent.

T Simulation results for alternative J apanese beef stock reductions

r'

Japanese 'quota beef' imports Australian beef price

J apanese quota beef' imports ZABARE

Baseline 100 kt

Australian beef price

North Asian beef import liberalisatiolz 51

Thus, to the extent that the baseline and alternative simulations discussed in this report underestimate the liquidation of Japanese imported beef stocks in JFY 1991, the trade and welfare measures for that year in these simulations will be overestimates.

In the Japanese livestock sector the pig and poultry industries compete with beef for both available resources and sales. Developments in both these industries, therefore, will influence market outcomes for the beef industry.

In the Japanese pig meat market, the assumed rise in disposable incomes initially results in an expansion of demand and increased prices (table 19). Despite

l the assumed increase in feed costs there is continued growth in domestic output throughout the projection period. The higher domestic demand for pig meat also results in some further gradual expansion in imports from the lower cost pig meat countries, Taiwan and North America. The slowing in the annual growth rate of domestic output reflects an assumption that Japanese pig meat producers receive no cotnpensation for the higher feed costs through an increase in the stabilisation prices for pigs.

Higher feed costs also have some effect in the Japanese poultry market. However, the expansion in consumer demand induced by rising disposable incomes has a much greater influence. Throughout the projection period retail prices are rising and there is a steady growth in poultry consumption (table 19) matched by increased domestic output. In general, imports of poultry meat remain approximately constant throughout the projection period.

By 1995 Japanese consumption of pig and poultry meats per person (retail weight equivalent) is around 14.9 kg and 13.2 kg respectively. The respective 1989 consumption levels are estimated to have been 11.6 kg for pig meat and 10.9 kg for poultry.

The Korean beef industry is assumed to remain protected froin international competition to a substantial degree while gradually expanding its minimum import quotas over the period to 1995. In the base simulation, the assumed strong growth in disposable incomes causes the demand for beef to expand and results in a rise in retail beef prices.

Toward the end of the projection period the higher beef prices induce a small expansion in domestic production. With the continued rise in annual beef imports, the rise in retail beef prices becomes more subdued. A faster rate of growth in beef imports than assumed in the baseline simulation would result in still smaller beef price rises.

Korea's pig and poultry industries, unlike beef, are assumed not to experience competition fro111 imported product: that is, the present policy on pig and poultry imports is assumed to continue. However, both industries are affected by developments in the doll~estic beef market and by the assumed changes in world feedgrain prices. Throughout the projection period the rise in retail beef prices stimulates consumer demand for both pig and poultry meats. In the absence of imports this results in increased domestic output of both meats, accompanied by rising prices.

6.3 Baseline simulation results for Oceania livestock markets As expected, the increased Japanese demand for Australian beef results in higher prices and eventually increased beef production in Australia (table 20 and figure I). Initially, Australian beef producers respond to the higher prices by expanding breeding herds, which reduces beef supplies in the short run. The lower supplies and rise in beef prices result in a fall in Australian beef consumption and a


20 Baseline projections for Oceania livestock markets

Australia b

Beef Production kt 1 492 1 678 1 676 1 541 1 645 1 691 1 813 Consumption kt 682 693 630 582 716 729 732 Exports kt 538 672 703 643 622 646 729 Farm price C AcI kg 210 216 234 251 267 257 256

Pig meat Production kt 308 317 327 320 324 322 322 Consumption kt 296 305 315 308 312 310 310 Farm price d Aclkg 215 208 210 213 235 239 246

Poultry Production kt 406 419 469 520 616 647 692 Consumption kt 410 427 469 520 616 647 692 Retail price e Ac/ kg 310 326 336 328 346 367 385

New Zealand f

Beef Production kt 542 487 438 423 434 473 527 Consumption kt 124 127 108 97 117 125 134 Exports kt 280 241 222 223 209 231 264 Farm price g NZc/ kg 197 246 258 268 277 263 256

Pig meat Production kt 45 48 49 48 49 49 49 Consumption kt 46 48 45 47 49 50 50 Farm price h NZc/ kg 260 211 215 217 250 255 265

Poultry Production kt 57 57 56 56 62 64 66 Consumption kt 57 57 56 56 62 64 66 Retail price i NZc/ kg 529 505 510 502 515 531 543

r Prices in nominal terms, production and consumption as carcass weight equivalent and exports as shipped weight. b Financial years ended June 30. c Weighted average saleyard price of beef, estimated dressed weight. d Price of pigs at auction, estimated dressed weight. e Chicken. f Years ended September 30. g Saleyard price of 'M' grade export cow beef (145.5170 kg), dressed carcass weight. h Saleyard price of porkers, carcass weight. i Chicken, frozen No. 6. p Provisional. s ABARE estimate.

redirection of exports away from the A inoveinent of resources out of the wool United States toward the Japanese and industry, and increased slaughter of sheep Korean markets. By 1995 the expanded because of relatively more favourable cattle herd provides larger beef supplies returns for grains and beef, result in higher and a greater quantity of exports. sheep ineat supplies and Iower prices. In

The rise in retail beef prices also affects the short term, this dampens the demand developments in Australia's pig and for pig meat, while lower pig prices and poultry industries. Higher beef prices higher feed costs encourage the slaughter induce greater consumer demands for of breeding sows and higher pig meat other meats, particularly lamb and mutton. output.

North Asian beef import liberalisatio~~ 53

During the latter part of the projection period higher retail prices for lamb as well as beef cause the demand for pig meat to expand. The resulting rise in pig prices contributes to a small expansion in output. In the poultry sector output grows steadily over the 1990-95 period in line with the growth in demand.

The baseline projections for New Zealand's livestock industries are similar to those for Australia. As both countries produce a grass fed product, changes in New Zealand's beef prices closely reflect Australian price movements. Higher beef prices contribute to an expansion of the New Zealand cattle herd over the ~nedium term, resulting in an expansion in beef output. Expansion in the New Zealand dairy industry is also encouraged by a substantial

I rise in New Zealand dairy returns toward I the end of the 1980s. (The dairy herd is a l major contributor to New Zealand's beef

production.) In the past, rnuch of New Zealand's

exports were destined for the US processing beef market, due to the relatively large contribution of beef from culled dairy cattle. Looking to the future, New Zealand's share of US beef imports can be expected to rise at the expense of Australian product. In the short term, Australian supplies of manufacturing beef may be limited due to the lower

I female slaughter as the herd expands and , because of the sale of more grass fed beef

to Japan in chilled form, which is accepted as a higher quality product than frozen grass fed beef.

Medium term projections for New Zealand's pig and poultry industries indicate similar trends to those obtained for Australia. Declining sheep meat prices initially dampen the demand for pig meat, resulting in little change in farm-level pig prices. Toward the mid-1990s pig meat demand strengthens and the price rise. Overall, pig meat production changes little over the medium term, and there is a small upward trend in poultry meat output.

6.4 Baseline simulation results for North American livestock markets Baseline projections for the US and Canadian livestock markets are suinmarised in table 21. Results for US beef suggest rising prices and a gradual expansion in production. The projected increases in US fed beef prices are largely in response to the assumed strong US growth in disposable incomes, which leads to an expansion in domestic demand for both fed and non- fed beef products (though the changes in actual consumption are small). At the same time, increasing Japanese demand for US grain fed beef results in higher exports and further upward pressure on US beef prices.

Throughout the simulation period US beef imports remain well below the estimated 1990 total iinport level of 624 kt. These lower iinport levels reflect the higher landed prices for Australian and New Zealand grass fed beef brought about by increased Japanese demand for the same type of beef. Although the trigger level for beef iinport restrictions declines for much of the simulation period (not shown), US import controls are not triggered in any year of the siinulation.

Despite the assumed increases in feed costs, rising livestock prices create sufficient incentive for a limited expansion in the US cattle herd over the medium term, Gradually, beef production expands in line with the growth in cattle inventories. At the same time, total US beef consumption increases moderately, even though beef prices rise substantially toward the end of the siinulation period.

Higher feed costs also have an influence on developments in the US pig meat industry and subsequently in the beef sector. In the short term, a rise in pig meat prices increases the profitability of raising pigs, causing a buildup in breeding stock


21Base l ine projections for North American livestock markets

United States

Beef Production Consumption Imports Exports Fed cattle price C

Pig meat Production Consumption Exports Farm price d

Poultry Production Consumption Exports Retail price e

Canada

Beef Production Consumption Imports Farm price r

Pig meat Production Consumption Exports Farm price g

Poultry Production Consumption Retail price h

Unit b

kt kt kt kt

USc/ kg

kt kt kt

USc/ kg

kt kt kt

USc / kg

kt kt kt

CNc/ kg

kt kt kt

CNc / kg

kt kt

CNc/ kg

a Trade between United States and Canada is excluded. Calendar years. b Prices in nominal terms, production and consumption as carcass weight equivalent and imports/exports as shipped weight. c Saleyard price of Omaha choice grade fed steers

I (90C-l100 Ib), liveweight. d Price of barrows and gilts at auction, liveweight. e Frying chickens, product weight. f Weighted

l average price of Al, A2 steers, Toronto. g Saleyard price of index 100 hogs, dressed weight. h Chicken, product weight.

l p Provisional. e ABARE estimate. l

and higher pig ineat output in subsequent years. As output expands, pig meat prices decline and, in conjunction with higher feed costs, reduce the profitability of pig meat production. Consequently US pig ineat production decljnes toward the end of the si~nulation period, thus allowing a recovery in pig meat prices. The decline in pig ineat output toward the end of the simulation period will also reduce competition for feedgrains between the

beef and pig sectors. The increased Japanese delnand for North American pig meat is reflected in a rise in US pig ineat exports.

In the US poultry sector a general expansion in demand results in higher consuinption levels and increased domestic output. As the US poultry sector is a large user of concentrate feedgrains, this expansion in output will also influence concentrate feed co~~sumpt io~~ in the US


beef sector due to the increased competition for available product. The expansion in poultry meat deinand largely reflects the higher prices for competing meats and growth in disposable incomes. US exports of poultry meat increase only slightly.

The baseline silnulation for the Canadian livestock industries is broadly similar to that for the United States. An increased demand for beef results in higher beef prices. Domestic output expands as imports of beef horn Australia, and to a lesser extent New Zealand, decline in line with the increase in landed prices. Developments in the Canadian pig and poultry industries closely resemble those in the US market. Canadian exports of pig meat to Japan expand while domestic consu~nption and production levels increase moderately. In the Canadian poultry inarket a gradual increase in demand results in higher do~iiestic output levels.

6.5 Baseline estimates of Pacific Basin feedgrain consumption Table 22 shows estimates of the feedgrain requirements by the livestock sectors of each country following the liberalisation of the North Asian beef trade. As outlined in appendix D, the results are based on simple technical relationships of livestock feedgrain usage. These relationships were applied to the livestock production results contained in the baseline silnulation (NABASE), discussed in the previous section. For the purposes of this report the emphasis is on the consu~nption of feedgrains by each Livestock sector in Japan, Korea, Australia and the United States.

Between the baseline simulation and both the alternative si~nulations which are the subjects of chapters 7 and 8, the changes in total feedgrain deinand are less than 1 per cent of total feedgrain consumption. The resultant changes in world feedgrain prices are estimated to be less than 1 per

cent. Consequently, the feedback effects of changes in grain prices under the policy alternatives simulated can be seen to be small. It was thus not necessary to repeat the si~nulations with adjusted feed prices.

Total coinpound feed consu~nptioii in Japan increases only moderately, from 25.5 Mt in 1990 to around 31.1 Mt by 1995. The rise in consu~nption is largely due to an expansion in poultry meat production.

In Japan, the use of feed rations l~iixed on-farm is almost entirely limited to tlie pig and cattle sectors. Because of the rise in pig meat production, use of on-farm rations by the pig sector therefore rises slightly. Consumption of on-fan11 ~nixed rations in the cattle sectors also increases, through an expansion in the dairy herd. Consequently, the on-farm usage of feedgrains increases sligl~tly over tlie medium term.

Japanese feedgrain use for animal feeds is calculated on the assumption that Japanese government policies affecting feedgrain prices do not change over the period to 1995. Feedgrain usage rises moderately, in line with the calculated rise in compound feed consumption. Corn and sorghu~n account for most of this increase, as they are the predon~jiia~it grains used in colnpound feeds in Japan. Only small quantities of feed wheat and barley are used in Japanese coinpound feeds, and provided that governlne~lt policy continues to set the domestic prices of wheat and barley above world parity prices, this will remain true.

Japanese imports of feedgrains rise over the medium term, while doinestic feedgrain production remains around current levels. A shortage of arable land, and the trend toward growing more profitable cash crops, constrain increases in feedgrain plantings. Consequently, any increase in feedgrain requirements for use in ani~nal feeds should result in higher imports of coarse grains. Corn and

Disclrssion paper 90.11

22 Baseline projections for Pacific Basin feedgrain markets

1989p 1990 S 1991 1992 1993 1994 1995

kt kt kt kt kt kt kt Japan

Compound feed consumption 26 187 25 528 26 750 27 827 29 144 30 290 31 135 Cattle 6 057 5 643 5 935 6 059 6 050 6 126 6 118 Pigs 7 651 7 291 7 493 8 021 8 837 9 403 9 720 Poultry 12 479 12 594 13 322 13 747 14 257 14 761 15 298

Feedgrain requirements a 18 576 18 159 18 968 19 695 20 614 21 407 21 989 Compound feeds 16 928 16 524 17 308 18 026 18 928 19 699 20 271 On-farm rations 1 647 1 635 1 661 1 669 1 686 1708 1719

Imports 19 939 19 522 20 332 21 058 21 978 22 770 23 353

Korea

Compound feed consumption 10 043 9 758 9 975 10 353 10 831 11 373 11 952 Cattle 3 163 3 066 3 248 3 478 3 759 4 083 4 427 Pigs 3 927 4 032 4 027 4 133 4 289 4 468 4 661 Poultry 2 822 2 660 2 701 2 741 2 782 2 823 2 864

Feedgrain requirements a 5 980 6 092 6 225 6 455 6 746 7 076 7 429 Compound feeds 5 830 5 942 6 075 6 305 6 596 6 926 7 279 On-farm rations 150 150 150 150 150 150 150

Imports 3 949 4 062 4 194 4 424 4 715 5 045 5 398

Australia

Compound feed consumption 2 076 2 141 2 336 2 497 2 838 2 941 3 096 Pigs 671 691 713 698 706 702 702 Poultry l 405 1 450 1 623 1 799 2 131 2 239 2 394

Feedgrain requirements a 2 920 3 270 3 439 3 586 3 976 4 165 4 492 Compound feeds b 1 308 1 349 1 471 1 573 1 788 1 853 1 951 On-farm rations b 357 368 379 371 376 374 374 Cattle on feed C 1255 1 554 1 588 1642 1812 1 939 2 167

United States

Concentrate feed consumption d 191 092 194 571 197 605 200 536 203 010 205 452 207 919 Cattle 69 171 69 745 70 900 72 094 73 084 74 117 75 173 Pigs 51 406 50 144 50 824 53 434 54 894 55 076 54 695 Poultry 70 515 74 682 75 881 75 009 75 032 76 259 78 051

Feedgrain requirements a 141 793 143 762 145 980 148 537 150 530 152 252 153 878

a Corn, sorghum, oats, rye and barley. Also includes feed wheat for Australia, Japan and Korea. b Excluding cattle. c Due to lack of data, only concentrate feed consumption was estimated for Australian cattle on feed: see appendix D. d Compound feed plus feed rations mixed on-farm, p Provisional. . ABARE estimate.

sorghum are likely to continue to account for the bulk of Japan's import requirements, as no tariffs are imposed on corn and sorghum imports used in the manufacture of compound feeds.

Korea Consumption of compound feeds in Korea rises considerably over the medium term,

from around 9.8 Mt in 1990 to almost 12.0 Mt by 1995. A major reason for this increase in consumption is the assumed continued trend toward the more specialised intensive production systems, particularly in the pig and cattle sectors (see appendix D). Production of beef, pig and poultry meats increase in the baseline simulation, and the use of compound feeds


for beef increases substantially if (as is assumed here) the apparent trend toward a higher quality domestic beef product continues (Harris and Dickson 1989).

Korean feedgrain consumption expands in line with the assumed growth in coinpound feed usage. The use of rations mixed on-farm is in Korea largely restricted to the pig and cattle sectors, with only sinall quantities of on-farm rations used in the poultry sector (United Nations Development and Trade Bureau 1984). Despite the col~tinued gradual substitution of con~pound feeds for on- farm feed rations, the total quantity of feedgrains used on-farm does not change over the projection period.

Import requirements increase, since dolnestic production of feedgrains is unlikely to expand. This is partly due to the relatively low levels of governnxent price support and of import tariffs applied to feedgrains. Most of Korea's dolnestically produced grains suitable for feed are sold for h u ~ u a n ponsumption or industrial processing. In addition, higher returns for alternative cash crops over recent years have acted as a disincentive for grain growers to expand their output of feedgrains.

Corn and sorghu~n are likely to contiiiue to dominate Korea's feedgrain imports, as these two grains are preferred by Korean coinpound feed ~nanufacturers. The rise in feed wheat i~nports over recent years has been due to the availability of relatively low priced feed wheat from Australia. If the availability of feed wheat from Australia declines, corn and sorghum imports are likely to increase further.

Australia Consumption of feedgrains by the Australian livestock industry expands significantly over the lnediu~ix term, largely due to the expansion of the Australian beef industry. In addition, the use of grain- based finishing rations for cattle raised on pastures increases in response to Japanese consumer requirements for a more

58

marbled grass fed beef product. As a result, feedgrain consumption by the Australian beef industry rises from an estimated 1554 kt in 1990 to around 2167 kt by 1995.

The feedgrain require~neli ts of Australia's pig and poultry irtdustries also increase as their outputs rise. The increasing domestic requirements for feedgrains could reduce the quantity available for export unless Australia's grain producers choose to expand the acreages sown to feedgrains. In the simulations, prices received by growers for feedgrains are linked to US feedgrain prices, which are assumed to increase significantly. However, in the baseline simulation the projected net returns for beef, wool and grain growing do not suggest that a large change in wheat and coarse grain production would be induced over tlxe ~nediuln term. Overall, cropping areas rise marginally, tlxe beef sector expands inoderately and the sheep flock remains roughly constant (table 23).

United States Consu~nption of concentrate feeds by US livestock industries also expands, despite the assumption of higher grain prices. Most of the expansion is in the fed beef sector and the poultry industry. Overall, concentrate feed consu~nytion in the United States rises from an estilnated 195 Mt in 1990 to around 208 Mt by 1995. This growth i~xxplies an increase in do~nestic feedgrain use fro111 144 Mt in 1990 to 154 Mt by 1995. Depending on the extent of any growth in US feedgrain production, this could result in reduced availability of feedgrajn for export d~u-ing a period of rising North Asian import demands.


23 Baseline projections for Australian broadacre agriculture a

Unit 1990 p 199lS 1992 1993 1994 1995

Coarse grain plantings bc '000 ha 3 910 4 252 4 547 4 844 4 921 5 087 Production kt 6 654 6 671 7 340 7 860 8 013 8 323

Domestic disposals Food d Feed e

Export availabilities f kt 3 004 2 551 3 111 3 535 3 434 3 418

Sheep numbers C million head 173 168 151 144 138 132 Cattle numbers C million head 22.6 22.9 23.8 24.9 26.2 27.5 Wheat plantings C '000 ha 8 936 9 851 10 340 10 509 10 587 10 717 Farm-level barley price g $A/t 152 119 125 138 157 171 Farm-level wheat price h $A/t 218 157 175 201 214 225

a Crop year outcomes, except for sheep and cattle inventories which are closing numbers at 31 March and prices which are financial year ending 30 June. b Barley, oats and sorghum. C Obtained from EMABA baseline simulation results, NABASE. d Projected by extrapolation of recent levels. e Derived using the projections in table 22. Projections of on-farm feeding of oats on extensive sheep properties were also included. f Excess of production over domestic disposals. Some of the export availabiities in any year will be held as stock rather than exported. g Domestic six row feed, Sydney. h Auskalian standard white wheat, fob, eastern states; $A equivalent of the Australian Wheat Board's $US asking price. p Provisional. S ABARE estimate.


7. Tariffication of Korean beef quotas

The current minimum access agreement covers Korean beef trade only until 1992. An option for future negotiations lnay be the replacement of Korean import quotas with a regime of declining ad ualorenz tariffs, beginning in 1993. In this chapter the ilnplications of such a 'tariffication' of Korean import quotas are examined by means of a simulation, retaining the same Japanese arrangements as in the base simulation. This alternative policy simulation is compared with the NABASE results given in chapter 6.

7.1 A scenario for the

that year, 50 per cent -will be subject to further negotiations based on the results of current GATT negotiations.

Following the 1989 GATT panel finding that Korea's beef import controls were inconsistent with GATT trading regulations, the Korean government negotiated with supplying countries in an effort to find a 'GAIT-consistent' mechanism for controlling beef imports. The iiutial negotiations resulted in the establishment of milumum import quotas for the 1990-92 period, which were incorporated in the analysis reported in chapter 6.

The Korean govern~nent has also given an undertaking to complete the reforins to

tariffication of Korean its beef ~011t;bl mechanisms by 1997.

beef quotas Subseque~lt bilateral negotiations are to determine the nature of the reforins and

As part of the efforts to liberalise world agricultural trade, the Cairns Group4 has supported some of the US proposals for reforming policies related to market access for agricultural imports. The central concept of these proposals has been a 'tariffication' process which would allow both internal and external market forces to affect domestic production levels. At the end of an appropriate transition period, all non-tariff barriers would be converted to tariffs with specified upper bounds (Riethmuller et al. 1990). Subsequently these tariffs would be reduced to either zero or relatively low levels.

Any such further reform of the North Asian beef trade is linked to the outcornes of the Uruguay Round. After 1993 the tariff applied to Japanese beef imports - in

The Cairns Group comprises fourteen agricultural exporting countries: Australia, New Zealand, Canada, Argentina, Brazil, Chile, Hungary, Columbia, Fiji, Malaysia, Indonesia, Thailand, the Philippines and Uruguay.

how they will be phased in. One possible outcome could be an agreement similar to Japan's beef trade liberalisation agreement, negotiated in 1988. Such an agreernent would involve a transition period of expanding minilnum access levels, followed by the replacement of import quotas with a regiine of declining ad ualor-em tariffs. As in the Japanese case, the key negotiating points would ii~volve the length of the transition period, the quota levels to apply during this phase and the level of tariff to be applied following the removal of import quotas. At the completion of the process, Korea would retain a degree of protection for doinestic beef producers while allowing consumer demand for imported beef (and domestic production) to respond to movements in the landed prices of such beef.

The adoption of tariffication would affect future market developments in the major Pacific Basin beef exporting countries, Australia, New Zealand and the United

Disczission paper 90.1 1

States. It would also have i~nplications for price responsive importing countries such as Japan. The EMABA model was therefore used to prepare an alternative simulation experiment, termed KORTRF.

For the purposes of the KORTRF experiment the following assumptions were made.

The existing (1990-92) ~ninimum access agreement would constitute the transition phase of expanding Korean import quotas prior to the adoption of tariff- based protection measures. Ilnport regulations and tariffs in these years would remain exactly as in the baseline scenario. In 1993 quota restrictions would be abolished and replaced by a tariff rate of 100 per cent applied to all beef imports. The tariff rate would be reduced to 90 per cent in 1994 and 80 per cent in 1995.

The assumed tariff rates were chosen for illustrative purposes only.

Replacement of import quotas with tariffs would result in domestic beef prices declining to a level related to the landed price of imported beef plus tariff. It cannot be assumed that there would be no difference between these prices, because imports and domestic beef are less than perfect substitutes, and in the newly reformed price-responsive trading environment a set of market deteriiuned price differentials would be established for the various types of beef available.

Currently, the Livestock Products Marketing Organisation maintains a policy of selling beef i~nports for general

I consumption purposes at 30 per cent less than the wholesale price of do~nestically produced beef (Harris and Dickson 1990). The Organisation argues that this price discount reflects the consumers' perception of imported beef as a lower quality product. With no other ii~forlnation available, it was assumed that domestic product continues to trade at a 30 per cent price premium over imported beef. That is, in the KORTRF simulation the price

North Asian beef import liberalisaf ion

received by Korean beef producers was made 30 per cent higher than the (import share weighted) average landed price of imported beef, inclusive of tariffs. This assumption is clearly a gross simplification of actual future market price outcomes, and to the extent that the assumed domestic beef price is too high or too low the simulated effects of tariffication will be correspondingly affected.

The final assumption required for the KORTRF simulation relates to the transmission of price signals through to the retail level. EMABA contains an estimated saleyard-retail margin equation for the transmission of prices within the Korean component of the model. As was done for Japan in the baseline simulation, an aggregate retail beef price was determined by applying the same margin to a weighted average of the producer level prices for domestic quality beef and the landed prices of imported beef from each supplying country.

Note that, for the reasons given previously, poultry supply is assumed to be infinitely responsive to price changes. In consequence, no changes in the price of poultry, relative to its baseline price, are generated in either of the two silnulation experiments.

Apart from the assumptions outlined, all other exogenous assumptions remained unchanged from those imposed in the baseline simulation. In particular, all aspects of the Japanese beef trade liberalisation agreement remained unchanged. The KORTRF simulation results were colnpared with NABASE results to indicate the potential effects of the tariffication of Korean beef quotas.

7.2 Simulation results for North Asian livestock markets The siinulated replacement of Korean import quotas with a 100 per cent tariff in

1993 results in a substantial fall in Korean beef prices (table 24). This decline in prices triggers a herd liquidation and reduced beef output. By 1995 Korean beef production is 26 per cent lower than in NAB ASE.

The lower retail prices encourage higher levels of beef consumption and substantially higher levels of imports (figure K). In 1989, when total beef imports were restricted to around 80 kt (shipped weight), Korean beef consumption was estimated at close to 4.0 kg per person (retail weight). Under the assu~nptions of the KORTRF simulation, liberalisation of the Korean beef trade yields a 1995 import level of around 260 kt, and an approxinlate doubling in beef consu~i~ption per person by 1995, to 6.7 kg.

Developments in the beef market also have significant effects on market outco~nes in Korea's pig and poultry industries. As would be expected, the lower retail price for beef affects consumer demand for alternative ~neats, reducing consumption and production levels for both pork and poultry. By 1995 Korea's pig and poultry meat output levels are 23 kt and 9 kt, respectively, below their levels in the base simulation.

Liberalisation of the Korean beef trade could also be expected to affect developments in the Japanese beef sector. In the simulation experiment the increase in demand for beef in Korea results in hgher prices for imported beef landed in Japan. Compared with the NABASE simulation results, the higher prices reduce Japanese beef consulnption and imports. For example, the 1995 level of Japanese 'quota' beef imports (see p. 50) is 570 kt (shipped weight) in KORTRF as against 582 kt in NABASE.

An interesting feature of the Japanese results is the relative changes in Japanese beef imports from Australia and the United States. On the assumption that (as in the baseline scenario) Australia will continue to supply 75 per cent of Korea's imported

24 Tariffication of Korean beef quotas: effects on North Asian livestock markets

Percentage change from baseline

1993 1994 1995

% % %

Beef Production Consumption 'Quota' imports - Australian - us Diaphragm imports Retail price Wholesale price

Pig meat Production Consumption Imports Farm price

Poultry Production Consumption Imports

Korea

Beef Production Consumption Imports Retail price Farm price

Pig meat Production Consumption Farm price

Poultry Production Consumption

beef trade, with the expansion of Korean beef imports the landed price of Australian beef in Japan increases more than that of US product. As a result of these relative price movements the United States expands its Japanese market share at the expense of Australia.

For Japan's pig and poultry industries the effects of these beef sector developments

62 Disct~ssion paper 90.1 1

K KORTRF simulation results- selected variables

Australian beef price ~ A B A R E Australian beef production EABARE

Australian beef exports Australian beef consumption

Japanese ' quota beef' imports Korean beef imports

Norfh Asian beef imporf liberalisation 63

are very small. The small rise in retail beef prices results in minor declines in Japan's pig and poultry meat consumption and imports, relative to the baseline simulation. This in turn leads to a slightly lower level of domestic production, but little or no price change.

7.3 Simulation results for Oceania livestock markets Under the assumptions used in this simulation, there are substantial gains for Australia from the liberalisation of Korea's beef trade. Compared with the NABASE simulation the initial, 1993, effect is an additional 8 per cent rise in the Australian beef price due to the increased export demand generated by Korean consumers (table 25 and figure K). Although the rise in beef prices reduces the competitiveness of Australian exports in markets such as Japan, the larger shipments to Korea result in a slight increase in total beef exports in 1993.

This additional rise in producer prices also strengthens the incentive for an expansion of the Australian cattle herd that was already evident in the baseline projections. The consequent further reduction in female slaughterings results in lower beef output in all years of the simulation.

By 1995 Australian beef supplies are still lower than the baseline level despite the increased cattle numbers. Beef prices are more than 9 per cent higher than base levels, due to the continued growth in Korean export demand and lower beef supplies as the herd expansion process continues. Australian beef consumption is more than 3 per cent below the baseline result, and total exports are down by almost 1 per cent.

With beef prices still well above base levels in 1995, there are substantial gains for Australian beef producers. Relative to

25 Tariffication of Korean beef quotas: effects on Oceania livestock markets

Australia

Beef Production Consumption Beef exports Farm price



New Zealand

Beef Production Consumption Exports Fann price


Poultry Production Poultry consumption


1993 1994 1995

% % %

baseline results, the additional profits to beef producers aggregated over the 1993- 95 period are around $A805111 in net present value terms using a discount rate of 10 per cent. For Australian beef consumers, however, the higher beef prices have a cost, in terms of lower consuinption and increased expenditure. The estimated net present value of the loss in consumer welfare in the same three years is around $A337in, resulting in a net gain to the Australian economy of around $A468m.

The effects of the assumed Korean liberalisation agreement on Australia's pig and poultry industries, like those in Japan,


are small. This is also true for the Australian sheep industry.

It is also evident in the KORTRF simulation results that liberalising the Korean beef trade would have a substantial impact on the New Zealand beef industry. As in Australia, beef prices in New Zealand are substantially higher than base levels in all three years. The medium term beef supply response to these higher prices is significantly lower than in Australia. In part, this reflects the large contribution made by the dairy sector (which responds more to developments in the milk market than in the beef market) to New Zealand's beef output. In a similar way to Australia, the higher prices result in lower domestic beef consumption. Again, the effects on the pig and poultry industries are small.

7.4 Simulation results for North American livestock markets Liberalising the Korean beef trade has a much smaller impact on the North American beef markets than on a number of other Pacific markets. On the assumption that Korean demand for US beef (grain fed primal cuts) will remain at 15 per cent of total Korean beef imports, as in the baseline scenario, the direct effect on the US beef industry will be limited. However, as has been noted, the assumption dictating the composition of Korean beef imports has the effect that Australian beef prices are increased relatively more than US beef prices. Consequently, Japanese purchases of US beef increase at the expense of Australian beef, resulting in higher US beef exports and higher fed beef prices, relative to the baseline situation (table 26).

Higher landed prices for imported grass fed beef from Australia and New Zealand also lead to a reduction in US beef imports, relative to the baseline. Furthermore, the higher prices for both fed and non-fed


26 Tariffication of Korean beef quotas: effects on North American livestock markets


United States

Beef Production Consumption Imports Exports Farm price (grain fed)

Pig meat Production Consumption Exports Farm price

Poultry Production Consumption Exports

Canada

Beef Production Consumption Imports Farm price



beef products in the United States are reflected in lower doil~estic US beef consumption.

The higher beef prices have ininor effects on the US pig and poultry industries. US pig meat prices are marginally higher, and the domestic output levels for both pig and poultry meat are also slightly higher, than in the baseline case.

In Canada, the effects of Korean liberalisation are similar to those in the United States. Domestic Canadian beef

prices are increased by a similar amount, and the level of beef imports is lower due to the effects of higher landed beef prices. Again, the effects on the Canadian pig and poultry industries are smd, with marginally higher output levels in both sectors.

Different results would be obtained if the assumption concerning Korean beef preferences were changed. With the lifting of Korean import quotas the Livestock Products Marketing Organisation would no longer be in a position to determine the quality (grass fed versus grain fed) and co~nposition (carcass versus primal cuts) of Korea's beef imports. Currently, the Australian dominance of the Korean trade is due to a willingness to supply carcass beef. The KORTRF siinulation results are implicitly based on the assumption that this preference for carcass beef would continue in a liberalised trading environment. However, a stronger preference for primal cuts could result in a larger US share of Korean beef imports, a larger rise in US beef prices and a smaller rise in the landed price of Australian beef. In the Korean market, the likely effects would be higher prices and higher domestic output compared with the KORTRF simulation, as well as lower consumption and imports.

7.5 Pacific Basin feedgrains consumption Overall the feedgrain effects of liberalising the Korean beef trade are small (table 27). As would be expected, the largest effects occur in Korea, where lower production of beef, pig meat and poultry reduces the requirements for feedgrains. Despite the assumed trend toward greater use of compound feeds by the beef sector, the lower domestic beef output has a sizeable effect on Korea's feedgrain requirements. By 1995, Korea's constunption of feedgrains is around 4 per cent below the baseline level.

The changes in Japanese, Australian and US feedgrain requirements are predomin-

Tariffication of Korean beef 27 uotas: effects on Pacific Basin ?eedgrain markets

Japan Compound feed consumption Feedgrain requirements Imports

Korea Compound feed consumption Feedgrain requirements Imports

Australia Compound feed consumption Feedgrain requirements

Feedlot cattle grain use a

United States Concentrate feed consumption Feedgrain requirements


a For derivation, see appendix D.

antly due to developinents in their respective beef industries, since production levels of pig and poultry meat change only slightly. The largest percentage change in feedgrain requirements occurs in the relatively small beef feedlot sector of Australia.

It has been shown that, initially, the higher price for Australian beef induces a larger expansion in the cattle herd, lower beef production, a sinaller supply of feeder cattle and lower shipments to Japan, relative to the base case. The effect on Australian feedgrain requirements of any reduction in shipments of grain fed beef to Japan would be partially offset by increased sales of grain fed carcass beef to Korea. In the simulation, by 1994 Australia's feedgrain requirements for cattle are around 3 per cent below the baseline level. However, by 1995 the number of cattle placed on feed in Australia increases, and total feedgrain consumption rises above the NABASE level.


7.6 C O ~ C ~ U S ~ O ~ S and higher beef consu~nption and imports. These changes in the Korean livestock

The results reported in this chapter provide sector provide a clear example of the evidence that tariffication of Korean import qualitative difference between tariffs and quotas, if it occurred, would be likely to quantitative import restrictions as a means result in substantial gains for the of assisting domestic producers. That is, Australian beef industry. Compared with tariffs allow prices in the domestic market the NABASE simulation, Australian beef to follow changes in world prices, while prices and exports rise substantially in quantitative restrictions prevent changes response to increased export demand in world prices from affecting domestic generated by Korean consumers. Over the prices, effectively insulating domestic simulation period the net gain to the producers from world price trends Australian economy was estimated to be (Riethmuller et al. 1990). This is one of the around $470m. major reasons why the tariffication of

It appears that, in Korea, large existing quantitative trade restrictions is a adjustments would occur both within the key objective of the Cairns Group in the beef industry and between livestock GATT negotiations. sectors in response to lower beef prices

North Asian beef import liberalisafion 67

8. Unrestricted North Asian beef trade

The objectives established for agriculture in the Uruguay Round (GATT 1986) include: - improving market access for

agricultural products through the reduction of import barriers; and

- improving the competitive environment by reducing internal agricultural supports which distort

l trade.

The success of negotiations for further reductions in assistance will depend, in part, on the ease with which North Asian beef producers accommodate the adjustment pressures imposed by the presently negotiated reductions in assistance levels. To assess the implications of further reductions in assistance to North Asian beef producers - both for those producers and for beef exporting countries - an alternative EMABA simulation was prepared and the results were coinpared with the NABASE simulation.

8.1 A scenario for unrestricted North Asian beef trade For this North Asian free trade simulation (NAFREE), it was assumed that, beginning in 1991: - tariffs on all Japanese beef imports

(both 'quota' beef and diaphragm beef - see p. 50) are set to zero;

- Korean import quotas are abolished; - tariffs on Korean beef imports are set

to zero, rather than the present 20 per cent; and

- there are no price support programs for feeder cattle producers in Japan or Korea. (This constitutes a difference from the present situation but not from

the baseline simulation, in which these support programs were omitted.) As in the previous simulations

(NABASE, KORTRF), the assumptions chosen concerning the levels of producer prices for beef in Japan and Korea is important. For NAFREE it was again assumed that Japanese dairy beef prices would decline to the landed price of grain fed US beef. Similarly, the saleyard price of Korean beef was again assumed to fall to 30 per cent above the weighted average landed price of imported beef. As has been noted, for both countries these assumptions will only approximate the domestic price changes that would be likely to occur under free trade.

8.2 Simulation results for North Asian livestock markets Compared with the NABASE simulatioi~ results, unrestrained access to North Asian beef markets results in lower beef prices and substantially higher imports in both Japan and Korea. In Japan (table 28 and figure L), retail beef prices in 1991 are reduced by 19 per cent, resulting in higher consumption and larger imports of 'quota' beef. Persistently lower market prices for beef gradually result in adjustments in the domestic beef industry. By 1995 total domestic beef output is around 7 per cent lower than NABASE levels.

The removal of tariffs reduces the price incentive for importing diaphragm beef, further contributing to expansion in the Japanese demand for 'quota' beef imports.

Initially the Australian share of the 'quota' beef trade declines to around 35 per cent and the US share rises to approxi~nately


unrestricted ~ ~ ~ t h ~~i~~ beef Australia and the United States. Later in 28 trade: effects on North Asian the simulation period the Australian livestock markets market share recovers to around 40 per

cent by 1995, when the US market share is Percentage change from approximately 54 per cent. By this time

baseline total Japanese imports of 'quota' beef have 1991 1992 1993 1994 1995 risen to 759 kt (shipped weight), 177 kt

higher than in NABASE. % % % % 'L The lower beef prices also encourage

Japan higher consumption levels, and by 1995 Japanese consumers are estimated to be

Beef Production Consumption

'Quota' imports - ~ustrali& - US Diaphragm imports

Retail price Wholesale price

Pig meat Production Consumption Imports Farm price

Poultry Production Consumption Imports

Korea

Beef Production Consumption Imports Retail price Farm price

l

I Pig meat Production Consumption Farm price

eating 8.8 kg of beef (retail weight) per person, as against 7.8 kg per person in NABASE.

The effects on the Japanese pig and poultry industries are relatively small, with little change in the pig meat industry and a relatively small increase in estimated poultry meat output.

In Korea, the reduction of producer prices throughout the simulation period results in large adjustments to the domestic beef industry; in 1995, production is inore than 50 per cent below the baseline level. The lower prices also encourage much higher levels of beef consumption, requiring greater quantities of imports.

In the first year of free trade Korean beef imports rise to around 230 kt, 129 per cent higher than the assumed NABASE quota level of 100 kt. In response to the continued expansion in beef demand, imports continue to rise, to approximately 360 kt in 1995, by which time beef consumption is 77 per cent higher than the base level. Korean beef consumption per person in the NAFREE simulation is to 8.3 kg (retail weight) in 1995, well in excess of the quota-constrained consumption level of 4.7 kg per person in the NABASE simulation.

poultry Korea's pig and poultry industries are Production -5.5 -5.5 -5.4 -5.7 -5.8 also affected. The reduced demand for pig Consumption -5.5 -5.5 -5.4 -5.7 -5.8 meat results in lower market prices and,

by 1995, an output 8 per cent below the base level. Similarly, the demand for

61 per cent. This change in market shares poultry meat declines, and by the end of reflects the relative movements in the the simulation period poultry meat output landed prices of beef imported from is 6 per cent below the NABASE level.

North Asian beef import liberalisafion 69

L NAFRE E simulation results - selected variables

Australian beef price I gA,AR, Australian beef production

EABARE

1989 1991 1993 1995 1989 1991 1993 1995

Australian beef exports Australian beef consumption EABARE

Japanese 'quota beef' imports Korean beef imports


8.3 Simulation results for Oceania livestock markets

29 Unrestricted North Asian beef trade: effects on Oceania livestock markets

The removal of all North Asian beef trade restrictions has a major influence on the beef industries of Australia and New Zealand. Beef prices rise dramatically, the additional price increase coinpared with the base simulation being 26 per cent in the first year of free trade (table 29 and figure L). Price rises of this magnitude greatly increase the incentive for an expansion of the Australian cattle herd. The process of expansion depresses beef production between 1991 and 1994, with a small increase evident in 1995. The expansion of the Australian beef industry occurs at the expense of the sheep flock and grain production.

In 1993, total beef exports are lower than in the base case, with the larger shipments to North Asia more than offset by reduced sales to other markets such as the United States and Canada. Indeed, sales to the latter markets are still below the baseline levels in 1995, even though larger beef supplies and lower domestic consulnption levels result in Australian beef exports increasing to an estimated 770 kt (shipped weight) by that year.

The higher beef prices and expansion l

Australia

Beef Production Consumption Exports Farm price



New Zealand

Beef Production Consumption Exports Farm price



I


1992 1993 1994 1995

% % % %

of the Australian cattle industry provide large benefits for beef producers, while at the same time reducing domestic consumption. Compared with NABASE, the gains to Australian beef producers aggregated over the entire simulation period are $A3896m in net present value terms using a discount rate of 10 per cent. The total cost to beef consuiners is $A1524m, leaving a net gain to the Australian economy of $A2371111 over the five years.

Despite the higher beef prices the expansion in domestic demand for pig and poultry meat is relatively small. The consulnption substitution relationships

Norfh Asian beef import liberalisafion

between beef and sheep meats are stronger than those between beef and the intensively produced pig and poultry meats. As a result, the higher beef prices induce higher domestic consumption of sheep meats and, consequently, higher prices for Australia's lamb and mutton producers over the medium term. As the expansion in demand for pig and poultry meats is small, output levels of both meats are only marginally higher than in the NABASE simulation.

The effects in New Zealand are similar to those in Australia. Higher beef prices encourage some additional expansion of

71

the cattle herd and eventually higher beef supplies. Beef exports increase to an estimated 313 kt by 1995, 11 per cent higher than the base level. The higher beef prices also result in lower domestic beef consumption and greater demand for sheep meats. The output levels of New Zealand's pig and poultry industries are little affected.

8.4 Simulation results for North American livestock markets In the United States and Canada, the larger exports to Japan and Korea initially result in higher prices for grain fed beef and lower domestic consuinption of fed beef (table 30). At the same time the landed price in the United States of imported beef from Australia and New Zealand increases substantially, causing US beef imports to decline. In the short run this decline leads to higher domestic prices for pasture fed beef, higher slaughterings of pasture fed cattle and lower US consumption of processed beef.

Toward the end of the simulation the continued rise in beef exports requires larger supplies of feeder cattle, resulting in even higher prices for fed beef. This induces a herd expansion, reducing supplies of non- fed beef as cow slaughterings are reduced. The higher prices for both fed and non-fed beef products result in a further depression of beef consumption. By 1995 the US price for grain fed cattle is around 6 per cent above the base level, while domestic beef consumption is just over 3 per cent below.

Pig prices are initially increased by up to 1 per cent, and by 1995 pig meat supplies are around 1 per cent above the baseline. Similarly, poultry meat supplies rise in response to the increased domestic demand. US exports of pig and poultry meat are alinost unchanged, as Japanese export demands for both products remain similar to the NABASE results.

30 Unrestricted North Asian beef trade: effects on North American livestock markets


United States

Beef Production Consumption Imports Exports Farm price (grain fed)


Poultry Production Consumption Exports

Canada

Beef Production Consumption Imports Farm price



The effects in Canadian livestock markets approximately mirror those in the United States. Higher beef prices induce some additional herd expansion, which results in slightly smaller beef supplies in the short term and increased supplies toward the end of the simulation, relative to the baseline. Canadian beef consumption is significantly lower than base levels, while the lower level of beef imports reflects the higher landed beef

Discussioir paper 90.1 1

prices for Australian and New Zealand product. Demand for pig and poultry meat expands in response to the higher beef prices, resulting in higher outputs relative to the production levels in NABASE.

8.5 Pacific Basin feedgrains consumption In the NAFREE simulation, the removal of all restrictions on the North Asian beef trade has a substantial impact on the level of fed beef production in Japan, Korea, the United States and, to a lesser extent, Australia. The effects on the pig and poultry sectors of these countries are relatively small in all cases except Korea. These changes in domestic meat output have corresponding effects on the feedgrain requirements of each sector (table 31). In general, the estimated changes in each country's feedgrain requirements are small.

Over the medium term, feedgrain consumption by the Japanese beef sector declines significantly under free trade. Offsetting this decline is the additional feedgrain requirements of the pig and poultry industries due to the projected increase in output in both sectors. Japan's net feedgrain consu~nption is around 0.3 per cent, or 60 kt, lower than the baseline level by 1995. Consequently (assuming no change in domestic grain output for livestock feeds), Japanese imports of feedgrain are by then also marginally lower than in the baseline case.

Feedgrain consumption effects are much larger in Korea due to the larger changes in beef, pig meat and poultry output. Domestic production of all three meats are lower than the base levels, resulting in a reduction in total feedgrain requirements over the entire period of analysis. (A factor that could offset this reduction is an acceleration of the trend toward greater use of compound feeds by Korean livestock industries.) Overall, Korea's feed requirements are around 600 kt, or 9 per


31 Unrestricted North Asian beef trade: effects o n Pacific Basin feedgrain markets


Japan Compound feed consumption

Feedgrain requirements

Imports

Korea Compound feed consumption


Imports

Australia Compound feed consumption

Feedgrain requirements Feedlot cattle grain use r

United States Concentrate feed consumption


a For derivation, see appendix D.

cent, lower than the baseline projections by 1995. Imports of feedgrains are similarly affected.

For Australia and the United States the changes in feedgrain requirements are small. In both countries the major effect is the lower feed requirements of the fed beef sector; the pig and poultry production changes are minimal. (Note however that under free trade conditions the Australian grain fed beef industry could expand further than these projections indicate, due to a stronger demand for grain fed beef by North Asian consumers.)

8.6 Conclusions Complete liberalisation of the North Asian beef trade would be likely to have a substantial impact on the Australian beef industry. Australian beef prices were 26 per cent higher in the first year of the free trade simulation than in the baseline case. Over the full simulation period, higher prices provide large benefits for Australian beef producers, and the expansion of the Australian cattle herd provides a basis for further benefits in subsequent years.

Substantial adjustments in both the Japanese and Korean beef industries would occur in response to the complete removal of assistance arrangements. In the simulation, Japanese beef consumption was 13 per cent higher and beef production

and saleyard prices around 7 per cent and 27 per cent lower, respectively, than the baseline levels by 1995. In Korea, 1995 beef production and prices were around 54 per cent and 76 per cent lower than the base levels, respectively, while beef consumption was about 77 per cent higher.

The objectives established for the Uruguay Round of negotiation were formulated in the belief that global welfare was reduced by barriers to trade in agricultural commodities. These estimates of the gains to Australian beef producers and North Asian beef consulners froin the removal of all barriers to beef trade in North Asia give an indication of the scale of welfare gains that are in principle available.


9. Concluding comments

The objective in this study was to analyse the implications for the Australian beef industry of reducing import restrictions in the North Asian beef trade. The Japanese and Korean beef markets have been significantly sheltered from developments in the Pacific Basin beef trade by import quotas which have provided substantial levels of assistance to beef producers in those countries. Government controlled importing authorities have imposed large costs on beef consumers in both countries and insulated domestic prices from the developments affecting beef prices in other Pacific Rim countries. These import arrangements have also resulted in lower prices and lower levels of beef output than would otherwise have prevailed in the major exporting countries of Australia, New Zealand and the United States.

9.1 Current reform programs Reform initiatives are currently under way in both Japan and South Korea. The latest

I agreement between Japan, Australia, New Zealand and the United States provides for the introduction of tariffs in JFY 1991 to replace existing quotas. In Korea, an understanding was reached to increase minimum access levels for beef imports in the years 1990-92. The deadline for achieving GATT-consistent reforms to Korea's beef import system has been set as 1997.

Tariffication of the Japanese beef quotas from JFY 1991 will expose Japanese producers and consumers to the supply, demand and price factors influencing beef trade throughout the Pacific Basin. For example, any triggering of US import controls or closure of the Korean beef


market will affect the Japanese market through their influence on beef prices in exporting countries. However, Japanese producers will still receive significant assistance, from the final tariff rate and the domestic program for supporting feeder calf prices. In addition, Japanese price support arrangements for milk producers will continue to be a major determinant of dairy beef production levels over the medium term.

In Korea, though increased access for beef imports will reduce the assistance afforded to beef producers, the domestic market will remain insulated from price movements in the Pacific Basin beef trade. With a 1997 deadline for reform of Korea's beef import policy, it seeins likely that protection levels will remain at relatively high levels until the mid-1990s at least.

On the basis of the simulation analysis presented in this report, the replacement of Japanese import quotas with ad valorern tariffs will result in lower retail beef prices and higher beef demand in Japan over the medium term. As a result beef imports are expected to increase substantially, with higher prices to Australian and US exporters encouraging increased beef output. However, the prospects for increased beef sales to Japan will also depend on other developments such as exchange rate movements, the demand for beef in other markets, competition from pig and poultry meats and movements in feedgrain prices.

The effects on the Australian beef industry of the policy reforms agreed to date were estimated to be substantial. The removal of Japanese import quotas will make the total demand for Australian beef more responsive to price movements. Higher beef prices due to increased demand by North Asian consumers could further encourage the

herd expansion already under way. While beef shipments to North Asia will expand, the higher prices will result in lower domestic consumption in Australia and reduced shipments to other markets such as the United States.

Lower returns for wool production and declining wheat prices are in any case increasing the attractiveness of beef production. In the absence of improvement in the net returns for wool and wheat production there is some risk of a sufficiently large expansion in the beef industry to reduce returns in the late 1990s. The increasing supplies of culled cow beef may increase the risk of triggering US import controls later in the decade. In addition, a breakdown of the 'Andriessen assurances' could occur, resulting in greater coinpetition for beef sales to Japan from Ireland and Denmark, which are foot- and-mouth-free countries.

9.2 Tariffication of Korean beef import controls As regards the required further reform of Korea's beef import policies, one option is the adoption of a tariffication process similar to that instigated in Japan. Such an approach would be consistent with the guidelines set down for the Uruguay Round of GATT negotiations on reforms to agricultural trade policies.

Tariffication of Korea's import quotas was estimated to bring substantial benefits to the Australian beef industry. The net '

welfare gain in Australia arising from one variant of this reform in the three years 1993-95 was estimated to be over $468m in net present value terms. The size of this benefit would, however, depend on the negotiated tariff levels and the preferences of Korea's beef consumers. Though Australia presently dominates the Korean beef trade, removal of the Livestock Products Marketing Organisation's controls on the

76

form and quality of beef imports may encourage higher sales of US grain fed primal cuts. On the other hand, larger sales of Australian pasture fed beef to Korea would reduce the prospect of US meat import controls being triggered later in the decade.

9.3 Unrestricted North Asia beef trade Of interest in the context of the Uruguay Round of GATT negotiations, a simulation of the complete removal of trade restrictions in North Asia has provided an indication of the gains to Australian beef producers that would follow the removal of all barriers to trade in North Asia.

The removal of all restrictions on beef trade in the North Asian region would result in substantial benefits for the beef industries of Australia, New Zealand and the United States. For Australia, the net welfare gain over the five years 1991-95 in present value terms, if all restraints were removed in 1991, was estimated at over $2371m. At the same time, beef consumers in North Asia would enjoy large gains through lower prices and an unrestricted choice on the types of beef they could consume. If they showed a strong preference for grain fed beef, this would favour higher sales of US product but might also encourage a much greater expansion of Australia's grain fed beef industry. The unrestricted trade would provide more opportunities for Australian exporters to find markets for the full range of cuts from grain fed cattle.

9.4 Feedgrain market effects Consumption and trade in pig meat, poultry and feedgrains have important substitution and 'second round' linkages l to the Pacific Rim beef market. The 1 estimated effects of the alternative policies on the pig and poultry markets were relatively minor in comparison with the


effects on beef. In both the 'Korean tariff Basin beef market generally, and Australia and 'free trade' simulations, the estimated in particular. changes in feedgrain demand within the In applying the EMABA model to a Pacific Rim countries amounted to less simulation analysis of the potential effects than 1 per cent of total feedgrain of liberalising the North Asian beef trade, consumption. The second round effects - an important area for further research those of the changes in feedgrain demand became apparent. A critical question that on beef production and prices - were remains to be answered, in order to also estimated to be small. anticipate the likely market outcomes in a

post-quota NO& Asian trading 9.5 The EMABA model: Lnvirokment, is the degree to whicG

further development imported beef and domestically produced beef are substitute products in the North

The simulation results represented above Asian countries. ~ h e s e beef substitution must be interpreted in the context of the relationships will be an important limitations of econometric modelling in determinant of future levels of Japanese the analysis of policy alternatives. beef imports and the respective trade

EMABA is a mathematical shares gained by Australia and the United representation of most major Pacific States. Basin livestock markets, and has been estimated over an historical time frame. Results may be inexact because the simulation results may fall outside the range of the original estimation data. Model outcomes for the baseline simulation are influenced by the projections of exogenous variables employed. However, as the exogenous assumptions are the same in the baseline and alternative simulation results, the percentage differences between each alternative scenario and the baseline will be unaffected. Unexpected events - whether natural

l or man made - such as an oil crisis, drought or flood, will also affect the accuracy of forecast exogenous values and subsequent model solutions in the baseline experiments. For the purposes of the present analysis,

however, the EMABA model has proved to be an extremely useful and powerful tool. The range and detail of the simulation results are sufficient to convey the economic implications of both current and future trade policy reforms in North Asia. The results have also provided a useful indication of the cost of present import arrangements to participants in the Pacific

I North Asian beef import liberalisation 77

Appcrtdix A. Japanese effects of beef trade liberalisation

The discussion in chapters 2 and 3 fed beef to Japan, and the domestic market highlights the non-homogeneous nature for wagyu beef is ignored. The imported of beef produced in Pacific Basin markets. and domestic products are assumed to be In importing countries, each type of partial substitutes. The two markets are domestically produced and imported beef therefore related, but not additive. available for consumption may be The pre-(JFY) 1991 market situation is represented by an individual demand represented, on the supply side, by a quota schedule. For example, the Japanese beef supply schedule for ilnports (Qf) and a market could be disaggregated into four domestic supply schedule (SS). On the product segments: wagyu beef, dairy heef, demand side, the schedule representing

I imported grain fed beef and imported Japanese demand for imported pasture I grass fed beef. Moreover, Japanese fed beef is DID,. With imports restricted to I demand for Australian pasture fed beef Qf by quota controls, the equilibrium price

might be identified as a separate schedule, and quantity outcomes are shown by P, assuming that Japanese consuiners and Qf for imports, and P, and Q, for differentiate Australian product from domestic beef. Because of price-quality other Japanese imports of this type of beef trade-offs, P, is norlnally greater than PI (for example, from New Zealand). and not as drawn here.

Such disaggregation is not necessary to Note that the Japanese landed price of show the broad effects of trade the imported product (5 as distinct from liberalisation, however. In figure M, the the consumer price PI) is determined by market for domestically produced dairy the price of beef in the exporting country beef is simply distinguished from an (adjusted for exchange rates, tariffs if any, import market. For the purposes of transport costs and unloading charges). discussion it is assumed that there is only For example, Australia is primarily a one country supplying imported pasture producer of grass fed beef which is

I M Effects of trade liberalisation on the Japanese beef market l

Dd Domestic dairy beef


consumed domestically as well as being sold in Japan and a number of other overseas markets. Each of these demands for Australian beef may be represented by a separate schedule showing the consumer requirements in each country. (See figure N, appendix C, for a simplified representation.) Thus, the Japanese import demand for Australian beef in figure M is just one of several competing demands for Australian product which collectively interact with Australian supplies to determine the Australian market price of beef. Because of the difference between P, and Pp a 'quota profit' is obtained in Japan, approximately represented by the area (P, -P.)Q,.

In JFY 1991 the Japanese import quota is replaced by an ad valorem tariff of 70 per cent. The tariff drives a wedge between the price paid by Japanese consumers for imported beef (P,') and the import price paid for it (P,'), after adjusting for marketing margins. The rise in the import price to c' is due to an increase in Japan's effective demand for the imported product, increasing aggregate demand, and hence beef prices, in the exporting country (see appendix C).

The new import price for pasture fed beef (Pn' ) plus the 70 per cent tariff, gives

I a consumer price for imported beef of P,'. Thus, the figure is drawn to show a fall in the retail price of imported beef in moving from a quota situation to a tariff situation, and therefore a rise in imported beef consumption to Q,'. If, on the other hand, the application of the 70 per cent tariff causes retail prices to rise relative to the qaota trading environment (as will occur if Pn' goes above a certain critical level),

imported beef consumption will decline. In either case, the government obtains a revenue which, for a 70 per cent tariff, is 0.70 Pn'Qi'.

An increase in consumption of imported pasture fed beef (from Qi to Qi' ) can be expected to reduce demand for domestic dairy beef - though not necessarily to the same extent, since they are not complete substitutes. Thus, demand for domestic beef shifts inward to Dd'Ddl. As a result, both the output of, and the price received by, domestic dairy beef producers are reduced, to Q,' and P,' respectively.

As tariff levels are reduced during the JFY 1991-93 period the depth of the price wedge declines and, all else unchanged, the retail price of imported beef will decline further. In the event that tariffs were abolished, retail and landed prices would equalise (neglecting transaction costs, etc.) at q". As a result import consumption would rise to Qi", consumption of domestic dairy beef would fall to Q," and the price of the domestic product would fall to P,".

For the purposes of discussion the substitution effect of this reduction in the domestic dairy beef price on the demand for imported beef has been ignored. In fact, the position of DiDi - and hence the price of imported beef - will adjust in response to movements in the price of domestic product. The extent of this adjustment will depend on the magnitude of the cross-price effects. Similarly, there will be cross-price effects from the markets for imported grain fed beef and domestic wagyu beef which have not been included in figure M.

endix B Comparison of landed wholesale beef prices in Japan

Movements in Japanese imported beef prices following the shift from quota controls to tariffs will have a major impact on the demand for imported beef in the short run. In section 5.1, estimates of the landed price of selected US grain fed and Australian pasture fed chilled imported beef cuts are compared with the Japanese

I wholesale price of similar chilled imported beef cuts. The prices are shown in tables

1 32 and 33. Due to data constraints it was

l not possible to include all imported beef cuts in this comparative analysis. The emphasis was placed on comparing equivalent cuts of similar product at the same points in the marketing chain.

The landed price of chilled US grain fed beef cuts in Japan was derived as follows:

Monthly average prices of weekly wholesale auction quotations in Usclkg were calculated for a selection of US vacuum packed, chilled fabricated boxed grain fed beef cuts from the West Coast (US Department of Agriculture 1990~). An estimated freight charge of US59.5c/kg was added to account for

l transport costs from the West Coast of the United States to Japan (Mark

l Gustafson, US Meat Export Federation, personal communication, March 1990). The USc/kg price was converted to Y/kg using the following monthly exchange rate quotations: US$1 equal to Y144.9 January, Y145.2 February, Y152.7 March, Y158.2 April, Y153.8 May,

Y153.6 June, Y149.1 July, Y147.1 August, Y138.6 September. An assumed handling and unloading charge of 10 per cent was applied to the #/kg imported beef price.

The landed prices of chilled Australian pasture fed beef cuts in Japan was derived as follows:

Average monthly prices from the Brisbane wholesale auction market for a selection of chilled pasture fed beef cuts were collected (Bill Tolisson, AMLC, 1990, personal communication, October 1990). Freight charges of A44.8c/kg for January, A45.6clkg for February and March, A45.4cIkg for April, May and June, and A44.8cIkg for July, August and September were added to account for transport costs from Australia to Japan (AMLC 1990b). The Aclkg price was converted to Y / kg using the following monthly exchange rate quotations: $A1 equivalent to Y113.2 January, Y 1 l O . l February, Y115.1 March, Y120.4 April, Y116.6 May, Y119.0 June, Y117.7 July, Y118.6 August, and Y114.0 September. An assumed handling and unloading charge of 10 per cent was applied to the Y/kg imported beef price.

The Japanese wholesale prices of selected vacuum packed imported beef cuts were derived as monthly averages of weekly wholesale auction price quotations (Chikusan Nippo 1990).


32 Comparison of 1990 wholesale and landed prices in Japan: grain fed beef

Unit January February March April May June July August September

Clod (1) California a USc/kg 326 342 330 325 336 327 316 319 327 (2) Landed Tokyo b %/kg 614 642 655 670 669 653 616 612 589 (3) Japanese wholesale

price C %/kg 1 365 1 424 1 350 1 175 1 108 900 935 893 1 150

Price differential d % 122 122 106 76 66 38 51 46 95

Chuck (1) California USc/kg 367 353 348 347 346 326 326 343 353 (2) Landed Tokyo Y / kg 617 659 684 707 686 651 633 651 629 (3) Japanese wholesale

price %/kg 1 983 1 866 1 856 1 631 1 350 1 275 1 255 1 350 1 525

Price differential % 221 183 171 131 97 96 98 107 143

Thick flank (1) California USclkg 402 389 381 390 409 383 374 375 398 (2) Landed Tokyo Y /kg 735 716 741 782 792 747 710 703 697 (3) Japanese wholesale

price Y/kg l 550 1 519 1 354 1231 1 148 1 050 1 125 1250 1 338


Topside (1) California USc/kg 398 389 396 408 413 412 391 400 395 (2) Landed Tokyo #/kg 728 716 766 814 799 796 739 743 693 (3) Japanese wholesale

price %/kg 1 655 1 649 1 480 1 244 1 363 1 200 1 205 1 342 1 438


I a Monthly average prices for vacuum packed, fabricated boxed beef cuts in California. b Prices (excluding tariffs) adjusted for exchange rates, transport costs and assumed unloading charges of 10 per cent. c Chilcusan Nippo wholesale prices for chilled, vacuum packed beef cuts. d Ratio (3)-(2):(2). Sources: US Department of Agriculture (1990c), Chikusan Nippo (1990).

3 3 Comparison of 1990 wholesale and landed prices in Japan: pasture fed beef

Unit January February March April May June July August September

Chuck (1) Brisbane a Ac/kg 373 349 360 357 361 392 417 360 369 (2) Landed Tokyo b Y/kg 520 478 513 533 521 573 598 528 519 (3) Japanese wholesale

price C Y/kg 1 643 1596 1 293 1285 1230 1 133 1 093 1 188 1 425

Price differential d % 216 234 152 141 136 98 82 125 175

Topside (1) Brisbane Ac/kg 375 378 389 378 388 388 360 390 400 (2) Landed Tokyo %/kg 523 513 550 561 556 568 524 567 558 (3) Japanese wholesale

price %/kg 1 567 1 526 1 329 1 164 1 225 1 100 1 080 1 238 1 350


Cube roll (1) Brisbane Ac/kg 719 648 556 634 629 633 615 618 698 (2) Landed Tokyo Y / kg 951 840 762 900 865 888 854 865 931 (3) Japanese wholesale

price Y/kg 2 375 2 244 1 981 2 225 2 600 2 358 2 253 2 205 2 225

Price differential % l50 167 160 147 201 165 163 155 139

a Average Brisbane wholesale auction prices for chilled pasture fed beef. b Prices (excluding tariffs) adjusted for exchange rates, transport costs and handling charges of 10 per cent. C Chikuan Nippo wholesale prices for chilled, vacuum packed beef cuts. d Ratio (3)-(2):(2). Sources: Chikusan Nippo (1990); Bill Tolisson, AMLC, personal communication, September 1990.


Appendix C: Effects on exporters of liberalising North Asian beef trade The effect on the Australian beef industry of import policy reforms in North Asian beef markets may be illustrated using figure N. This figure contains a simplified, static representation of the price determination process in the Australian beef industry. To simplify the discussion, Australia is assumed to be a supplier of grass fed product only, and the small quantities of Australian grain fed beef exports are ignored. With the same product supplied to all markets the individual demands for Australian beef may be aggregated.

In figure N, schedule D n represents the Japanese demand for Australian beef, at the saleyard level, and Q, represents the trade constraint imposed by Japanese import quotas. Schedule DODO represents an aggregation of Australian domestic demand and export demands by all countries other than Japan. The kink in the schedule is the effect of North American meat import laws. The position of the kink depends on annual adjustments in US and Canadian maximum access levels.

Prior to the removal of Japanese quotas the aggregate demand schedule for Australian beef (DFD ) is the summation of DODO and DIAQj. f h e intersection of DFD with the Australian beef supply sche2ule (SS) yields a market clearing saleyard price q. At this price level total beef production is Q, and since exports to Japan are restricted to Q,, sales on the domestic and other overseas markets are Q. . While the LIPC purchase price of Australian beef is P. plus trading costs, the price paid by Japanese end users is P, due to the effects of the import quota and ad valorem tariff. Excluding trading charges, quota rents and tariff revenue obtained in Japan on imports from Australia are approximated by the area P,ABPI.

The abolition of import quotas allows the Japanese demand sclledule DjDj to become effective, causing the aggregate demand for Australian beef to become more price-elastic. With the imposition of Japanese tariffs, the Japanese import demand schedule, as viewed by the exporter, becomes DeD,: that is, the

P-

I N Effects of Japanese beef trade reforms on a beef exporting country l

Japanese demand for Other beef demand Aggre te demand and sup ly in imported beef a g e f exporting corn ry

l l

Pj'

P"

Qj Q) Q'j Qb Qo Qo QQQ' Quantity


demand schedule qq minus the tariff. In the case shown, the tariff is 50 per cent. The aggregate demand for Australian beef is then D,D, and the price paid to Australian exporters becomes q'. The price paid by Japanese end users for Australian beef becomes q'. In the case shown, the quantity exported to Japan rises to Q,'. Japanese tariff revenue is approximated by the area P,'CEPaf. Australian beef production rises to Q' while the combined sales in the domestic and other overseas markets decline to Qo'.

(Note that this result depends on the specific levels of the quota and of the tariff that replaces it, and on the relations between the various demand and supply schedules. In principle, the change from quotas to tariffs could result in a lowering of aggregate and Japanese sales and of the prices obtained, and an increase in sales to other markets. It is for this reason that the kind of numerical modelling described in this paper is needed, and that the price history set out in appendix B is of interest.)

As Japan lowers the tariff rate, the wedge between prices received by Australian producers (P,') and the price paid by Japanese endusers (P,') narrows. Under free trade conditions the aggregate demand for Australian beef would become DFD and the two prices would equalise

d at P . Exports to Japan would rise to Q ", total production would rise to Q" and sdes in other markets would decline to Qon.

In the past, a change in the quota level was essentially the only Japanese-related development that affected total Australian beef demand. Over coming years, developments in the Japanese market that cause shifts in the schedule DIDj will now become an important feature of the Australian price determination process. For example, higher prices for competing meats or an increase in real per-person disposable incomes in Japan would directly affect Australian beef prices through an outward shift of the Japanese demand schedule, DID,, and in the

84

corresponding aggregate demand schedule, DID,.

Changes in the $A/# exchange rate will also directly affect Japanese consumer demand for Australian beef. The effect of a depreciation (appreciation) of the Australian dollar against the yen is to raise (lower) D g and hence move DIDl to the right (leit), resulting in higher (lower) beef demand and prices. In future, Australian beef demand will become more price-responsive, and developments in the Japanese market will need to be considered in the same light as US market developments when assessing future trends in Australian beef prices.

The effects of Korean policy developments on Australian beef prices will occur through changes in the position of the other demand schedule (DODO) in figure N. A gradual expansion of the Korean import quota, with a constant Australian market share, will shift DODO and DID, to the right. Australian prices will rise and total beef production expand, while domestic consumption and sales to markets other than Korea will decline.

The final position of D,D, is difficult to assess from a discussion of the effects of North Asian policy changes in isolation. In general, the aggregate demand schedule for beef will shift outwards and cause Australian beef prices to rise. The higher beef prices will increase or decrease the demands for meats such as lamb, pork and poultry, depending on whether they are competitive with or complementary to beef. As competing meat prices rise (fall) the domestic outputs of these other meats will correspondingly expand (contract).

Figure N may also be used to illustrate the effects of North Asian policy changes on the New Zealand beef industry and - though only up to a point - those on the US beef industry. In the latter case, a complicating factor is that the United States exports grain fed beef to Japan as well as importing grass fed beef from Australia and New Zealand to supplement its domestic supplies of processing beef.


The effect of the tariffication of Japanese country - for example, Australia and New quotas on the US grain fed beef market Zealand.) can, however, be illustrated in figure N. The price and output of domestic The aggregate demand schedule for (US) product (PU and QU) are determined by the grain fed beef - at present, DFD - intersection of DUDU with the doinestic rotates to the more elastic schedule b , ~ , supply schedule SUSu. The landed price of following the removal of Japanese quota imported product (Pa) is determined by restrictions. Prices received rise (Pa to Pia') the market price in the exporting country and output expands (Q to Q') while US (plus the appropriate adjustments for and overseas sales to countries other than exchange rates, transport costs and Japan decline (Qo to Qo'). Similarly, an handling charges). The quantity of beef expansion of the Korean import quota, imported (Qa) is determined by Pa and the assuming a constant US market share, import deinand schedule. As drawn, Qa is results in an outward shift in DODO and less than the maximum access level D,D, resulting in higher prices and specified by the US meat import law, 0". increased output. Tariffication of Japanese import quotas

The effects of North Asian policy has two effects. The increased export deinand changes on the US processing beef market and higher prices for US grain fed beef are illustrated in figure 0. The US demand causes an expansion in demands for both for domestically produced pasture fed beef doinestic and imported pasture fed beef is represented by DUDU. For the purposes products, to the extent that they are substitutes of discussion it is assumed that there is for grain fed beef. At the same time, the only one country supplying pasture fed increased Japanese demand for pasture beef, and that the ilnported product is fed beef raises its price in countries differentiated from the domestic product. exporting beef to the United States (such as Thus the ilnport deinand schedule DaDa is Australia). This raises the landed price of influenced by the amount of the doinestic imported pasture fed beef in the United product consulned and its price; and there States from 5 to 4: which further expands is also a converse influence. (In a more the demand for domestically produced pasture realistic representation, separate US import fed beef. Thus, the domestic demand schedule demand schedules could be identified for shifts from DUDU to Q'q' and the irnport the products sourced from each supplying deinand schedule from DaDa to D,'Dar .

0 Effects of Japanese beef trade reforms on the US processing beef market

demand for imported pasture fed-beef


The net result is a higher price for US processing beef (PU') and increased domestic output (Q,'). For imported beef the net effect on the quantity purchased will depend on the magnitudes of the rise in the landed beef price and of the increase in demand. For example, a small price rise (to P117 may be offset by the expansion in US demand, and imports may rise, to

Qa'. Alternatively, a large rise in the Japanese consumption of grass fed beef may cause landed prices to rise to 5'' in which case imports will decline to Qa". An expansion of the Korean import quota has a similar set of impacts on the US market for processing beef, as the majority of the quota is currently filled by Australian pasture fed beef.


A~aenc i i x 12 Estimation of feedgrain P 1

effects of North Asian trade refoUms Estimates of the feedgrain effects of North Asian beef trade reforms are derived by applying livestock-feedgrain conversion factors to the estimated meat production levels provided by EMABA simulation experiments, to obtain estimates of the change in feedgrain requirements. The key relationships are the quantities of feed required to produce units of grain fed beef, pork and poultry meat. In this simplified approach, US feedgrain prices - and hence those in other countries - are initially assumed to be unaffected by changes in feedgrain demands. This is the assumption concerning feedgrain prices that is adopted in all EMABA simulations of livestock outcomes. It implies that the estimated changes in feedgrain requirements result in immediate changes in annual feedgrain stocks and /o r production, of the required magnitude.

D.l Annual feed consumption In most countries the use of feedgrains by intensive livestock producers is predominantly in prepared compound feed rations. These prepared rations are

I based on predetermined formulas for the energy and protein requirements of each class of livestock. Provided that these energy and protein requirements are met, alternative feedgrains may be substituted in the feed mixtures as their prices change.

Feedgrains are also consumed in feed rations mixed on-farm. In Japan, the United States and Australia the relative use of this type of ration has declined and in recent years has stabilised at a low level. The exception is the Korean beef industry, which historically has largely been a consumer of on-farm mixed feeds


made up of grain and forage materials. Recently, however, Korea's beef producers have been making more use of compound feeds.

The approach adopted in this study for estimating Pacific Basin feedgrain usage was to estimate the quantities of both compound feeds and on-farm feeds consumed by three aggregate livestock categories - cattle (beef and dairy), pigs, and poultry (eggs, chicken and turkey) - in Japan, Korea, the United States and Australia. Using simple technical relationships, estimates of total concentrate feed use were converted into the quantities of feedgrains consumed by each livestock sector. There were two exceptions. For the United States, estimates of total concentrate feed usage were used, as disaggregated data on compound feeds and on-farm mixed feeds were unavailable. For the Australian grain fed beef industry, because of lack of data, concentrate feed consumption was estimated from the average feeding period and the daily feed requirements.

D.2 Compound feed consumption Compound feed consumption by each livestock sector was determined from livestock production and compound feed conversion ratios:

Ci = L,.F, where Ci is compound feed consumption for the ith livestock; product; L, is production of the ith livestock product; and F; is the amount of compound feed requi;ed to produce a unit-of the ith livestock product.

Over time, livestock-feedgrain conversion ratios (F,) are influenced by

trends in the use of compound feeds relative to mixed on-farm feeds. They are also influenced by technological advances that lower the amount of feed required to produce a unit of livestock product. In Japan, the United States and Australia, pork and poultry production are almost exclusively based on compound feed rations, whilst grain fed beef production is based on a mixture of roughage and compound feed rations. Since the early 1980s, estimated feed conversion ratios for the livestock sectors of Japan and Australia have changed little (figure P). In the United States, poultry feed conversion

I rates have declined slightly in recent years. I In the US cattle industry, feed conversion I rates declined sharply in the early 1980s

but have since substantially stabilised. In Korea, feed conversion ratios in the

pig and cattle industries have risen, on average, over the 1980s while those in the poultry sector have declined. Over recent years, Korea's livestock industries have developed rapidly, with greater numbers of livestock being fed in specialised intensive feedlot operations. As a result compound feed use has increased rapidly, with a consequent reduction in the amount of forage crops and farm wastes being used as animal feed.

It was assumed that livestock-feedgrain conversion ratios (F,) in the former three

I countries will - with a single exception - equal the respective average conversion

l

rates for the previous five years (table 34). For the United States poultry industry, feed conversion rates were assumed to decrease at 1 per cent a year in line with the trend of the past five years. Use of roughage per unit of cattle products was assumed to remain constant in all three countries, rather than increasing, because of the relative lower price and better feed efficiency of compound feeds.

In Korea, trends in livestock-feedgrain conversion ratios over the most recent recorded five years were assumed to continue. Restructuring of Korea's

88

p Feed-livestock conversion ratios

Poultry feed

--.-- - c I - c ~ ~ ~ - - c Australia 3.0 -- -.

ratio d d d b d d d A d b

1980 1982 1984 1986 1988

Pig feed

Korea 7

2.0 ' Australia -

ratio 1680 19's~ ' 1684 ' 1686 ' 19'88

Cattle feed

United States E A B A R E

4.0 \-

Korea

0 --- ratio ~

19'80 ' 1682 1684 ' 19'86 . 1688 1


34 Estimated livestock-feedgrain conversion for pi S, poultry and cattle in selecte Pacific Basin countries I

d Beef cattle Dairy cattle Pigs Poultry

Actual b Japan 7.58 0.34 4.82 3.17 Korea 8.00 0.99 6.83 4.98 United States 4.33 0.52 8.10 3.86 Australia - - 2.19 3.27

Projection C

Japan 8.49 0.37 4.80 2.94 Korea 7.52 1.01 5.63 4.68 United States 4.21 0.51 7.16 5.38 Australia - - 2.25 3.38

a Kilotonnes of compound feed required to produce 1 kt of meat, milk and/or eggs. b Based on 1988 data except for the United States (1986). c Averages for the most recent five years for which data were available. Projections assumed to remain constant for the period 1990-95, except in the cases of Korea (all livestock industries) and the US poultry industry, where projections follow the trends of the past five years. Sources: MAFF (1989a,b, 1990a,b); NLCF (1989, 1990); US

livestock industries toward the more efficient intensive operations is expected to continue over the medium term. In addition, limits on supplies of roughage and forage crops are likely to limit any expansion in their use (Dyck and Sillars 1986).

D.3 Feedgrain consumption Feedgrain consumption by each livestock sector was derived using the following relationship:

FG, = (C,.G,) + Oi where FGi is quantity of feedgrains used for livestock product i; C, is compound feed consumption for livestock product i; Gi is the conversion factor for feedgrain usage in compound feeds used for livestock product i; and 0, is quantity of feed grains used in on-farm mixed feeds.

Over the past ten years the proportion of feedgrain used per tonne of compound


feed (G,) has changed little in Japan, Australia and the United States. For these countries the conversion factors Gi were assumed to equal their average over the past decade. In Korea, there was a marked rise in the proportion of grain used in compound feeds during the mid-1980s, when reductions in tariffs and government price supports lowered the price of feedgrains relative to the cost of other feed ingredients (Dyck and Sillars 1986) and government-imposed ceilings on grain use were removed. Consequently, the Gi for Korea's compound feed industry were assumed to be those of the more recent period 1985-89.

For Japan, Korea and Australia the use of feedgrains in on-farm mixed feeds (Oi) in intensive livestock production was assumed to remain constant at the estimated 1989 levels for each class of livestock. In Japan the mixing of livestock feeds on-farm is expected to remain limited as government price support programs make this practice relatively costly. In Korea, as in Japan, the use of on-farm mixed feeds is likely to stabilise as the restructuring of cattle and pig industries continues toward larger feedlot operations based on the cheaper compound feeds.

Feedgrain consumption by the Australian beef industry was estimated from a simplified relationship based on the number of cattle on feed, the period of feeding, and the daily feedgrain requirements:

FG, = CF.D.R, where FG, is feedgrain consumption by beef cattle; CF is the number of cattle on feed; D is the median number of days on feed; and R, is the minimum daily feed grain requirements for beef cattle.

Feedgrain consumption (FG,) was calculated separately for fed beef sold on the Australian domestic market and the longer-fed beef exported to Japan and Korea. Currently, around half of Australia's fed beef production is destined for the export market. The AMLC (198927) has suggested

this proportion could rise to 70 per cent over the medium term as the feedlot sector expands in response to the greater opportunities for grain fed beef sales in North Asia.

Assumptions for the number of days on feed (D) and the daily feedgrain requirements (R,) were obtained from AMLC (1989b). These figures were adjusted on the assumption that 70 per cent of Australian grain fed beef is the longer fed product for North Asia. The number of cattle on feed (CF) was derived from recent projections by Blyth and Mues (1990) which indicate a rise in the proportion of

l the totalcattle numbers fattened in feedlots.

I D.4 'Second round' 1 feedgrain effects

'Second round feedgrain effects' refers to the effect of a change in feedgrain demand on the price of feedgrains, and the subsequent effects of this price change on feedgrain use and ultimately on beef, pig or poultry meat production. The initial change in feedgrain demand is assumed to result from an increase in the demand for beef, pig or poultry meat.

World feedgrain prices are determined by the interaction of total demands and supplies for those countries involved in feedgrain trade. In principle, a weighted average elasticity of demand for feedgrains determines world feedgrain prices. However, in view of the dominance of US

I demand and supply, a weighted average elasticity of feedgrain demand was estimated from the US domestic and export demand elasticities. For this purpose, US elasticity estimates of -0.26 for domestic feedgrain demand and -0.65 for export feedgrain demand (Westhoff, Baur, Stephens and Meyers 1989) were used.

For both the 'free trade' and 'Korean tariff' simulations the initial changes in feedgrain demand (for beef, pigs and poultry in the United States, Australia,

Japan and Korea) amount to less than 0.01 per cent of total world feedgrain consumption. Even using a total price flexibility for demand of 2.0 (approximately the inverse of the weighted average US price elasticity of feedgrain demand) the effects on world feedgrain prices from the alternative policy simulations were estimated to be less than 1 per cent.

To allow for a possible underestimation of this price effect, the free trade simulation was repeated with world grain prices increased by 10 per cent in all years. The percentage impacts on the substitution relationships are outlined, for Australian broadacre agriculture, in table 35. From these results it can be seen that the estimated 'second round' effects on the Australian beef industry are negligible, even i f it is assumed that there is a large change in world feedgrain prices.

35 Estimated effects of a permanent 10 per cent rise in world grain prices on Australian broadacre agriculture

Percentage change from baseline simulation results

1991 1992 1993 1994 1995

% % % % %

Wheat area - 0.3 1.1 2.1 2.7

Sheep flock - -0.3 -0.1 -1.8 -2.4

W001 supply - -0.1 -1.0 -1.8 -2.4

Cattle numbers - -0.02 -0.04 -0.07 -0.09

Beef production 0.01 0.03 0.07 0.06 0.00


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