I NFORME JURÍDICO POR CONSULTA

Previous research indicated a wide range of costs associated with COOL. Added costs include direct marginal costs of production for each individual firm in the industry and indirect costs (losses in market share, trade ramifications, etc.) associated with the implementation of mandatory COOL regulations. General assumptions suggest the increases in costs will be passed on to the consumer in the form of higher prices or, more likely, passed down the beef supply chain to the producer in the form of lower prices.

Two recent studies have shown estimated changes in producer and consumer surplus, but have not calculated how much demand for retail beef, wholesale beef, fed cattle, and feeder cattle must increase to offset the increases in costs resulting from implementation.

Restatement of Objectives

Two objectives existed for this study. The first objective of this study was to provide a full beef industry cost assessment for implementing COOL based on USDA’s preliminary guidelines for COOL. The research sought to estimate the total marketing and production costs that would be imposed on retail chain stores and distributors, meat packers and processors, cattle feedlots, and cow-calf operators, cattle backgrounders or stockers as a result of the implementation of COOL.

• To determine the magnitude of increases in the demand for retail beef needed to negate the increased cost of implementing COOL.

• To determine the magnitude of increases in the demand for wholesale beef needed to negate the increased cost of implementing COOL.

• To determine the magnitude of increases in the demand for fed cattle needed to negate the increased cost of implementing COOL.

The increases in demand at the various market levels was used to estimate or examine the changes in producer, consumer and overall social welfare (surplus) that would occur from the implementation of COOL.

Results

Financial and production data and information, collected from retail chain stores and distributors, meat packers/processors, cattle feeders, and cow-calf operator, cattle stockers and backgrounders, was used to estimate the total added costs imposed on each beef industry sector. The results of the research indicate COOL will cost the retail industry $818.3 million, the meat packing and processing industry $603.0 million, the cattle feeding industry $356.9 million, and the cattle producer, backgrounding or stocking industry $97.1 million. Therefore, the total annual cost to the beef industry is $1.875 billion.

The weighted average costs estimated for each marketing level were used to determine the marketing and social welfare effects of implementing COOL. The

percentage changes in price and demand at the retail, wholesale and fed cattle (slaughter) levels were estimated using an equilibrium displacement model. Previously published

supply and demand elasticities for retail beef, wholesale beef, fed cattle, and feeder cattle were utilized. The results of the EDM model show that the implementation of COOL will increase the price of retail beef by 2.44 percent to 2.72 percent, increase the price of wholesale beef by 1.79 percent to 1.94 percent, increase the price of fed cattle and feeder cattle by 1.40 percent and 0.62 percent, respectively. In addition to

determining the percentage changes in the price for retail beef, wholesale beef and fed cattle, the results of the model show that a permanent increase of 1.12 percent to 1.15 percent in the demand for retail beef, a 0.71 percent to 0.78 percent increase in the demand for wholesale beef, a 0.56 percent increase in the demand for fed cattle, and a 0.24 percent increase in the demand for feeder cattle is needed to negate the estimated costs of implementing COOL.

The changes in price and demand at the various market levels were used to calculate the changes in producer surplus at the various market levels, consumer surplus at the retail level and overall total economic welfare at each market level. The results show that with no change in demand the producer surplus at the retail level decreases by $589.1 to $544.6 million, the producer surplus at the wholesale level decreases by $399.3 to $436.6 million, the producer surplus at the fed cattle (slaughter) level decreases by $237.4 million, and for the feeder cattle (producer) level the producer surplus decreases by $70.3 million. Additional is the fact that with no change in demand, consumer surplus decreases by $235.6 to $280.1 million at the retail level and total economic surplus diminishes by $1.25 to $1.33 billion for the beef industry. Contrary to the results where no demand change exists, necessary percentage changes in

demand at the various market levels will result in producers and consumers being

unaffected from a welfare standpoint. That is to say, that because the original quantity is being held constant and the magnitude in the shifts of the supply and demand price intercepts are equal, the producer, consumer and total economic surplus will be the same as before or equal zero. At the retail level, an outward shift (increase) in demand by 1.15 percent or 1.12 percent will result in the producer and consumer surplus equaling zero. The same results hold for the wholesale, fed cattle (slaughter), and feeder cattle (producer) levels, where an increase in demand of 0.78 percent, 0.71 percent, 0.56 percent, and 0.24 percent resulted in the producer, consumer surplus remaining the same or equaling zero. In addition to the results showing that producers and consumers are not impacted by the changes in demand, the overall total economic surplus would have a net value of zero.

Conclusions and Implications

The conclusions that can be drawn from this study revolve around two main themes. The first is that the implementation of mandatory COOL regulations will assess some level of cost burden on all market levels of the beef industry. The estimates made using the questionnaire surveys show or support the idea (hypothesis) that COOL will impose increases in both marketing and marginal production (incremental and capital) costs to each supply sector of the industry, which in turn will result in major changes in company productivity and market channel distributions. Without benefits outweighing the additional costs; cow-calf producers, stockers/backgrounders, feeders,

packers/processors, and retailers will likely suffer through diminished production, losses in market share and decreased net returns or profits.

The second implication of this research is the market and social welfare effects that will occur to all participants of the beef industry as a result of the implementation of mandatory COOL. The forecasts made using the model show that if COOL-induced demand increases do not occur, then all sectors of the beef industry will lose producer surplus, the retail sector will lose consumer surplus, and there will be a lose in total economic welfare. This suggests that in order for COOL to be a feasible policy and marketing tool for the beef industry, consumer demand will have to increase at a rate necessary to negate or offset the added costs of implementation and compliance such that producers and consumers are no worse off.

Two similar studies have been published by Brester, Marsh and Atwood (2004) and Lusk and Anderson (2004) examining the market, social welfare and revenue effects of COOL on the beef industry. These studies examined the revenue changes and producer surplus and consumer surplus for different cost scenarios. This particular study differs in two areas. First, the cost estimates and productivity changes used in the model calculations were collected from surveys administered to various industry representatives. Secondly, this study examines market and social welfare effects under the assumption that the original quantity is held constant. This study estimates how much beef demand must increase at each market level in order for producers and consumers to be no worse off. Other studies examine the magnitude of changes in quantity and prices that will occur given different scenarios.

Limitations

The limitations of the study are two-fold. The first limitation centers on the data used for the study. It is possible that the data set for the retail and meat packing market levels is not large enough to capture a true accurate estimate of the added marketing and marginal production costs that will be assessed by the implementation of COOL. Receiving a higher return rate on the questionnaire surveys and including financial and production data from more respondents than what was reported could give the study more depth and a higher accuracy as it pertains to cost estimates and productivity changes within the industry.

The second limitation is that of the elasticities. The possibility that the assumed own-price supply elasticities for retail beef products and wholesale beef carcasses causes a somewhat cautious approach to having comparison conclusions between the choice and select grade price series results from this study.

Future Research Needs

The cost estimates and production changes found in this study are vital in understanding the impact of COOL. Further research could include increasing the data sample by surveying a larger number of companies within the corresponding sector or market level. By doing so, the results will provide a more precise and accurate

assessment of the cost estimates and production changes that will occur within each sector of the industry as a result of the implementation of mandatory COOL. However, this would be difficult due to the highly political nature of the issue.

A secondary approach to increasing the accuracy of the costs estimates and productivity differences could be to restructure the format of the questions on the questionnaire survey for each given market level in order to increase the return rates by the respondents. Furthermore, another possibility may be to determine an alternative solution for collecting the financial and production data from the various companies within the beef industry.

The differences in the market and social welfare effects of COOL that exist between the choice and select grade price series at the retail and wholesale sectors are intriguing and warrants more research. Such research could include actually estimating, rather than assuming, supply and demand own-price elasticities for both the heavy and light weight choice and select prices for retail beef products and wholesale beef

carcasses. A study detailing the differences found between the choice and select grades and whether or not the margins are significant could be beneficial and provide industry officials with necessary data for feasibility and profitability comparisons.

The issue of the consumer’s willingness to pay for COOL and the relationship to advertising and checkoff dollars is interesting and deserves future research. Future research could include determining the value consumer would be willing to pay for country-of-origin labeling and calculating whether it would be feasible from an

advertising standpoint. In other words, deciding whether or not consumer’s value of the label (or willingness to pay for COOL) would outweigh or pay for the additional

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APPENDIX A

FEDERAL REGISTER PROPOSED RULE OF COUNTRY-OF-ORIGIN