Tradeoffs and Resource Allocation Effects for Alternative IS Management Policies

1. Tradeoffs and Resource Allocation Effects for Alternative IS Management Policies Thomas Wahl, Zishun Zhao, & Ricardo Diaz IMPACT Center and School of Economic Sciences Washington State University www.impact.wsu.edu

2. The Rest Of The Team • Preston Andrews, Horticulture • Jan Busboom, Animal Science • Ron Mittelhammer, Economics • Ray Huffaker, Economics • Michael Livingston, ERS

3. Motivation Agricultural production is a complex and dynamic process with an evolving productive stock • Changing demographics due to shocks • BSE, FMD, coddling moth, … • Long-lasting effects of these shocks • Different effects on various participants • Get the biological process right and then add the IS shocks and policies

4. Objectives • Develop a modeling framework that: • Can be used to measure effects on social welfare from IS • Is general enough to accommodate different animal and plant species • Can establish the linkage between economic loss and risk management policies • Will generate optimal resource allocation schemes for alternative IS management policies

5. Model Highlights • Two bio-economic models developed • Animal Pest (Livestock model) • Plant pest (Perennial fruit model) www.wsu.edu www.nny.org

6. Model Highlights • Inventories are differentiated by age • Demand system • AIDS • Substitution effects • Money-metric welfare measure • Important IS pathways endogenized • Flexibility in accommodating various expectation schemes

7. Feed Price Breeding Animal Imports Feeder Imports Non-Feed Fixed and Variable Costs Price of Imports Nutrient Requirement Sub-Model (Cow) Breeding (Mature Female) Breeding Stock Feed Cost Import Costs Retention Constraints Profit Maximization Culling Offspring(M) Offspring(F) Solution Initial Breeding Stock and Feeders Expected Revenues Culled Feeders Feeders Expected price Culled Mature Females Info available Expectations Expected price Feedlot Optimization Mature Animal Slaughter Average Slaughter Weight of Cows Fixed and Variable Costs Finished Animal Slaughter Optimal Slaughter Weight Non-fed Meat Nutrient Requirement Sub-Model (Feeder) Exports Fed Meat Domestic Beef Market Imports World Beef Market Exports Domestic Prices World Prices Livestock Model

8. Interest and Depreciation Rates Wage Rates Material Prices Capital Cost Labor Cost Material Cost Fruit production Orchard New Plantings Profit Maximization Removal Cost Planting Cost Low-production blocks removal Domestic Revenue Export Revenue Fruits Exports Info available Expectations Expected prices Solution Constraints Domestic Market Imports Border Control World Market Perennial Fruit Model

9. IS Introduction and Dissemination • Production decisions in the presence of an invasive species • Non-susceptible inventories • Immune inventories • Susceptible inventories • Affected (host) inventories • Inventory groups determined by the dynamics of dissemination • Random nature of introduction and spread

10. Introduction Contact Vaccination Vaccination IS Introduction and Dissemination (e.g.. livestock) Susceptible Immune Non-Susceptible Hosts Death and Depopulation Immune Non-Susceptible Hosts Susceptible

11. IS Introduction and Spread • Establishment and spread • Prevention—reducing the probability of establishment and/or number of hosts • Control—increasing the probability of eradication

12. IS Introduction and Dissemination • Introduction and eradication are random variables with a geometric distribution • Prevention—reducing the probability of establishment • Control—increasing the probability of an IS being detected and eliminated

13. Policy Implications • Prevention measures • Marginal cost among measures equal • Positive probability of establishment • Eventually an IS becomes established • Prolong interval between events • Monitoring and emergency response

14. Policy Implications • Tradeoff between prevention and control • Resource use • Fast-spreading, hard-to-eliminate species • Preventing less costly • Costly-to-detect, slow-spreading species • Control less costly • Confidence in government agencies • Producers perception of susceptibility will change probability of becoming affected

15. Livestock Model Implementation • Annual beef production model with 9-year reproductive life • Feeders go through backgrounding and a fixed ration feeding program • Growth and body composition of feeders predicted using NRC nutrient requirements • Quality and yield grade predicted to fit the marketing system grid • Linear search to determine the optimal slaughter point

16. Livestock Model Implementation • Demand for both fed beef and cow beef • Inventory updating—naïve expectations in unit profitability with partial adjustment • Unit profitability as a proxy for capital value of cows

17. Simulated Scenarios • Assumed scenarios to test the validity and stability of the model • One-time 30% reduction in breeding herd representing a dramatic depopulation • 15% death rate in the breeding herd representing an epidemic • 100% increase in the feed cost representing feed regulation • 100% increase in breeding cost (maintenance cost of cows)

18. One-time 30% Inventory Reduction

19. Death Rate Increase to 15%

20. 100% Increase in Feed Cost

21. 100% Increase in Breeding Cost

22. Simulation of FMD w/o Intervention • Assuming no treatment and full recovery • Dissemination rate of 4 herds/week • 2% death in mature cattle and 20% death in calves • Normal demand continues

23. FMD Scenarios With Normal Demand

24. Progress of the Perennial fruit model • A simulation model for apple production is being implemented • Increasing marginal cost is assumed • Formulated as a mixed complementarity problem • Runs of a preliminary version show stable and reasonable solutions

25. Summary and Conclusion • Dynamic general equilibrium framework captures short- and long-term effects • Linkage between the economic loss and the risk management policies • Cost-benefit analysis • Optimal resource allocation • Validity and stability demonstrated

26. Unresolved Issues and Possible Extension • Welfare measure for the producers • A simulation model incorporating all livestock production • Common diseases • Substitution effects • A livestock model including Canada, the US, and Mexico where all the live trade occur

27. Conference Papers • Zhao, Zishun, Thomas Wahl, and Ricardo Diaz. “Modeling the Effects of Alternative Invasive Species Management Policies on livestock Production.” Selected long paper, AAEA 2004, Denver, CO. • Zhao, Zishun, Thomas Wahl, and Ricardo Diaz. “Modeling the Impacts of Alternative Invasive Species Management Policies on Perennial Fruit Production and Consumption.” Selected paper, WAEA 2004, Honolulu, HI. • Díaz, Ricardo, Thomas Wahl and Zishun Zhao. “The Economic Implications of Invasive Species in International Trade: The Chile – US Fresh Fruit Market.” Paper Presented to ASCC, PECC Trade Forum – LAEBA Conference 2004, Viña del Mar, Chile

29. Tradeoffs and Resource Allocation Effects for Alternative IS Management Policies Thomas Wahl, Zishun Zhao, & Ricardo Diaz IMPACT Center and School of Economic Sciences Washington State University www.impact.wsu.edu