Environmental Externalities,Comparative Advantage,and the Location of Production: An Application to the Canadian Dairy Industry

The traditional theory of comparative advantage has not been well integrated with the theories of externalities and location. In this paper we develop a conceptual framework which undertakes such an integration at the firm and regional levels. We call this the General Equilibrium with Individual Spatial Heterogeneity and Externalities (GEISHE) model. We use the model to study the effect of spatial heterogeneity in emission intensity on the spatial distribution of production under a uniform emission standard. This model suggests that the introduction of an emission restriction can have differential effects on the spatial patterns of production, depending on local production intensity. We also present empirical analysis of intraprovincial movement of production for the Canadian dairy industry using 1996 and 2006 Census data. Ceteris paribus, areas that had higher dairy production intensities in 1996 also tended to experience higher declines in their dairy cow populations between 1996 and 2006, which is consistent with the GEISHE model. These results suggest that environmental pressure may change the patterns of comparative advantage within a supply managed industry, even if relocation of production across provincial boundaries is not permitted. Expression of environmental comparative advantages seems to be taking place within provinces.     

Les avantages comparatifs dans I'agriculture canadienne et le partage interprovincial des quotas laitiers

L'objectif de cet article est d'utiliser la théorie des avantages comparatifs pour éclairer le débat sur la question du partage interprovicial des quotas laitiers. Une mesure des avantages comparatifs dans I'agriculture canadienne est effectuée pour la période 1958–1987. La méthodologie utilisée est similaire à celle d'autres travaux non spécifiquement reliés à la production agricole. IIs'agit d'une mesure indirecte des avantages comparatifs révélés par les flux de commerce. Ceci nous a permis d'établir un classement des productions indiquant où se trouvent les avantages comparatifs de chaque province et du pays. On peut en conclure que les ajustements qui ont été faits ces dernières années au niveau du partage des quotas entre les provinces ne reflètent pas les avantages comparatifs de production.
The objective of this paper is to use comparative advantage theory to discuss the question of interprovincial milk quota allocation. Comparative agricultural production advantage in various Canadian provinces is measured for the 1958-87 period. The methodology used is similar to that in other studies not specifically related to agricultural production. This indirect assessment measures revealed comparative advantage by means of trade flows. This allows a ranking of the products according to comparative advantage in each province and for the country. One conclusion of this study is that adjustments in interprovincial allocation of quotas over the past few years do not reflect comparative advantage in production.     

Structural Change and Policy Reform in the UK Dairy Sector

Estimation of a cost function for a representative sample of UK dairy producers allows future re‐structuring of the industry to be simulated using a model which incorporates producers' differential costs and milk prices. Consideration is also given to reductions in producer prices and to the introduction of an A/B quota system. The results indicate that, despite the history of quota trading in the UK, there is considerable scope for further restructuring in the industry to take advantage of differential incentives between producers. It is also projected that UK milk supply would increase if quota restrictions were removed.     

The Simple Analytics of Transferable Production Quota: Implications for the Marginal Cost of Ontario Milk Production

Using a competitive dynamic optimization model, the difference between unused and used industrial milk quota values is shown to give an exact measure of the annual rental rate of production quota. Knowledge of the rental rate of production quota and output price can be used to impute the marginal cost of industrial milk production. However, if there is a transfer tax on production quota sales, the imputation of the equilibrium rental value of quota depends on the elasticity of demand and supply for quota as well as the level of the transfer assessment. The marginal cost of Ontario milk production is estimated for each year from 1980–81 to 1994–95, based on unused and used quota values. However, the imputed marginal cost estimates are not totally satisfactory. The results suggest that caution should be exercised in using the difference between unused and used quota prices as a measure of the rental rate of industrial milk production quota.     

Identifying and Applying a Comparative Advantage Framework in Canadian Supply-Managed Agriculture

The marketing of table eggs, broiler hatching eggs, chickens, and turkeys in Canada is limited by federal and provincial supply management (SM) legislation through production quotas. The respective national regulatory agencies in each of these industries allocate, among the provinces, growth in national quotas called “overbase.” Federal legislation stipulates that the allocation of overbase among provinces must take into account the principle of comparative advantage (CA) of production. None of the agencies pertaining to the feather industry has ever identified and applied CA in national quota allocation decisions. To fill this void, we modify the revealed comparative advantage approach developed by Balassa and Bowen to identify CA and develop a provincial agricultural CA index to assign overbase allocations among provinces. Overbase quota allocations should shift toward the agriculturally intensive Prairie provinces that have a CA in the Canadian feather industry and away from the nonagricultural industry‐intensive provinces. Our method of SM overbase quota allocation is consistent with the objectives of Canadian SM legislation. Au Canada, la commercialisation des æufs de consommation, des æufs d'incubation de poulet de chair, du poulet et du dindon est régie par un régime de gestion de l'offre encadré par des lois fédérales et provinciales. Chaque organisme de réglementation national divise, entre les provinces, la croissance des contingents nationaux appelés ?contingent supplémentaire?. La loi fédérale stipule que l'attribution des contingents supplémentaires entre les provinces doit tenir compte du principe d'avantage comparatif en matière de production. Aucun des organismes du secteur de la volaille n'a déterminé l'avantage comparatif ni ne l'a appliqué dans les décisions d'attribution des contingents nationaux. Pour combler cette lacune, nous avons modifié la méthode de ?l'avantage comparatif révélé?élaborée par Balassa (1965) et Bowen (1983; 1985; 1986) pour déterminer l'avantage comparatif et établir un index des avantages comparatifs agricoles provinciaux pour l'attribution des contingents supplémentaires entre les provinces. L'attribution des contingents supplémentaires devrait être dirigée vers les provinces des Prairies très agricoles qui ont un avantage comparatif dans le secteur canadien de la volaille et devrait être écartée des provinces moins agricoles. Notre méthode d'attribution des contingents supplémentaires concorde avec les objectifs de la loi canadienne sur la gestion de l'offre.     

The Value of Dairy Quota under a Commercial Export Milk Program

This paper argues that under a commercial export milk program, the market value of quota will be determined by the spread between the domestic market price and the export price, rather than the conventional wisdom that it is determined by the spread between the domestic milk price and the marginal cost of production. Under this new economy, it is argued that ultimately the market price of dairy quota will be priced independently of firm marginal costs, which implies that low-cost (or high-margin) producers will not hold an economic advantage in bidding for quota over higher-cost producers. Regression results are consistent with the hypothesized positive relationship between quota values and the difference between domestic and export milk price. The average export price has generally increased over time and is approximately equal to the marginal cost for an average producer. The results have implications for a World Trade Organization (WTO) challenge. New Zealand and the United States feel the domestic program acts as an export subsidy by cross-subsidizing production of commercial export milk. The results here suggest that the prices for the filled export contracts are approximately the marginal cost of production for the average producer and not lower, as suggested by the challenge. Export contracts were found to have higher price risk than domestically produced milk. The risk is compounded by the short-term nature of most export contracts. The increase in risk for the commercial export milk program (CEM) implies that it is unlikely many farmers will greatly diversify into CEM contracts unless the uncertainty is reduced.     

Asset Pricing in Created Markets

We investigate the applicability of the present-value asset pricing model to fishing quota markets by applying instrumental variable panel data estimation techniques to 15 years of market transactions from New Zealand's individual transferable quota (ITQ) market. In addition to the influence of current fishing rents, we explore the effect of market interest rates, risk, and expected changes in future rents on quota asset prices. The results indicate that quota asset prices are positively related to declines in interest rates, lower levels of risk, expected increases in future fish prices, and expected cost reductions from rationalization under the quota system.     

Reducing the Cost of the Dairy Program

The effects on farm incomes and consumer prices of elimination of the special export program and both an immediate and phased elimination of the direct subsidy with compensatory increases in support prices are examined. The supply of milk is assumed to be verticle at a level determined by the amount of quota which in turn is set so that butter supplies and demand balance at the support price. The analysis then is concentrated on the demand side which is represented by the demands for 13 categories of dairy products at the consumer level. The demands are represented in a linear programming model to simulate changing relative prices of individual products caused by the changing support prices. Dropping the special export program unambiguously leads to gains in Canadian welfare. Both an immediate and phased reduction of the direct subsidy requires either a large increase in consumer prices or decrease in farm income. All policy alternatives require a reduction of quota. Gradually eliminating the direct subsidy has the advantage that growth in demand due increases in population and per capita incomes will offset the reduction of quota due to the policy. L'article qui suit examine les consequences, aux revenus agricoles et aux consommateurs de l'élimination du programme spécial d'exportation ainsi que de l'élimination immédiate et progressive de la subvention directe avec compensation sur les prix d'indemnités. On suppose que l'offre du lait est verticale à un niveau déterminé par le quota qui lui est établi de façon à ce que l'offre et la demandé du beurre soient en équilibre avec les subventions. L'analyse, est done surtout du côté demande, et, est répresentée par les demandes de 13 catégories de produits laitiers au niveau du consommateur. Les demandes sont répresentées dans un modèle de programmation linéaire simulant le changement des prix relatifs des produits, causé par le changement des subventions. Laisser tomber le programme spécial d'exportation mène éventuellement à une augmentation du bien-être des canadiens. De toute façon l'élimination immédiate et progressive de la subvention directe requière soit une augmentation du prix aux consommateurs ou une diminution dans les revenus agricoles. Toutes alternatives requièrent une réduction du quota. L'avantage de l'élimination progressive est que la demande évoluant de la croissance de la population et des revenus per capita contrebalance la réduction des quotas.     

中国粮食生产的区域比较优势分析

通过应用国内资源成本法和综合比较优势指数法对中国主要粮食产品生产区域比较优势的测定和差异分析,验证了中国粮食生产区域比较优势存在着很大的差异,中国可以也应当引导各地区按照比较优势的原理进行农业生产结构的调整,实现农业生产的合理布局和专业化生产,以充分发挥农业生产的比较优势。     

Profitability,efficiency and comparative advantage of African cattle meat and milk production: the case of trypanotolerant village cattle production

Trypanosomiasis is a major constraint to increased food production in Africa as it limits livestock production and mixed farming over an area of 10 million km². The use of African trypanotolerant breeds of cattle is one approach to control trypanosomiasis that is being given increasing attention. This paper examines under what circumstances trypanotolerant village cattle enterprises can be economically viable in regions of origin and areas of introduction. On-going production is analysed in four countries using cost-benefit analyses. Comparative advantage and subsidies received are also estimated. Results indicate that resources for trypanotolerant cattle production are efficiently allocated as the sector has a comparative advantage and contributes effectively to the national welfare. Financial returns to producers are attractive and by comparing social and private prices important constraints are identified to improve profitability.     

Market Integration and Market Efficiency under Seasonal Tariff Rate Quotas

Switzerland applies seasonal tariff rate quotas (TRQs) for the import of many fruits and vegetables during the domestic harvest season. We examine how this system affects the relationship between Italian and Swiss tomato prices and test for physical market integration and spatial equilibrium conditions over time. We use detailed, transaction‐based data on trade flows and trade costs and estimate an extended parity bounds model, following Barrett and Li (2002). We confirm that in the summer season, when TRQs are in place, markets are inefficient. While quota holders receive positive rents, the marginal rents for importers without quota shares are negative. This inhibits trade flows above the in‐quota import quantity allowed by TRQs. Hence, despite leading to inefficiencies and creating rents for importers, seasonal TRQs are effective in protecting domestic production against competing imports.     

The End of the Federal Tobacco Program: Economic Impacts of the Deregulation of U.S. Tobacco Production

In 2004, Congress ended the sixty-six-year-old federal tobacco program, effectively deregulating production and prices. With deregulation came a buyout package, with cigarette manufacturers agreeing to pay more than $3 billion in present value to quota owners and farmers. While the dollar values of compensation payments are known, the effects of the historic legislation on tobacco markets are uncertain. We examine these effects and their welfare consequences. We also consider the appropriateness of the buyout payments under alternative views of economic damages due to the quota system's demise.     

INSURANCE MILK

Where the production of milk for sale on the fresh milk market at 'controlled' prices is subject to nontransferable quotas the holders of quota who wish to maximise profits have a motive to maintain production above the quota level to insure against variations in demand for over-quota sales and yield. The concept of 'production of milk as insurance' is used to clarify the way in which such behaviour gives rise to social costs which could be avoided in a competitive market, by a permissive attitude to arbitrage, or where quotas can be traded.     

中国蛋鸡生产布局优化研究  ———基于比较优势的实证分析

该文在分析中国蛋鸡生产布局变动的前提下,从比较优势的角度对中国蛋鸡生产布局的优化进行研究。研究表明:目前中国蛋鸡的生产布局基本符合比较优势原则,蛋鸡的生产布局正由自然性布局决定向经济型布局决定转变。同时,资源禀赋、社会经济条件等因素导致中国蛋鸡的比较优势具有一定的差异,今后中国应该在比较优势的基础上,根据市场、资源及环境的原则进一步优化蛋鸡生产布局。     

Is Exchange Rate Pass-Through in Pork Meat Export Prices Constrained by the Supply of Live Hogs?

The impact of lags in the production and marketing of agricultural products on the degree of exchange rate pass-through in export prices is investigated. The predictions of the theoretical model are tested by investigating Canadian pork export prices in the United States and Japan. The empirical methodology accounts for unit root and cointegration using the dynamic seemingly unrelated regression framework and a minimum distance estimator. Predetermined hog supplies have a statistically significant impact on export prices of two out of three Canadian provinces. The degree of misspecification involved with standard pass-through models that do not account for production lags is also illustrated.     

On the Comovement of Commodity Prices

We present strong evidence against the excess-comovement hypothesis—that the prices of commodities move together beyond what can be explained by fundamentals. Prior studies employ broad macroeconomic indicators to explain common price movements, and potentially correlated fundamentals are not controlled for. We use inventory and harvest data to fit a partial equilibrium model that more effectively captures the variation in individual prices. The model explains the majority of the comovements among commodities with high price correlation, and all of the comovements among those with marginal price correlation. Common movements in supply factors appear to play an important role in the observed comovements in commodity prices.     

A laboratory assessment of the choice of vessel size under individual transferable quota regimes

This paper examines the effect of individual transferable quota regimes on technology choice, such as choice of vessel size, by using the laboratory experiment method. We find that even if vessel sizes change over time, the quota price can converge to the fundamental value conditioned on the vessels chosen. We also find that subjects choose their vessel type to maximise their profits based on the quota trading prices in the previous period. This result implies that the efficiency of quota markets in the beginning period is important because any inefficiency in quota markets may affect vessel sizes in ensuing periods. Moreover, we find that the initial allocations may significantly influence vessel sizes through two channels: first, a higher initial allocation to a subject increases the likelihood that the subject invests in a large‐sized vessel; second, the quota price may be higher and more unstable under unequal allocation than under equal allocation; thus, whether the allocation is equal influences subjects' choice of vessel type.     

EU Reform of the Sugar Beet Regime: Implications for UK Agriculture

The purpose of this article is to discuss possible scenarios for UK sugar beet production after the reform of the sugar regime. The analysis is built on an evaluation undertaken by the University of Cambridge and The Royal Agricultural College of the impact that reforming the EU sugar regime may have on UK agriculture. The analysis focuses on the implications of reductions in quota and the support price and on the possible reactions by British Sugar, as the final outcome in terms of production will depend on the interaction between British Sugar and sugar beet farmers. The analysis indicates that British Sugar strategies such as reallocating the available quota to the more efficient producers or paying higher beet prices might mitigate the impacts of the reform. The key factor in limiting the overall impact on production is the extent that the industry can restructure and reduce its cost base. For example, following a 40 per cent reduction in the sugar beet price we estimate that if farmers could reduce their average costs by 20 per cent, about 52 per cent of UK beet production would still be viable, compared to less than 20 per cent if costs were not altered.     

The impact of OECD biofuels policies on developing countries

OECD countries’ biofuels policies, derived from energy and environmental legislation and activated by high oil prices, were the primary cause of not only the sudden spike in grain and oilseed prices in 2007–2008 but also of the ensuing price volatility. Even though developing countries have a comparative advantage in biofuels production, they were shut out of rich countries’ biofuel markets by trade discriminating biofuels policies. Developing countries would not have been able to take full advantage of the price spike in the short run anyway given the low supply elasticities and the long time required for biofuel production to come online, unlike for corn‐ethanol. The controversy over the right price of food is misplaced and policy makers should instead focus on improving biofuels policies, which like their counterpart agricultural policies in previous decades, have damaged the welfare of developing countries.     

Dairy Trade Liberalization Impacts in Canada

Supply management in Canada is facing broad trade liberalization pressures. This paper uses a spatial equilibrium trade model to simulate the impacts of various trade liberalization scenarios in the Canadian dairy industry. The results critically hinge on the relationship between increased market access and the market sharing quota (MSQ) at the farm level. Two different MSQ decision rules are simulated: (i) global output at the farm level remains unchanged following liberalization; and (ii) the MSQ is reduced to support the unit production quota rent at its preliberalization level. The results show that if the MSQ is held constant following a potential compromise in the Doha Round, retail prices of fluid milk and cheese would decrease by about 5%. These price movements can be negated by a 1.4% cut in the global MSQ at the farm level. Net welfare gains in the Canadian dairy sector following market access reforms range between $48.2 and $64.2 million when evaluated at the 2003–04 world prices. Le courant de libéralisation des échanges crée une certaine pression sur les programmes de gestion de l'offre au Canada. Ce papier présente un modèle de commerce en équilibre spatial afin de simuler les effets de différents scénarios de libéralisation des échanges sur l'industrie laitière canadienne. Les résultats dépendent fortement de la relation entre amélioration de l'accès au marché et quota de mise en marché (QMM). Deux différentes règles de décision du QMM sont simulées : i) la production globale est inchangée après la libéralisation ; et ii) le QMM est réduit afin d'assurer une rente de quota par unité de production identique à son niveau de pré‐libéralisation. Les résultats associés à un compromis potentiel dans le cadre du Cycle de Doha indiquent que les prix au détail du lait de consommation et du fromage diminueraient d'environ 5% si le QMM demeure constant. En revanche, les variations de prix seraient nulles si le QMM est réduit de 1.4%. Suivant les scénarios de libéralisation des échanges considérés, le gain net pour l'industrie laitière canadienne serait compris entre 48.2 et 64.2 millions de dollars, lorsqu'évalué aux prix mondiaux de 2003/2004.