Commodity Programs, Distorted Markets and Economic Consequences of Invasive Species Policy

1. Commodity Programs, Distorted Markets and Economic Consequences of Invasive Species Policy Daniel Sumner, Julian Alston, Hyunok Lee and Albert Acquaye University of California, Davis August 20, 2004

2. Broad Objectives of the Project • Improve evaluation of economic consequences of invasive species and related policies by considering more fully the interactions with farm commodity policies. • Conduct three case studies to illustrate conceptually and assess empirically the implications of commodity policies for welfare effects of invasive species and related policies.

3. Background • Elaborate and complex government programs and policies pervade agriculture and apply to commodities where invasive species issues are also important. • We consider such policies as commodity payment programs, price supports, crop insurance, marketing orders and trade barriers. • The welfare incidence of invasive species events and policies to deal with them must therefore be analyzed in the context of other policies.

4. Approaches • Our models will include the commodity policies as part of the framework of the industry and ask how an invasive species event or policy affects the equilibrium. Welfare consequences will be drawn from these models. • Policy for invasive species and policy for agricultural R&D have much in common. • The R&D literature provides specific insights that can guide the evaluation of invasive species policy in the presence of various commodity policies.

5. Case Studies • Three case studies: • Karnal bunt in wheat. • Foot and Mouth Disease (FMD) in dairy. • Citrus canker in citrus.

6. Justification for Case Studies • We picked case studies such that we have the opportunity to study the interactions between invasive species policies and the major agricultural commodity policies used in the United States. • Have been picked for empirical results on the economic impacts of invasive species policy in distorted markets. • Citrus canker and karnal bunt are currently present in the United States, and FMD is a potential serious threat.

7. Karnal Bunt (1) • Healthy wheat seed. • "Tip" infection. • More advanced tip infection. • Advanced infection. • 5. "Canoe" symptom hollowing out interior of seed

8. Karnal Bunt (2) • Effects of an outbreak include: • Varying degrees of bunted kernels. • Fishy-smelling wheat grain and flour. • No harm to human life but unpalatable in infestation levels of 3 percent or more. • Minor change to production quantities. • Reduction in the quality of flour. • Trade embargo placed on wheat from infestation area • Increased cost of production. Wheat grain and wheat need to be treated before they can be processed even for livestock feed within quarantine area.

9. Karnal Bunt (3) • Commodity policies for wheat • Direct payments. • Counter-cyclical income support payments. • Marketing loan programs. • Crop yield and revenue insurance. • Export credit guarantees. • Irrigation subsidy in the southwest desert.

10. Foot and Mouth Disease (1) Ruptured blisters on the nose and mouth of a cow, with excessive salivation. A ruptured vesicle with blanching of tissue in the interdigital space.

11. Foot and Mouth Disease (2) • Effects of an outbreak include: • Causes pyrexia, anorexia, and shivering in animals. • Characterized by blister-like lesions followed by erosions on the tongue and lips, in the mouth, on the teats, and between the hooves. • Reduction in milk production for 2-3 days in cattle, and after recovery pre-infection production rates are hardly ever matched. • Mortality is very low in adults but higher in calves. • Beef cattle do not regain lost weight for many months. • Loss of markets (as a result of embargoes on meat).

12. Foot and Mouth Disease (3) • Commodity policies for dairy • Import barriers and export subsidies. • Federal milk marketing orders. • Milk price support program. • Milk income loss contract payments.

13. Citrus Canker (1) Fruit symptoms of Citrus Canker on sweet orange Lesions on orange leaves and twigs

14. Citrus Canker (2) • Effects of an outbreak include: • Lesions on fruits. • Increased use of chemicals to treat groves for prevention of attack and treatment of compromised trees. • Use of chemicals to clean fruits before they get to the market. • 5 percent to 10 percent increase in fruit drop, results in reduction in frozen concentrated orange juice (FCOJ) production. • Quality of FCOJ is not affected. • Trade restrictions are placed on U.S. exports of fruits, peels, and leaves (but not FCOJ).

15. Citrus Canker (3) • Commodity policies for Florida citrus: • Federal crop insurance for oranges. • In 2002, 69% of eligible Florida orange acreage was under CAT insurance. • About 88% of eligible Florida acreage was covered under federal crop insurance. • Import tariffs on FCOJ. • Tariff of $0.0785/liter for 2004 (about 40%). • Imports accounted for about 12% ($227 million) of domestic FCOJ consumption in 2003.

16. U.S. Demand Price U.S. Supply Eradication of invasive species Invasive species outbreak U.S. price U.S. tax revenue World price U.S. imports Quantity Invasive Species Policy and Import Tariffs

17. Benefits No tariff Import tariff Producer A A + B Taxpayers 0 -B Price U.S. supply as a result of Invasive species outbreak Total A A U.S. Supply Supply shift as a result of eradication Quantity Benefits from the Eradication of Invasive Species in the Presence of Import Tariffs U.S. price B World price A

18. Work Plan • Documentation of commodity policies. • Documentation of three diseases. • Models for wheat, dairy, and citrus. • Supply response/demand response. • Models of commodity policies (especially, crop insurance). • Citrus canker to be completed for January 2005 ASSA meetings.