Impact on South African meat demand of a possible free trade agreement with the European Union.
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Date
1998
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Abstract
South Africa (SA) is currently negotiating for an 'interim agreement' which will
lead to a Free Trade Agreement (FTA) with the European Union. In the 'interim
agreement' trade barriers between the two are to be removed gradually. This
study, therefore, examines the potential impacts of such an FTA on SA meat
demand and prices. The objectives are to first, estimate a demand system model
for SA beef, chicken, mutton and pork, and identify interrelationships among
beef, chicken, pork and mutton consumption, using the Rotterdam Model
developed by Barten (1964) and Theil (1965); and second, use the price elasticity
of beef demand estimated from the model with a beef supply elasticity estimated
by Lubbe (1992) to simulate the impact of EU beef imports on SA beef prices and
meat consumption. Finally, the potential impacts on SA beef price of the likely
outcomes of current FTA negotiations which include full reduction of current
meat import tariffs, and/or reduction in EU beef export refunds, will be
quantified. The extent of the reduction depends on the EU reclassifying SA as a
meat producer or a meat importer, rather than the current EU classification of SA
as a non-meat producer or importer. A review of literature indicates that no
work on the study topic has been published in SA.
The study estimates the Rotterdam model of SA meat demand for the years 1971-
1996 using data on annual per capita consumption of beef, pork, chicken and
mutton, annual average retail meat prices, and per capita disposable income. The
model is formulated in terms of changes in budget share allocations within this
group of meats, based on consumer utility maximization subject to a budget
constraint. It satisfies the adding up, negativity, homogeneity, and the Slutsky
symmetry conditions, with the latter two conditions being imposed during
model estimation.
Conditional Slutsky cross-price elasticity estimates show that for a given 1 per
cent change (rise or fall) in beef, chicken, mutton and pork prices, the beef price
change would have the largest impact on consumption of the other meats which
are all substitutes in consumption. The estimated conditional income elasticities
show that beef and mutton are luxuries, while chicken and pork are necessities.
Results show further that even if meat prices and per capita income do not
change, there is a trend towards lower per capita beef and mutton consumption
and higher per capita chicken consumption. A linear beef demand and supply
model predicts that EU beef imports without an FTA reduced local beef prices by
about 7 per cent in 1996. Cross-price elasticity estimates imply that the 7 per cent
beef price fall reduced chicken, mutton and pork consumption by about 2.59, 5.53
and 3.36 per cent respectively in 1996. Local beef producers with small profit
margins are probably adversely affected by current EU beef imports, while local
consumers have probably benefited.
The net short term effect of an EU-SA FTA on SA meat prices would depend on
the likely outcomes of the current negotiations. If EU export refunds are retained
when the current 40 per cent SA import tariff on beef is removed, EU beef
exports would rise by some 32000 tons based on 1996 data. Elimination of the EU
export refund would offset the price lowering effect of no SA import tariff. This
would have raised the import cleared price of EU beef by 91.10 per cent based on
1996 prices. Under this scenario, there would be no EU beef imports to SA, and
local producers and other overseas exporters would benefit. Higher retail beef
prices for local consumers must be weighed against potential increased long-term
investment by producers in the domestic livestock industry, as additional
investment would benefit SA producers of yellow maize which is fed to local
beef animals.
Description
Thesis (M.Sc.)-University of Natal, Pietermaritzburg, 1998.
Keywords
Meat--South Africa--Marketing., Meat industry and trade--South Africa., Meat--Prices--South Africa., Free trade--South Africa., Theses--Agricultural economics.