Impact on South African meat demand of a possible free trade agreement with the European Union.

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.