This appendix lists the main assumptions used in the market impact calculations referred to in the text. (This appendix is based primarily on work by economist J. van Sickle.) Table 14.1 summarizes the expected economic impacts for each set of potential future events, i.e., each branch through the decision tree to a leaf node in Fig. 14.1. The impacts are calculated starting from a baseline situation in which BSE has already been discovered in Canadian cattle (May 2003) and the impacts of the discovery have been absorbed in the market. The impacts also assume that BSE has been discovered in a Canadian animal in the United States (December 2003), resulting in a roughly 50% reduction of the previous U.S. export market.
Major assumptions for estimating the expected market outcomes following these events are listed below.
If the United States tracks all imports and tests all animals and no subsequent BSE case is discovered, then the exports lost following the discovery of the BSE-positive cow in Washington state in 2003 will gradually be regained. Analysis of a proposed rule for designating minimal risk regions presented by the USDA in 2004 indicates that producer surplus would decline $1.91 billion as a result of U.S. producers losing 50% of their export market (excluding Canada and Mexico). The impact on producer revenues from this decline is estimated to be $2.864 billion ($1.02 billion from lower values on beef continuing to be sold and $1.84 billion on the value of beef no longer produced because of lower prices). It is assumed that tracking and testing will restore confidence in the international community and allow that market to be restored.
If the United States chooses to track all imports and test only Canadian animals, then it will only gain back half of the export market lost in the baseline model. Therefore, the impact of this scenario is assumed to be half of that estimated in assumption 1, i.e., $1.432 billion.
If a case of BSE is discovered in Canada, it is assumed that loss of confidence in the Canadian beef supply will increase demand for U.S. beef in domestic and international markets by another $1.382 billion (roughly half of the estimated gains the United States experienced following the first case of BSE in Canada). The gains the United States realized from the first discovery of BSE in Canada were estimated from the USDA study on the proposed rule for minimal risk regions. The USDA estimated that the reintroduction of all beef from Canada into the U.S. market would result in a decline in producer surplus of $1.545 billion. The impact on producer revenues from this decline is $2.765 billion ($1.375 billion price impact and a $1.39 billion quantity impact). Because most of the U.S. revenue gains to be expected from a subsequent discovery of BSE in Canada were realized in the first discovery, revenue gains to U.S. producers are assumed to be half of that value ($1.382 billion).
A discovery of BSE in a U.S. animal inside the U.S. border (Stage 2 outcome) is expected to cause a decline in domestic demand for U.S. beef and also result in the loss of most remaining exports. A study completed by Jin et al. (2004) indicated that a discovery of BSE in a U.S. animal was expected to cause a 25% decline in domestic demand for U.S. beef, equal to $12.27 billion in producer revenues from our base model analysis. This result, combined with the loss of export markets equal to $2.864 billion (see discussion in assumption 1), results in a combined impact on producer revenues of $15.14 billion.
A discovery of BSE in a U.S. animal inside the U.S. border as a Stage 1 outcome followed by rigorous testing (test all) with no additional discoveries of BSE in the United States is assumed to have half the impact of a Stage 2 outcome of BSE in the United States It is assumed in this scenario that rigorous testing with no additional discoveries of BSE will mitigate the impacts resulting from a decline in domestic demand. It is assumed that consumer demand will decline by half that of a Stage 2 outcome of BSE in the United States ($6.14 billion) and that all remaining export markets will be lost ($2.863 billion), resulting in a total impact of $9.003 billion.
A discovery of BSE in a Canadian animal in the United States is assumed to cause a decline in U.S. producer revenues of $1.432 billion. This result is assumed to occur from a loss equal to one half the remaining export earnings from beef (see discussion in assumption 1).
The $4.246 billion impact for Stage 1 No BSE and Stage 2 BSE in Canada is a combination of assumptions 1 and 2.