The occurrence of ASF in China will induce a negative supply shock in China's pork market. Pork price is very likely to increase, especially when there is no negative shock in demand. The question is: to what extent that the pork price will increase? Besides, given the sheer market size, it is important to understand how the domestic producers and consumers would be impacted by the ASF. Here I attempt to answer these questions by using the Equilibrium Displacement Model (EDM).
1. The model
The EDM model is a partial equilibrium model that has been widely used to evaluate the impacts of demand or supply shocks. For those who are interested in the model, I prepare a one-page handout that offers a brief graphical explanation (from Dr. Nathan Hendricks). Briefly speaking, the model derives for price changes following the demand or supply changes based on demand and supply elasticities. Then, the derived price changes are combined with the elasticities to calculate the changes in consumer and producer welfare. Here I use a closed-economy EDM model since pork imports only account for 4% of domestic consumption, according to the USDA PSD database.
To run the model, I collect estimates of elasticities from the agricultural economics literature. The price elasticity of demand for pork is -0.67 (Chen et al., 2015). The price elasticity of supply for pork is 0.128 (Zhuang and Abbott, 2005). Besides, I also collect consumption and price data from the USDA report. In 2017, The domestic consumption of pork is estimated to be 55 million tonnes, and the average pork price is 25 RMB per kg (roughly 3.6 USD per kg). The model is then calibrated to the China's pork market in 2017.
2. Simulation results
(1) Price changes
The figure below shows the simulated percentage changes in pork price in China given some hypothetical decreases in pork supply. We see that the pork price is likely to increase by 7% if the pork supply decreases by 5%. If the pork supply decreases by 10%, the pork price in China will increase by 12%. The pork price is a bit sensitive to the supply shock mainly because the demand elasticity is low (or pork consumers are insensitive to the price changes). If demand in elastic, price change will be small.
(2) Welfare changes
My simulation shows that pork producers will be largely negatively affected. If the pork supply reduces by 5%, the pork producers will loss 63 billion dollars; meanwhile, the pork consumers will loss about 12 billion dollars. This number, divided by the Chinese population which is 14 billion, is 86 cents (or 6 RMB). In total, the social welfare will decline by 75 billion dollars given a 5% supply shock. The change in social welfare is dominated by the change in producer surplus. Besides, the social welfare loss will be higher if the supply shock is larger. For instance, the social welfare will decline by 150 billion dollars if the supply shock is -10%.
3. Conclusion
Here I present a simple welfare analysis of the African swine fever in China's pork market based on the Equilibrium Displacement Model. Imports are not accounted due to its relative small size. However, pork imports will likely grow in China following the negative supply shock, offsetting some of the negative welfare impacts. Nevertheless, I find that Chinese pork producers could be largely impacted by the ASF, with possible 63 billion losses in their welfare in a hypothetical scenario with 5% negative supply shock.
This analysis faces several caveats. First, I do not consider the elasticity uncertainty. Results are potentially sensitive to the elasticity inputs. Second, I solve this model using linear approximation method, and the approximation might perform badly when the supply shocks are large. Third, the analysis ignores the supply chain effect. The shock transmission might be escalated or lessened depending on the market structure. Lastly, no policy response is considered.
