Economy Wide Impacts of a Foreign Animal Disease in the UnitedStatesDermot Hayes, Jacinto Fabiosa, Amani Elobeid and Miguel Carriquiry

Working Paper 11-WP 525
November 2011

Center for Agricultural and Rural Development
Iowa State University
Ames, Iowa 50011-1070
www.card.iastate.edu

Dermot Hayes is a professor of economics and of finance at Iowa State University.
Miguel Carriquiry is an associate scientist, Amani Elobeid is an associate scientist, Jacinto F. Fabiosa isa scientist, all at the Center for Agricultural and Rural Development at Iowa State University.
Acknowledgments: The authors acknowledge the National Pork Producers Association for their financial
support. The views expressed in this paper are those of the authors and do not necessarily represent theviews of the National Pork Producers Association.
This paper is available online on the CARD Web site: www.card.iastate.edu. © The authors. All rights
reserved. Permission is granted to quote this information with appropriate attribution to the authors.
Questions or comments about the contents of this paper should be directed to Dermot Hayes atdhayes@iastate.edu
Iowa State University does not discriminate on the basis of race, color, age, religion, national origin, sexual orientation, gender
identity, genetic information, sex, marital status, disability, or status as a U.S. veteran. Inquiries can be directed to the Director of
Equal Opportunity and Compliance, 3280 Beardshear Hall, (515) 294-7612.

Abstract

This report uses the CARD FAPRI model to evaluate the economy wide impacts of adisease outbreak that eliminates US pork and beef exports simultaneously and pork
exports alone. In either case industry losses are enormous and spread well beyond thepork and beef sectors. Revenues fall significantly for poultry, corn and soybean producers
and employment in rural areas is negatively impacted as the US pork and beef sectors areforced to downsize. Revenue losses in the combined US pork and beef industries fall by
an average of $12.9 billion per year. The removal of this level of value added activity isequivalent to the loss of as many as 58,000 full time jobs. The report uses option prices tocalculate the likelihood of a price impact of the magnitude reported here. This suggests aless than one percent possibility of an outbreak of this severity. Multiplying theprobability of an outbreak times the reduction in pork industry net revenues over variable
costs in the event of an outbreak, suggests that the annual benefit of eliminating thepossibility of this outcome would be worth $137 million.

Keywords: Foot and Mouth Disease, Swine Fever, Economic Impact of Exports.

2

Economy Wide Impacts of a Foreign Animal Disease in the
United States
Dermot Hayes, Jacinto Fabiosa, Amani Elobeid and Miguel Carriquiry
Iowa State University

Introduction
Infectious animal diseases such as Foot and Mouth Disease (Aphtae epizooticae) and
Swine Fever (hog cholera) can have a devastating impact on animal productivity often
leading to the death of infected animals. Because these diseases spread so rapidly,
eradication is difficult and control programs usually revolve around the isolation andslaughter of infected animals. Countries that are free of these diseases will typicallyprohibit the importation of chilled or frozen meat from countries where the disease isprevalent, even when the infected country uses vaccines to control the disease.
Importation of meat from vaccinated animals has been prohibited because current tests
cannot differentiate between animals that have been vaccinated and animals which havethe disease. Countries that are infested with the disease but who are trying to get it undercontrol typically prohibit meat imports from infected countries.

The US has been fortunate in avoiding FMD with the last outbreak registered as far backas 1929. The US eradicated swine fever in 1978 and it has never experienced an outbreakof African swine fever, the most damaging of the swine fevers. Other countries have notbeen so fortunate. The UK experienced outbreaks of FMD in 1967, 2001, and 2007 andJapan, Korea, Bulgaria and China were struggling with FMD as recently as 2011.
Classical Swine fever is endemic in Asia, Central and South America, and Africa.
African swine fever outbreaks occurred in Spain, Portugal, Cuba, and the Dominican3Republic in the late 1970,s and early 1980’s and a devastating outbreak is ongoing andspreading in Russia, Georgia, Iran and Armenia.

An outbreak of one of these diseases in the US would have immediate consequences.
Federal and local governments would step in to kill or vaccinate infected animals and all
at risk animals in an area around the source. Wild animals in the infected zone would
likely be slaughtered and almost all movement of animals from that state to other states
and countries would be prohibited. Evidence from the UK and South Korea suggest thatthese costs could potentially be enormous. However the magnitude of these costs is
impossible to determine prior to the event because the costs will depend on the severityof the outbreak.

It is possible to estimate one set of costs associated with the outbreak of one of these
diseases. It is reasonably certain that such an outbreak of FMD would result in the loss ofsome US export markets for both beef and pork and that an outbreak of a swine fever
would result in the loss of some export markets for pork. The sudden loss of these export
markets would force this meat onto the US domestic market and potentially would force
US prices down until the surplus product had cleared the market. The magnitude of theprice associated losses will depend on the location of the outbreak and the willingness ofimporting countries to accept meat from states where no outbreak has occurred.

Costs associated with the loss of export markets are of immediate relevance because theUS, unlike the UK or South Korea is a major exporter of both pork and also because theburden of these costs would likely fall on the producers rather than on taxpayers. The
purpose of this paper is to examine the economy wide impacts of the elimination ofexport markets due to a foreign animal disease. We do this analysis for beef and pork andthen separately for pork alone. In both cases we assume a worst case scenario andeliminate all US exports of that product for ten years. We use a ten year period because
this is long enough to allow the industry to arrive at a new equilibrium where it
downsizes and provides product only to US domestic market. By comparing the industry
sales in the baseline scenario and the disease scenario we can get an estimate of the4

impact of this downsizing on the US economy. The last part of the paper is an attempt at
estimating the likelihood of such an outbreak. We do this by examining the distributionof lean hog futures prices that is used to determine the premium on options on thiscontract. The proportion of the distribution to the left to of the price reductions we project
earlier in the paper provides some guidance on the likelihood of the disease over thecourse of one year. Multiplying the probability of the disease by the costs in the event of
the disease provides a rough estimate of the annual burden this disease imposes on the
US beef and pork industries. As we will show these private sector costs are large enoughto justify preparation in the form of insurance against catastrophic price reductions aswell as to motivate risk mitigation projects and regulations.

Likely Impact of a Foreign Animal Disease on the US economy

According to the USDA the US will export more than $10 billion of pork and beef in2011 i. This represents approximately 10 percent of the beef and 22 percent of the pork
produced in the US. The loss of these exports markets would create an oversupply ofmeat on the domestic market with significant price reductions throughout the marketingsystem. Live animal prices would fall to encourage the US consumer to eat more beef andpork as well as to reduce or eliminate US meat imports.

The availability of inexpensive pork and beef in the US domestic market would lead toprice reductions in competing proteins such as chicken, eggs and cheese. Consumers in
the rest of the world who are suddenly cut off from imported meats will necessarily
reduce consumption and turn towards domestic proteins or to meat imports from otherexporting countries. Taiwan has never managed to regain the export markets it lost due tothe FMD outbreak that occurred in 1997. Therefore it seems possible that the US would
lose its status as a major exporter of pork and beef for a significant amount of time after
the first outbreak. As the US beef, pork and poultry sectors adjust to lower domestic
demand, feed-grain use will fall and employment in the US livestock sector and its
affiliated industries will suffer. Second round impacts will include a reduction in the US
trade balance and in rural employment.

5Because we are focused on the economy wide impacts, we present results showing how
both profits and total revenue adjust over a ten year period. We use this revenue impact tocalculate the impact on employment. The profits based measure will underestimate thefull economy wide impact because it excludes the impact of industry downsizing on input
suppliers.

Previous Work
The most recent work in this area is from Schoenbaum and Disney (2003). The primary
focus of their paper involves the costs of controlling the outbreak under several
assumptions as how this might be attempted. This paper does provide an estimate of thecost of the outbreak in terms of lost producer and consumer surplus. This is estimated at$2.16 million per day. This estimate is based on a comparative static multi-commodity,
price-endogenous spatial-equilibrium programming model of the US agriculture sector(USMP) that was calibrated to reflect projected economic conditions in 2005. This workis valuable but it does not allow us to go beyond the agricultural sector. To see why thisis true consider the way producer surplus is measured. This is the difference between themarginal cost of production and the actual market price at each output level; it is closely
related to producer profit if fixed costs are ignored. This measure therefore captures thelosses to producers but not to society. For example suppose it costs $100 of variable costs
to raise a hog and the market price is $105 then the producer surplus is $5. But if this hog
is not ever produced because market conditions are poor then the true measure of the costof the disease is the $105 of economic activity that is eliminated.

Another good source is Paarlberg et al (2002). This article focuses on revenue impacts
and is based on the 2001 outbreak in the UK. It uses a model of the US agricultural sector
calibrated to reflect 1999 to 2000 data and includes a measure of the lost export markets
in the economic analysis. Change in gross revenue for each industry is as follows; live
swine, –34%; pork, –24%; live cattle –17%; beef, –20%; milk, –16%; live lambs andsheep, –14%; lamb and sheep meat, –10%; forage, –15%; and soybean meal, –7%. The

6base year for this study is now approximately ten years old and reflects a period whenmeat exports, particularity pork exports were much lower than they are today.

McCauley, (1979) examines the period immediately after the outbreak without the aid ofan economic model. The focus of this paper is on the epidemiology of the disease undervarious control strategies. One interesting take away from this discussion is that society
as a whole bears the cost of destroying the animals while the animal producer pays thecosts associated with reductions in market prices. This sets up a tradeoff between theinterests of the producer and the rest of society. The more animals that are destroyed, andby extension, the more meat taken off the market, the lower will be the negative priceimpact on producers. On the other hand if control is achieved by means of a vaccination
program then fewer animals will be destroyed and the primary economic impact will be
on market prices. This tradeoff between the interest of producers and the rest of society
sets up an incentive problem which has not been explored. In the event of an outbreakproducers will be the ones with primary responsibility for obeying restrictions on animal
movement, but the more effectively they implement these rules, the greater the proportionof the adjustment burden that will be placed on them.

Methodology
The results presented below are from the FAPRI model that is maintained at the
University of Missouri and at Iowa State University. The model is designed for use by the
US House and Senate to allow policy makers to understand the full economic impacts ofvarious policy changes. The model is best used when an existing published baseline isused against which to examine the impact of a policy or economic shock.

In our case the baseline is the existing FAPRI ISU 2011 baseline and the shock consistsof the loss of all export markets for pork, beef, live hogs and live cattle in the FMD
scenario and for pork and live hogs in the Swine Fever scenario. To implement this shock
we simply restrict these export parameters to zero and then allow the model to arrive at a
new equilibrium.

7

This full FAPRI model is documented at Meyers et. al. 2010. Below we reproduce andsummarize some key model details from that publication. The FAPRI model is an attempt
to describe the behavior of world markets for temperate food and feed products. It
consists of a set of dynamic, multi-market (multi-commodity and multi-country),
econometric, non-spatial, partial-equilibrium models. The key drivers in the model aresupply and demand equations for all of the important temperate commodities in all of theimportant producing and consuming countries. The international model covers most of
the commodities listed in table 1, but not all commodities are covered in all countries. A
total of 61 countries and regional aggregates are covered in the full model.

Table 1. Commodity Coverage in FAPRI’s Deterministic Model of U.S. Markets
Crops

Crop-based

Livestock andAnimal-based

products

poultry

products

Corn

Ethanol

Beef cattle

Beef

Wheat

Biodiesel

Dairy cattle

Pork

Soybeans

Sugar

Hogs

ChickenUpland cotton

High-fructose corn

Chickens

TurkeyTurkeys

Fluid milksyrupLong-grain rice

Distillers grains

Short/medium

Corn gluten feed

American cheese

SorghumCorn gluten meal

Other cheese

BarleyCorn oilNonfat dry milk

Oats

Corn stover

Butter

Sunflowerseed

Soybean meal and oil

Evaporated milk

Peanuts

Sunflower meal andIce creamgrain riceoil
CanolaCanola meal and oil

Hay

Peanut meal and oil

Eggs

8

Sugar beets

Cottonseed

Sugarcane

Cottonseed meal andoil

Switchgrass

The FAPRI model for the United States covers 16 crops, 20 crop products, 5 typesof livestock and poultry, and 12 animal-based products. Modeled commodities
accounted for approximately two-thirds of U.S. crop receipts and 96 percent of livestock
and poultry sector receipts.
For almost all commodities, the model estimates production, consumption andprices. For example for corn, the model includes corn planted area, harvested area, andyields per acre on a regional basis. Domestic corn consumption is divided into feed andresidual, ethanol, high-fructose corn syrup, seed, and other food and industrial uses. The
model estimates corn prices by the equilibrium condition that total supply (production
plus imports and beginning stocks) must equal total demand (domestic consumption plus
exports and ending stocks). U.S. exports must be consistent with net trade by all the othercountries in the world model.
Model parameters are derived from a combination of econometric estimation fromtime series data, prior information based on economic theory, technical relationships, theliterature, and analyst judgment. For example, corn feed and residual use is a function of
feed and livestock prices, an index of grain-consuming animals, and the quantities ofcompeting feeds consumed. The equation is constructed to ensure that corn feed andresidual use changes proportionally with livestock and poultry production. Given thisassumed structure and parameters, econometric estimation is used to estimate theresponsiveness of corn feed use with respect to corn and soybean meal prices and aweighted index of livestock prices.
The modeling system captures the biological, technical, and economic relations
among key variables within a particular commodity and across commodities. The modelis based on historical data analysis, current academic research, and a reliance on accepted
economic, agronomic, and biological relationships in agricultural production andmarkets. Specifically, the model attempts to explicitly capture the extensive linkages that9

exist in agricultural markets such as the derived demand for feed in livestock and dairy
sectors, competition for land in production, and consumer substitution possibilities forsets of close substitutes.
The model includes detailed policy variable coverage. In particular, agriculturaland trade policies for each commodity in a country are included in the sub-models to theextent that they affect the supply and demand decisions of the economic agents. These
include taxes on exports and imports, tariffs, tariff rate quotas, export subsidies,intervention prices, other domestic support instruments, and set-aside rates.
For the baseline analysis, existing agricultural and trade policy variables areextended at current levels through the outlook period. For the scenarios of interest in thispaper we do not need to know how each country outside the US responds but we need toknow how they respond in aggregate. Therefore the results presented below are based ona version of the model that includes only this aggregate response.
Data for commodity supply and utilization are obtained from the Production,
Supply and Distribution (PSD) online database of the U.S. Department of Agriculture(USDA), the F.O. Lichts online database, the Food and Agriculture Organization (FAO)of the United Nations (FAOSTAT Online), the European Commission Directorate
General for Energy and Transport, and Brazilian Sugarcane Industry Association(UNICA), among others. Macroeconomic data such as gross domestic product (GDP),
GDP deflator, population, and exchange rate are exogenous variables that drive theprojections of the model. They are from the International Monetary Fund and IHS Global
Insight.

FMD Scenario Results
The FMD scenario was implemented by eliminating all pork and beef exports as well as
lives exports of swine and cattle for 10 years. The impact of this change was to force thedomestic pork and beef markets to come to find a price at which US consumers wouldpurchase the meat that would otherwise have been exported. We did not restrict US meat
imports but lower US meat prices did cause these imports to fall significantly.

10With shocks of this magnitude considered here the model needs several years to find a
new level of production that allows pork and beef producers to break even. There is no
historical evidence on how long this process might take and therefore we implemented arule to bring prices back to breakeven in 2016.

The impact of the FMD scenario is greatest on pork and beef producers. These impacts
are shown in Figures 1 and 2 below.

Beef prices fall by almost 25% in the first year and stay low for three years. The beefindustry responds to these low prices by reducing imports by approximately 50% andcutting back on production. This reduction in production allows prices to rebound formuch of the rest of the simulation period. Prices overshoot slightly and long-run
equilibrium is achieved in 2021.

US net pork exports as a percent of production are far greater than net beef exports.
Therefore the impact of the export restriction is greater on the pork market and the pricereduction in the first year is just in excess of 50%. It takes less than a year to alter US
pork production, and as a result prices begin to improve in the second year and are almost
back to baseline levels in 2016.

11

Percent Change
from Baseline
200
150
100
50
0
-50
-100
-150
-200
-250
-300

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Percent Change in the Price of US Steers and Heifers
Figure 1. Impact of FMD on Beef Prices
Percent Change
from Baseline
0
-10
-20
-30
-40
-50
-60

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Percent Change in Live Hog Prices
Figure 2. Impact of FMD on Hog Prices

12

The price recovery shown in Figures 1 and 2 disguises the overall impact of the diseaseon the economy. This is true because the price impact comes about because the industry
downsizes. The impact of smaller beef and pork industries will last much longer than the
period it takes prices to recover. For example a 20% reduction in the size of the US pork
industry will cause some packing plant to close down, reduce domestic demand for cornand soybean meal and reduce the level of input purchases such as transport, construction,
labor and veterinary services. These industries essentially contribute the revenue of thetwo sectors and one way to measure the overall impact is to examine the total revenue
impact. In order to ensure than the packing sector impacts are included in estimate
revenue loss is evaluated by estimating the wholesale meat price for each industry
multiplied by wholesale meat production. These impacts are shown below.

Bilion Dollars
70
60
50
40
30
20
10
0

Baseline

FMD Scenario

Figure 3. Impact of FMD on Beef Industry Revenue(Beef Production times Boxed Beef Cutout Value)
Cumulative Lost Value = $71.23 Billion

13

Billion Dollars
30
25
20
15
10
5
0

Baseline

FMD Scenario

Figure 4. Impact of FMD on Pork Industry Revenue(US Pork Production times Carcass Cutout Value)
Cumulative Loss = $57 Billion

The cumulative impact on both sectors over the ten year period is $128.23 billion andaverage $12.8 billion per year. The USDA has estimated that each billion dollars ofexport value supports 4,528 jobs directly and 12,000 jobs throughout the economy(Edmonson, 2008). Using this as a measure of the labor intensity of these industries theannual jobs impact of a $12.8 billion reduction in industry revenue is 58,066 in direct
employment direct 153,876 in total. Compare this job loss with total US based GM
employment (salaried and hourly) of 79,000 ii.
This employment measure likely overstates the global impact of this outbreak because
other industry segments will adjust to the elimination of US meat exports and to lower
input prices for corn and soybean meal. In particular livestock production in othercountries will grow as the world economy adjusts. Also US consumers will benefit fromlower meat prices and should have more money to spend on other items. These second
round adjustments occur with every major economic shock and it is impossible to provide

14

an employment estimate that includes these adjustments because they involve every
sector of the international economy.
Impact on Profitability
The FAPRI model calculates the net returns over variable expenses for each sector of
agriculture and therefore we can estimate the impact of FMD on net returns. This isshown for the US Pork industry in Figure 5. Returns fall dramatically in the years after
the outbreak and never fully recover to baseline levels. Baseline projections for US pork
returns are high because pork exports are strong throughout the period. Expected net
returns over the ten year baseline are approximately $8.54 Billion, net returns in the
scenario are $-10.19 billion. The difference between these two amounts is $18.65 Billion
over a ten year period or $1.8 billion per year.
Billion Dollars
64202001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-2
-4
-6

Baseline

FMD Scenario

Figure 5. Impact of FMD on Total Net Returns in the US Pork Industry
Cumulative Difference $18.65 Billion, Net Returns in the FMD Scenario $-10.19 Billion

Impact on Poultry and Grains
US poultry producers will experience two offsetting impacts. First the availability of
inexpensive pork and beef will drive US poultry prices down. But consumers in meat15

importing countries will import poultry rather than pork or beef and this will support
poultry. The results shown in Figure 6 suggest that the first effect will dominate and thatrevenues in the US poultry sector will fall slightly.
Billion Dollars
50
45
40
35
30
25
20
15
10
5
0

Baseline

FMD Scenario

Figure 6. Revenues from Poultry Production
Cumulative Impact of FMD: $0.98 Billion

The baseline results projects relatively strong corn and soybean prices for the entire
period. This is true because growth in incomes in developing countries and in biofuel
production pushes world land resources to capacity. In the FMD scenario we relax one ofthe drivers of these high prices because we reduce the size of two major feed grain using
industries. With lower US beef, pork and poultry production and lower world meat
consumption some of the economic tensions that generated high prices in the baseline areremoved and therefore corn and soybean prices fall substantially as shown in Figures 7
and 8. Corn prices fall by about $0.20 per bushel and soybeans by $0.60 per bushel andthese price impacts last for the entire period. Cumulative revenues for corn growers fall16

by $44 billion and $24.9 for soybeans Figures 9 and 10. The impact on US wheat
producers is much lower as shown in Figure 11.
Dollars Per Bushel
6.00

5.00

4.00

3.00

2.00

1.00

-

Baseline

FMD Scenario

Figure 7. Impact of FMD on Corn Prices

17

Dollars per Bushel
12.00
10.00
8.00
6.00
4.00
2.00
-

Baseline

FMD Scenario

Figure 8. Impact of FMD on Soybean Prices
Billion Dollars
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
-

Baseline

FMD Scenario

Figure 9. Revenue from Corn Production
Total Revenue Loss $44 Billion

18

Billion Dollars
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-

Baseline

FMD Senario

Baseline

FMD Scenario

Figure 10. Soybean Revenues
Total Revenue Loss $24.9 Billion
Billion Dollars
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
-

Figure 11. Impact of FMD on Wheat Revenues
Total Revenue Loss $1.84 Billion

19

Swine Fever Scenario
One reason for the dramatic impact of FMD on the US meat sector is that both beef andpork exports are restricted at the same time. In The FMD scenario pork prices fall not
only because pork exports are eliminated but also because the US domestic market isswamped with inexpensive beef. In order to tease out these two impacts were now reportresults where only pork exports are restricted. This might happen if the US experiences
and outbreak of one of the swine fevers. Therefore we call this the Classical Swine fever
Scenario (CSF) scenario.
As shown in Figures 12 to 17 below, pork prices fall by approximately 45% in the CSF
scenario and beef prices fall by approximately 7%. Corn prices fall by approximately$0.10 cents per bushel and soybean prices fall by approximately $0.50 per bushel. The
proportionally greater losses for soybeans are due to the intensity of soybean use in thehog industry. These corn and soybean price and revenue impacts also go to show how
much these industries benefited in the past as exports caused expansion in pork and beef
production.

20

Percent Change
from Base
0
-1
-2
-3
-4
-5
-6
-7
-8

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Steer and Heifer Price
Figure 12. Impact of CSF on US Cattle Prices

Percent Change
from Base
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Change in Barrow and Gilt Price
Figure 13. Impact of CSF On US Live Hog Prices
21

Dollars Per Bushel
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
-

Baselline

CSF Scenario

Figure 14. Impact of CSF on Farm Level Corn Prices

Dollars per Bushel
12.00
10.00
8.00
6.00
4.00
2.00
-

Baseline

CSF Scenario

Figure 15. Impact of CSF on Farm Level Soybean Prices

22

Billion Dollars
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
-

Baseline

CSF Scenario

Figure 16. Impact of CSF on Corn Revenues:
Cumulative Impact $28.4 billion Over Ten Years
Billion Dollars of
Revenue
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-

Baseline

CSf Scenario

Figure 17. Impact of CSF on US Soybean Revenues
Cumulative Impact $16.8 Billion Over Ten Years23

Calculating the Probability of a Disease OutbreakWe can get a sense for the likelihood of the kind of price reductions associated with an
outbreak from the experts who trade options on the Chicago Mercantile Exchange. This istrue because option premiums depend on the expected volatility of the underlying futures
prices. The more the experts are willing to pay for options the greater the likelihood ofmajor price movements. Figure 18 below shows the distribution of Dec 2012 lean hog
futures as of November 17th 2011.
The data in Figure 18 suggest a 2.36 percent probability of a price reduction in excess of
40% in the December lean hog futures and a 0.76 percent chance of a price reduction of
50% or greater.
Our FMD scenario analysis predicts a reduction of slightly more than 50%. This suggeststhat the CME traders believe that there is a less than 1% chance that this will occur in
2012.
As mentioned earlier if there is an outbreak of FMD, pork sector net returns over variable
costs will fall by an average of $1.8 billion per year. If we multiply the probability of an
outbreak (0.76%) by the expected reduction in net revenues in the event of an outbreak($1.8) billion then the burden of this disease can be estimated at $137 million per year.
In other words the mere possibility of this disease adds an expected cost to the US Pork
industry of $137 million per year. It would be worth at least this much to US pork
producers to eliminate the possibility of a disease outbreak or to buy insurance that
protect margins in the event that the disease occurs.

24Frequency
300
250
200
150
100
50

162

156

150

144

138

132

126

120

114

108

102

96

90

84

78

72

66

60

54

48

42

36

30

0

Dollars per Hundredweight
Figure 18. Distribution of Dec 2012, Lean Hog Futures Prices as Implied by Futures
and Option Prices on the CME, November 17th, 2011. (Futures Price $81.5 Options
Implied Volatility 19.5%)

References
Paarlberg Philip L., John G. Lee, Ann H. Seitzinger, “Potential revenue impact of an
outbreak of foot-and-mouth disease in the United States” Food Animal Economics
JAVMA, Vol 220, No. 7, April 1, 2002
McCauley, Earl Hunt, Potential economic impact of foot-and of foot-and-mouth diseasein the United States University of Minnesota, and United States Animal and Plant HealthInspection Service. Technical report number 5.
Schoenbaum , Mark A and W Terry Disney Modeling alternative mitigation strategies fora hypothetical outbreak of foot-and-mouth disease in the United States Preventative
Veterinary Medicine Volume 58, Issues 1-2, 30 April 2003, Pages 25-52

25

Meyers, William H., Patrick Westhoff, Jay Fabiosa, and Dermot Hayes. “The FAPRI Global
Modeling System and Outlook Process.” Journal of International Agricultural Trade andDevelopment, 6(1) 2010: 1-19.

Edmondson William U.S. Agricultural Trade Boosts Overall Economy ERS USDA FAU-124
April 2008i
ii

See http://www.fas.usda.gov/psdonline/psdquery.aspx for an estimate of 2011 pork and beef exports
See http://media.gm.com/product/public/us/en/gmfacts/facts.html

26